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<TITLE>FORM S-1</TITLE>
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 <B><FONT size="2">As filed with the Securities and Exchange
Commission on January&nbsp;10, 2005</FONT></B>
</DIV>

<DIV align="right">
<B><FONT size="2">Registration
No.&nbsp;333-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B>
</DIV>

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<B><FONT size="4">SECURITIES AND EXCHANGE COMMISSION</FONT></B>

<DIV align="center">
<B>Washington,&nbsp;D.C. 20549</B>
</DIV>

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<B><FONT size="5">Form&nbsp;S-1</FONT></B>

<DIV align="center">
<B>REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933</B>
</DIV>

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<B><FONT size="6">EpiCept Corporation</FONT></B>

<DIV align="center">
<I><FONT size="2">(Exact name of Registrant as specified in its
charter)</FONT></I>
</DIV>

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<TR>
    <TD width="33%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="32%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="29%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B><FONT size="2">Delaware</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <B><FONT size="2">2834</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <B><FONT size="2">52-1841431</FONT></B></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <I><FONT size="2">(State or other jurisdiction of<BR>
    incorporation or organization)</FONT></I></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <I><FONT size="2">(Primary Standard Industrial<BR>
    Classification Code Number)</FONT></I></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <I><FONT size="2">(I.R.S. Employer<BR>
    Identification Number)</FONT></I></TD>
</TR>

</TABLE>
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<B><FONT size="2">270 Sylvan Avenue</FONT></B>

<DIV align="center">
<B><FONT size="2">Englewood Cliffs, NJ 07632</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(201)&nbsp;894-8980</FONT></B>
</DIV>

<DIV align="center">
<I><FONT size="2">(Address, including zip code, and telephone
number,</FONT></I>
</DIV>

<DIV align="center">
<I><FONT size="2">including area code, of Registrant&#146;s
principal executive offices)</FONT></I>
</DIV>

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<B><FONT size="2">John V. Talley</FONT></B>

<DIV align="center">
<B><FONT size="2">Chief Executive Officer</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">EpiCept Corporation</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">270 Sylvan Avenue</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">Englewood Cliffs, NJ 07632</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(201)&nbsp;894-8980</FONT></B>
</DIV>

<DIV align="center">
<I><FONT size="2">(Name, address, including zip code, and
telephone number,</FONT></I>
</DIV>

<DIV align="center">
<I><FONT size="2">including area code, of agent for
service)</FONT></I>
</DIV>

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<B><I><FONT size="2">Copies to:</FONT></I></B>

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<TR>
    <TD width="55%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="42%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B><FONT size="2">Alexander D. Lynch,&nbsp;Esq.<BR>
    Weil, Gotshal&nbsp;&#38; Manges LLP<BR>
    767 Fifth Avenue<BR>
    New York, NY 10153<BR>
    (212) 310-8000</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <B><FONT size="2">Danielle Carbone,&nbsp;Esq.<BR>
    Shearman&nbsp;&#38; Sterling LLP<BR>
    599 Lexington Avenue<BR>
    New York, NY 10022<BR>
    (212) 848-4000</FONT></B></TD>
</TR>

</TABLE>
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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Approximate date of commencement of proposed
sale to the public:</FONT></B><FONT size="2"> As soon as
practicable after the effective date of this Registration
Statement.
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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
(the &#147;Securities Act&#148;), check the following
box.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If this form is filed to register additional
securities for an offering pursuant to Rule&nbsp;462(b) under
the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If delivery of the prospectus is expected to be
made pursuant to Rule&nbsp;434, check the following
box.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

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<B><FONT size="2">CALCULATION OF REGISTRATION FEE</FONT></B>

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<TR>
    <TD width="57%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="17%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="20%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="5"></TD>
</TR>

<TR>
    <TD colspan="5" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="5"></TD>
</TR>

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    <TD colspan="5" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Title of Each Class of</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Proposed Maximum</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Amount of</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Securities to be Registered</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Offering Price (1)</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Registration Fee</FONT></B></TD>
</TR>

<TR>
    <TD colspan="5"></TD>
</TR>

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    <TD colspan="5" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common Stock $0.0001&nbsp;par value
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$75,000,000
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$8,827.50
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5" align="left"><HR size="1" noshade></TD>

</TR>

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    <TD colspan="5" align="left"><HR size="1" noshade></TD>

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<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Estimated solely for the purpose of computing the
    amount of the registration fee pursuant to Rule&nbsp;457(o)
    under the Securities Act of 1933.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">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 the
Registration Statement shall become effective on such date as
the Commission acting pursuant to said Section&nbsp;8(a) may
determine.</FONT></B>

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<TABLE width="100%" border="1" cellpadding="5"><TR><TD>
<B><FONT size="2" color="#E8112D">The information in this
preliminary prospectus is not complete and may be changed. These
securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective.
This preliminary prospectus is not an offer to sell nor does it
constitute an offer to buy these securities in any jurisdiction
where the offer or sale is not
permitted.</FONT></B><FONT size="2"> <BR>
</FONT>
</TD></TR></TABLE>

<P align="left">


<DIV align="left">
<FONT size="2">&nbsp;<FONT color="#00337F">PROSPECTUS</FONT>
</FONT>
</DIV>

<DIV align="center">
<FONT size="2"> <B><FONT color="#E8112D">SUBJECT TO COMPLETION,
DATED JANUARY&nbsp;10, 2005</FONT></B>
</FONT>
</DIV>

<P align="center">
<IMG src="e01897s1e0189705.gif" alt="(EPICEPT CORPORATION LOGO)">

<P align="center">
<B><FONT size="4" color="#00337F">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shares</FONT></B>

<P align="center">
<B><FONT size="4" color="#00337F">Common Stock</FONT></B>

<P align="center">
<HR size="1" width="100%" align="center" noshade>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2" color="#00337F">This is EpiCept
Corporation&#146;s initial public offering. 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 our common stock. We expect the initial public offering price
to be between
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2" color="#00337F">Prior to this offering, there has
been no public market for our common stock. We intend to file an
application for our common stock to be quoted on The Nasdaq
National Market under the symbol &#147;EPCT.&#148;
</FONT>

<P align="center">
<HR size="1" width="100%" align="center" noshade>

<P align="left">
<B><FONT size="4" color="#00337F">Investing in our common stock
involves risks. See &#147;Risk Factors&#148; beginning on
page&nbsp;6.</FONT></B>

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<TR>
    <TD width="53%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="23%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Per Share</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Public Offering Price
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Underwriting Discounts and Commissions
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds to EpiCept (before expenses)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<FONT size="2" color="#00337F">Delivery of the shares of common
stock will be made on or
about &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2" color="#00337F">Neither the Securities and
Exchange Commission, any state securities commission nor any
other regulatory body has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2" color="#00337F">We have granted the underwriters
an option to purchase up to a maximum
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock to cover over-allotments of shares,
exercisable at any time until 30 days after the date of this
prospectus.
</FONT>

<P align="center">
<HR size="1" width="100%" align="center" noshade>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD align="left"><B><FONT size="4" color="#00337F">Wachovia Securities</FONT></B></TD>
    <TD align="right"><B><FONT size="4" color="#00337F">C.E. Unterberg, Towbin</FONT></B></TD>
</TR>

</TABLE>

<P align="center">
<FONT size="2" color="#00337F">The date of this prospectus
is &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005.
</FONT>

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<B><FONT size="4">TABLE OF CONTENTS</FONT></B>

<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="90%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Page</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#101'>Prospectus Summary</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#102'>Risk Factors</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#103'>Special Note Regarding
    Forward-Looking Statements</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#104'>Use of Proceeds</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#105'>Dividend Policy</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#106'>Capitalization</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#107'>Dilution</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#108'>Selected Consolidated
    Financial Data</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#109'>Management&#146;s Discussion
    and Analysis of Financial Condition and Results of Operations</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#110'>Business</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#111'>Management</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">64</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#112'>Certain Relationships and
    Related Party Transactions</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">77</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#113'>Principal Stockholders</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#114'>Description of Capital
    Stock</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">81</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#115'>Shares Eligible for Future
    Sale</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">85</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#121'>Material U.S.&nbsp;Federal
    Income Tax Consequences</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">87</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#116'>Underwriting</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">90</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#117'>Validity of Securities</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">92</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#118'>Experts</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">92</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#121'>Change in Independent
    Registered Public Accounting Firm</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">93</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#119'>Where You Can Find
    Additional Information</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">93</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">&nbsp;<A HREF='#120'>Index to Financial
    Statements</A>
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">i
</FONT>

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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2"> <A name='101'></A>
</FONT>
</DIV>

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

<P align="center">
<B><FONT size="2">PROSPECTUS SUMMARY</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">This summary highlights selected information
contained elsewhere in this prospectus. This summary does not
contain all of the information that you should consider before
making an investment decision. This prospectus contains
forward-looking statements that involve risks and uncertainties.
Our results could differ materially from those anticipated in
these forward-looking statements as a result of various factors,
including those set forth in &#147;Risk Factors&#148; and
elsewhere in this prospectus. Except as otherwise indicated, all
information in this prospectus assumes no exercise of the
underwriters&#146; over-allotment option. References to
&#147;we,&#148; &#147;us,&#148; &#147;our,&#148; and
&#147;EpiCept&#148; mean EpiCept Corporation and our subsidiary,
EpiCept GmbH. &#147;EpiCept,&#148; the EpiCept logo and
&#147;LidoPAIN&#148; are our trademarks. Other service marks,
trademarks and trade names referred to in this prospectus are
the property of their respective owners.</FONT></I>

<P align="center">
<B><FONT size="2">OUR COMPANY</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are a specialty pharmaceutical company focused
on the development and commercialization of topically-delivered
prescription pain management therapeutics. We have six product
candidates in clinical development; three in late-stage clinical
development that are ready to enter, or have entered, pivotal
Phase&nbsp;IIb or Phase&nbsp;III clinical trials, and three that
have completed initial Phase&nbsp;II clinical trials. All of our
product candidates target moderate-to-severe pain that is
influenced, or mediated, by nerve receptors located just beneath
the skin&#146;s surface. Our product candidates utilize
proprietary formulations and several topical delivery
technologies to administer FDA-approved pain management
therapeutics, or analgesics. We believe using FDA-approved
analgesics reduces the risks associated with new drug
development, lowers our development costs and speeds
time-to-market. Our product candidates are designed to provide
effective pain relief with fewer adverse side effects than
systemically-delivered drugs, which are absorbed into the
bloodstream. None of our product candidates has been approved by
the U.S.&nbsp;Food and Drug Administration, or FDA, or any
comparable agency in another country. Consequently, we may not
sell our products for use by patients.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">IMS Health has estimated that the total
U.S.&nbsp;market for prescription analgesics has increased from
$5.3&nbsp;billion in 1998 to $14.7&nbsp;billion in 2003,
representing an approximate 23% compounded annual growth rate.
In 2003, analgesics were the third most prescribed class of
medications in the United States with approximately
313&nbsp;million prescriptions written. We believe that growth
in this market has been primarily attributable to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">increased physician recognition of the need for
    effective pain management;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">patient demand for more effective pain treatments;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">an aging population, with an increased prevalence
    of chronic pain conditions, such as cancer, arthritis,
    neuropathies and lower back pain;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">increased number of surgeries;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">introduction of new and reformulated branded
    products;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">increased active and healthy lifestyles,
    resulting in additional sports and fitness related injuries.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are targeting peripheral nerve receptors using
topical analgesics as a novel mechanism to effectively treat
both acute and chronic pain, without the liabilities of
traditional systemically-delivered analgesics. We are developing
innovative topically-delivered analgesics using a combination of
our proprietary internally-developed and in-licensed
technologies and know-how to address the unmet medical needs and
adverse side effects associated with systemically-delivered
analgesics. Our topical delivery technologies and formulations
are designed to deliver FDA-approved analgesics safely,
effectively and conveniently to the appropriate peripheral
nerves while preventing or limiting the amount of drug that
enters the bloodstream. We utilize patch, cream and spray gel
matrix delivery methods to topically deliver the active
ingredients to the pain site. In some instances, we combine
existing FDA-approved analgesics to create a new product having
a therapeutic profile superior to either one of the standalone
analgesics.
</FONT>

<P align="center"><FONT size="2">1
</FONT>

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<P align="center">
<B><FONT size="2">Our Product Candidates</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes the current status
of our principal development programs and product candidates:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="14%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="19%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="21%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Product</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Topical</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Initial</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Candidates</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Dosage Form</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Indication</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Clinical Status</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Next Steps</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Marketing Rights</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">EpiCept NP-1
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Cream
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Post- herpetic neuralgia
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">Phase&nbsp;II completed</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Initiate Phase&nbsp;III during second half of 2005
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">EpiCept
    </FONT></TD>
</TR>

<TR>
    <TD colspan="13"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LidoPAIN SP
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Sterile patch
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Surgical incision pain
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="left" valign="top"><FONT size="2">Phase&nbsp;III initiated in Germany</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Adolor has announced plans for Phase&nbsp;IIb and
    Phase&nbsp;III clinical trials in United States
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Adolor Corporation in North America; EpiCept
    outside of North America; EpiCept retains right to negotiate
    future co-promotion agreement
    </FONT></TD>
</TR>

<TR>
    <TD colspan="13"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LidoPAIN BP
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Patch<BR>
    (non-sterile)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Acute lower back pain
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">Phase&nbsp;II completed</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Initiate pivotal Phase&nbsp;IIb clinical trial
    during second half of 2005
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Endo Pharmaceuticals, Inc. worldwide; EpiCept
    retains right to negotiate future co-promotion agreement
    </FONT></TD>
</TR>

<TR>
    <TD colspan="13"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">EpiCept MP/ DP
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Spray gel matrix
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Oral mucositis; Dental pain
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">Phase&nbsp;II</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Continue Phase&nbsp;II development
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">EpiCept
    </FONT></TD>
</TR>

<TR>
    <TD colspan="13"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LidoPAIN TV
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Patch<BR>
    (non-sterile)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Tinnitus
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">Phase&nbsp;II in Europe</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Continue Phase&nbsp;II development
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">EpiCept
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LidoPAIN HM
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Patch<BR>
    (non-sterile)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Headache
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">Phase&nbsp;II</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Continue Phase&nbsp;II development
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">EpiCept
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<B><I><FONT size="2">EpiCept NP-1</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our lead late-stage product candidate, EpiCept
NP-1, is a prescription topical analgesic cream containing a
patented formulation, the contents of which include two
FDA-approved drugs, amitriptyline and ketamine. Amitriptyline is
a widely-used antidepressant, and ketamine is an NMDA, or
N-methyl-D-aspartate, antagonist that is used as an anesthetic.
EpiCept NP-1 is designed to provide effective, long-term relief
from the pain of peripheral neuropathies. We believe the topical
delivery of our patented combination represents a fundamentally
new approach for the treatment of pain associated with
peripheral neuropathy and will significantly reduce the risk of
adverse side effects associated with the systemic delivery of
the active ingredients. Peripheral neuropathies are medical
conditions caused by damage to the nerves in the nervous system.
The initial indication for this product candidate is
post-herpetic neuralgia, a specific type of peripheral
neuropathy associated with shingles, a condition caused by the
herpes zoster virus. We have completed Phase&nbsp;II clinical
trials in the United States and Canada that included 343
subjects and plan to commence a Phase&nbsp;III clinical trial in
the United States during the second half of 2005 that will
include at least 800&nbsp;subjects.
</FONT>

<P align="left">
<B><I><FONT size="2">LidoPAIN SP</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">LidoPAIN SP, our second late-stage product
candidate, is a sterile prescription analgesic patch designed to
provide sustained topical delivery of lidocaine to a
post-surgical or post-traumatic sutured wound while also
providing a sterile protective covering for the wound. If
approved, we believe that LidoPAIN SP would be the first sterile
prescription analgesic patch on the market. We have completed a
</FONT>

<P align="center"><FONT size="2">2
</FONT>

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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2">Phase&nbsp;II clinical trial in Germany that
included 221 subjects who underwent hernia repair and commenced
a Phase&nbsp;III clinical trial in Europe during the fourth
quarter of 2004 that will include at least 400&nbsp;subjects who
have undergone hernia repair. In July 2003, we entered into an
agreement with Adolor Corporation for the development&nbsp;and
commercialization of LidoPAIN SP in North America.
</FONT>
</DIV>

<P align="left">
<B><I><FONT size="2">LidoPAIN BP</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our third late-stage product candidate is
LidoPAIN BP, a prescription analgesic non-sterile patch designed
to provide sustained topical delivery of lidocaine for the
treatment of acute or recurrent lower back pain. We have
completed Phase&nbsp;IIa and Phase&nbsp;IIb clinical trials in
the United States that included 242 subjects and plan to
commence a pivotal Phase&nbsp;IIb clinical trial in the United
States during the second half of 2005 that will include at least
400 subjects. In December 2003, we entered into an agreement
with Endo Pharmaceuticals Inc. for the commercialization of
LidoPAIN BP worldwide.
</FONT>

<P align="left">
<B><I><FONT size="2">Other Product Candidates</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have three earlier-stage product candidates in
clinical development: (1)&nbsp;EpiCept MP/ DP, a topical spray
gel matrix containing morphine and lidocaine for the treatment
of oral mucositis, an inflammation of the mucosa of the mouth
typically resulting from chemotherapy and radiation therapy, and
dental pain; (2)&nbsp;LidoPAIN TV, a topical lidocaine patch for
the treatment of tinnitus, a constant or intermittent buzzing or
ringing noise in the ear; and (3)&nbsp;LidoPAIN HM, a topical
anesthetic patch for the treatment of headache pain. We have
completed initial Phase&nbsp;II clinical trials and expect to
conduct additional Phase&nbsp;II clinical trials for each of
these product candidates.
</FONT>

<P align="center">
<B><FONT size="2">Our Strategy</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our objective is to address unmet medical needs
in pain management by developing a broad portfolio of
topically-delivered prescription analgesics for the treatment of
moderate-to-severe pain where existing treatments are
ineffective or cause significant adverse side effects. To
achieve our objective, the three key elements of our strategy
are to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">focus our development efforts on
    topically-delivered analgesics targeting peripheral nerve
    receptors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">focus our development efforts on FDA-approved
    drugs;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">opportunistically enter into development and
    commercialization alliances for our products
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<B><FONT size="2">Strategic Alliances</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have established strategic alliances with
Adolor with respect to our LidoPAIN SP product candidate for the
treatment of pain associated with surgical incisions and with
Endo with respect to our LidoPAIN BP product candidate for the
treatment of lower back pain. These strategic alliances are
designed to provide us with operating capital and marketing
capabilities and to supplement our development efforts. Under
these agreements, we have received $10.0&nbsp;million and are
eligible to receive up to an additional $102.5&nbsp;million in
milestone payments. The agreements also provide for royalty
payments from each of Adolor and Endo based on the net sales of
certain licensed products. We also intend to pursue other
strategic alliances as appropriate.
</FONT>

<P align="center">
<B><FONT size="2">Risks Affecting Us</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are subject to a number of risks of which you
should be aware before you decide to buy our common stock. These
risks are discussed more fully under the heading &#147;Risk
Factors.&#148; We have not received regulatory approval for, or
generated commercial revenues from, any of our product
candidates. All of our product candidates are in development. If
we do not successfully obtain regulatory approval for, and
commercialize any of our product candidates, we will be unable
to achieve our business objectives. As of September&nbsp;30,
2004, we had an accumulated deficit of $56.0&nbsp;million. We
expect to continue to incur increasing losses over the next
several years, and we may never become profitable.
</FONT>

<P align="center">
<B><FONT size="2">Corporate Information</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We were incorporated in Delaware in March 1993.
We have a 100%-owned subsidiary, EpiCept GmbH, based in Munich,
Germany, which is engaged in research and development activities
on our behalf. Our principal executive offices are located at
270&nbsp;Sylvan Avenue, Englewood Cliffs, New Jersey, and our
telephone number is (201)&nbsp;894-8980. Our website address is
<I>www.epicept.com</I>. Our website, and the information
contained in our website, is not a part of this prospectus.
</FONT>

<P align="center"><FONT size="2">3
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">THE OFFERING</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

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

<TR>
    <TD valign="top">
    <FONT size="2">Common stock offered
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Common stock to be outstanding after this offering
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Use of proceeds
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">We intend to use the proceeds from this offering
    for working capital and general corporate purposes, including
    continuing our clinical trials and research and development
    efforts and the continued preparation for the manufacturing and
    commercialization of our product candidates. We will also repay
    approximately $5.8&nbsp;million of our outstanding indebtedness
    (including accrued interest), which includes our convertible
    bridge loan and our loan from IKB Private Equity GmbH, or
    &#147;IKB.&#148; The lenders under our convertible bridge loan
    include our President and Chief Executive Officer and affiliates
    of certain of our shareholders. See &#147;Use of Proceeds.&#148;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Risk factors
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">See &#147;Risk Factors&#148; and other
    information in this prospectus for information you should
    consider before deciding whether to invest in shares of our
    common stock.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Proposed Nasdaq National Market symbol
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">EPCT
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The number of shares of our common stock to be
outstanding after this offering is based on the number of shares
of our 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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
also reflects the automatic conversion of our outstanding
preferred stock
into &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, the issuance
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 upon the exercise of warrants granted in
connection with our convertible bridge loan, which we refer to
in this prospectus as the bridge warrants, and the conversion of
a convertible term loan with Technologie-Beteiligungs
Gesellschaft mbH der Deutschen Ansgleichsbank, which we refer to
in this prospectus as the tbg convertible loan,
into &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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This number does not include, as
of &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;:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of our common stock issuable upon exercise of options
    outstanding, at a weighted average exercise price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of our common stock reserved for issuance under our 1995 Stock
    Option Plan, our 2005 Equity Incentive Plan and our 2005
    Employee Stock Purchase Plan.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Except as otherwise indicated, all information in
this prospectus:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reflects the automatic conversion of our
    outstanding preferred stock
    into &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;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reflects the exercise of the bridge warrants
    into &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of common stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reflects the conversion of the tbg convertible
    loan
    into &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;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">assumes an initial public offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, the midpoint of the offering range set forth on the cover
    of this prospectus;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">gives effect to
    a &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;-for-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;reverse
    split of our common stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">gives effect to our amended and restated
    certificate of incorporation, which we will file immediately
    prior to the closing of this offering, and our amended and
    restated bylaws, which will be adopted effective immediately
    prior to the closing of this offering; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">assumes the underwriters do not exercise their
    option to
    purchase &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
    shares from us in this offering.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">4
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">SUMMARY CONSOLIDATED FINANCIAL DATA</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">You should read the following financial
information together with the information under &#147;Selected
Consolidated Financial Data&#148; and &#147;Management&#146;s
Discussion and Analysis of Financial Condition and Results of
Operations&#148; and our consolidated financial statements and
the notes thereto included elsewhere in this
prospectus.</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following tables present our summary
consolidated balance sheet and statement of operations data as
of and for the fiscal years ended December&nbsp;31, 2001, 2002
and 2003 and the nine months ended September&nbsp;30, 2003 and
2004. Our consolidated balance sheet data as of
September&nbsp;30, 2004 is presented on an actual basis and as
adjusted to reflect the sale
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock in this offering at an assumed public
offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, after deducting the estimated underwriting discounts and
commissions and the estimated offering expenses. Our
consolidated statement of operations data for the fiscal years
ended December&nbsp;31, 2001, 2002 and 2003 and our consolidated
balance sheet data as of September&nbsp;30, 2004 and our
consolidated statement of operations data for the nine months
ended September&nbsp;30, 2004 were derived from our audited
consolidated financial statements included elsewhere in this
prospectus. Our consolidated statement of operations data for
the nine months ended September&nbsp;30, 2003 were derived from
our unaudited consolidated financial statements included
elsewhere in this prospectus. Operating results for the nine
months ended September&nbsp;30, 2004 are not necessarily
indicative of the results that may be expected for the full
fiscal year ending December&nbsp;31, 2004.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="45%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Ended September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">(Dollars in thousands, except per share data)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Consolidated Statements of Operations
    Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">434</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">160</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,875</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Operating expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">General and administrative
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,394</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,493</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,407</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,131</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,148</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Research and development
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,085</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,874</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,641</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,183</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total operating expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,479</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,367</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,048</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,314</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,420</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss from operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,479</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,367</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,614</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,154</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,545</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other income (expense), net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">186</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,509</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,364</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,613</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,123</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss before benefit for income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,293</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,876</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,978</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,767</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,668</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Benefit for income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">278</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">225</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,015</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,651</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,903</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,767</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,668</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Warrant deemed dividend and redeemable
    convertible preferred stock dividends
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,254</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,288</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,254</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(941</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,091</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss attributable to common stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,269</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,939</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,157</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,708</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,759</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per common share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.26</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.66</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.69</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.86</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,551,622</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,597,638</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,602,871</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,602,707</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,710,741</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Unaudited pro forma basic and diluted loss per
    common<BR>
    share(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.24</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.12</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares used in computing unaudited pro forma
    basic and diluted loss per common share(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,486,162</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,666,628</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="71%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">As of September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Pro Forma</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Actual</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">as Adjusted</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(Dollars in thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Consolidated Balance Sheet Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,026</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Working capital (deficit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,068</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt, net of current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,692</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Redeemable convertible preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,040</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(55,993</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(48,734</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">As discussed in Note&nbsp;11 to our consolidated
    financial statements, the 2001 consolidated financial statements
    were restated.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">For a discussion of the calculation of unaudited
    pro forma loss per share, see Note&nbsp;2 to our consolidated
    financial statements.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">5
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<A name='102'></A>
</DIV>

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

<P align="center">
<B><FONT size="2">RISK FACTORS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Any investment in our common stock involves a
high degree of risk. You should carefully consider the risks
described below together with all of the other information
included in this prospectus before making an investment
decision. The risks and uncertainties described below are not
the only ones we face. If any of the following risks actually
occurs, our business, results of operations or financial
condition would likely suffer. In such an event, the trading
price of our common stock could decline and you could lose all
or part of your investment.</FONT></I>

<P align="center">
<B><FONT size="2">Clinical and Regulatory Risks</FONT></B>

<P align="left">
<B><I><FONT size="2">If we are unable to successfully design,
conduct and complete clinical trials, we will not be able to
obtain regulatory approval for our product candidates, which
could delay or prevent us from being able to generate revenue
from product sales.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We currently have no products for sale, and we
cannot guarantee you that we will ever have marketable products.
Before our product candidates can be commercialized, we or our
partners must submit a New Drug Application, or NDA, to the FDA.
The NDA must demonstrate that the product candidate is safe and
effective in humans for its intended use. To support our NDAs,
we or our partners must conduct extensive human tests, which are
referred to as clinical trials. Satisfaction of all regulatory
requirements typically takes many years and requires the
expenditure of substantial resources.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We currently have several product candidates in
various stages of clinical testing. The results of pre-clinical
studies and early-stage clinical trials do not necessarily
predict the results of later-stage clinical trials. All of our
product candidates are prone to the risks of failure inherent in
drug development and testing. Product candidates in later-stage
clinical trials may fail to show desired safety and efficacy
traits despite having progressed through initial clinical
testing. In addition, the data collected from clinical trials of
our product candidates may not be sufficient to support FDA
approval, or FDA officials could interpret the data differently
than we do. The FDA may require us or our partners to conduct
additional clinical testing, in which case we would have to
expend additional time and resources. The approval process may
also be delayed by changes in government regulation, future
legislation or administrative action or changes in FDA policy
that occur prior to or during our regulatory review.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Any failure or significant delay in completing
clinical trials for our product candidates, or in receiving
regulatory approval for the sale of our product candidates, may
severely harm our business and negatively affect our ability to
generate revenue from product sales, and our stock price will
likely decline.
</FONT>

<P align="left">
<B><I><FONT size="2">The results of our clinical trials are
uncertain, which could substantially delay or prevent us from
bringing our product candidates to market.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Before we can obtain regulatory approval for a
product candidate, we must undertake extensive clinical testing
in humans to demonstrate safety and efficacy to the satisfaction
of the FDA or other regulatory agencies. Clinical trials are
very expensive and difficult to design and implement. The
clinical trial process is also time consuming. The commencement
and completion of our clinical trials could be delayed or
prevented by several factors, including:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">delays in obtaining regulatory approvals to
    commence or continue a study;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">delays in reaching agreement on acceptable
    clinical trial parameters;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">slower than expected rates of patient recruitment
    and enrollment;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">inability to demonstrate effectiveness or
    statistically significant results in our clinical trials;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">unforeseen safety issues;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">uncertain dosing issues;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">inability to monitor patients adequately during
    or after treatment;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">inability or unwillingness of medical
    investigators to follow our clinical protocols.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">6
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We cannot assure you that our planned clinical
trials will begin or be completed on time or at all, or that
they will not need to be restructured prior to completion.
Significant delays in clinical testing will impede our ability
to commercialize our product candidates and generate revenue
from product sales and could materially affect our development
costs.
</FONT>

<P align="left">
<B><I><FONT size="2">In some instances, we rely on third
parties, over which we have little or no control, to conduct
clinical trials for our products and their failure to perform
their obligations in a timely or competent manner may delay
development and commercialization of our product
candidates.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to our license agreement with Adolor for
LidoPAIN SP, Adolor is responsible for conducting clinical
studies relating to LidoPAIN SP in North America. In addition,
Adolor has the exclusive control over, and authority and
responsibility for, the North American regulatory strategies
relating to LidoPAIN SP, including the preparation and filing of
all documents submitted to the FDA. We may enter into similar
agreements from time to time with additional third parties for
our other product candidates whereby these third parties
undertake significant responsibility for research, clinical
trials or other aspects of obtaining FDA approval. As a result,
we may face delays if Adolor or these additional third parties
do not conduct clinical studies and trials, or prepare or file
regulatory related documents, in a timely or competent fashion.
The conduct of the clinical studies by, and the regulatory
strategies of, Adolor or these additional third parties, over
which we have limited or no control, may delay or prevent
regulatory approval of our product candidates, which will have
an adverse effect on our ability to generate revenue from
product sales.
</FONT>

<P align="left">
<B><I><FONT size="2">Clinical trial designs that were discussed
with regulatory authorities prior to their commencement may
subsequently be considered insufficient for approval at the time
of application for regulatory approval.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We or our partners discuss with and obtain
guidance from regulatory authorities on several of our clinical
trial protocols. Over the course of conducting our clinical
trials, circumstances may change, such as standards of safety,
efficacy or medical practice, which could affect regulatory
authorities&#146; perception of the adequacy of any of our
clinical trial designs or the data we develop from our studies.
Changes in circumstances could affect our ability to conduct
clinical trials as planned. Even with successful clinical safety
and efficacy data, we may be required to conduct additional,
expensive trials to obtain regulatory approval.
</FONT>

<P align="left">
<B><I><FONT size="2">If we receive regulatory approval, our
marketed products will also be subject to ongoing FDA
obligations and continued regulatory review and if we fail to
comply with these regulations, we could lose approvals to market
any products and our business would be seriously
harmed.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Following initial regulatory approval of any of
our product candidates, we will be subject to continuing
regulatory review, including review of adverse experiences and
clinical results that are reported after our products become
commercially available. This would include results from any
post-marketing tests or vigilance required as a condition of
approval. The manufacturer and manufacturing facilities we use
to make any of our product candidates will also be subject to
periodic review and inspection by the FDA or foreign regulatory
agencies. If a previously unknown problem or problems with a
product, manufacturing or laboratory facility used by us is
discovered, the FDA or foreign regulatory agency may impose
restrictions on that product or on the manufacturing facility,
including requiring us to withdraw the product from the market.
Any changes to an approved product, including the way it is
manufactured or promoted, often require FDA approval before the
product, as modified, can be marketed. We and our manufacturers
will be subject to ongoing FDA requirements for submission of
safety and other post-market information. If we and our
manufacturers fail to comply with applicable regulatory
requirements, a regulatory agency may:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">issue warning letters;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">impose civil or criminal penalties;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">suspend or withdraw our regulatory approval;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">suspend any of our ongoing clinical trials;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">refuse to approve pending applications or
    supplements to approved applications filed by us;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">7
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">impose restrictions on our operations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">close the facilities of our manufacturers;&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">seize or detain products or require a product
    recall.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, the FDA&#146;s policies may change
and additional government regulations may be enacted that could
prevent or delay regulatory approval of our product candidates.
We cannot predict the likelihood, nature, or extent of adverse
government regulation that may arise from future legislation or
administrative action, either in the United States or abroad.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Even if the FDA approves our product
    candidates, the approval will be limited to those indications
    and conditions for which we are able to show clinical safety and
    efficacy.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Any regulatory approval that we may receive for
our current or future product candidates will be limited to
those diseases and indications for which such product candidates
are clinically demonstrated to be safe and effective. In
addition to the FDA approval required for new formulations, any
new indication to an approved product also requires FDA
approval. If we are not able to obtain FDA approval for a broad
range of indications for our product candidates, our ability to
effectively market and sell our product candidates may be
greatly reduced and our business and ability to generate revenue
may be adversely affected.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">While physicians may choose to prescribe drugs
for uses that are not described in the product&#146;s labeling
and for uses that differ from those tested in clinical studies
and approved by regulatory authorities, our regulatory approvals
will be limited to those indications that are specifically
submitted to the FDA for review. These &#147;off-label&#148;
uses are common across medical specialties and may constitute
the best treatment for many patients in varied circumstances.
Regulatory authorities in the United States generally do not
regulate the behavior of physicians in their choice of
treatments. Regulatory authorities do, however, restrict
communications by pharmaceutical companies on the subject of
off-label use. If our promotional activities fail to comply with
these regulations or guidelines, we may be subject to warnings
from, or enforcement action by, these authorities. In addition,
our failure to follow FDA rules&nbsp;and guidelines relating to
promotion and advertising may cause the FDA to delay its
approval or refuse to approve a product, the suspension or
withdrawal of an approved product from the market, recalls,
fines, disgorgement of money, operating restrictions,
injunctions or criminal prosecutions, any of which could harm
our business.
</FONT>

<P align="center">
<B><FONT size="2">Risks Relating to Commercialization</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">If we fail to enter into and maintain
    successful strategic alliances for our product candidates, we
    may have to reduce or delay our product commercialization or
    increase our expenditures.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our strategy for developing, manufacturing and
commercializing potential product candidates in multiple
therapeutic areas currently requires us to enter into and
successfully maintain strategic alliances with pharmaceutical
companies that have product development resources and expertise,
established distribution systems and direct sales forces to
advance our development programs and reduce our expenditures on
each development program and market any products that we may
develop. We have formed a strategic alliance with Adolor with
respect to our LidoPAIN SP product candidate and with Endo with
respect to our LidoPAIN BP product candidate. Although we have
ongoing discussions with other companies with respect to certain
of our product candidates, we may not be able to negotiate
additional strategic alliances on acceptable terms, or at all.
If we are unable to maintain our existing strategic alliances or
establish and maintain additional strategic alliances, we may
have to limit the size or scope of, or delay, one or more of our
product development or commercialization programs, or undertake
the various activities at our own expense. In addition, our
dependence on strategic alliances is subject to a number of
risks, including:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the inability to control the amount or timing of
    resources that our collaborators may devote to developing the
    product candidates;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">8
</FONT>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the possibility that we may be required to
    relinquish important rights, including intellectual property,
    marketing and distribution rights;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the receipt of lower revenues than if we were to
    commercialize such products ourselves;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our failure to receive future milestone payments
    or royalties should a collaborator fail to commercialize one of
    our product candidates successfully;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the possibility that a collaborator could
    separately move forward with a competing product candidate
    developed either independently or in collaboration with others,
    including our competitors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the possibility that our collaborators may
    experience financial difficulties;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">business combinations or significant changes in a
    collaborator&#146;s business strategy that may adversely affect
    that collaborator&#146;s willingness or ability to complete its
    obligations under any arrangement;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the chance that our collaborators may operate in
    countries where their operations could be adversely affected by
    changes in the local regulatory environment or by political
    unrest.
    </FONT></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">If the market does not accept and use our
    product candidates, we will not achieve sufficient product
    revenues and our business will suffer.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Even if we receive regulatory approval to market
our product candidates, physicians, patients, healthcare payors
and the medical community may not accept and use them. The
degree of market acceptance and use of any approved products
will depend on a number of factors, including:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">perceptions by members of the healthcare
    community, including physicians, about the safety and
    effectiveness of our products;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">cost effectiveness of our products relative to
    competing products;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">relative convenience and ease of administration;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">availability of reimbursement for our products
    from government or healthcare payors;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">effectiveness of marketing and distribution
    efforts by us and our licensees and distributors.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Because we expect to rely on sales and royalties
generated by our current lead product candidates for a
substantial portion of our product revenues for the foreseeable
future, the failure of any of these drugs to find market
acceptance would harm our business and could require us to seek
additional funding to continue our other development programs.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Our product candidates could be rendered
    obsolete by technological change and medical advances, which
    would adversely affect the performance of our
    business.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our product candidates may be rendered obsolete
or uneconomical by the development of medical advances to treat
the conditions that our product candidates are designed to
address. Pain management therapeutics are the subject of active
research and development by many potential competitors,
including major pharmaceutical companies, specialized
biotechnology firms, universities and other research
institutions. While we will seek to expand our technological
capabilities to remain competitive, research and development by
others may render our technology or product candidates obsolete
or noncompetitive or result in treatments or cures superior to
any therapy we developed. Technological advances affecting costs
of production could also negatively affect our ability to sell
products.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">We have no manufacturing capacity and
    anticipate continued reliance on third parties for the
    manufacture of our product candidates.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We do not currently operate manufacturing
facilities for our product candidates. We lack the resources and
the capabilities to manufacture any of our product candidates.
We currently rely on a single contract manufacturer for each
product candidate to supply, store and distribute drug supplies
for our
</FONT>

<P align="center"><FONT size="2">9
</FONT>

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<DIV align="left">
<FONT size="2">clinical trials. Any performance failure or delay
on the part of our existing manufacturers could delay clinical
development or regulatory approval of our product candidates and
commercialization of our drugs, producing additional losses and
depriving us of potential product revenues.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If the FDA or other regulatory agencies approve
any of our product candidates for commercial sale, the product
will need to be manufactured in larger quantities. Since to date
our product candidates have only been manufactured in small
quantities for preclinical and clinical trials, our third party
manufacturers may not be able to successfully increase their
manufacturing capacity in a timely or economical manner, or at
all. We may be forced to identify alternative or additional
third party manufacturers, which may prove difficult because the
number of potential manufacturers is limited and the FDA must
approve any replacement contractor prior to manufacturing our
products. Such approval would require new testing and compliance
inspections. In addition, a new manufacturer would have to be
educated in, or develop substantially equivalent processes for,
production of our product candidates. It may be difficult or
impossible for us to find a replacement manufacturer on
acceptable terms quickly, or at all. If we are unable to
successfully increase the manufacturing capacity for a drug
candidate in a timely and economical manner, the regulatory
approval or commercial launch of any related products may be
delayed or there may be a shortage in supply, both of which may
have an adverse effect on our business.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our product candidates require precise, high
quality manufacturing. A failure to achieve and maintain high
manufacturing standards, including the incidence of
manufacturing errors, could result in patient injury or death,
product recalls or withdrawals, delays or failures in product
testing or delivery, cost overruns or other problems that could
seriously hurt our business. Manufacturers often encounter
difficulties involving production yields, quality control and
quality assurance, as well as shortages of qualified personnel.
These manufacturers are subject to ongoing periodic unannounced
inspection by the FDA, the U.S.&nbsp;Drug Enforcement Agency, or
DEA, and corresponding state agencies to ensure strict
compliance with current Good Manufacturing Practice and other
applicable government regulations and corresponding foreign
standards; however, we do not have control over third party
manufacturers&#146; compliance with these regulations and
standards. If one of our manufacturers fails to maintain
compliance, the production of our product candidates could be
interrupted, resulting in delays, additional costs and
potentially lost revenues. Additionally, third-party
manufacturers must pass a preapproval inspection before we can
obtain marketing approval for any of our products in development.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Furthermore, our existing and future contract
manufacturers may not perform as agreed or may not remain in the
contract manufacturing business for the time required to
successfully produce, store and distribute our product
candidates. Even if any third party manufacturer or licensee
makes improvements in the manufacturing process for our product
candidates, we may not own, or may have to share, the
intellectual property rights to such innovation. In the event of
a natural disaster, equipment failure, power failure, strike or
other difficulty, we may be unable to replace our third party
manufacturers in a timely manner.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">We may be the subject of costly product
    liability claims or product recalls, and we may be unable to
    obtain or maintain insurance adequate to cover potential
    liabilities.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The risk of product liability is inherent in the
development, manufacturing and marketing of human therapeutic
products. Regardless of merit or eventual outcome, product
liability claims may result in:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">delays in, or failure to complete, our clinical
    trials;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">withdrawal of clinical trial participants;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">decreased demand for our product candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">injury to our reputation;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">litigation costs;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">10
</FONT>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">substantial monetary awards against us;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">diversion of management or other resources from
    key aspects of our operations.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If we succeed in marketing our products, product
liability claims could result in an FDA investigation of the
safety or efficacy of our products or our marketing programs. An
FDA investigation could also potentially lead to a recall of our
products or more serious enforcement actions, or limitations on
the indications for which our products may be used, or
suspension or withdrawal of approval.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have product liability insurance that covers
our clinical trials up to a $1,000,000 annual limit. We intend
to expand our insurance coverage to include the sale of
commercial products if marketing approval is obtained for our
product candidates. However, insurance coverage is increasingly
expensive. We may not be able to maintain insurance coverage at
a reasonable cost or at all, and the insurance coverage that we
obtain may not be adequate to cover potential claims or losses.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">The coverage and reimbursement status of
    newly approved healthcare drugs is uncertain and failure to
    obtain adequate coverage and reimbursement could limit our
    ability to market our products.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our ability to commercialize any products
successfully will depend in part on the extent to which
reimbursement will be available from governmental and other
third-party payors, both in the United States and in foreign
markets. Even if we succeed in bringing one or more products to
the market, the amount reimbursed for our products may be
insufficient to allow them to compete effectively with products
that are reimbursed at a higher level. If the price we are able
to charge for any products we develop is inadequate in light of
our development costs, our profitability could be adversely
affected.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Reimbursement by a governmental and other
third-party payor may depend upon a number of factors, including
the governmental and other third-party payor&#146;s
determination that the use of a product is:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a covered benefit under its health plan;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">safe, effective and medically necessary;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">appropriate for the specific patient;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">cost-effective;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">neither experimental nor investigational.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Obtaining reimbursement approval for a product
from each third-party and governmental payor is a time consuming
and costly process that could require us to provide supporting
scientific, clinical and cost effectiveness data for the use of
our products to each payor. We may not be able to provide data
sufficient to obtain reimbursement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Eligibility for coverage does not imply that any
drug product will be reimbursed in all cases or at a rate that
allows us to make a profit. Interim payments for new products,
if applicable, may also not be sufficient to cover our costs and
may not become permanent. Reimbursement rates may vary according
to the use of the drug and the clinical setting in which it is
used, may be based on payments allowed for lower-cost drugs that
are already reimbursed, may be incorporated into existing
payments for other products or services and may reflect
budgetary constraints and/or Medicare or Medicaid data used to
calculate these rates. Net prices for products also may be
reduced by mandatory discounts or rebates required by government
health care programs or by any future relaxation of laws that
restrict imports of certain medical products from countries
where they may be sold at lower prices than in the United States.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The health care industry is experiencing a trend
toward containing or reducing costs through various means,
including lowering reimbursement rates, limiting therapeutic
class coverage and negotiating reduced payment schedules with
service providers for drug products. There have been, and we
expect that there will continue to be, federal and state
proposals to constrain expenditures for medical products and
services, which may affect reimbursement levels for our future
products. In addition, the Centers for Medicare and Medicaid
Services frequently change product descriptors, coverage
policies, product and service codes,
</FONT>

<P align="center"><FONT size="2">11
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<FONT size="2">payment methodologies and reimbursement values.
Third-party payors often follow Medicare coverage policies and
payment limitations in setting their own reimbursement rates and
may have sufficient market power to demand significant price
reductions.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Foreign governments tend to impose strict
    price controls, which may adversely affect our future
    profitability.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In some foreign countries, particularly in the
European Union, prescription drug pricing is subject to
governmental control. In these countries, pricing negotiations
with governmental authorities can take considerable time after
the receipt of marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be
required to conduct a clinical trial that compares the
cost-effectiveness of our product candidates to other available
therapies. If reimbursement of our products is unavailable or
limited in scope or amount, or if pricing is set at
unsatisfactory levels, our profitability will be negatively
affected.
</FONT>

<P align="center">
<B><FONT size="2">Risks Relating to our Financial
Condition</FONT></B>

<P align="left">
<B><I><FONT size="2">Our independent registered public
accounting firm determined that a material weakness related to
our internal controls and procedures existed in certain periods
prior to December&nbsp;31, 2003, which could adversely impact
our ability to report our consolidated financial results
accurately and on a timely basis.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of numerous journal entry adjustments
and corrections recorded in the latter part of 2004 in
connection with the audit of our 2003 and 2002 consolidated
financial statements and the restatement of our 2001
consolidated financial statements, our independent registered
public accounting firm determined that a material weakness
related to our financial reporting internal controls and
procedures existed in those prior periods. Such journal entry
adjustments and corrections related to our accounting for
patents, redeemable preferred stock dividends, beneficial
conversion features of our debt and equity instruments, interest
and other individually insignificant items. Our auditors made
various recommendations to improve our financial reporting
internal controls, including establishing formal technical
accounting training for financial personnel, reviewing our
internal financial and accounting resources, performing periodic
detailed financial analysis of EpiCept&#146;s and its German
subsidiary&#146;s financial results, documenting our conclusions
on technical accounting issues and determinations on a timely
basis and ensuring the technical proficiency of our audit
committee to oversee our financial reporting function.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are addressing these issues and have acted
upon many of these recommendations. We hired a Chief Financial
Officer in the second quarter of 2004. We have installed a new
general ledger system and have adopted stricter journal entry
authorization procedures. We have had only limited experience
with the improvements we have made to date. We cannot assure you
that the steps we have taken to date or any future measures will
remediate the material weakness reported by our independent
registered public accounting firm or that we will implement and
maintain adequate controls over our financial reporting in the
future. Our independent registered public accounting firm has
not evaluated the steps we have taken or intend to take to
address the material weakness described above. We cannot assure
you that additional material weaknesses or reportable conditions
in our financial reporting internal controls will not be
discovered in the future. Any failure to remediate any reported
material weaknesses or implement required new or improved
internal controls, or difficulties encountered in their
implementation, could cause us to fail to meet our reporting
obligations or result in material misstatements in our financial
statements. Inadequate internal controls could also cause
investors to lose confidence in our reported financial
statements, which could adversely affect the trading price of
our stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, in 2005 we will be required to
comply with Section&nbsp;404(a) of the Sarbanes-Oxley Act of
2002, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting
and an attestation to, and testing and assessment of, our
internal controls over financial
</FONT>

<P align="center"><FONT size="2">12
</FONT>
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<DIV align="left">
<FONT size="2">reporting by our independent registered public
accounting firm. While we have begun the development and
execution of a plan to ensure the effectiveness of our internal
controls over financial reporting, our failure to satisfy the
requirements of Section&nbsp;404 on a timely basis could
adversely affect the price of our common stock.
</FONT>
</DIV>

<P align="left">
<B><I><FONT size="2">We have had limited operating activities,
which may make it difficult for you to evaluate the success of
our business to date and to assess our future
viability.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our activities to date have been limited to
organizing and staffing our operations, acquiring, developing
and securing our technology and undertaking preclinical and
clinical studies and clinical trials. We have not yet
demonstrated our ability to obtain regulatory approval,
manufacture products or conduct sales and marketing activities.
Consequently, it is difficult to make any predictions about our
future success, viability or profitability based on our
historical operations.
</FONT>

<P align="left">
<B><I><FONT size="2">We have incurred significant losses since
our inception, may not generate revenue from product sales for
the foreseeable future.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since our inception in 1993, we have incurred
significant net losses in each year. Our losses have resulted
principally from costs incurred in connection with our
development activities and from general and administrative costs
associated with our operations. Our net loss for the fiscal year
ended December&nbsp;31, 2003 and the nine months ended
September&nbsp;30, 2004 was $9.9&nbsp;million and
$4.7&nbsp;million, respectively. As of September&nbsp;30, 2004,
we had an accumulated deficit of $56.0&nbsp;million. Even if we
succeed in developing and commercializing one or more of our
products, we may never become profitable. We expect to continue
to incur increasing expenses over the next several years as we:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">continue to conduct clinical trials for our
    product candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">seek regulatory approvals for our product
    candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">develop, formulate and commercialize our product
    candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">implement additional internal systems and develop
    new infrastructure;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">acquire or in-license additional products or
    technologies or expand the use of our technologies;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">maintain, defend and expand the scope of our
    intellectual property;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">hire additional personnel.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will need to generate significant revenues to
achieve and maintain profitability. If we cannot successfully
develop and commercialize our products, we will not be able to
generate significant revenue from product sales or achieve
profitability in the future. Our failure to achieve or maintain
profitability could cause the market price of our common stock
and the value of your investment to decline.
</FONT>

<P align="left">
<B><I><FONT size="2">We may need substantial additional funding,
may be unable to raise additional capital when needed and may
not continue as a going concern. This could force us to delay,
reduce or eliminate our product development and
commercialization activities.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Developing drugs, conducting clinical trials and
commercializing products is time-consuming and expensive. Our
future funding requirements will depend on many factors,
including:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the progress and cost of our clinical trials and
    other development activities;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the costs and timing of obtaining regulatory
    approval;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the costs of filing, prosecuting, defending and
    enforcing any patent applications, claims, patent and other
    intellectual property rights;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the cost and timing of securing manufacturing
    capabilities for our clinical product candidates and commercial
    products, if any;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the costs of establishing sales, marketing and
    distribution capabilities;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the terms and timing of any collaborative,
    licensing and other arrangements that we may establish.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">13
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that the net proceeds from this
offering, together with our cash on hand, will be sufficient to
fund our projected operating requirements for the next two
years. However, we may need to raise additional capital or incur
indebtedness to continue to fund our operations in the future.
The audit report from our independent registered public
accounting firm, included elsewhere in this prospectus, states
that our recurring losses from operations and our accumulated
deficit raise substantial doubt about our ability to continue as
a going concern. We cannot assure you that sufficient funds will
be available to us when required or on satisfactory terms. If
necessary funds are not available, we may have to delay, reduce
the scope of or eliminate some of our development programs,
which could delay the time to market for any of our product
candidates.
</FONT>

<P align="left">
<B><I><FONT size="2">Our quarterly financial results are likely
to fluctuate significantly, which could have an adverse effect
on our stock price.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our quarterly operating results are difficult to
predict and may fluctuate significantly from period to period,
particularly because we are a relatively small company with no
approved products. The level of our revenues, if any, and
results of operations at any given time could fluctuate as a
result of any of the following factors:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">results of our clinical trials;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our ability to obtain regulatory approval for our
    product candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our ability to achieve milestones under our
    strategic relationships on a timely basis or at all;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">timing of new product offerings, acquisitions,
    licenses or other significant events by us or our competitors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">regulatory approvals and legislative changes
    affecting the products we may offer or those of our competitors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our ability to establish and maintain a
    productive sales force;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">demand and pricing of any products we may offer;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">physician and patient acceptance of our products;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">levels of third-party reimbursement for our
    products;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">interruption in the manufacturing or distribution
    of our products;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the effect of competing technological and market
    developments;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">litigation involving patents, licenses or other
    intellectual property rights; and
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">&#149;&nbsp;product failures or product liability
lawsuits.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Until we obtain regulatory approval for any of
our product candidates, we cannot begin to market or sell them.
As a result, it will be difficult for us to forecast demand for
our products with any degree of certainty. It is also difficult
for us to predict the timing of the achievement of various
milestones under our strategic relationships. In addition, we
will be increasing our operating expenses as we develop our
product candidates and build our commercial capabilities.
Accordingly, we may experience significant, unanticipated
quarterly losses. Because of these factors, our operating
results in one or more future quarters may fail to meet the
expectations of securities analysts or investors, which could
cause our stock price to decline significantly.
</FONT>

<P align="left">
<B><I><FONT size="2">Raising additional capital may cause
dilution to existing stockholders or require us to relinquish
valuable rights.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We may raise additional capital through public or
private equity offerings, debt financings or corporate
collaboration and licensing arrangements. Our ability to raise
additional capital will depend on financial, economic and market
conditions and other factors, many of which are beyond our
control. We cannot be certain that such additional funding will
be available upon acceptable terms, or at all. To the extent
that we raise additional capital by issuing equity securities,
our stockholders may experience further dilution. Debt
financing, if available, may subject us to restrictive covenants
that could limit our flexibility in
</FONT>

<P align="center"><FONT size="2">14
</FONT>

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<DIV align="left">
<FONT size="2">conducting future business activities. To the
extent that we raise additional capital through collaboration
and licensing arrangements, it may be necessary for us to
relinquish valuable rights to our product candidates that we
might otherwise seek to develop or commercialize independently.
</FONT>
</DIV>

<P align="center">
<B><FONT size="2">Risks Relating to Intellectual
Property</FONT></B>

<P align="left">
<B><I><FONT size="2">If we are unable to protect our
intellectual property, our competitors could develop and market
products with features similar to our products and demand for
our products may decline.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our commercial success will depend in part on
obtaining and maintaining patent protection and trade secret
protection of our technologies and product candidates as well as
successfully defending these patents and trade secrets against
third party challenges. We will only be able to protect our
intellectual property from unauthorized use by third parties to
the extent that valid and enforceable patents or trade secrets
cover them.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The patent positions of pharmaceutical and
biotechnology companies can be highly uncertain and involve
complex legal and factual questions for which important legal
principles remain unresolved. In addition, changes in either the
patent laws or in interpretations of patent laws in the United
States or other countries may diminish the value of our
intellectual property. Accordingly, we cannot predict the
breadth of claims that may be allowed or enforced in our patents
or in third party patents.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The degree of future protection for our
proprietary rights is uncertain because legal means afford only
limited protection and may not adequately protect our rights or
permit us to gain or keep our competitive advantage. For example:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">we might not have been the first to make the
    inventions covered by each of our pending patent applications
    and issued patents, and we could lose our patent rights as a
    result;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">we might not have been the first to file patent
    applications for these inventions or our patent applications may
    not have been timely filed, and we could lose our patent rights
    as a result;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">others may independently develop similar or
    alternative technologies or duplicate any of our technologies;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">it is possible that none of our pending patent
    applications will result in issued patents;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our issued patents may not provide a basis for
    commercially viable drugs or therapies, may not provide us with
    any protection from unauthorized use of our intellectual
    property by third parties, may not provide us with any
    competitive advantages;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our patent applications or patents may be subject
    to interference, opposition or similar administrative
    proceedings;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">we may not develop additional proprietary
    technologies that are patentable;&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the patents of others may have an adverse effect
    on our business.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Moreover, the issuance of a patent is not
conclusive as to its validity or enforceability and it is
uncertain how much protection, if any, will be afforded by our
patents if we attempt to enforce them and they are challenged in
court or in other proceedings, such as oppositions, which may be
brought in U.S. or foreign jurisdictions to challenge the
validity of a patent. A third party may challenge the validity
or enforceability of a patent after its issuance by the
U.S.&nbsp;Patent and Trademark Office, or USPTO. It is possible
that a third party could attempt to challenge the validity or
enforceability of the two issued patents related to
LidoPAIN&nbsp;SP based upon a short videotape prepared by the
inventor more than one year prior to the filing of the initial
patent application related to LidoPAIN&nbsp;SP. It is possible
that a third party could attempt to challenge the validity and
enforceability of these patents based on the videotape and/or
its nondisclosure to the USPTO.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The defense and prosecution of intellectual
property suits, interferences, oppositions and related legal and
administrative proceedings in the United States are costly, time
consuming to pursue and result in diversion of resources. The
outcome of these proceedings is uncertain and could
significantly harm our business.
</FONT>

<P align="center"><FONT size="2">15
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We also rely on trade secrets to protect our
technology, especially where we do not believe patent protection
is appropriate or obtainable. However, trade secrets are
difficult to protect. While we use reasonable efforts to protect
our trade secrets, our employees, consultants, contractors,
outside scientific partners and other advisors may
unintentionally or willfully disclose our confidential
information to competitors. Enforcing a claim that a third party
improperly obtained and is using our trade secrets is expensive
and time consuming, and the outcome is unpredictable. In
addition, courts outside the United States are sometimes less
willing to protect trade secrets. Moreover, our competitors may
independently develop equivalent knowledge, methods and know-how.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If we are not able to defend the patent
protection position of our technologies and product candidates,
then we will not be able to exclude competitors from marketing
product candidates that directly compete with our product
candidates, and we may not generate enough revenue from our
product candidates to justify the cost of their development and
to achieve or maintain profitability.
</FONT>

<P align="left">
<B><I><FONT size="2">If we are sued for infringing intellectual
property rights of third parties, such litigation will be costly
and time consuming, and an unfavorable outcome would have a
material adverse effect on our business.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our ability to commercialize our products depends
on our ability to sell our products without infringing the
proprietary rights of third parties. Numerous U.S. and foreign
issued patents and pending applications, which are owned by
third parties, exist in the same field of research we are
exploring. In addition, because patent applications can take
several years to issue, there may be currently pending
applications, unknown to us, which may later result in issued
patents that our product candidates may infringe. There could
also be existing patents of which we are not aware that our
product candidates may inadvertently infringe.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Although we are not aware that any of our product
candidates infringe the intellectual property of others, we
cannot assure you that this is the case. There is a substantial
amount of litigation involving patent and other intellectual
property rights in the biotechnology and biopharmaceutical
industries generally. If a third party claims that we infringe
on their technology, we could face a number of issues that could
adversely affect our business, including:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">infringement and other intellectual property
    claims which, with or without merit, can be costly and time
    consuming to litigate and can delay the regulatory approval
    process and divert management&#146;s attention from our core
    business strategy;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">substantial damages for past infringement, which
    we may have to pay if a court determines that our product
    infringes a competitor&#146;s patent;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">an injunction prohibiting us from selling or
    licensing our product unless the patent holder licenses the
    patent to us, which it is not required to do;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">if a license is available from a patent holder,
    we may have to pay substantial royalties or grant cross licenses
    to our patents.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><I><FONT size="2">We may be subject to damages resulting from
claims that our employees or we have wrongfully used or
disclosed alleged trade secrets of their former
employers.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Many of our employees were previously employed at
other biotechnology or pharmaceutical companies, including our
competitors or potential competitors. Although no claims against
us are currently pending, we may be subject to claims that these
employees or we have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend
against these claims. If we fail in defending such claims, in
addition to paying monetary claims, we may lose valuable
intellectual property rights or personnel. A loss of key
research personnel or their work product could hamper or prevent
our ability to commercialize certain product candidates, which
could severely harm our business. Even if we are successful in
defending against these claims, litigation could result in
substantial costs and be a distraction to management.
</FONT>

<P align="center"><FONT size="2">16
</FONT>

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<P align="center">
<B><FONT size="2">Risks Relating to our Business and
Industry</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Our failure to attract and retain skilled
    personnel could impair our product development and
    commercialization efforts.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our success is substantially dependent on our
continued ability to attract, retain and motivate highly
qualified management, scientific and technical personnel and our
ability to develop and maintain important relationships with
leading institutions, clinicians and scientists. We are highly
dependent upon our senior management, particularly John V.
Talley, our President and Chief Executive Officer, and key
scientific and technical personnel. The loss of the services of
any member of our senior management, key scientific or technical
staff may significantly delay or prevent the achievement of
product development, commercialization and other business
objectives. We also rely on consultants and advisors to assist
us in formulating our research and development strategy. All of
our consultants and advisors are either self-employed or
employed by other organizations, and they may have conflicts of
interest or other commitments such as consulting or advisory
contracts with other organizations that may affect their ability
to contribute to us.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of September&nbsp;30, 2004, we had 13
employees. We believe that we will need to recruit additional
management and technical personnel. There is currently a
shortage of, and intense competition for, skilled executives and
employees with relevant scientific and technical expertise, and
this shortage is likely to continue. The inability to attract
and retain sufficient scientific, technical and managerial
personnel could limit or delay our product development efforts,
which would adversely affect the commercialization of our
product candidates and growth of our business.
</FONT>

<P align="left">
<B><I><FONT size="2">We expect to expand our operations, and as
a result, we may encounter difficulties in managing our growth,
which could disrupt our operations.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We expect to have significant growth in the scope
of our operations as our product candidates are commercialized.
To manage our anticipated future growth, we must continue to
implement and improve our managerial, operational and financial
systems, expand our facilities and continue to recruit and train
additional qualified personnel. Due to our limited resources, we
may not be able to effectively manage the expansion of our
operations or recruit and train additional qualified personnel.
The physical expansion of our operations may lead to significant
costs and may divert our management and business development
resources. Any inability to manage growth could delay the
execution of our business strategy or disrupt our operations.
</FONT>

<P align="left">
<B><I><FONT size="2">Our competitors may develop and market
drugs that are less expensive, safer, or more effective, which
may diminish or eliminate the commercial success of any of our
product candidates.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The biotechnology and pharmaceutical industries
are highly competitive and characterized by rapid technological
change. Because our research approach integrates many
technologies, it may be difficult for us to stay abreast of the
rapid changes in technology. If we fail to stay at the forefront
of technological change, we will be unable to compete
effectively. Our competitors may render our technologies
obsolete by advances in existing technological approaches or the
development of different approaches by one or more of our
current or future competitors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will compete with Pfizer Inc. and Endo in the
treatment of neuropathic pain; Purdue Pharmaceuticals, L.P.,
Abbott Laboratories, and Endo in the treatment of post-operative
pain; Johnson&nbsp;&#38; Johnson and others in the treatment of
back pain. Our competitors may:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">develop and market product candidates that are
    less expensive and more effective than our future product
    candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">adapt more quickly to new technologies and
    scientific advances;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">commercialize competing product candidates before
    we or our partners can launch any product candidates developed
    from our product candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">initiate or withstand substantial price
    competition more successfully than we can;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">have greater success in recruiting skilled
    scientific workers from the limited pool of available talent;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">17
</FONT>

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<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">more effectively negotiate third party licenses
    and strategic alliances;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">take advantage of acquisition or other
    opportunities more readily than we can.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will compete for market share against
fully-integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, new
companies, academic institutions, government agencies and other
public and private research organizations. Many of these
competitors, either alone or together with their partners, may
develop new product candidates that will compete with ours, as
these competitors may operate larger research and development
programs or have substantially greater financial resources than
we do. Our competitors may also have significantly greater
experience in:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">developing drugs;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">undertaking preclinical testing and human
    clinical trials;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">building relationships with key customers and
    opinion-leading physicians;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">obtaining and maintaining FDA and other
    regulatory approvals of drugs;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">formulating and manufacturing drugs;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">launching, marketing and selling drugs.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">These and other competitive factors may adversely
affect our financial performance.
</FONT>

<P align="center">
<B><FONT size="2">Risks Relating to our Common Stock and this
Offering</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">We expect that our stock price will
    fluctuate significantly, and you may not be able to resell your
    shares at or above the initial public offering
    price.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to this offering, there has been no public
market for our common stock. An active and liquid trading market
for our common stock may not develop or be sustained following
this offering. We will negotiate and determine the initial
public offering price with the representatives of the
underwriters based on several factors. This price may vary from
the market price of our common stock after this offering. The
volatility of biopharmaceutical stocks often does not relate to
the operating performance of the companies represented by the
stock. Factors that could cause this volatility in the market
price of our common stock include:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">results from and any delays in our clinical trial
    programs;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">announcements concerning our collaborations with
    Adolor and Endo or future strategic alliances;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">delays in the development and commercialization
    of our product candidates due to inadequate allocation of
    resources by our strategic collaborators or otherwise;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">market conditions in the broader stock market in
    general, or in the pharmaceutical and biotechnology sectors in
    particular;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">issuance of new or changed securities
    analysts&#146; reports or recommendations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">actual and anticipated fluctuations in our
    quarterly financial and operating results;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">developments or disputes concerning our
    intellectual property or proprietary rights;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">introduction of technological innovations or new
    commercial products by us or our competitors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">additions or departures of key personnel;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">FDA or international regulatory actions affecting
    us or our industry;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">issues in manufacturing our product candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">market acceptance of our product candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">third party healthcare reimbursement
    policies;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">litigation or public concern about the safety of
    our product candidates.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">18
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">These and other factors may cause the market
price and demand for our common stock to fluctuate
substantially, which may limit or prevent investors from readily
selling their shares of common stock and may otherwise
negatively affect the liquidity of our common stock. In
addition, in the past, when the market price of a stock has been
volatile, holders of that stock have instituted securities class
action litigation against the company that issued the stock. If
any of our stockholders brought a lawsuit against us, we could
incur substantial costs defending the lawsuit. Such a lawsuit
could also divert the time and attention of our management.
</FONT>

<P align="left">
<B><I><FONT size="2">If the ownership of our common stock
continues to be highly concentrated, it may prevent you and
other stockholders from influencing significant corporate
decisions and may result in conflicts of interest that could
cause our stock price to decline.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our executive officers, directors and their
affiliates will beneficially own or control
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;percent
of the outstanding shares of our common stock (after giving
effect to the conversion of all outstanding convertible
preferred stock and the exercise of all outstanding vested and
unvested options and warrants) following the completion of this
offering. Accordingly, these executive officers, directors and
their affiliates, acting as a group, will have substantial
influence over the outcome of corporate actions requiring
stockholder approval, including the election of directors, any
merger, consolidation or sale of all or substantially all of our
assets or any other significant corporate transactions. These
stockholders may also delay or prevent a change of control of
us, even if such a change of control would benefit our other
stockholders. The significant concentration of stock ownership
may adversely affect the trading price of our common stock due
to investors&#146; perception that conflicts of interest may
exist or arise.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">If securities or industry analysts do not
    publish research or reports about our business, if they change
    their recommendations regarding our stock adversely or if our
    operating results do not meet their expectations, our stock
    price and trading volume could decline.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The trading market for our common stock will be
influenced by the research and reports that industry or
securities analysts publish about us or our business. If one or
more of these analysts cease coverage of our company or fail to
publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or
trading volume to decline. Moreover, if one or more of the
analysts who cover us downgrade our stock or if our operating
results do not meet their expectations, our stock price could
decline.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Future sales of common stock by our
    existing stockholders may cause our stock price to
    fall.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The market price of our common stock could
decline as a result of sales by our existing stockholders in the
market after this offering, or the perception that these sales
could occur. These sales might also make it more difficult for
us to sell equity securities at a time and price that we deem
appropriate. The lock-up agreements to be entered into by our
executive officers and directors and substantially all of our
stockholders and optionholders provide that Wachovia Capital
Markets, LLC, in its sole discretion, may release those parties,
at any time or from time to time and without notice, from their
obligation not to dispose of shares of common stock for a period
of 180&nbsp;days after the date of this prospectus. Wachovia
Capital Markets, LLC has no pre-established conditions to
waiving the terms of the lock-up agreements, and any decision by
it to waive those conditions would depend on a number of
factors, which may include market conditions, the performance of
the common stock in the market and our financial condition at
that time. See &#147;Shares Eligible for Future Sale.&#148;
</FONT>

<P align="center"><FONT size="2">19
</FONT>

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<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">We will have broad discretion in how we use
    the proceeds of this offering, and we may not use these proceeds
    effectively, which could affect our results of operations and
    cause our stock price to decline.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will have considerable discretion in the
application of the net proceeds of this offering. We currently
intend to use the net proceeds for working capital and general
corporate purposes, including:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">clinical trials;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">research and development expenses;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">general and administrative expenses; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">potential acquisitions of companies, products and
    technologies that complement our business.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The amounts and timing of our actual expenditures
depend on several factors, including the progress of our
research and development efforts and the amount of cash used by
our operations. We have not yet determined the amount or timing
of the expenditures listed above. We also intend to use
approximately $5.8&nbsp;million of the net proceeds to repay
existing indebtedness. We may use the net proceeds in ways in
which stockholders do not agree, or for corporate purposes that
do not yield a significant return or any return at all for our
stockholders.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Provisions of our charter documents or
    Delaware law could delay or prevent an acquisition of our
    company, even if the acquisition would be beneficial to our
    stockholders, and could make it more difficult for you to change
    management.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 stockholders
might otherwise receive a premium for their shares. This is
because these provisions may prevent or frustrate attempts by
stockholders to replace or remove our current management. These
provisions include:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a classified board of directors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a prohibition on stockholder action through
    written consent;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a requirement that special meetings of
    stockholders be called only by the board of directors or a
    committee duly designated by the board of directors whose powers
    and authorities include the power to call such special meetings;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">advance notice requirements for stockholder
    proposals and nominations;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the authority of the board of directors to issue
    preferred stock with such terms as the board of directors may
    determine.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 that 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of these provisions in our charter
and Delaware law, the price investors may be willing to pay in
the future for shares of our common stock may be limited.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">The requirements of being a public company
    may strain our resources and distract management.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a public company, we will be subject to the
reporting requirements of the Securities Exchange Act of 1934,
as amended, the Sarbanes-Oxley Act and the listing requirements
of The Nasdaq National Market, Inc. We expect that the
obligations of being a public company will require significant
additional expenditures and will place additional demands on our
management as we comply with the reporting
</FONT>

<P align="center"><FONT size="2">20
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2">requirements of a public company. We will need to
hire additional accounting and financial staff with appropriate
public company experience and technical accounting knowledge.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">We have never paid dividends on our capital
    stock, and we do not anticipate paying any cash dividends in the
    foreseeable future.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have not paid cash dividends on any of our
classes of capital stock to date, and we currently intend to
retain our future earnings, if any, to fund the development and
growth of our businesses. In addition, the terms of existing or
any future debt may preclude us from paying these dividends. As
a result, capital appreciation, if any, of our common stock will
be your sole source of gain for the foreseeable future.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Investors in this offering will pay a much
    higher price than the book value of our common
    stock.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you purchase common stock in this offering,
you will pay more for your shares than the amounts paid by
existing stockholders for their shares. You will incur immediate
and substantial dilution of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, representing the difference between our pro forma net
tangible book value per share after giving effect to this
offering and an assumed initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
In the past, we issued options and warrants to acquire common
stock at prices significantly below the initial public offering
price. To the extent these outstanding options or warrants are
ultimately exercised, you will sustain further dilution.
</FONT>

<P align="center"><FONT size="2">21
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<A name='103'></A>
</DIV>

<!-- link1 "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" -->

<P align="center">
<B><FONT size="2">SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This prospectus, including the sections entitled
&#147;Summary,&#148; &#147;Risk Factors,&#148;
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations&#148; and
&#147;Business,&#148; contains forward-looking statements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Forward-looking statements include, but are not
limited to, statements about:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the progress of preclinical development and
    laboratory testing and clinical trials;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the time and costs involved in obtaining
    regulatory approvals;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">delays that may be caused by evolving
    requirements of regulatory agencies;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the number of drug candidates we pursue;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the costs involved in filing and prosecuting
    patent applications and enforcing or defending patent claims;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the establishment of sales, marketing and/or
    manufacturing capabilities;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our ability to establish, enforce and maintain
    selected strategic alliances and activities required for product
    commercialization;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the acquisition of technologies, products and
    other business opportunities that require financial
    commitments;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our revenues, if any, from successful development
    and commercialization of our drug candidates.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">These statements relate to future events or our
future financial performance and involve known and unknown
risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be
materially different from any future results, levels of
activity, performance or achievements expressed or implied by
these forward-looking statements. These risks and other factors
include those listed under &#147;Risk Factors&#148; and
elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as
&#147;may,&#148; &#147;will,&#148; &#147;should,&#148;
&#147;expects,&#148; &#147;intends,&#148; &#147;plans,&#148;
&#147;anticipates,&#148; &#147;believes,&#148;
&#147;estimates,&#148; &#147;predicts,&#148;
&#147;potential,&#148; &#147;continue&#148; or the negative of
these terms or other comparable terminology. Although we believe
that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We do not
intend to update any of the forward-looking statements after the
date of this prospectus or to conform these statements to actual
results. Neither the Private Securities Litigation Reform Act of
1995 nor Section&nbsp;27A of the Securities Act provides any
protection to us for statements made in this prospectus.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Neither we nor any of the underwriters have
authorized anyone to provide information different from that
contained in this prospectus. When you make a decision about
whether to invest in our common stock, you should not rely upon
any information other than the information in this prospectus.
Neither the delivery of this prospectus nor sale of common stock
means that information contained in this prospectus is correct
after the date of this prospectus.</FONT></B>

<P align="center"><FONT size="2">22
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="left">
<A name='104'></A>

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

<P align="center">
<B><FONT size="2">USE OF PROCEEDS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our net proceeds from the 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 are estimated to be
approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million,
based on an assumed offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, which are payable
by us.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We intend to use the proceeds of this offering
for working capital and general corporate purposes, including to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">continue clinical trials and research and
    development efforts;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">continue preparation for the manufacturing and
    commercialization of our product candidates;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">repay approximately $5.8&nbsp;million of our
    outstanding indebtedness (including accrued interest), which
    includes our convertible bridge loan and our loan from IKB.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The convertible bridge loan matures on
October&nbsp;30, 2005 and bears interest at a rate of
8%&nbsp;per annum. The term loan with IKB matures on
December&nbsp;31, 2006 and currently bears interest at a rate of
20%&nbsp;per annum, payable quarterly. For more detail on the
convertible bridge loan and our term loan from IKB, see
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations&nbsp;&#151; Liquidity and
Capital Resources.&#148;
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The amounts and timing of our actual expenditures
depend on several factors, including the progress of our
research and development efforts and the amount of cash used by
our operations. We have not determined the amount or timing of
the expenditures in the areas listed above. Pending their use,
we intend to invest the net proceeds in short-term,
investment-grade, interest-bearing instruments.
</FONT>

<P align="left">
<A name='105'></A>

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

<P align="center">
<B><FONT size="2">DIVIDEND POLICY</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have never declared or paid cash dividends on
our capital stock. We do not anticipate paying any cash
dividends on our capital stock in the foreseeable future. We
currently intend to retain all available funds and any future
earnings to fund the development and growth of our business.
</FONT>

<P align="center"><FONT size="2">23
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<A name='106'></A>
</DIV>

<!-- link1 "CAPITALIZATION" -->

<P align="center">
<B><FONT size="2">CAPITALIZATION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth our cash and cash
equivalents and our capitalization as of September&nbsp;30, 2004
on an actual basis and on a pro forma as adjusted basis, to give
effect to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the filing of an amended and restated certificate
    of incorporation to
    authorize &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 &nbsp;&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,
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the conversion of all of our preferred stock into
    an aggregate
    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 immediately prior to the closing of this
    offering;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the exercise of the bridge warrants into an
    aggregate
    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 immediately prior to the closing of this
    offering;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the conversion of the tbg convertible term loan
    into an aggregate
    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 immediately prior to the closing of this
    offering;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the 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 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 discounts and
    commissions and estimated offering expenses payable by
    us;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the repayment of certain of our outstanding
    indebtedness as described under &#147;Use of Proceeds.&#148;
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">You should read this table in conjunction with
the sections of this prospectus entitled &#147;Selected
Consolidated Financial Data&#148; and &#147;Management&#146;s
Discussion and Analysis of Financial Condition and Results of
Operations&#148; and with our consolidated financial statements
and the notes thereto.
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="66%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">As of September&nbsp;30, 2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Pro Forma</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Actual</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">As Adjusted</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(Dollars in thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,026</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt, less current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,692</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;B Redeemable Convertible Preferred
    Stock, $0.0001 par value, 3,440,069&nbsp;shares authorized,
    3,106,736&nbsp;shares issued and outstanding, actual;
    0&nbsp;shares issued and outstanding, as adjusted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,667</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;C Redeemable Convertible Preferred
    Stock, $0.0001 par value, 12,769,573&nbsp;shares authorized,
    8,839,573&nbsp;shares issued and outstanding, actual;
    0&nbsp;shares, issued and outstanding, as adjusted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,374</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Warrants
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,584</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; (deficit)&nbsp;equity:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;A Convertible Preferred Stock,
    $0.0001 par value, 3,422,620&nbsp;shares authorized,
    3,368,485&nbsp;shares issued and outstanding, actual;
    0&nbsp;shares issued and outstanding, as adjusted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,226</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock, $0.0001&nbsp;par value,
    31,000,000&nbsp;shares authorized, 6,798,485&nbsp;shares issued
    and outstanding,
    actual; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    outstanding pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Additional paid-in capital
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred stock compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(90</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(55,993</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated other comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(953</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Treasury stock, 50,000&nbsp;shares
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(75</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; (deficit)&nbsp;equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(48,734</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total capitalization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,417</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The number of shares of common stock to be
outstanding after this offering is based on the number of shares
outstanding as
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
This number excludes:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of our common stock issuable upon exercise of options
    outstanding, at weighted average exercise price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of our common stock reserved for issuance under our 1995 Stock
    Option Plan, our 2005 Equity Incentive Plan and our 2005
    Employee Stock Purchase Plan.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">24
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<A name='107'></A>
</DIV>

<!-- link1 "DILUTION" -->

<P align="center">
<B><FONT size="2">DILUTION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you invest in our common stock in this
offering, your ownership interest will be diluted to the extent
of the difference between the initial public offering price per
share and the historical adjusted net tangible book value per
share of common stock upon the completion of this offering. The
historical adjusted net tangible book value as
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;was
approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million,
or approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. Historical adjusted net tangible book value per share
represents our total tangible assets less total liabilities
divided by the pro forma total number of shares of common stock
outstanding after giving effect to the automatic conversion of
all shares of our outstanding preferred stock. Dilution in
historical adjusted net tangible book value per share represents
the difference between the amount per share paid by purchasers
of common stock in this offering and the net tangible book value
per share of common stock immediately after the closing of this
offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">After giving effect to the sale of the shares of
common stock at an assumed initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share and after deducting underwriting discounts and commissions
and estimated offering expenses payable by us, our pro forma net
tangible book value as
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;would
have been approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million,
or
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share of common stock. This represents an immediate increase in
net tangible book value of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to existing stockholders and an immediate dilution of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to new investors purchasing shares of common stock in this
offering at the initial offering price.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table illustrates this dilution on
a per share basis:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="69%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Assumed initial public offering price per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Historical adjusted net tangible book value per
    share as of
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase per share attributable to new investors
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma net tangible book value per share after
    this offering
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dilution per share to new investors
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes as
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;the
number of shares of our common stock purchased from us, the
total consideration paid to us, and the average price per share
paid to us by existing stockholders and to be paid by new
investors purchasing shares of our common stock in this
offering. The table assumes an initial public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, and deducts underwriting discounts and commissions and
estimated offering expenses payable by us:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="45%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Shares Purchased</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Total Consideration</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price Per</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Percent</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Percent</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Share</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Existing stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">New investors
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">100</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">100</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The above discussion and tables are 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 issued and outstanding as of September&nbsp;30,
2004 and excludes:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of our common stock issuable upon exercise of options
    outstanding;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of our common stock reserved for issuance under our 1995 Stock
    Option Plan, our 2005 Equity Incentive Plan and our 2005
    Employee Stock Purchase Plan.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To the extent the outstanding options are
exercised, you will experience further dilution. In addition, we
may choose to raise additional capital due to market conditions
or strategic considerations even if we believe we have
sufficient funds for our current or future operating plans. To
the extent that additional capital is raised through the sale of
equity or convertible debt securities, the issuance of these
securities could result in further dilution to our stockholders.
</FONT>

<P align="center"><FONT size="2">25
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<A name='108'></A>
</DIV>

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

<P align="center">
<B><FONT size="2">SELECTED CONSOLIDATED FINANCIAL DATA</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">You should read the following financial
information together with &#147;Management&#146;s Discussion and
Analysis of Financial Condition and Results of Operations&#148;
following this section and our consolidated financial statements
and the notes thereto included elsewhere in this
prospectus.</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following tables present our selected
consolidated balance sheet and statement of operations data as
of and for the fiscal years ended December&nbsp;31, 1999, 2000,
2001, 2002 and 2003 and the nine months ended September&nbsp;30,
2003 and 2004. Our consolidated balance sheet data as of
December&nbsp;31, 2002 and 2003 and September&nbsp;30, 2004 and
our consolidated statement of operations data for the fiscal
years ended December&nbsp;31, 2001, 2002 and 2003 and the nine
months ended September&nbsp;30, 2004 have been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. Our consolidated balance sheet data as of
December&nbsp;31, 1999, 2000 and 2001 and our consolidated
statement of operations data for the fiscal years ended
December&nbsp;31, 1999 and 2000 have been derived from our
unaudited consolidated financial statements not included in this
prospectus. Our selected consolidated financial data for and as
of the nine months ended September&nbsp;30, 2003 were derived
from our unaudited consolidated financial statements included
elsewhere in this prospectus. Operating results for the nine
months ended September&nbsp;30, 2004 are not necessarily
indicative of the results that may be expected for the full
fiscal year ending December&nbsp;31, 2004.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="31%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Ended September 30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1999(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="27"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="27" align="center" nowrap><B><FONT size="1">(Dollars in thousands, except per share data)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Consolidated Statements of Operations
    Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">434</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">160</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,875</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Operating expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">General and administrative
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,529</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,904</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,394</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,493</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,407</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,131</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,148</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Research and development
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,209</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,784</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,085</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,874</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,641</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,183</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total operating expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,738</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,688</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,479</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,367</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,048</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,314</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,420</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss from operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,722</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,688</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,479</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,367</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,614</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,154</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,545</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other income (expense), net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">843</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,070</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">186</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,509</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,364</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,613</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,123</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss before benefit for income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,879</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,758</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,293</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,876</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,978</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,767</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,668</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Benefit for income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">235</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">278</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">225</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,879</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,523</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,015</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,651</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,903</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,767</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,668</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Warrant deemed dividend and redeemable
    convertible preferred stock dividends
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(301</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,254</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,288</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,254</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(941</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,091</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss attributable to common stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,879</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,824</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,269</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,939</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,157</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,708</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,759</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per common share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.75</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.05</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.26</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.66</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.69</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.86</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,507,323</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,507,323</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,551,622</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,597,638</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,602,871</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,602,707</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,710,741</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Unaudited pro forma basic and diluted loss per
    common share(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.24</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.12</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares used in computing unaudited pro forma
    basic and diluted loss per common share(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,486,162</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,666,628</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">26
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="40%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">As of December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">As of</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1999(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">(Dollars in thousands)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Consolidated Balance Sheet Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">895</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,791</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,356</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">620</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,007</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,026</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Working capital (deficit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,896</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,590</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(933</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,133</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,068</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,839</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,232</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,654</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">951</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,196</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt, net of current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,032</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,709</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,407</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,085</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,692</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Redeemable convertible preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,147</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,201</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,456</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,099</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,040</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(16,376</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(22,998</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,013</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(39,664</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(50,354</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(55,993</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,332</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,931</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,174</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(31,430</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(43,595</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(48,734</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">As discussed in Note&nbsp;11 to our consolidated
    financial statements, our 2001 consolidated financial statements
    were restated. We made certain adjustments to our previously
    audited 1999 and 2000 consolidated financial statements in this
    summary to reflect our results on a basis consistent with our
    restated 2001 consolidated financial statements. Those
    adjustments have not been audited.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">For a discussion of the calculation of unaudited
    pro forma loss per common share, see Note&nbsp;2 to our
    consolidated financial statements.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">27
</FONT>

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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2"> <A name='109'></A>
</FONT>
</DIV>

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

<P align="center">
<B><FONT size="2">MANAGEMENT&#146;S DISCUSSION AND
ANALYSIS</FONT></B>

<DIV align="center">
<B><FONT size="2">OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">You should read the following discussion of
our financial condition and results of operations in conjunction
with our consolidated financial statements and the related notes
included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties.
As a result of many factors, including those set forth under the
section entitled &#147;Risk Factors&#148; and elsewhere in this
prospectus, our actual results may differ materially from those
anticipated in these forward-looking statements.</FONT></I>

<P align="center">
<B><FONT size="2">Overview</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are a specialty pharmaceutical company focused
on the development and commercialization of topically-delivered
prescription pain management therapeutics. We have six product
candidates in clinical development; three in late-stage
development that are ready to enter, or have entered,
Phase&nbsp;IIb or Phase&nbsp;III clinical trials, and three that
have completed initial Phase&nbsp;II clinical trials. All of our
product candidates target moderate-to-severe pain that is
influenced, or mediated, by nerve receptors located just beneath
the skin&#146;s surface. Our product candidates utilize
proprietary formulations and several topical delivery
technologies to administer FDA-approved pain management
therapeutics, or analgesics.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our late stage product candidates are:
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">EpiCept NP-1, a prescription topical analgesic
cream designed to provide effective, long-term relief from the
pain of peripheral neuropathies;
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">LidoPAIN&nbsp;SP, a sterile prescription
analgesic patch designed to provide sustained topical delivery
of lidocaine to a post-surgical or post-traumatic sutured wound
while also providing a sterile protective covering for the
wound; and
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">LidoPAIN&nbsp;BP, a prescription analgesic
non-sterile patch designed to provide sustained topical delivery
of lidocaine for the treatment of acute or recurrent lower back
pain.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our objective is to address unmet medical needs
in pain management by developing a broad portfolio of
topically-delivered prescription analgesics for the treatment of
moderate-to-severe pain where existing treatments are
ineffective or cause significant adverse side effects. To
achieve our objective, the three key elements of our strategy
are to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">focus our development efforts on
    topically-delivered analgesics targeting peripheral nerve
    receptors;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">focus our development efforts on FDA-approved
    drugs;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">opportunistically enter into development and
    commercialization alliances for our products.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">None of our product candidates has been approved
by the FDA or any comparable foreign agencies. We have yet to
generate revenues from product sales. Until 2003, we had not
generated any significant revenues. During 2003, we entered into
two agreements, the first in July with Adolor for the
development and commercialization of certain products, including
LidoPAIN&nbsp;SP in North America, and the second in December
with Endo for the worldwide commercialization of certain
products, including LidoPAIN&nbsp;BP. We received a total of
$10.0&nbsp;million in upfront license fees upon the closing of
these license agreements. Under these relationships, we are
eligible to receive an additional $102.5&nbsp;million in
milestone payments and, upon receipt of appropriate regulatory
approvals, royalties based on net sales of products. There is no
assurance that any of these milestones will be earned or any
royalties paid. Our ability to generate additional revenue in
the future will depend on our ability to meet development or
regulatory milestones under our existing license agreements that
trigger additional payments to us, to enter into new license
agreements for other products or territories and to receive
regulatory approvals for, and successfully commercialize, our
product candidates either directly or through commercial
partners.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since our inception we have incurred significant
net losses each year. Our net loss for the year ended
December&nbsp;31, 2003 and the nine months ended
September&nbsp;30, 2004 was $9.9&nbsp;million and
$4.7&nbsp;million,
</FONT>

<P align="center"><FONT size="2">28
</FONT>

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<DIV align="left">
<FONT size="2">respectively. As of September&nbsp;30, 2004, we
had an accumulated deficit of $56.0&nbsp;million. Our losses
have resulted principally from costs incurred in connection with
our development activities and from general and administrative
expenses. Even if we succeed in developing and commercializing
one or more of our product candidates, we may never become
profitable. We expect to continue to incur increasing expenses
over the next several years as we:
</FONT>
</DIV>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">continue to conduct clinical trials for our
    product candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">seek regulatory approvals for our product
    candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">develop, formulate, and commercialize our product
    candidates;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">implement additional internal systems and develop
    new infrastructure;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">acquire or in-license additional products or
    technologies or expand the use of our technologies;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">maintain, defend and expand the scope of our
    intellectual property;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">hire additional personnel.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our operations to date have been funded
principally through the proceeds from the sales of common and
preferred securities, debt, revenue from collaborative
relationships, investment income earned on cash balances and
short-term investments and the sales of a portion of its New
Jersey net operating loss carry forwards.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As disclosed in Note&nbsp;11 to our consolidated
financial statements, our 2001 consolidated financial statements
were restated to correct errors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have a 100%-owned subsidiary, EpiCept GmbH,
based in Munich, Germany, which is engaged in research and
development activities on our behalf. Historically, a
significant amount of our debt was denominated in euros.
Following this offering, more than half of our euro-denominated
debt will either be repaid or converted into common stock.
</FONT>

<P align="center">
<B><FONT size="2">Financial Operations Review</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Revenues</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our revenues are limited to amounts earned under
licenses and related development agreements. We have not
generated any significant revenue from product sales or
royalties, nor do we expect to generate such revenues in the
near term. We are currently recognizing the payment of upfront
license fees from our licensees as revenues on a straight-line
basis over the anticipated development period for the respective
product candidates. Licensing fees of $2.5 and $7.5&nbsp;million
were received in 2003 from Adolor and Endo, respectively, of
which $2.3&nbsp;million in the aggregate was recognized as
revenue through September&nbsp;30, 2004. We expect that any
additional revenue we generate as a result of the timing and
amount of milestone payments we may receive from our strategic
relationships, as well as those we may receive upon the sale of
our product candidates, to the extent any are successfully
commercialized, will vary from quarter-to-quarter and from
year-to-year.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Royalty Expense</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon receipt of marketing approval and
commencement of commercial sales, which may not occur for
several years, we will owe royalties to licensors of certain
patents. Under a royalty agreement with Dr.&nbsp;R. Douglas
Cassel, we are obligated to pay a royalty based on net sales of
any of our products for the treatment of pain associated with
surgically closed wounds. Under a sublicense agreement with
Epitome Pharmaceuticals Limited that relates to EpiCept NP-1, we
are obligated to pay royalties based on annual net sales derived
from the products incorporating the licensed technology. In each
case, our royalty obligation expires upon the expiration of the
last to expire related patent.
</FONT>

<P align="center"><FONT size="2">29
</FONT>

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<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Research and Development
    Expense</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Research and development expense consists of
development work associated with product candidates, including
employee compensation, costs of preclinical studies, clinical
trials and clinical supplies, consultant fees and payments to
our research partners. We are responsible for all of the
research and development costs related to EpiCept&nbsp;NP-1 and
LidoPAIN&nbsp;BP and for continuing and completing our European
Phase&nbsp;III clinical trial for LidoPAIN&nbsp;SP that we
anticipate will be used to support an application for marketing
approval in Europe. As we commence more extensive development
activities, including Phase&nbsp;III clinical trials and
commercial scale-up, we expect research and development expense
to increase substantially.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">For the years ended December&nbsp;31, 2003, 2002,
and 2001, and the nine-month periods ended September&nbsp;30,
2004 and 2003, we incurred the following research and
development expense:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="52%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">(Dollars in thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><I><FONT size="2">Direct Expenses</FONT></I></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">EpiCept&nbsp;NP-1
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">447</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,069</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,144</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">260</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LidoPAIN&nbsp;SP
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">186</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">513</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">139</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">196</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LidoPAIN&nbsp;BP
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">527</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">501</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other Projects
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">345</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">902</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">76</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><I><FONT size="2">Total Direct Expenses</FONT></I></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">698</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,783</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,060</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">460</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">494</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><I><FONT size="2">Indirect Expenses</FONT></I></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Staffing
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">637</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">681</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">654</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">629</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">489</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other Indirect
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">306</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">410</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">371</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">183</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><I><FONT size="2">Total Indirect Expenses</FONT></I></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">943</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,091</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,025</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">812</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">689</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Total Research&nbsp;&#38;
    Development</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,641</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,874</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,085</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,183</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Direct expenses consist primarily of fees paid to
vendors and consultants for services related to preclinical
product development, clinical trials, and manufacturing of the
respective products. We generally maintain few fixed
commitments; therefore, we have flexibility with respect to the
timing and magnitude of a significant portion of our direct
expenses. Indirect expenses are those expenses we incur that are
not allocated by project, which consist primarily of the
salaries and benefits of our research and development staff.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Development timelines and costs are difficult to
estimate and may vary significantly for each product and from
quarter-to-quarter. The process of seeking regulatory approvals,
and the subsequent compliance with applicable regulations,
require the expenditure of substantial resources. We intend to
advance our three late-stage product candidates into
Phase&nbsp;IIb or Phase&nbsp;III clinical trials by the first
half of 2005. You should read the risk factors contained
elsewhere in this prospectus that relate to the risks inherent
in our research and development programs.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">General and Administrative
    Expense</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">General and administrative expense consists
primarily of compensation for employees in executive and
operational functions, including finance and accounting,
business development and corporate development. Other
significant costs include facilities costs and professional fees
for accounting and legal services. After completion of this
offering, we anticipate our general and administrative expenses
to increase due to increased costs for insurance, professional
fees, external reporting requirements, Sarbanes-Oxley compliance
and investor relations associated with operating as a
publicly-traded company. These increases will also likely
include the hiring of additional personnel.
</FONT>

<P align="center"><FONT size="2">30
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Stock-Based Compensation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the grant of stock options to
employees, we recorded deferred stock-based compensation as a
component of stockholders&#146; deficit. Deferred stock
compensation for options granted to employees is the difference
between the fair value of our common stock on the date such
options were granted and their exercise price. We amortize this
stock-based compensation as charges to operations over the
vesting periods of the options, generally 36 months.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We recorded $0.6&nbsp;million in amortization of
deferred stock-based compensation related to options granted to
employees during the year ended December&nbsp;31, 2003. There
was a balance of $0.4&nbsp;million of deferred stock-based
compensation at December&nbsp;31, 2003 which we expect to be
substantially amortized in 2004 with the balance amortized in
2005. We also recorded $0.2&nbsp;million of stock-based
compensation expense related to options granted to non-employees
during the year ended December&nbsp;31, 2003. Stock-based
compensation expense for non-employees is recorded based on the
fair value method utilizing the Black-Scholes option pricing
model. The value of the underlying option is periodically
re-measured at each reporting date and income or expense is
recognized during the vesting period. Stock-based compensation
expense is classified as either research and development expense
or general and administrative expense depending on the nature of
the compensated services.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The amount of stock-based compensation expense we
expect to incur in future periods may decrease if unvested
options for which deferred compensation expense has been
recorded are subsequently cancelled, or may increase if we make
future option grants with exercise prices below the estimated
fair market value of our common stock on the date of grant.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Other Income (Expense)</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Other income (expense)&nbsp;consists of
non-operating items, including interest income, interest expense
and foreign exchange transaction gains or losses. Interest
income is earned from funds on deposit. Interest expense is
incurred from our various financing arrangements. A portion of
our interest expense derives from non-cash charges for debt
discount and beneficial conversion feature present in certain of
our debt obligations. Foreign exchange transaction gains and
losses are principally related to the payment of intercompany
debt obligations denominated in foreign currencies.
</FONT>

<P align="center">
<B><FONT size="2">Results of Operations</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Nine Months Ended September&nbsp;30, 2004
    and 2003</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Revenues.</FONT></I></B><FONT size="2"> We
recorded $1.9&nbsp;million in revenue during the nine months
ended September&nbsp;30, 2004, representing the recognized
portion of the deferred revenue from upfront licensing fees
received from Adolor and Endo in 2003. In July 2003, we entered
into a license agreement with Adolor relating to certain
products, including LidoPAIN&nbsp;SP, which resulted in our
receipt of a $2.5&nbsp;million payment upon signing. This amount
has been deferred and is being recognized as revenue on a
straight-line basis over the three-year estimated development
period of LidoPAIN&nbsp;SP. In December 2003, we signed a
license agreement with Endo, which resulted in our receipt of a
$7.5&nbsp;million payment upon signing. This payment has also
been deferred and is being recognized as revenue on a
straight-line basis over the estimated 4.5&nbsp;year development
period of LidoPAIN&nbsp;BP.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Revenue in the first nine months of 2003 amounted
to $0.2&nbsp;million representing the recognized portion of the
deferred revenue from the upfront licensing fee received from
Adolor in July 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Research and development
expense.</FONT></I></B><FONT size="2"> Research and development
expense increased approximately 8% in the nine-month period
ended September&nbsp;30, 2004 to $1.3&nbsp;million compared to
$1.2&nbsp;million during the nine-month period ended
September&nbsp;30, 2003. Primary research and development
activity during the 2004 period included preparing for the
commencement of the Phase III clinical trial of LidoPAIN SP in
Germany, an End of Phase II meeting with the FDA for EpiCept
NP-1, ongoing work with respect to the design of pivotal
clinical trials for EpiCept NP-1 and LidoPAIN BP, and the
selection of manufacturers for the commercial scale-up of our
product candidates. Included in 2004 research and development
expense was a $0.1&nbsp;million maintenance fee payment relating
to our license agreement for Epicept NP-1. We commenced
enrollment of our Phase III trial in Germany of LidoPAIN SP in
November&nbsp;2004.
</FONT>

<P align="center"><FONT size="2">31
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Research and development expenses in the first
nine months of 2003 consisted primarily of salaries and
benefits, payments to consultants and clinical trial expenses
related to EpiCept&nbsp;NP-1 and LidoPAIN&nbsp;SP. We completed
two Phase&nbsp;II clinical trials for EpiCept&nbsp;NP-1 and one
Phase&nbsp;II clinical trial for LidoPAIN&nbsp;SP during the
first quarter of 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">General and administrative
expense.</FONT></I></B><FONT size="2"> General and
administrative expense increased $1.0&nbsp;million to
$3.1&nbsp;million from $2.1&nbsp;million for the nine months
ended September&nbsp;30, 2004 and 2003, respectively, primarily
as a result of higher audit and legal expenses, additional
staffing, higher employee compensation and increased consulting
expenses in connection with business development activities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Other income
(expense).</FONT></I></B><FONT size="2"> Other expense, net,
decreased $1.5&nbsp;million, to $2.1&nbsp;million from
$3.6&nbsp;million for the nine months ended September&nbsp;30,
2004 and 2003, respectively. Loan discount and beneficial
conversion feature related to the convertible bridge loan taken
in 2002 and early 2003 was fully accreted during the first half
of 2004; as a result, interest expense for the nine-month period
ended September 30, 2004 decreased to $2.3&nbsp;million from
$3.2&nbsp;million for the nine-month period ended
September&nbsp;30, 2003, a decline of $0.9&nbsp;million.
Components of interest expense for the 2004 period were non-cash
charges of $1.3&nbsp;million related to the accretion of the
discount on the convertible bridge loan, $0.8&nbsp;million in
coupon interest payable on loans, and $0.1&nbsp;million each for
increases in additional and contingent interest on certain debt
obligations. Other expense, net, was also affected by net
foreign exchange transaction gains related to intercompany debt
recognized in 2004 of $0.1&nbsp;million compared with net
foreign exchange transaction losses recognized in 2003 of
$0.4&nbsp;million, a net improvement of $0.5&nbsp;million. Since
a portion of our transactions is denominated in euros, foreign
exchange transaction gains and losses result from changes in the
exchange rate between the U.S. dollar and the euro during the
relevant period.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Warrant Deemed Dividend and Redeemable
Convertible Preferred Stock
Dividends.</FONT></I></B><FONT size="2"> In addition to accrued
redeemable convertible preferred stock dividends of
$0.9&nbsp;million relating to our Series&nbsp;B and C redeemable
convertible preferred stock, we recorded a beneficial conversion
charge of $0.2&nbsp;million related to the exercise of warrants
into Series&nbsp;A convertible preferred stock. A total of
74,259&nbsp;warrants were exercised via a net share issuance of
53,225 shares of Series&nbsp;A convertible preferred stock.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Years Ended December&nbsp;31, 2003, 2002
    and 2001</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Revenues.</FONT></I></B><FONT size="2"> We
recorded $0.4&nbsp;million in revenue during the year ended
December&nbsp;31, 2003, representing the recognized portion of
the deferred revenue from upfront licensing fees received from
Adolor and Endo. In July&nbsp;2003, we entered into a license
agreement with Adolor relating to certain products, including
LidoPAIN&nbsp;SP, which resulted in our receipt of a
$2.5&nbsp;million non-refundable payment upon signing. This
amount has been deferred and is being recognized as revenue on a
straight-line basis over the three-year estimated development
period of LidoPAIN&nbsp;SP. In December&nbsp;2003, we signed a
license agreement with Endo, which resulted in our receipt of a
non-refundable $7.5&nbsp;million payment upon signing. This
payment has also been deferred and is being recognized as
revenue on a straight-line basis over the estimated four and
one-half-year development period of LidoPAIN&nbsp;BP. We did not
recognize any revenues in 2002 or 2001.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Research and development
expense.</FONT></I></B><FONT size="2"> Our research and
development expenses were $1.6, $4.9 and $4.1&nbsp;million for
the years ended December&nbsp;31, 2003, 2002 and 2001,
respectively. In early 2003, we completed three clinical trials
for two of our late-stage product candidates: one Phase&nbsp;II
trial for LidoPAIN&nbsp;SP in Germany and two Phase&nbsp;II
trials for EpiCept&nbsp;NP-1. We undertook no new significant
clinical activity during the balance of the year, resulting in
the reduction of expense from 2002 and 2001 as compared to 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In 2002, we were conducting three clinical trials
for two of our late stage product candidates, including two
Phase&nbsp;II trials for EpiCept&nbsp;NP-1 that involved more
than 25 centers in the United States and Canada. Direct expenses
related to the EpiCept&nbsp;NP-1 clinical trial totaled
$2.1&nbsp;million, or 42%, of our total research and development
expenses in 2002. A Phase&nbsp;II clinical trial for
LidoPAIN&nbsp;SP at nine centers in Germany commenced in
December&nbsp;2001 and continued throughout 2002. Direct
expenses for the LidoPAIN&nbsp;SP clinical trial totaled
$0.8&nbsp;million, or 17%, of total research and development
expenses in 2002.
</FONT>

<P align="center"><FONT size="2">32
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Research and development expenses for 2001
consisted primarily of the costs of non-clinical testing and
clinical trial activity for our product candidates, payments to
consultants and salaries and benefits.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">General and administrative
expense.</FONT></I></B><FONT size="2"> General and
administrative expenses were $3.4, $3.5 and $3.4&nbsp;million
for the years ended December&nbsp;31, 2003, 2002, and 2001,
respectively. In 2003, general and administrative expenses were
affected by higher legal, audit and insurance expenses and
increased business development efforts in connection with the
negotiation and conclusion of our license agreements with Adolor
and with Endo. This increase was offset by lower consulting and
directors&#146; expenses. Increased staffing costs of
$0.1&nbsp;million primarily accounted for the increase in
general and administrative expenses in 2002 from 2001.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">General and administrative expense in 2001
consisted primarily of compensation for employees in executive
and operational functions, facilities costs and professional
fees for accounting and legal services, including patent
maintenance.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Other income
(expense).</FONT></I></B><FONT size="2"> Other income (expense),
net, consisted of net other expense of $5.4, $1.5 and net other
income of $0.2&nbsp;million for the years ended
December&nbsp;31, 2003, 2002 and 2001, respectively. The
increase in net expense in 2003 of $3.9&nbsp;million was
primarily attributable to an increase of $3.8&nbsp;million in
interest expense, principally due to the amortization of the
debt discount and the beneficial conversion feature in
connection with our convertible bridge loan that closed in
tranches beginning November 2002. The discount is being accreted
over the original scheduled term of the convertible bridge loan
and totaled $2.6&nbsp;million for the year ended
December&nbsp;31, 2003. The beneficial conversion feature of
approximately $1.2&nbsp;million was recorded in April&nbsp;2003,
of which $0.8&nbsp;million was recognized in 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The increase in other expense of
$1.7&nbsp;million in 2002 over 2001 was principally due to
$0.7&nbsp;million in net foreign exchange transaction losses
recognized in 2002 compared with $0.3&nbsp;million in net
foreign exchange transaction gains recognized in 2001, as well
as reduced interest income and increased interest expense as
cash on hand declined while notes and loans payable increased.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Benefit for income
taxes.</FONT></I></B><FONT size="2"> Federal income tax expense
for the year ended December&nbsp;31, 2003 was approximately
$31,000. State income benefit for the year ended
December&nbsp;31, 2003 was $(105,000). The state income tax
benefit is comprised of current state income tax expense of
$0.1&nbsp;million offset by a state income tax benefit resulting
from the sale of some state NOLs of $0.2&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the years ended December&nbsp;31, 2003 and
2002, we sold a portion of our state NOLs resulting in a state
tax benefit of approximately $0.3&nbsp;million in each of those
years. The sales of cumulative net operating losses are a result
of a New&nbsp;Jersey state law enacted January&nbsp;1, 1999
allowing emerging technology and biotechnology companies to
transfer or &#147;sell&#148; their unused New&nbsp;Jersey net
operating loss carryforwards and New&nbsp;Jersey research and
development tax credits to any profitable New&nbsp;Jersey
company qualified to purchase them for cash. We received
approval from the State of New&nbsp;Jersey to sell NOLs in
November&nbsp;2003 and November&nbsp;2002 and entered into a
contract with a third party to sell the NOLs at a discount for
approximately $0.2&nbsp;million in each December of the year.
</FONT>

<P align="center">
<B><FONT size="2">License Agreements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December&nbsp;2003, we entered into a license
agreement with Endo under which we granted Endo (and its
affiliates) the exclusive (including as to us and our
affiliates) worldwide right to commercialize LidoPAIN&nbsp;BP.
We also granted Endo worldwide rights to certain of our other
patents used by Endo in the development of certain Endo
products, including Lidoderm, Endo&#146;s topical
lidocaine-containing patch, for the treatment of chronic lower
back pain. We remain responsible for continuing and completing
the development of LidoPAIN&nbsp;BP, including the conduct of
all clinical trials and the supply of the clinical products
necessary for those trials and the preparation and submission of
the NDA in order to obtain regulatory approval for
LidoPAIN&nbsp;BP. Upon the execution of the Endo agreement, we
received a payment of $7.5&nbsp;million, which has been deferred
and is being recognized as revenue ratably over the estimated
development period of LidoPAIN&nbsp;BP, and we may receive
payments of up to $52.5&nbsp;million upon the achievement of
various milestones relating to product development, regulatory
approval and commercial success for both our LidoPAIN&nbsp;BP
product candidate and Endo&#146;s own back pain product
candidate, so long as, in the case of Endo&#146;s product
candidate, our patents provide protection thereof. We will also
</FONT>

<P align="center"><FONT size="2">33
</FONT>

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<DIV align="left">
<FONT size="2">receive royalties from Endo based on the net
sales of LidoPAIN&nbsp;BP. These royalties are payable until
generic equivalents of the LidoPAIN&nbsp;BP product candidate
are available or until expiration of the patents covering
LidoPAIN&nbsp;BP, whichever is sooner. We are also eligible to
receive milestone payments from Endo of up to approximately
$30.0&nbsp;million upon the achievement of specified net sales
milestones of covered Endo products, including Lidoderm,
Endo&#146;s chronic lower back pain product candidate, so long
as our patents provide protection thereof. The total amount of
upfront and milestone payments we are eligible to receive under
the Endo agreement is $90.0&nbsp;million. There is no certainty
that any of these milestones will be achieved or any royalty
earned.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July&nbsp;2003, we entered into a license
agreement with Adolor under which we granted Adolor the
exclusive right to commercialize, among other products,
LidoPAIN&nbsp;SP throughout North America. Upon the execution of
the Adolor agreement, we received a payment of
$2.5&nbsp;million, which has been deferred and will be
recognized as revenue over the estimated development period of
LidoPAIN&nbsp;SP. The agreement also requires Adolor to pay us
up to $20.0&nbsp;million upon reaching certain development,
regulatory and commercial milestones and a royalty on sales of
licensed products, including LidoPAIN&nbsp;SP. There is no
certainty that any of these milestones will be achieved or any
royalty earned.
</FONT>

<P align="center">
<B><FONT size="2">Liquidity and Capital Resources</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have devoted substantially all of our cash
resources to research and development programs and general and
administrative expenses. To date, we have not generated any
meaningful revenues from the sale of products and we do not
expect to generate any such revenues for a number of years, if
at all. As a result, we have incurred an accumulated deficit of
$50.4 and $56.0&nbsp;million as of December&nbsp;31, 2003 and
September&nbsp;30, 2004, respectively, and we expect to incur
operating losses, potentially greater than losses in prior
years, for a number of years in the future. The audit report
from our independent registered public accounting firm states
that our recurring losses from operations and our accumulated
deficit raise substantial doubt about our ability to continue as
a going concern. Our working capital deficit as of
September&nbsp;30, 2004 amounted to $3.1&nbsp;million. Cash and
cash equivalents were $3.0&nbsp;million as of September&nbsp;30,
2004. Since our inception through September&nbsp;30, 2004, we
have financed our operations through the proceeds from the sales
of common and preferred securities, debt, revenue from
collaborative relationships, investment income earned on cash
balances and short-term investments and the sales of a portion
of our New&nbsp;Jersey net operating loss carry forwards.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the nine months ended September&nbsp;30,
2004, cash used in operating activities totaled
$3.6&nbsp;million, primarily due to our net loss of
$4.7&nbsp;million and a $1.9&nbsp;million reduction in deferred
revenue representing the amount we recorded as revenue during
the period. Cash use was partially offset by a $1.1 million
increase in accounts payable and $1.3&nbsp;million for the
accretion of loan discount on our convertible bridge loan. For
the year ended December&nbsp;31, 2003, net cash of
$4.8&nbsp;million was provided by operating activities primarily
as a result of $10.0&nbsp;million in deferred revenue that will
be recognized in future periods, $3.4&nbsp;million in accretion
of discount on our convertible bridge loan, $0.8&nbsp;million
foreign exchange loss due to an unfavorable change in the
exchange rate between the U.S.&nbsp;dollar and euro pertaining
primarily to our loan interest payments and $0.8&nbsp;million in
stock-based compensation charges, which were partially offset by
our $9.9&nbsp;million net loss. Deferred revenue of
$10.0&nbsp;million represents the $10.0&nbsp;million in
non-refundable license fee payments we received from Adolor and
Endo in 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Cash used in investing activities totaled
approximately $25,000 and $17,000 during the nine months ended
September&nbsp;30, 2004 and the year ended December&nbsp;31,
2003, respectively, primarily for the purchase of office
equipment. Future cash used in investing activities for property
and equipment are not expected to be significant.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Cash used in financing activities totaled
approximately $1.4&nbsp;million during the nine months ended
September&nbsp;30, 2004 and consisted of $0.7&nbsp;million of
scheduled loan repayments and $0.7&nbsp;million of costs related
to our proposed initial public offering of common stock. Cash
provided by financing activities totaled approximately
$2.7&nbsp;million for the year ended December&nbsp;31, 2003,
primarily related to the receipt of a portion of the proceeds
from our convertible bridge loan.
</FONT>

<P align="center"><FONT size="2">34
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that our existing cash resources, the
net proceeds of this offering, future payments from our
strategic partners, future sales of our New&nbsp;Jersey net
operating loss carry forwards and interest earned on cash
balances and investments will be sufficient to meet our
projected operating requirements for at least the next
24&nbsp;months. However, we may need to raise additional capital
or incur indebtedness to continue to fund our operations in the
future.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our future capital uses and requirements depend
on numerous forward-looking factors. These factors include, but
are not limited to, the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">progress in our research and development
    programs, as well as the magnitude of these programs;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the timing, receipt and amount of milestone and
    other payments, if any, from present and future collaborators,
    if any;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our ability to establish and maintain additional
    collaborative arrangements;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the resources, time and costs required to
    successfully initiate and complete our preclinical and clinical
    trials, obtain regulatory approvals, protect our intellectual
    property and obtain and maintain licenses to third-party
    intellectual property;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the cost of preparing, filing, prosecuting,
    maintaining and enforcing patent claims; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the timing, receipt and amount of sales and
    royalties, if any, from our potential products.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If, at any time, our prospects for financing our
clinical development programs decline, we may decide to reduce
research and development expenses by delaying, discontinuing or
reducing our funding of development of one or more product
candidates. Alternatively, we might raise funds through public
or private financings, strategic relationships or other
arrangements. We cannot assure you that the funding, if needed,
will be available on attractive terms, or at all. Furthermore,
any additional equity financing may be dilutive to stockholders
and debt financing, if available, may involve restrictive
covenants and increased interest expense. Similarly, financing
obtained through future co-development arrangements may require
us to forego certain commercial rights to future drug
candidates. Our failure to raise capital as and when needed
could have a negative impact on our financial condition and our
ability to pursue our business strategy.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Contractual Obligations</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2003, the annual amounts
of future minimum payments under debt obligations, interest,
lease obligations and other long term liabilities consisting of
research, development, and license agreements are as follows (in
thousands of U.S.&nbsp;dollars, using exchange rates where
applicable in effect as of December&nbsp;31, 2003):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="28%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">12/31/04</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">12/31/05</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">12/31/06</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">12/31/07</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">12/31/08</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Thereafter</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,010</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,861</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,208</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,520</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,599</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">690</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">484</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">272</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,279</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,725</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Operating leases
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">267</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">222</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">68</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">597</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other long-term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">439</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">406</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">524</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,225</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">525</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">950</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,069</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,406</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,973</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,072</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,064</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">525</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">950</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,990</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our long-term debt commitments consist of the
following:
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2"><FONT face="times new roman,times">&#128;</FONT>&nbsp;1.5&nbsp;Million
Due 2007.</FONT></I></B><FONT size="2"> In August&nbsp;1997, our
subsidiary, EpiCept&nbsp;GmbH entered into a 10-year
non-amortizing loan in the amount of
<FONT face="times new roman,times">&#128;</FONT>&nbsp;1.5&nbsp;million
with Technologie-Beteiligungs Gesellschaft mbH der Deutschen
Ausgleichsbank, or &#147;tbg.&#148; Proceeds must be directed
toward research, development, production and distribution of
pharmaceutical products. The loan bears interest at 6%&nbsp;per
annum. Tbg is also entitled to receive additional compensation
equal to 9% of the annual surplus (income before taxes, as
defined in the debt agreement) of EpiCept&nbsp;GmbH, reduced by
any other compensation received from EpiCept&nbsp;GmbH by virtue
of other loans to or investments in EpiCept&nbsp;GmbH provided
that tbg is an equity investor in EpiCept&nbsp;GmbH during that
time period. To date, EpiCept&nbsp;GmbH has had no annual
surplus. We consider the additional compensation element based
on the surplus of the EpiCept&nbsp;GmbH to
</FONT>

<P align="center"><FONT size="2">35
</FONT>

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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2">be a derivative. We have assigned no value to the
derivative at each reporting period as no surplus of
EpiCept&nbsp;GmbH is anticipated over the term of the agreement.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At the demand of tbg, additional amounts may be
due at the end of the loan term up to 30% of the loan amount,
plus 6% of the principal balance of the loan for each year after
the expiration of the fifth complete year of the loan period,
such payments to be offset by the cumulative amount of all
payments made to tbg from the annual surplus of
EpiCept&nbsp;GmbH. We are accruing these additional amounts as
additional interest up to the maximum amount due over the term
of the loan. Accrued interest attributable to these additional
amounts totaled $0.3, $0.3 and $0.4&nbsp;million at
December&nbsp;31, 2003 and 2002, and September&nbsp;30, 2004,
respectively. The effective rate of interest of this loan is
9.7%.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2"><FONT face="times new roman,times">&#128;</FONT>&nbsp;2.0&nbsp;Million
Due 2007.</FONT></I></B><FONT size="2"> In February&nbsp;1998,
EpiCept&nbsp;GmbH entered into a 10-year non-amortizing
convertible term loan in the amount of
<FONT face="times new roman,times">&#128;</FONT>&nbsp;2.0&nbsp;million
with tbg. The loan is non-interest bearing; however, the loan
agreement provides for potential future annual payments from
surplus of EpiCept&nbsp;GmbH up to 6% of the outstanding loan
principal balance, not to exceed 9% of all payments made from
surplus of EpiCept&nbsp;GmbH and limited to 7% of the total
financing from tbg. To date, EpiCept&nbsp;GmbH has had no annual
surplus. We consider the additional compensation element based
on the surplus of the EpiCept&nbsp;GmbH to be a derivative. We
have assigned no value to the derivative at each reporting
period as no surplus of EpiCept&nbsp;GmbH is anticipated over
the term of the agreement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The loan is convertible into shares of our common
stock at any time by tbg at a conversion price of $7.07&nbsp;per
share. We can require conversion upon a defined triggering event
(such as a sale of substantially all our assets, a public
offering of our securities, a sale of more than 50% of the
voting power of our outstanding equity securities, a merger,
etc.) at a calculated conversion price ranging between $2.02 and
$7.07 based on the applicable triggering event&#146;s proceed.
We intend to require tbg to convert this loan upon consummation
of this offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2"><FONT face="times new roman,times">&#128;</FONT>&nbsp;2.6&nbsp;Million
Due 2006.</FONT></I></B><FONT size="2"> In March&nbsp;1998,
EpiCept&nbsp;GmbH entered into a term loan in the amount of
<FONT face="times new roman,times">&#128;</FONT>&nbsp;2.6&nbsp;million
with IKB Private Equity&nbsp;GmbH, or &#147;IKB,&#148; which we
guaranteed. The interest rate on the loan varies and was
10.5%&nbsp;per annum from August&nbsp;1, 2000 through
March&nbsp;31, 2001, 15%&nbsp;per annum through June&nbsp;30,
2003 and 20%&nbsp;per annum thereafter. The loan was amended in
December&nbsp;2002 to extend the maturity to December&nbsp;31,
2006 and incorporate a principal repayment schedule, which
commenced April&nbsp;30, 2004. The first 11 quarterly principal
payments are
<FONT face="times new roman,times">&#128;</FONT>&nbsp;0.2&nbsp;million
(approximately $0.2&nbsp;million as of September&nbsp;30, 2004),
and the final quarterly principal payment will be approximately
<FONT face="times new roman,times">&#128;</FONT>&nbsp;0.4&nbsp;million
(approximately $0.4&nbsp;million as of September&nbsp;30, 2004).
The loan agreement provides for contingent interest of
4%&nbsp;per annum of the principal balance, becoming due only
upon our realization of a profit and payable up to two years
thereafter, as defined in the agreement. We have not realized a
profit through September&nbsp;30, 2004. We value the contingent
interest as a derivative using the fair value method in
accordance with SFAS&nbsp;133. Changes in the fair value of the
contingent interest are recorded as an adjustment to interest
expense. The fair value of the contingent interest was
approximately $0.5, $0.3 and $0.6&nbsp;million as of
December&nbsp;31, 2003 and 2002, and September&nbsp;30, 2004,
respectively. We intend to repay this term loan with a portion
of the proceeds of this offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Convertible Bridge Loan Due 2005.
</FONT></I></B><FONT size="2">In November 2002, we entered into
a convertible bridge loan with several of our shareholders in an
aggregate amount of up to $5.0&nbsp;million. At
December&nbsp;31, 2003, we had outstanding borrowings of
$4.8&nbsp;million. The convertible bridge loan bears interest at
8%&nbsp;per annum. The convertible bridge loan is convertible
into the next round of preferred stock financing and also has
provisions for optional conversion into preferred stock or
common stock. The conversion rate is equal to the lowest price
per share paid by any purchaser in a financing of the next round
of preferred stock or at anti-dilutive conversion rates for
optional conversion into preferred stock or common stock based
upon the results of certain milestones. In addition, warrants to
purchase preferred stock were issued to the lenders in
connection with the convertible bridge loan. Such warrants were
valued utilizing the Black-Scholes options pricing model and
resulted in recording warrants at $3.6&nbsp;million and a
discount of $3.6&nbsp;million to the convertible bridge loan.
The discount was accreted over the original scheduled term of
the loans. During the years ended December&nbsp;31, 2003 and
2002 and the nine months ended September&nbsp;30, 2004 and 2003,
we recognized approximately $2.5, $0.2, $0.9 and
$1.9&nbsp;million, respectively, of non-cash interest expense
</FONT>

<P align="center"><FONT size="2">36
</FONT>

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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2">related to the accretion of the debt discount.
The term of the convertible bridge loan has been extended from
April&nbsp;30, 2004 until October&nbsp;30, 2005. We intend to
repay all amounts outstanding under the convertible bridge loan
with a portion of the proceeds of this offering.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our long-term commitments under operating leases
shown above consist of payments relating to our facility leases
in Englewood Cliffs, New Jersey, which expires in September
2005, and Munich, Germany, which expires in July 2009, but is
cancelable at our option in July 2007<I>.</I>
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have a number of research, consulting and
license agreements that require us to make payments to the other
party to the agreement upon us attaining certain milestones as
defined in the agreements. In 2003, we made payments of
approximately $1.5&nbsp;million under these agreements, the
majority of which were in connection with milestones relating to
preclinical and clinical trials and manufacturing. As of
December&nbsp;31, 2003, we may be required to make future
milestone payments, totaling approximately $4.1&nbsp;million,
under these agreements, depending upon the success and timing of
future clinical trials and the attainment of other milestones as
defined in the respective agreement. In 2004, we entered into an
additional clinical research agreement totaling approximately
$1.2&nbsp;million in payments beginning in September&nbsp;2004
through 2006. Under our agreement with Epitome, we are obligated
to pay an annual maintenance fee that is equal to twice the fee
paid in the previous year as long as no commercial product sales
have occurred. We recorded a maintenance expense of $100,000
during the third quarter 2004. Our current estimate as to the
timing of other research, development and license payments,
assuming all related research and development work is
successful, is listed in the table above in &#147;Other
long-term liabilities.&#148;
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are also obligated to make future royalty
payments to two of our collaborators under existing license
agreements, one based on net sales of EpiCept NP-1 and the other
based on net sales of LidoPAIN SP, to the extent revenues on
such products are realized. We have not estimated the amount or
timing of such royalty payments.
</FONT>

<P align="center">
<B><FONT size="2">Market Risks</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The financial currency of our German subsidiary
is the euro. As a result, we are exposed to various foreign
currency risks. First, our consolidated financial statements are
in U.S. dollars, but a portion of our consolidated assets and
liabilities is denominated in euros. Accordingly, changes in the
exchange rate between the euro and the U.S. dollar will affect
the translation of our German subsidiary&#146;s financial
results into U.S. dollars for purposes of reporting our
consolidated financial results. We also bear the risk that
interest on our euro-denominated debt, when translated from
euros to U.S.&nbsp;dollars, will exceed our current estimates
and that principal payments we make on those loans may be
greater than those amounts currently reflected on our balance
sheet. Historically, fluctuations in exchange rates resulting in
transaction gains or losses have had a material effect on our
consolidated financial results. We have not engaged in any
hedging activities to minimize this exposure, although we may do
so in the future.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our exposure to interest rate risk is limited to
interest income sensitivity, which is affected by changes in the
general level of U.S.&nbsp;dollar interest rates, particularly
as the majority of our investments are in short-term debt
securities and bank deposits. The primary objective of our
investment activities is to preserve principal while at the same
time maximizing the income we receive without significantly
increasing risk. To minimize risk, we maintain our portfolio of
cash and cash equivalents in a variety of interest-bearing
instruments, including U.S.&nbsp;government and agency
securities, high-grade U.S.&nbsp;corporate bonds, commercial
paper and money market funds. Due to the nature of our
short-term and restricted investments, we believe that we are
not exposed to any material market risk.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We do not have any relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded
contracts. Therefore, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships. We do not have
relationships or transactions with persons or entities that
derive benefits from their non-independent relationship with our
related parties or us.
</FONT>

<P align="center"><FONT size="2">37
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<B><FONT size="2">Critical Accounting Policies and
Estimates</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our discussion and analysis of our financial
condition and results of operations are based on our financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses and related disclosure of
contingent assets and liabilities. We review our estimates on an
ongoing basis. We base our estimates on historical experience
and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more
detail in the notes to our financial statements included in this
prospectus, we believe the following accounting policies to be
critical to the judgments and estimates used in the preparation
of our financial statements.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

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    <TD></TD>
    <TD>
    <B><I><FONT size="2">Revenue Recognition</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We recognize revenue relating to our
collaboration agreements in accordance with the Securities and
Exchange Commission&#146;s Staff Accounting Bulletin
(&#147;SAB&#148;) No.&nbsp;101, <I>Revenue Recognition in
Financial Statements</I>, SAB No.&nbsp;104, <I>Revenue
Recognition</I>, and Emerging Issues Task Force
(&#147;EITF&#148;) Issue No.&nbsp;00-21, <I>Revenue Arrangements
with Multiple Deliverables</I>. Revenue under collaborative
arrangements may include the receipt of non-refundable license
fees, milestone payments and research and development payments.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We evaluate our collaboration agreements to
determine units of accounting for revenue recognition purposes.
Revenue is deemed earned when all of the following have
occurred: all of our obligations relating to the revenue have
been met and the earnings process is complete; the monies
received or receivable are not refundable irrespective of
research results; and there are neither future obligations nor
milestones that we must meet with respect to such revenue. We
recognize revenue from non-refundable, upfront licenses and
related payments, not specifically tied to a separate earnings
process, ratably over the development period in which we are
obligated to participate on a continuing and substantial basis
in the research and development activities outlined in each
contract. We periodically review the estimated development
period and, to the extent such estimates change, the impact of
such change is recorded at the time. When payments are
specifically tied to a separate earnings process, revenue will
be recognized when the specific performance obligation
associated with the payment has been satisfied. Performance
obligations typically consist of contracted services or
development milestones. Revenue from significant milestones in
the development lifecycle of the related technology, including
filing for and obtaining approvals with regulatory agencies,
will be considered earned when the payer acknowledges the
milestone achievement, generally by payment of amounts due.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
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<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Stock-Based Compensation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As permitted by Statement No.&nbsp;123,
<I>Accounting for Stock-Based Compensation</I>
(&#147;SFAS&nbsp;123&#148;), we account for employee stock-based
compensation in accordance with Accounting Principles Board
(&#147;APB&#148;) Opinion No.&nbsp;25, <I>Accounting for Stock
Issued to Employees </I>(&#147;APB&nbsp;25&#148;), using
intrinsic values with appropriate disclosures using the fair
value based method. Accordingly, we have recorded stock-based
compensation expense for stock options issued to employees in
fixed amounts with exercise prices that are, for financial
reporting purposes, deemed to be below fair market value on the
measurement date&nbsp;&#151; generally being the date of grant.
In the notes to our consolidated financial statements, we
provide pro forma disclosures required by SFAS&nbsp;No.&nbsp;123
and related pronouncements. We account for stock-based
transactions with non-employees in which services are received
in exchange for the equity instruments based upon the fair value
of the equity instruments issued, in accordance with
SFAS&nbsp;No.&nbsp;123 and EITF Issue No.&nbsp;96-18,
<I>&#147;Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services.&#148;</I> The two factors that most
affect charges or credits to operations related to stock-based
compensation are the estimated fair market value of the common
stock underlying stock options for which stock-based
compensation is recorded and the estimated volatility of such
fair market value.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Accounting for equity instruments granted by us
requires fair value estimates of the equity instrument granted
or sold. If our estimates of fair value of these equity
instruments are too high or too low, it would
</FONT>

<P align="center"><FONT size="2">38
</FONT>

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<FONT size="2">have the effect of overstating or understating
expenses. When equity instruments are granted in exchange for
the receipt of goods or services, we estimate the value of the
equity instruments based upon consideration of factors that we
deem to be relevant at the time using cost, market and/or income
approaches to such valuations. Because shares of our common
stock have not been publicly traded, market factors historically
considered in valuing stock and stock option grants include
comparative values of public companies discounted for the risk
and limited liquidity provided for in the shares we are issuing,
pricing of private sales of our convertible preferred stock,
prior valuations of stock grants and the effect of events that
have occurred between the time of such grants, economic trends,
perspective provided by investment banks and the comparative
rights and preferences of the security being granted compared to
the rights and preferences of our other outstanding equity. As a
result of these factors, some of which are subjective, changes
in our estimates of fair market value and volatility could have
a significant effect on the determination of stock-based
compensation.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The fair value of our common stock for options
granted during 2003, 2002 and 2001 and for the nine month period
ending September&nbsp;30, 2004 was determined contemporaneously
at the time of the grant by our board of directors, with input
from management. Prior to our entering into the Adolor license
agreement in July 2003, we utilized the value paid for each of
our series of preferred stock as an estimate of the fair value
of our common stock. During the period October&nbsp;1, 2003
through September&nbsp;30, 2004, we did not grant any options to
employees. During the nine month period ended September&nbsp;30,
2003 and for the years ended December&nbsp;31, 2002 and 2001, we
granted options to employees at prices, which, for financial
reporting purposes, were deemed to be below fair market value on
the dates of grant. As a result, we recorded deferred
compensation related to these grants for the difference between
the deemed fair market value and the exercise price. We are
amortizing this deferred compensation as a charge to operations
over the vesting period of the options. In 2002 and 2001, we
also granted options to non-employees for which we recorded
stock-based compensation in the statements of operations based
upon the fair market value of these options, as determined using
the Black-Scholes model, over the service period, which is
usually the vesting period. We did not grant any options to
non-employees in 2003. Stock-based compensation for third
parties is re-measured through the vesting period at fair value.
The following weighted average assumptions were used for grants
in 2003 and 2002: dividend yield of 0% percent, risk free
interest rate from 2.79% to 4.74%, volatility of 101% and
expected life of four to five years. As discussed above, these
stock-based compensation charges will fluctuate based primarily
on the volatility and fair value of our common stock.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

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    <TD></TD>
    <TD>
    <B><I><FONT size="2">Derivatives</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We comply with SFAS&nbsp;No.&nbsp;149,
<I>Amendment of Statement&nbsp;133 on Derivative Instruments and
Hedging Activities </I>(&#147;SFAS&nbsp;149&#148;).
SFAS&nbsp;149 clarifies under what circumstances a contract with
an initial net investment meets the characteristics of a
derivative as discussed in Statement No.&nbsp;133. It also
specifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. As a
result of certain financings, derivative instruments were
created that we measured at fair value and mark to market at
each reporting period.
</FONT>

<P align="left">
<B><I><FONT size="2">Foreign Exchange Gains and
Losses</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have a 100%-owned subsidiary in Germany,
EpiCept GmbH, that performs certain research and development
activities on our behalf pursuant to a research collaboration
agreement. EpiCept GmbH has been unprofitable since its
inception. Its functional currency is the euro. The process by
which EpiCept GmbH&#146;s financial results are translated into
U.S.&nbsp;dollars is as follows: income statement accounts are
translated at average exchange rates for the period and balance
sheet asset and liability accounts are translated at end of
period exchange rates. Translation of the balance sheet in this
manner affects the stockholders&#146; equity account, referred
to as the cumulative translation adjustment account. This
account exists only in EpiCept GmbH&#146;s U.S.&nbsp;dollar
balance sheet and is necessary to keep the foreign balance sheet
stated in U.S.&nbsp;dollars in balance.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Several of our debt instruments, originally
expressed in German deutsche marks, are now denominated in
euros. Changes in the value of the euro relative to the value of
the U.S.&nbsp;dollar could affect
</FONT>

<P align="center"><FONT size="2">39
</FONT>

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<FONT size="2">the U.S.&nbsp;dollar value of our indebtedness at
each reporting date as substantially all of our assets are held
in U.S.&nbsp;dollars. These changes are recognized by us as a
foreign currency transaction gain or loss, as applicable, and
are reported in other expense or income in our consolidated
statements of operations.
</FONT>
</DIV>

<P align="center">
<B><FONT size="2">Recent Accounting Pronouncements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2004, the Financial Accounting
Standards Board (&#147;FASB&#148;) issued Statement of Financial
Accounting Standards (&#147;SFAS&#148;) No.&nbsp;153,
<I>Exchanges of Nonmonetary Assets </I>(&#147;SFAS 153&#148;).
SFAS&nbsp;153 amends Accounting Policy Board (&#147;APB&#148;)
Opinion No.&nbsp;29 (&#147;APB&nbsp;29&#148;), <I>Accounting for
Nonmonetary Transactions,</I> which requires that exchanges of
nonmonetary assets be measured based on the fair value of the
assets exchanged, but which includes certain exceptions to that
principle. SFAS&nbsp;153 eliminates the exception from
APB&nbsp;29 for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have a commercial substance.
SFAS&nbsp;153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June&nbsp;15, 2005.
The adoption of SFAS&nbsp;153 is not expected to have a material
impact on our consolidated financial position or results of
operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2004, the FASB issued a revision to
SFAS No.&nbsp;123, <I>Accounting for Stock-Based Compensation
</I>(&#147;SFAS&nbsp;123R&#148;). SFAS&nbsp;123R replaces
SFAS&nbsp;123 and supersedes APB Opinion No.&nbsp;25,
<I>Accounting for Stock Issued to Employees,</I> and establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services.
SFAS&nbsp;123R focuses primarily on accounting for transactions
in which an entity obtains employee services in share-based
payment transactions and is effective as of the beginning of the
first reporting period that begins after June&nbsp;15, 2005 for
public entities that do not file as small business issuers. We
have illustrated the effect on our earnings as if we had adopted
the fair value method of accounting for stock-based compensation
under SFAS&nbsp;123 in Note&nbsp;2 to our Consolidated Financial
Statements for the years ended December&nbsp;31, 2001, 2002, and
2003 and for the nine months ended September&nbsp;30, 2004. The
fair value-based method of SFAS&nbsp;123 is similar in most
respects to the fair value-based method under SFAS&nbsp;123R,
although the election of certain methods within the applicable
transition rules of SFAS&nbsp;123R may affect the impact on our
consolidated financial position or results of operations. Such
impact, if any, on our consolidated financial position or
results of operations has not been determined.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2003, the FASB issued Interpretation
No.&nbsp;46(R), <I>Consolidation of Variable Interest Entities
</I>(&#147;FIN&nbsp;46R&#148;), which is an interpretation of
Accounting Research Bulletin No.&nbsp;51, <I>Consolidated
Financial Statements</I>. FIN&nbsp;46R requires that if an
entity has a controlling interest in a variable interest entity,
the assets, liabilities and results of activities of the
variable interest entity should be included in the consolidated
financial statements of the entity. FIN&nbsp;46R is effective
immediately for all new variable interest entities created or
acquired after December&nbsp;31, 2003. The adoption of
FIN&nbsp;46R is not expected to have a significant impact on our
consolidated financial position or results of operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In May 2003, SFAS&nbsp;No.&nbsp;150,
<I>Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
</I>(&#147;SFAS&nbsp;150&#148;) was issued. This statement
establishes how a company classifies and measures certain
financial instruments with characteristics of both liabilities
and equity, including redeemable convertible preferred stock.
This statement is effective for financial instruments entered
into or modified after May&nbsp;31, 2003 and otherwise effective
at the beginning of the interim period commencing July&nbsp;1,
2003, except for mandatorily redeemable financial instruments of
nonpublic companies. The FASB has indefinitely deferred
implementation of certain provisions of SFAS&nbsp;150. The
adoption of SFAS&nbsp;150 did not have a significant impact on
our consolidated financial position or results of operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In April 2003, the FASB issued
SFAS&nbsp;No.&nbsp;149, <I>Amendment of Statement&nbsp;133 on
Derivative Instruments and Hedging Activities
</I>(&#147;SFAS&nbsp;149&#148;). SFAS&nbsp;149 clarifies under
what circumstances a contract with an initial net investment
meets the characteristics of a derivative as discussed in
Statement No.&nbsp;133. It also specifies when a derivative
contains a financing component that warrants special reporting
in the statement of cash flows. SFAS&nbsp;149 amends certain
other existing pronouncements in order to improve consistency in
reporting these types of transactions. The new guidance is
effective for contracts entered into or modified after
June&nbsp;30, 2003 and for hedging relationships designated
after June&nbsp;30, 2003.
</FONT>

<P align="center"><FONT size="2">40
</FONT>

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<FONT size="2">The adoption of this standard did not have a
significant impact on our consolidated financial position or
results of operations.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In November 2002, the FASB issued Interpretation
No.&nbsp;45, <I>Guarantor&#146;s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others </I>(&#147;FIN&nbsp;45&#148;).
FIN&nbsp;45 requires a guarantor to recognize, at the inception
of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The accounting
provisions and new disclosure requirements of FIN&nbsp;45 are
required to be adopted for all guarantees issued or modified on
or after January&nbsp;1, 2003. The adoption of FIN&nbsp;45 had
no impact on our consolidated financial position or results of
operations, as we do not enter into guarantees with third
parties.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2002, the FASB issued
SFAS&nbsp;No.&nbsp;146, <I>Accounting for Costs Associated with
Exit or Disposal Activities </I>(&#147;SFAS&nbsp;146&#148;).
SFAS&nbsp;146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability
is incurred, as opposed to when the entity commits to an exit
plan under previous guidance. This statement is effective for
exit or disposal activities initiated after December&nbsp;31,
2002. The adoption of SFAS&nbsp;146 did not have a significant
impact on our consolidated financial position or results of
operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2001, the FASB issued
SFAS&nbsp;No.&nbsp;143, <I>Accounting for Asset Retirement
Obligations </I>(&#147;SFAS&nbsp;143&#148;). SFAS&nbsp;143
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement requires
that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. It applies
to legal obligations associated with the retirement of
long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees.
This statement is effective for financial statements issued for
fiscal years beginning after June&nbsp;15, 2002. The adoption of
SFAS&nbsp;143 did not have a significant impact on our
consolidated financial position or results of operations.
</FONT>

<P align="center"><FONT size="2">41
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<FONT size="2"> <A name='110'></A>
</FONT>
</DIV>

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<P align="center">
<B><FONT size="2">BUSINESS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are a specialty pharmaceutical company focused
on the development and commercialization of topically-delivered
prescription pain management therapeutics. We have six product
candidates in clinical development; three in late-stage clinical
development that are ready to enter, or have entered, pivotal
Phase&nbsp;IIb or Phase&nbsp;III clinical trials, and three that
have completed initial Phase&nbsp;II clinical trials. All of our
product candidates target moderate-to-severe pain that is
influenced, or mediated, by nerve receptors located just beneath
the skin&#146;s surface. Our product candidates utilize
proprietary formulations and several topical delivery
technologies to administer FDA-approved pain management
therapeutics, or analgesics. We believe using FDA-approved
analgesics reduces the risks associated with new drug
development, lowers our development costs and speeds
time-to-market. Our product candidates are designed to provide
effective pain relief with fewer adverse side effects than
systemically-delivered drugs, which are absorbed into the
bloodstream. None of our products has been approved by the FDA
or its counterparts in other countries.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our lead late-stage product candidate,
EpiCept&nbsp;NP-1, is a prescription topical analgesic cream
containing a patented formulation, the contents of which include
two FDA-approved drugs, amitriptyline and ketamine.
Amitriptyline is a widely-used antidepressant, and ketamine is
an NMDA antagonist that is used as an anesthetic.
EpiCept&nbsp;NP-1 is designed to provide effective, long-term
relief from the pain of peripheral neuropathies. Peripheral
neuropathies are medical conditions caused by damage to the
nerves in the nervous system. The initial indication for this
product candidate is post-herpetic neuralgia, a specific type of
peripheral neuropathy associated with shingles, a condition
caused by the herpes zoster virus. We have completed
Phase&nbsp;II clinical trials in the United States and Canada
that included 343 subjects and plan to commence a Phase&nbsp;III
clinical trial in the United States by the second half of 2005
that will include at least 800 subjects.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">LidoPAIN&nbsp;SP, our second late-stage product
candidate, is a sterile prescription analgesic patch designed to
provide sustained topical delivery of lidocaine to a
post-surgical or post-traumatic sutured wound while also
providing a sterile protective covering for the wound. If
approved, we believe that LidoPAIN SP would be the first sterile
prescription analgesic patch on the market. We have completed a
Phase&nbsp;II clinical trial in Germany that included 221 hernia
repair subjects and commenced a Phase&nbsp;III clinical trial in
Europe during the fourth quarter of 2004 that will include at
least 400 hernia repair subjects. In July 2003, we entered into
an agreement with Adolor for the development and
commercialization of LidoPAIN&nbsp;SP in North America.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our third late-stage product candidate is
LidoPAIN&nbsp;BP, a prescription analgesic non-sterile patch
designed to provide sustained topical delivery of lidocaine for
the treatment of acute or recurrent lower back pain. We have
completed Phase&nbsp;IIa and Phase&nbsp;IIb clinical trials in
the United States that included 242&nbsp;subjects and plan to
commence a pivotal Phase&nbsp;IIb clinical trial in the United
States during the second half of 2005 that will include at least
400 subjects. In December 2003, we entered into an agreement
with Endo for the commercialization of LidoPAIN&nbsp;BP
worldwide.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have three earlier-stage product candidates in
clinical development: (1)&nbsp;EpiCept&nbsp;MP/DP, a topical
spray gel matrix containing morphine and lidocaine for the
treatment of oral mucositis, an inflammation of the mucosa of
the mouth typically resulting from chemotherapy and radiation
therapy, and dental pain; (2)&nbsp;LidoPAIN TV, a topical
lidocaine patch for the treatment of tinnitus, a constant or
intermittent buzzing or ringing noise in the ear; and
(3)&nbsp;LidoPAIN&nbsp;HM, a topical anesthetic patch for the
treatment of headache pain. We have completed initial
Phase&nbsp;II clinical trials and expect to conduct additional
Phase&nbsp;II clinical trials for each of these product
candidates.
</FONT>

<P align="center">
<B><FONT size="2">Pain and Pain Management</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pain occurs as a result of surgery, trauma or
disease. It is generally provoked by a harmful stimulus to a
pain receptor in the skin or muscle. Pain can range in severity
(mild, moderate or severe) and duration (acute or chronic).
Acute pain, such as pain resulting from an injury or surgery, is
of short duration, generally less than a month, but may last up
to three months. Chronic pain is more persistent, extending long
after an injury has healed, and typically results from a chronic
illness or appears spontaneously and
</FONT>

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<FONT size="2">persists for undefined reasons. Examples of
chronic pain include chronic lower back pain and pain resulting
from bone cancer or advanced arthritis. If treated inadequately,
unrelieved acute and chronic pain can slow recovery and healing
and adversely affect a person&#146;s quality of life.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">IMS Health has estimated that the total
U.S.&nbsp;market for prescription analgesics has increased from
$5.3&nbsp;billion in 1998 to $14.7&nbsp;billion in 2003,
representing an approximate 23% compounded annual growth rate.
In 2003, analgesics were the third most prescribed class of
medications in the United States with approximately
313&nbsp;million prescriptions written. We believe that growth
in this market has been primarily attributable to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">increased physician recognition of the need for
    effective pain management;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">patient demand for more effective pain treatments;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">an aging population, with an increased prevalence
    of chronic pain conditions, such as cancer, arthritis,
    neuropathies and lower back pain;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">increased number of surgeries;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">introduction of new and reformulated branded
    products;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">increased active and healthy lifestyles,
    resulting in additional sports and fitness related injuries.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Analgesics typically fall into one of three
categories:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">opioid analgesics or narcotics, such as morphine,
    codeine, oxycodone (OxyContin) and tramadol (Ultram);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">non-narcotic analgesics, primarily non-steroidal
    anti-inflammatory drugs (NSAIDs), including prostaglandin
    inhibitors (such as aspirin, acetaminophen and ibuprofen) and
    inhibitors of the enzyme cycloxygenase-2 (COX-2), so-called
    COX-2 inhibitors (such as Celebrex);&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">adjuvant therapeutics, such as anesthetics
    (lidocaine), antidepressants (amitriptyline), anti-convulsives
    and corticosteriods.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><I><FONT size="2">Limitations of Current
Therapies</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Until recently, analgesics primarily have been
delivered systemically and absorbed into the bloodstream where
they can then alleviate the pain. Systemic delivery is achieved
either orally, via injection or through a transdermal patch.
Systemic delivery of analgesics can have significant adverse
side effects because the concentration of analgesics in the
bloodstream can impact other organs and systems throughout the
body.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Adverse side effects of systemically-delivered
analgesics are well documented. Systemically-delivered opioid
analgesics can cause respiratory distress, nausea, vomiting,
dizziness, sedation, constipation, urinary retention and severe
itching. In addition, chronic use of opioid analgesics can lead
to the need for increased dosing and potential addiction.
Concerns about addiction and abuse often influence physicians to
prescribe less than adequate doses of opioids or to prescribe
opioids less frequently. Systemically-delivered NSAIDs and
adjuvant therapeutics can also have significant adverse side
effects, including kidney failure, liver dysfunction, gastric
ulcers and nausea. In the United States, there are approximately
16,500 NSAID-related deaths each year, and over
103,000&nbsp;patients are hospitalized annually due to NSAID
complications. These adverse side effects may lead doctors to
prescribe analgesics less often and at lower doses than may be
necessary to alleviate pain. Further, patients may take lower
doses for shorter periods of time and opt to suffer with the
pain rather than risk the adverse side effects. Systemic
delivery of these drugs may also result in significant
interactions with other drugs, which is of particular concern
when treating elderly patients who typically take multiple
pharmaceutical therapies.
</FONT>

<P align="left">
<B><I><FONT size="2">Recent Scientific
Developments</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Almost every disease and every trauma is
associated with pain. Injury or inflammation stimulates the pain
receptors, causing electrical pain signals to be transmitted
from the pain receptors through nerve fibers into the spinal
cord and eventually to the brain. Pain receptors include central
pain receptors, such as those found in the brain and spinal
cord, and peripheral nerve receptors, also called
&#147;nociceptors,&#148; such
</FONT>

<P align="center"><FONT size="2">43
</FONT>

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<DIV align="left">
<FONT size="2">as those located directly beneath the skin and in
joints, eyes and visceral organs. Within the spinal cord, the
electrical pain signals are received by a second set of nerve
fibers that continue the transmission of the signal up the
spinal cord and through the central nervous system into the
brain. Within the brain, additional nerve fibers transmit the
electrical signals to the &#147;pain center&#148; of the brain.
The brain decodes the messages being sent to the central nervous
system from the peripheral nervous system, and the signals are
perceived as &#147;pain&#148; and pain is &#147;felt.&#148;
These messages can be disrupted with pharmaceutical intervention
either at the source of the pain, such as the pain receptor, or
at the point of receipt of the pain message, in the brain.
Topical delivery of analgesics blocks the transmission of pain
at the source of the pain message, whereas systemic delivery of
analgesics primarily blocks the perception of pain within the
brain.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Not until recently has the contribution of
peripheral nerve receptors to the perception of pain been well
understood. Recent studies have indicated that peripheral nerve
receptors can play an important role in both the sensory
perception of pain and the transmission of pain impulses.
Specifically, certain types of acute and chronic pain depend to
some degree on the activation of peripheral pain receptors
located beneath the skin&#146;s surface. The topical
administration of well-known analgesics can localize drug
concentrations at the point where the pain signals originate,
resulting in dramatically lower systemic blood levels. We
believe this results in a new treatment strategy that provides
significant pain relief, with fewer adverse side effects, fewer
drug to drug interactions and lower potential for abuse.
</FONT>

<P align="center">
<B><FONT size="2">Our Solution</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are targeting peripheral nerve receptors using
topical analgesics as a novel mechanism to effectively treat
both acute and chronic pain, without the liabilities of
traditional systemically-delivered analgesics. We are developing
innovative topically-delivered analgesics using a combination of
our internally-developed and in-licensed proprietary
technologies and know-how to address the unmet medical needs and
adverse side effects associated with systemically-delivered
analgesics. Our topical delivery technologies and formulations
are designed to deliver FDA-approved analgesics safely,
effectively and conveniently to the appropriate peripheral
nerves while preventing or limiting the amount of drug that
enters the bloodstream. We utilize patch, cream and spray gel
matrix delivery methods to topically deliver the active
ingredients to the pain site. In some instances, we combine
existing FDA-approved analgesics to create a new product having
a therapeutic profile superior to either one of the standalone
analgesics.
</FONT>

<P align="center"><FONT size="2">44
</FONT>

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<P align="center">
<B><FONT size="2">Our Products</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have six product candidates in clinical
development; three in late-stage clinical development that ready
to enter, or have entered, pivotal Phase&nbsp;IIb or
Phase&nbsp;III clinical trials, and three that have completed
initial Phase&nbsp;II clinical trials. The following table
summarizes the current status of our principal development
programs and product candidates:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="18%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="11%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="13%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="11%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="13%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="19%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Topical</FONT></B></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Product</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Dosage Form</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Initial Indication</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Clinical Status</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Next Steps</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Marketing Rights</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">EpiCept NP-1
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Cream
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Post-herpetic neuralgia
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Phase&nbsp;II completed
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Initiate Phase&nbsp;III during second half of 2005
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">EpiCept
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LidoPAIN SP
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Sterile patch
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Surgical incision pain
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Phase&nbsp;III initiated in Germany
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Adolor has announced plans for Phase&nbsp;IIb and
    Phase&nbsp;III clinical trials in United States
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Adolor in North America; EpiCept outside of North
    America EpiCept retains right to negotiate future co-promotion
    agreement
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LidoPAIN BP
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Patch<BR>
    (non-sterile)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Acute or recurrent lower back pain
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Phase&nbsp;IIa completed
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Initiate pivotal Phase&nbsp;IIb clinical trial
    during second half of 2005
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Endo worldwide; EpiCept<BR>
    retains right to negotiate future co-promotion agreement
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">EpiCept&nbsp;MP/DP
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Spray gel matrix
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Oral mucositis; Dental pain
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Phase&nbsp;II
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Continue Phase&nbsp;II development
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">EpiCept
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LidoPAIN TV
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Patch<BR>
    (non-sterile)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Tinnitus
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Phase&nbsp;II in Europe
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Continue Phase&nbsp;II development
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">EpiCept
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LidoPAIN HM
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Patch<BR>
    (non-sterile)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Headache
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Phase&nbsp;II
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Continue Phase&nbsp;II development
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">EpiCept
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We conduct our clinical trials in pain centers
throughout North America and in Europe. There are various ways
in which to assess a subject&#146;s severity of pain. Pain is a
subjective phenomenon, and each person has a different pain
threshold. We utilize various types of validated pain assessment
scales in our clinical trials that are self-administered by each
subject in the form of questionnaires. The first is the
numerical pain scale, or &#147;11-point numerical pain
scale,&#148; which is generally a number line from 0 (no pain)
to 10 (worst possible pain). The subject is asked how much pain
he or she feels at a given moment or over a period of time and
is asked to rank it based on the 11-point numerical pain scale.
A second pain assessment tool we often utilize is the McGill
Pain Questionnaire, which is a two part questionnaire that asks
the subject to rate both type and intensity of pain experienced.
We analyze the data from these studies in a number of ways,
including a responder analysis. In this type of analysis,
subjects serve as their own control and are required to
demonstrate a clinically-significant level of response depending
upon the structure of the particular clinical trial.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We utilize various statistical analyses to
evaluate the data from our clinical trials. We commonly utilize
the &#147;area under the curve&#148; analysis as a measure of
efficacy. The term &#147;area under the curve&#148; is a
recognized statistical analytical tool that refers to the
measurement of the total sum of pain that a patient experiences
over a particular period of time. We also use statistical
analyses to estimate the probability that a positive effect is
actually produced by the product candidate. This probability is
expressed as a &#147;P-value,&#148; which refers to the
likelihood that the difference measured between the drug group
and the placebo group occurred just &#147;by chance.&#148; For
example, when a P-value is reported as &#147;P&#60;0.05,&#148;
the probability that the drug produced an effect just by chance
is less than 5%. A P-value of 0.05 or less is generally
considered to be statistically significant.
</FONT>

<P align="center"><FONT size="2">45
</FONT>

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<P align="left">
<B><I><FONT size="2">Peripheral Neuropathy and Post-Herpetic
Neuralgia</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Peripheral neuropathy is a medical condition
caused by damage to the nerves in the peripheral nervous system.
The peripheral nervous system includes nerves that run from the
brain and spinal cord to the rest of the body. According to
Datamonitor&#146;s study <I>&#147;Stakeholder Insight:
Neuropathic Pain,&#148;</I> published in February 2004,
peripheral neuropathy affects over 15&nbsp;million people in the
United States and is associated with conditions that injure
peripheral nerves, including herpes zoster, or shingles,
diabetes, HIV and AIDS and other diseases. It can also be caused
by trauma or may result from surgical procedures. Peripheral
neuropathy is usually first felt as tingling and numbness in the
hands and feet. Symptoms can be experienced in many ways,
including burning, shooting pain, throbbing or aching.
Peripheral neuropathy can cause intense chronic pain that, in
many instances, is debilitating.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Post-herpetic neuralgia (PHN)&nbsp;is one type of
peripheral neuropathic pain associated with herpes zoster, or
shingles, that exists after the rash has healed. According to
Datamonitor, PHN affects over 100,000 people in the United
States each year. PHN causes pain on and around the area of skin
that was affected by the shingles rash. Most people with PHN
describe their pain as &#147;mild&#148; or &#147;moderate.&#148;
However, the pain can be severe in some cases. PHN pain is
usually a constant, burning or gnawing pain but can be an
intermittent sharp or stabbing pain. Current treatments for PHN
have limited effectiveness, particularly in severe cases and can
cause significant adverse side effects. The initial indication
for our EpiCept NP-1 product candidate is for the treatment of
peripheral neuropathy in PHN patients.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">There are currently three FDA-approved treatments
for post-herpetic neuralgia: Neurontin (gabapentin), Lidoderm
(lidocaine patch 5%) and Lyrica (pregabalin). Market estimates
indicate that Neurontin is expected to generate sales of
approximately $3&nbsp;billion in the United States in 2004.
According to the Scott-Levin Physician Drug and Diagnosis Audit,
approximately 55% of the 5.1&nbsp;million prescriptions for
Neurontin relate to some form of neuropathic pain. Some patients
also receive Tegretol (carbamazepine)&nbsp;to manage the
symptoms of peripheral neuropathy. However, these drugs only
work in some patients, and Neurontin may have significant side
adverse effects, such as drowsiness. Often the use of these
medications is combined with topical analgesics such as the
Lidoderm patch and over-the-counter topical analgesic creams
that provide minimal relief with a short duration of action.
Lidoderm is expected to generate sales of approximately
$300&nbsp;million in the United States in 2004, much of which we
believe will be attributable to patients with PHN. Lyrica was
approved for the treatment of neuralgia in December 2004.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">EpiCept NP-1.
</FONT></I></B><FONT size="2">EpiCept NP-1 is a prescription
topical analgesic cream containing a patented formulation, the
contents of which include two FDA-approved drugs, amitriptyline
(a widely-used antidepressant) and ketamine (an NMDA antagonist
that is used as an anesthetic). EpiCept NP-1 is designed to
provide effective, long-term relief from the pain caused by
peripheral neuropathies. We believe that EpiCept NP-1 can be
used in conjunction with systemically-delivered analgesics, such
as Neurontin. The cream contains a 4% concentration of
amitriptyline and a 2% concentration of ketamine. Since each of
these ingredients has been shown to have significant analgesic
effects and because NMDA antagonists, such as ketamine, have
demonstrated the ability to enhance the analgesic effects of
amitriptyline, we believe the combination is a good candidate
for the development of a new class of analgesics. We intend to
selectively seek a partner or strategic alliance to enable us to
maintain financial and operational flexibility while retaining
significant economic and commercial rights to this product
candidate.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">EpiCept NP-1 is a white vanishing cream that is
applied twice daily and is quickly absorbed into the applied
area. We believe the topical delivery of our patented
combination represents a fundamentally new approach for the
treatment of pain associated with peripheral neuropathy. In
addition, we believe that the topical delivery of our product
candidate will significantly reduce the risk of adverse side
effects and drug to drug interactions associated with the
systemic delivery of the active ingredients. The results of our
clinical trials to date have demonstrated the safety of the
cream for use for up to one year and a potent analgesic effect
in subjects with both post-herpetic neuralgia and other types of
peripheral neuropathy, such as those with diabetic, traumatic
and surgical causes.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe EpiCept NP-1, if approved, would offer
the following favorable attributes:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">analgesic effect comparable to levels provided
    when using systemically-delivered analgesics;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">additive therapy to systemically-delivered
    analgesics, such as Neurontin;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">46
</FONT>

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<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">minimal adverse side effects, including reduced
    drowsiness;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">ease of application and suitability for
    self-administration;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">low potential for abuse;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">good patient compliance;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">no drug to drug interactions;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">potential to treat a broad range of peripheral
    neuropathic conditions.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Clinical
Development.</FONT></I></B><FONT size="2"> We have completed two
Phase&nbsp;II clinical trials, one initiated in Canada in
October 2001 and one initiated in the United States in February
2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Placebo-controlled Factorial
Trial.</FONT></I></B><FONT size="2"> This four center Canadian
Phase&nbsp;II clinical trial in Ontario and Nova Scotia
(Dalhousie University) was a placebo-controlled factorial trial
designed to demonstrate that the use of the combination of
amitriptyline and ketamine was more effective than either drug
alone. A factorial trial is a clinical trial in which the active
ingredients in combination are compared with each drug used on
its own accompanied by a placebo control. The trial included 92
subjects with a history of diabetic, post surgical or traumatic
neuropathy or PHN. The trial tested a low-dose formulation of
EpiCept NP-1, consisting of a 2% concentration of amitriptyline
and a 1% concentration of ketamine, applied three times daily
for three weeks. Subjects were allowed to continue their current
pain medications (other than Lidoderm) as long as they did not
alter their dosage level or frequency. Subjects who entered the
trial had to have a score of at least 4 on the 11-point
numerical pain scale. We completed the analysis of data from
this clinical trial in February 2004.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We assessed several end points in this clinical
trial, including mean daily pain severity as measured on the
11-point numerical pain scale, pain relief, a responder analysis
and changes in the McGill Pain Questionnaire. While none of the
results was statistically significant, the results of the
responder analysis were the most compelling. In the responder
analysis, subjects were required to show at least a 30%
reduction in their pain as compared to placebo for the duration
of the study. The results indicated a desirable rank order of
the combination being more effective than either amitriptyline
or ketamine alone or placebo. The cream was well-tolerated by a
majority of the subjects, and no significant adverse reactions
were observed. Based on a review of our Phase&nbsp;II clinical
trial results, the FDA concurred in our End of Phase&nbsp;II
meeting that we design our Phase&nbsp;III clinical trial as a
responder analysis.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following chart shows the number of subjects
that completed the clinical trial with a reduction in pain of
two points or more on the 11-point numerical pain scale. The
number of subjects in each group were as follows: placebo: 25;
ketamine only: 22; amitriptyline only: 22; and combination of
amitriptyline and ketamine: 23:
</FONT>

<P align="center">
<B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<U>NP-1
Factorial Trial Results</U></FONT></B>

<DIV align="center">
<B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B><I><FONT size="2">Percentage
of Subjects with Reduction in Neuropathic Pain&#062;2</FONT></I>
</DIV>

<P align="center">
<IMG src="e01897s1e0189700.gif" alt="BAR GRAPH">

<DIV align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Note:
p=0.10; (ami + ket vs. placebo)
</FONT>
</DIV>

<P align="center"><FONT size="2">47
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Dose-Response Clinical
Trial.</FONT></I></B><FONT size="2"> In the United States, we
conducted a Phase&nbsp;II placebo-controlled dose-response
clinical trial in subjects recruited from 21&nbsp;pain centers
to determine an effective clinical dose of EpiCept NP-1. The
trial included 251&nbsp;subjects with post-herpetic neuralgia
who had been suffering significant pain for at least three
months. We tested two dosage formulations, one containing a
4%&nbsp;concentration of amitriptyline and a 2% concentration of
ketamine, which we refer to as &#147;high-dose&#148; and one
containing a 2%&nbsp;concentration of amitriptyline and a 1%
concentration of ketamine, which we refer to as
&#147;low-dose,&#148; as compared to placebo. Subjects were
allowed to continue on their current pain medications as long as
they did not alter their dosage level or frequency. Subjects who
entered the trial had to have a score of at least 4 on the
11-point numerical pain scale. All subjects initially received
the high-dose formulation twice daily for seven days.
Responders, which were defined in the initial phase of this
clinical trial as those experiencing a one point or greater drop
on the 11-point numerical pain scale for three or more days,
were then randomized into one of three study arms (high-dose,
low-dose or placebo). Each study arm applied the applicable
formulation of EpiCept NP-1 or placebo twice daily for an
additional 14&nbsp;days. We completed the analysis of the data
from this clinical trial in August 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The primary endpoint was the baseline average
daily pain score compared to the average daily pain score at
day&nbsp;21, measured on the 11-point numerical pain scale. We
measured the score for a 14&nbsp;day period beginning on the day
the subjects were randomized. The clinical trial&#146;s primary
objective was to determine if the subjects in either the
high-dose or low-dose groups experienced better analgesia as
reflected by lower pain intensity scores over the length of the
trial. Secondary endpoints included pain relief, sleep quality
and patient global satisfaction, all measured on the 11-point
numerical scale.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following chart shows the outcome following
randomization of the responding subjects in either the
high-dose, low-dose or placebo group:
</FONT>

<P align="center">
<B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<U>NP-1
Dose-Response Clinical Trial Results</U></FONT></B>

<P align="center">
<IMG src="e01897s1e0189701.gif" alt="BAR GRAPH">
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B><FONT size="2">Note:</FONT></TD>
    <TD align="left">
    <FONT size="2">*p=0.026 (NP-1 high-dose group versus placebo
    group&nbsp;&#151; baseline to day 21)
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;
<FONT size="2">The clinical trial results indicated that the
high-dose formulation of EpiCept NP-1 met the primary endpoint
for the trial and resulted in a statistically significant
reduction in pain intensity and increase in pain relief as
compared to placebo. We also observed a dose-related effect,
<I>i.e.</I> the subjects receiving the high-dose formulation had
more favorable results than the subjects receiving the low-dose
formulation. In addition, the subjects receiving the high-dose
formulation reported better sleep quality and greater overall
satisfaction than subjects receiving placebo. In addition, we
observed a greater number of &#147;responders,&#148; which for
purposes of the responder analysis conducted during the 14-day
period were defined as subjects with a two or more point drop in
average daily pain scores on the 11-point numerical pain scale.
No significant adverse reactions were observed other than skin
irritation and rash, which were equivalent to placebo.
</FONT>

<P align="center"><FONT size="2">48
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">After the completion of the two Phase&nbsp;II
trials, we conducted open label trials in which participants in
the clinical trials could continue to use the low-dose
formulation for a period of up to one year. The low-dose
formulation was well-tolerated and detectable blood
concentration levels of the active ingredients were
insignificant, which is indicative of the safety and potential
long term efficacy of the product.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The results of our Phase&nbsp;II clinical trials
helped us decide to use the high-dose formulation of EpiCept
NP-1 in our Phase&nbsp;III clinical trials.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Current Clinical
Initiatives.</FONT></I></B><FONT size="2"> We held an End of
Phase&nbsp;II meeting with the FDA in April 2004 to discuss the
Phase&nbsp;II clinical trial results and the protocols for our
planned Phase&nbsp;III clinical trials. In that meeting, the FDA
accepted our stability data and manufacturing plans for the
combination product, as well as toxicology data on ketamine from
studies conducted by others and published literature. The FDA
also confirmed that the proposed New Drug Application, or NDA
would qualify for a Section&nbsp;505(b)(2) submission (for
details on this submission process, see
&#147;Business&nbsp;&#151; Government Regulation&nbsp;&#151;
Section&nbsp;505(b)(2) Drug Applications&#148; below). In
addition, the FDA approved our Phase&nbsp;III clinical trial
protocol and indicated that a second factorial Phase&nbsp;III
clinical trial would be required. The FDA also requested that we
conduct an additional pharmacokinetic trial to assess dermal
absorption of ketamine and outlined the parameters for long-term
safety studies for the high-dose formulation. The
pharmacokinetic clinical trial will involve applying the cream
twice daily and measuring blood concentration levels of
amitriptyline and ketamine over 48&nbsp;hours.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will work with the FDA to develop an
appropriate toxicology program for amitriptyline and ketamine
where existing data is not available. We initiated a
supplemental toxicology study in the third quarter of 2004
related to the application of EpiCept NP-1 on the skin. The
duration of the study and the number and types of animals to be
tested will be determined during further discussions with the
FDA.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, we plan to commence our
Phase&nbsp;III clinical trial in the United States during the
second half of 2005 with at least 800 subjects with PHN. The
enrollment of these subjects could take up to one year to
complete. This Phase&nbsp;III clinical trial will test the
high-dose formulation against each component used on its own
accompanied by a placebo control. We expect to utilize primarily
the same endpoints that we used in our Phase&nbsp;II clinical
trial conducted in the United States. A responder analysis based
on pain intensity and pain relief, as well as sleep and patient
global satisfaction, will be assessed over the eight-week
duration of the clinical trial.
</FONT>

<P align="left">
<B><I><FONT size="2">Surgical Pain</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">According to Datamonitor&#146;s study
&#147;<I>Postoperative Pain</I>,&#148; published in April 2004,
there are over 53&nbsp;million surgical procedures conducted
annually in the United States. Traditional post-surgical pain
treatment usually begins with the application of a local
anesthetic at the surgical incision site during the surgery. The
pain relief provided by the anesthetic applied during surgery
typically wears off within the first two hours. Pain relief is
then provided by a combination of oral or injectible narcotic
analgesics and NSAIDs, with accompanying adverse side effects
and drug to drug interactions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">LidoPAIN SP.</FONT></I></B><FONT size="2">
LidoPAIN SP is a sterile prescription analgesic patch designed
to provide sustained topical delivery of lidocaine to a
post-surgical or post-traumatic sutured wound while also
providing a sterile protective covering for the wound. The
LidoPAIN SP patch contains a 10% concentration of lidocaine and
is intended to be applied once daily for as many days as needed,
typically two to three days. LidoPAIN SP can be targeted for use
following both inpatient and ambulatory surgical procedures,
including among others: hernia repair, plastic surgery, puncture
wounds, biopsy, cardiac catheterization and tumor removal.
</FONT>

<P align="center"><FONT size="2">49
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Currently, there is no marketed product similar
to LidoPAIN SP, and we believe that it would be the first
sterile prescription analgesic patch on the market. If approved,
we believe LidoPAIN SP would offer the following favorable
attributes:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">safety and ease of use;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">sterility on a sutured wound;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reduced need for systemically-delivered narcotic
    analgesics and NSAIDs;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">once daily administration;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">minimal adverse side effects, including no
    observed nausea or vomiting;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">additive therapy to systemically-delivered
    analgesics;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">no drug to drug interactions;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">no wound healing interference.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Clinical
Development.</FONT></I></B><FONT size="2"> In December 2001, we
initiated a randomized, double-blind, placebo-controlled
Phase&nbsp;II clinical trial in 221 subjects who underwent
hernia repair. We conducted the clinical trial in nine surgical
centers in Germany. Subjects were randomized to receive two
different doses of lidocaine, 9.5% and 3.5%, or placebo, in a
patch applied once each day for two days. Subjects were not
allowed to take any supplemental analgesics. We completed the
analysis of this clinical trial in January 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The primary endpoint was subject pain
self-assessment at various intervals during the 48-hour period
following the subject&#146;s surgery and the secondary endpoint
was the number of &#147;rescues,&#148; i.e. subjects receiving
systemically-delivered analgesics to alleviate pain. The results
of this trial indicate that the 9.5% formulation of LidoPAIN SP
provided a statistically significant analgesic effect in the
subjects. A dose-related response was also observed, with
subjects receiving the higher dose reporting a greater reduction
in pain and fewer rescues. No significant adverse reactions were
observed.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following chart shows the pain scores over
time for LidoPAIN SP relative to placebo in a two-day trial
following hernia repair surgery:
</FONT>

<P align="center">
<B><U><FONT size="2">LidoPAIN SP Placebo-Controlled Clinical
Trial
Results</FONT></U><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B>

<P align="center">
<IMG src="e01897s1e0189702.gif" alt="Placebo Graph">

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Current Clinical
Initiatives.</FONT></I></B><FONT size="2"> Our clinical protocol
for a Phase&nbsp;III clinical trial in Europe was approved by
Germany&#146;s Federal Institute for Drugs and Medical Devices,
commonly known as the BfArM. We initiated dosing for this trial
during the fourth quarter of 2004. The clinical trial is a
randomized, double-blind, placebo-controlled trial in which at
least 400 subjects who underwent hernia repair will receive a
LidoPAIN SP patch or a placebo patch, for 48&nbsp;hours. The
primary endpoint is
</FONT>

<P align="center"><FONT size="2">50
</FONT>

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<DIV align="left">
<FONT size="2">self-assessed pain intensity at various times
from 4 to 24&nbsp;hours. The secondary endpoints include pain
intensity over the 48-hour duration of the study, global
satisfaction and the use of rescue medications. We believe that
this clinical trial will be adequate for European registration,
but we anticipate that we will need to conduct additional
clinical trials in Europe in order to broaden the product
labeling. We remain responsible for continuing and completing
our ongoing dermal sensitivity study for LidoPAIN SP, but Adolor
is responsible for further clinical trials and managing the
approval process in North America under our strategic alliance
with them. Adolor has announced that it plans to conduct
Phase&nbsp;IIb and Phase&nbsp;III clinical trials in the United
States.
</FONT>
</DIV>

<P align="left">
<B><I><FONT size="2">Back Pain</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In the United States, 80% of the U.S. population
will experience significant back pain at some point. Back pain
ranks second only to headaches as the most frequent pain people
experience. It is the leading reason for visits to neurologists
and orthopedists and the second most frequent reason for
physician visits overall. Both acute and chronic back pain are
typically treated with NSAIDs, muscle relaxants or opioid
analgesics. All of these drugs can subject the patient to
systemic toxicity, significant adverse side effects and drug to
drug interactions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">LidoPAIN BP.</FONT></I></B><FONT size="2">
LidoPAIN BP is a prescription analgesic non-sterile patch
designed to provide sustained topical delivery of lidocaine for
the treatment of acute or recurrent lower back pain of moderate
severity of less than three months duration. The LidoPAIN BP
patch contains 140&nbsp;mg of lidocaine in a 19.5%
concentration, is intended to be applied once daily and can be
worn for a continuous 24-hour period. The patch&#146;s adhesive
is strong enough to permit a patient to move and conduct normal
daily activities but can be removed easily.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If approved, we believe LidoPAIN BP would offer
the following favorable attributes:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">safety and ease of use;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reduced need for treatment with NSAIDs, muscle
    relaxants and narcotic analgesics;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">once daily administration;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">minimal adverse side effects;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">no drug to drug interactions.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">LidoPAIN BP is designed to treat acute or
recurrent lower back pain. As part of our strategic alliance
with Endo, we licensed to Endo certain of our patents to enable
Endo to develop a patch for the treatment of chronic lower back
pain. The significant differences between LidoPAIN BP and
Endo&#146;s product, Lidoderm, are as follows:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">LidoPAIN BP is designed for 24-hour use whereas
    Lidoderm is approved for 12-hour use;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">LidoPAIN BP is made with a stronger adhesive;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">LidoPAIN BP contains a higher concentration of
    lidocaine;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">LidoPAIN BP is designed to provide earlier onset
    of action.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Clinical
Development.</FONT></I></B><FONT size="2"> In May 2001, we
initiated a placebo-controlled dose-response trial
Phase&nbsp;IIa clinical trial in the United States. In this
clinical trial, we tested two dosage formulations of LidoPAIN
BP&nbsp;&#151; one patch measuring 150&nbsp;sq. cm. with a 19.5%
concentration of lidocaine and one patch measuring 75&nbsp;sq.
cm. with a 19.5% concentration of lidocaine&nbsp;&#151; compared
to placebo. Each patch was applied once daily for three days to
43&nbsp;subjects with acute lower back pain of at least moderate
intensity. Subjects abstained from other analgesics and other
therapeutic regimens.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We completed the analysis of this clinical trial
in August 2003. The primary endpoint was pain intensity measured
by a 5-point numerical pain scale where 0 indicated no pain and
5 indicated severe pain. Pain measurements were made at various
times over the three-day duration of the trial. We assessed
</FONT>

<P align="center"><FONT size="2">51
</FONT>

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<DIV align="left">
<FONT size="2">a number of secondary endpoints, including pain
relief, muscle stiffness and global satisfaction. The trial
demonstrated a dose-related statistically significant reduction
in back pain intensity and muscle stiffness as well as increase
in pain relief from the initiation of the trial.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following chart demonstrates the significant
improvement in pain intensity relative to the baseline over the
three-day duration of the study:
</FONT>

<P align="center">
<B><U><FONT size="2">LidoPAIN BP&nbsp;Placebo-Controlled
Dose-Response Clinical Trial Results</FONT></U></B>

<P align="center">
<IMG src="e01897s1e0189703.gif" alt="Pain Graph">

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In January 2002, we initiated a double-blind,
placebo-controlled Phase&nbsp;IIb clinical trial in three
centers in the United States. In this clinical trial, we tested
a LidoPAIN BP patch measuring 150&nbsp;sq. cm. with a 19.5%
concentration of lidocaine. Each patch was applied once daily
for three days to 198&nbsp;subjects with acute lower back pain
of at least moderate intensity. Subjects abstained from other
analgesics and other therapeutic regimens.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Although the results at two of the three centers
in this study did indicate that LidoPAIN BP had a greater
analgesic effect as compared to the placebo control, the results
at a third center were contradictory. At that center, the trial
subjects who received placebo reported an analgesic effect that
exceeded the analgesic effect reported by the subjects receiving
LidoPAIN BP. After the trial, our consultant concluded that the
unusually large placebo effect reported at this center most
likely resulted because many of the subjects may have been
concerned that a failure to report an analgesic effect would
result in a loss of the stipend offered as compensation for
participation in the trial. Due to the results reported at this
center, this clinical trial did not demonstrate a statistically
significant analgesic effect.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Current Clinical
Initiatives.</FONT></I></B><FONT size="2"> Based on the results
from our Phase&nbsp;I and Phase&nbsp;II clinical trials, we are
designing a new pivotal Phase&nbsp;IIb clinical trial, which we
expect to commence by the second half of 2005. Our new trial
will be designed to address the issues raised in our previous
Phase&nbsp;IIb clinical trial. The trial will be longer and will
have more stringent enrollment criteria. Under our strategic
alliance with Endo, we remain responsible for the development of
LidoPAIN BP, including all clinical trials and regulatory
submissions. We intend to request an End of Phase&nbsp;II
meeting with the FDA during the first half of 2005.
</FONT>

<P align="center">
<B><FONT size="2">Other Product Candidates</FONT></B>

<P align="left">
<B><I><FONT size="2">EpiCept MP/DP</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">EpiCept MP/DP is a spray gel matrix of morphine
and lidocaine for the treatment of oral mucositis and dental
pain. A spray gel matrix is a liquid spray that solidifies upon
contact with a warm surface. Oral mucositis is an inflammation
of the mucosa of the mouth that ranges from redness to severe
ulceration and typically results from chemotherapy and radiation
therapy. It is anticipated that other clinical uses will be
</FONT>

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<DIV align="left">
<FONT size="2">considered to expand upon the initial indications
being studied. The FDA cleared our IND for EpiCept MP/DP in July
2001, and we completed a Phase&nbsp;IIa clinical trial on dental
pain subjects in Europe in April 2002. Preliminary results have
indicated that the product is well tolerated and provided a
longer duration of pain relief compared to lidocaine by itself.
We intend to continue dose ranging and dose optimization trials.
</FONT>
</DIV>

<P align="left">
<B><I><FONT size="2">LidoPAIN TV</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">LidoPAIN TV is a topical lidocaine patch applied
to the periauricular skin region (behind the ear) for the
treatment of tinnitus. This product releases doses of lidocaine
into nerve endings located behind the ear. Tinnitus is
characterized by a constant or intermittent hissing, buzzing or
ringing noise in the ear that affects over 50&nbsp;million
Americans. There are many causes of tinnitus, including defects
in nerve conduction, however, there are no currently approved
treatments. We completed a European Phase&nbsp;II clinical trial
in subjects with tinnitus in May 2002. Subjects utilizing the
LidoPAIN TV patch perceived a beneficial effect as compared to
subjects given the placebo patch.
</FONT>

<P align="left">
<B><I><FONT size="2">LidoPAIN HM</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">LidoPAIN HM is a topical lidocaine patch applied
to the forehead for the treatment of headaches. LidoPAIN HM
releases analgesic doses of lidocaine directly into the
trigeminal nerve, a nerve located in the face and forehead,
stimulating the coverings (meninges)&nbsp;of the brain, which is
believed to be a cause of migraine pain. The FDA cleared our IND
for LidoPAIN HM in January 2001, and we completed a
Phase&nbsp;II clinical trial for LidoPAIN HM in headache
subjects. Our initial pilot study indicated that the patch was
well tolerated and demonstrated statistically significant
efficacy of the lidocaine patch over the placebo patch. A second
larger study was unable to replicate those results. We intend to
continue our clinical trials to establish efficacy of this
product candidate in various types of headache pain.
</FONT>

<P align="center">
<B><FONT size="2">Our Strategy</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our objective is to address unmet medical needs
in pain management by developing a broad portfolio of
topically-delivered prescription analgesics for the treatment of
moderate-to-severe pain where existing treatments are
ineffective or cause significant adverse side effects. To
achieve our objective, the key elements of our strategy are to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Focus our development efforts on
    topically-delivered analgesics targeting peripheral nerve
    receptors.</FONT></I></B><FONT size="2"> We intend to leverage
    our pain management expertise by developing proprietary products
    that target peripheral nerve receptors as a novel mechanism to
    effectively treat both acute and chronic pain, with fewer
    adverse side effects than conventional oral, injectable or
    transdermal pain therapeutics. We are developing new
    patent-protected products for conditions that can be treated by
    blocking the ability of peripheral nerve receptors to transmit
    pain messages to the brain.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Focus our development efforts on
    FDA-approved drugs.</FONT></I></B><FONT size="2"> All of our
    product candidates utilize several proprietary formulations and
    topical delivery technologies to administer FDA-approved
    analgesics. We believe using FDA-approved analgesics reduces the
    risks associated with new drug development, lowers our
    development costs and speeds time-to-market<B>.</B>
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Opportunistically enter into development
    and commercialization alliances for our
    products.</FONT></I></B><FONT size="2"> We plan to market
    products for which we obtain regulatory approval through
    co-marketing, co-promotion, licensing and distribution
    arrangements with third-party collaborators. We may also
    consider contracting with a third party professional
    pharmaceutical sales organization to perform the marketing
    function for our products. Where appropriate, we plan to retain
    certain rights to the development and commercialization of our
    product candidates and build our own internal sales and
    marketing capabilities in order to retain a greater share of any
    potential revenues. We believe that our current approach allows
    us maximum flexibility of selecting the marketing method that
    will optimize market penetration and commercial acceptance of
    our products and enable us to avoid developing a large internal
    sales and marketing organization.
    </FONT></TD>
</TR>

</TABLE>

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<P align="center">
<B><FONT size="2">Our Strategic Alliances</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have established strategic alliances with
Adolor with respect to our LidoPAIN&nbsp;SP product candidate
for the treatment of pain associated with surgical incisions and
with Endo with respect to our LidoPAIN&nbsp;BP product candidate
for the treatment of lower back pain. These strategic alliances
are designed to provide us with operating capital and supplement
our development and marketing capabilities. We intend to
selectively pursue additional strategic alliances as appropriate.
</FONT>

<P align="left">
<B><I><FONT size="2">Adolor</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2003, we entered into a license agreement
with Adolor under which we granted Adolor the exclusive right to
commercialize a sterile topical patch containing an analgesic
alone or in combination, including without limitation,
LidoPAIN&nbsp;SP, throughout North America. Upon the execution
of the Adolor agreement, we received a non-refundable payment of
$2.5&nbsp;million, and we may receive additional non-refundable
payments of up to $15.0&nbsp;million that become due upon the
achievement of various milestones relating to product
development and regulatory approval. Under the agreement, we
will also receive royalties from Adolor based on the net sales
of licensed products in North America. These royalties are
payable on a country-by-country basis until our last patent
covering the licensed product expires or the tenth anniversary
of the first commercial sale of licensed product, whichever is
later. Under the agreement, Adolor is obligated to pay us a one
time bonus payment of up to $5.0&nbsp;million upon the
achievement of specified net sales milestones of licensed
product. The total amount of upfront and milestone payments we
are eligible to receive from Adolor is $22.5&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the terms of the agreement, Adolor is
responsible for conducting further clinical trials and
completing the approval process in North America. At
Adolor&#146;s option, we may be required to supply or to obtain
supply of the clinical products necessary to complete clinical
trials. Alternatively, Adolor can choose to subcontract these
responsibilities to a third party. In North America, Adolor is
responsible for the supply and manufacture of LidoPAIN SP for
commercial use or, at its option, may subcontract these
responsibilities to third parties. In October 2004, we and
Adolor entered into an amendment to the license agreement to
facilitate our respective clinical development activities. The
amendment provided that the we and Adolor would coordinate our
independent pre-clinical and clinical activities with respect to
the LidoPAIN SP product. In addition, we agreed to provide
Adolor with clinical trial data generated from our recent
clinical trial conducted in Europe and to permit Adolor to use
such data for development, regulatory and commercialization of
licensed products. Adolor, in turn, agreed to provide us with
certain data generated by Adolor relating to the lidocaine
patches manufactured by Corium International, Inc. and to permit
us to use such data for the development, regulatory and
commercialization of sterile lidocaine patches. Lastly, the
amendment permits us to enter into an agreement with Corium
pursuant to which Corium will manufacture and supply our
clinical and commercial supplies of sterile lidocaine patches
for use outside North America. We have not yet entered into any
manufacturing or supply agreement with Corium.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At our option, within 30&nbsp;days after
Adolor&#146;s first filing of an NDA (or foreign equivalent) for
LidoPAIN SP or similar product, we have the right to negotiate
with Adolor regarding a co-promotion arrangement in any country
in North America in which such filing has been made. However,
neither we nor Adolor is under any obligation to enter into any
such arrangement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Adolor license terminates on a
country-by-country and licensed product-by-licensed product
basis upon the expiration of the royalty obligations in the
particular country. Adolor may also terminate the agreement upon
120&nbsp;days advance written notice to us, and either Adolor or
EpiCept may terminate the agreement upon an uncured material
breach by the other or, subject to the relevant bankruptcy laws,
upon a bankruptcy event of the other.
</FONT>

<P align="left">
<B><I><FONT size="2">Endo</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2003, we entered into a license
agreement with Endo under which we granted Endo (and its
affiliates) the exclusive (including as to us and our
affiliates) worldwide right to commercialize LidoPAIN BP. We
also granted Endo worldwide rights to use certain of our patents
for the development
</FONT>

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<FONT size="2">of certain other non-sterile, topical lidocaine
patches, including Lidoderm, Endo&#146;s non-sterile topical
lidocaine-containing patch for the treatment of chronic lower
back pain. Upon the execution of the Endo agreement, we received
a non-refundable payment of $7.5&nbsp;million, and we may
receive payments of up to $52.5&nbsp;million upon the
achievement of various milestones relating to product
development, regulatory approval and commercial success for both
our LidoPAIN BP product and Endo&#146;s own back pain product,
so long as, in the case of Endo&#146;s product candidate, our
patents provide protection thereof. We will also receive
royalties from Endo based on the net sales of LidoPAIN BP. These
royalties are payable until generic equivalents to the LidoPAIN
BP product are available or until expiration of the patents
covering LidoPAIN BP, whichever is sooner. We are also eligible
to receive milestone payments from Endo of up to approximately
$30.0&nbsp;million upon the achievement of specified regulatory
and net sales milestones of Lidoderm, Endo&#146;s chronic lower
back pain product candidate, so long as our patents provide
protection thereof. The total amount of upfront and milestone
payments we are eligible to receive under this agreement is
$90.0&nbsp;million.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We remain responsible for continuing and
completing the development of LidoPAIN BP, including conducting
all clinical trials (and supplying the clinical products
necessary for those trials) and the preparation and submission
of the NDA in order to obtain regulatory approval for LidoPAIN
BP. We may subcontract with third parties for the manufacture
and supply of LidoPAIN BP. Endo is conducting Phase&nbsp;II
clinical trials for its Lidoderm patch and remains responsible
for continuing and completing the development, including
conducting all clinical trials (and supplying the clinical
products necessary for those trials) in connection with that
product candidate.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In the event that we have obtained regulatory
approval of LidoPAIN BP in a particular country and Endo fails
to commercialize LidoPAIN BP in that country within three years
from the date on which we receive final regulatory approval in
the United States, then the license granted to Endo relating to
the commercialization of LidoPAIN BP in that country terminates,
and we will have the right to commercialize or license the
product in that country. In that event, we will be required to
pay Endo a royalty on the net sales of LidoPAIN BP in any such
country.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At our option, within 30&nbsp;days after our
first filing of an NDA (or foreign equivalent) for LidoPAIN BP,
we have the right to negotiate a co-promotion arrangement with
Endo in any country in which such filing has been made. However,
neither we nor Endo is under any obligation to enter into any
such arrangement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The license terminates upon the later of the
conclusion of the royalty term, on a country-by-country basis,
and the expiration of the last applicable EpiCept patent
covering licensed Endo product candidates on a
country-by-country basis. Either Endo or EpiCept may terminate
the agreement upon an uncured material breach by the other or,
subject to the relevant bankruptcy laws, upon a bankruptcy event
of the other.
</FONT>

<P align="center">
<B><FONT size="2">Manufacturing</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have no in-house manufacturing capabilities.
We intend to outsource all of our manufacturing activities for
the foreseeable future. We believe that this strategy will
enable us to direct operational and financial resources to the
development of our product candidates rather than diverting
resources to establishing a manufacturing infrastructure.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have entered into arrangements with qualified
third parties for the formulation and manufacture of our
clinical supplies. We intend to enter into additional written
supply agreements in the future and are currently in
negotiations with several potential suppliers. We generally
purchase our supplies from our current suppliers pursuant to
purchase orders. We plan to use a single, separate third party
manufacturer for each of our product candidates that we are
responsible for manufacturing. In some cases, the responsibility
to manufacture product, or to identify suitable third party
manufacturers, may be assumed by our licensees. For example,
under the Adolor agreement, Adolor is responsible for the
manufacture of the commercial supply of LidoPAIN SP in North
America. We may source LidoPAIN SP for marketing outside of
North America from Adolor or Adolor&#146;s third party supplier.
Alternatively, we can separately arrange for other third party
suppliers to manufacture the commercial supply of LidoPAIN SP
outside
</FONT>

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<DIV align="left">
<FONT size="2">North America. Pursuant to the October 2004
amendment to the Adolor agreement, Adolor has agreed to permit
us to enter into an agreement with Corium pursuant to which
Corium would manufacture and supply our clinical and commercial
supplies of sterile lidocaine patches for our use outside North
America. We have not yet entered into any manufacturing or
supply agreement with Corium.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We cannot assure you that our current
manufacturers can successfully increase their production to meet
full commercial demand. We believe that there are several
manufacturing sources available to us, including our current
manufacturers, which can meet our commercial supply requirements
on commercially reasonable terms. We will continue to look for
and secure the appropriate manufacturing capabilities and
capacity to ensure commercial supply at the appropriate time.
</FONT>

<P align="center">
<B><FONT size="2">Sales and Marketing</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We do not currently have internal sales or
marketing capabilities. In order to commercially market our
product candidates if we obtain regulatory approval, we must
either develop an internal sales and marketing infrastructure or
collaborate with third parties with sales and marketing
expertise. We have retained full rights to commercialize EpiCept
NP-1 worldwide. We have granted Adolor exclusive
commercialization rights for LidoPAIN SP in North America but
have also retained the right to negotiate with Adolor a
co-promotion agreement for LidoPAIN SP in North America. In
addition, we have granted Endo exclusive worldwide marketing and
commercialization rights for LidoPAIN BP but have also retained
the right to negotiate with Endo co-promotion rights for
LidoPAIN BP worldwide. We will likely market our products in
international markets outside of North America through
collaborations with third parties. We intend to make decisions
regarding internal sales and marketing of our product candidates
on a product-by-product and country-by-country basis.
</FONT>

<P align="center">
<B><FONT size="2">Intellectual Property</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our commercial success will depend in part on
obtaining and maintaining patent protection and trade secret
protection of our technologies and drug candidates as well as
successfully defending these patents against third-party
challenges. We have various composition of matter and use
patents, which have claims directed to our product candidates or
methods of their use. Our patent policy is to retain and secure
patents for the technology, inventions and improvements related
to our core portfolio of product candidates. We currently own 17
issued U.S.&nbsp;patents, five issued foreign patents, one
allowed U.S.&nbsp;patent application and seven pending U.S. and
foreign patent applications. We also rely on trade secrets,
technical know-how and continuing innovation to develop and
maintain our competitive position.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following is a summary of the patent position
relating to our three late-stage product candidates:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <B><I><FONT size="2">EpiCept
    NP-1</FONT></I></B><FONT size="2">&nbsp;&#151; We own a U.S.
    patent with claims directed to a formulation containing a
    combination of amitriptyline and ketamine, which can be used as
    a treatment for the topical relief of pain, including
    neuropathic pain, that expires in August 2021. We also have a
    license to additional patents, which expire in September 2015
    and May 2018, and which have claims directed to topical uses of
    tricyclic antidepressants, such as amitriptyline, and NMDA
    antagonists, such as ketamine, as treatments for relieving pain,
    including neuropathic pain. Additional foreign patent
    applications are pending related to EpiCept NP-1 in many major
    pharmaceutical markets outside the United States.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <B><I><FONT size="2">LidoPAIN
    SP</FONT></I></B><FONT size="2">&nbsp;&#151; We own two U.S.
    patents that have claims directed to the topical use of a local
    anesthetic or salt thereof, such as lidocaine, for the
    prevention or relief of pain from surgically closed wounds, in a
    hydrogel patch, which expire in October 2019. Additionally, we
    own a pending U.S. patent application that is directed to a
    breathable, sterile patch that can be used to treat pain caused
    by various types of wounds, including surgically closed wounds.
    We have foreign patent applications pending relating to LidoPAIN
    SP in many major pharmaceutical markets outside the United
    States.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <B><I><FONT size="2">LidoPAIN
    BP</FONT></I></B><FONT size="2">&nbsp;&#151; We own a U.S.
    patent that has claims directed to the use and composition of a
    patch containing a local anesthetic, such as lidocaine, to
    topically treat back pain, myofascial pain and
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">56
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    <TD width="97%"></TD>
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    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">muscular tensions, which expires in July 2016.
    Equivalent foreign patents have been granted in many major
    European pharmaceutical markets.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We also seek to protect our proprietary
information by requiring our employees, consultants,
contractors, outside partners and other advisers to execute, as
appropriate, nondisclosure and assignment of invention
agreements upon commencement of their employment or engagement.
We also require confidentiality or material transfer agreements
from third parties that receive our confidential data or
materials.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We also rely on trade secrets to protect our
technology, especially where we do not believe patent protection
is appropriate or obtainable. However, trade secrets are
difficult to protect. While we use reasonable efforts to protect
our trade secrets, our employees, consultants, contractors,
partners and other advisors may unintentionally or willfully
disclose our information to competitors. Enforcing a claim that
a third party illegally obtained and is using our trade secrets
is expensive and time consuming, and the outcome is
unpredictable. In addition, courts outside the United States are
sometimes less willing to protect trade secrets. Moreover, our
competitors may independently develop equivalent knowledge,
methods and know-how.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The pharmaceutical, biotechnology and other life
sciences industries are characterized by the existence of a
large number of patents and frequent litigation based upon
allegations of patent infringement. While our drug candidates
are in clinical trials, and prior to commercialization, we
believe our current activities fall within the scope of the
exemptions provided by 35&nbsp;U.S.C. Section&nbsp;271(e) in the
United States and Section&nbsp;55.2(1) of the Canadian Patent
Act, each of which covers activities related to developing
information for submission to the FDA and its counterpart agency
in Canada. As our drug candidates progress toward
commercialization, the possibility of an infringement claim
against us increases. While we attempt to ensure that our drug
candidates and the methods we employ to manufacture them do not
infringe other parties&#146; patents and other proprietary
rights, competitors or other parties may assert that we infringe
on their proprietary rights.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">For a discussion of the risks associated with our
intellectual property, see &#147;Risk Factors&nbsp;&#151; Risks
Relating to Intellectual Property.&#148;
</FONT>

<P align="center">
<B><FONT size="2">License Agreements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have in the past licensed and will continue to
license patents from collaborating research groups and
individual inventors.
</FONT>

<P align="left">
<B><I><FONT size="2">Hyson</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In March 2001, we entered into a license
agreement with Dr.&nbsp;Morton Hyson under which Dr.&nbsp;Hyson
licensed to us various patents relating to LidoPAIN HM. We are
required to pay Dr.&nbsp;Hyson a royalty based on both the
composition and the net sales of the product ultimately
developed. Commencing with the first commercial sale of a
product incorporating the licensed patents, the royalties to
Dr.&nbsp;Hyson will not be less than $50,000&nbsp;per year. The
term of the license extends until the last to expire of the
licensed patents, at which time the royalties also terminate.
Dr.&nbsp;Hyson may also terminate the agreement if we fail to
pay royalties when due or, subject to the relevant bankruptcy
laws, if we become subject to a bankruptcy event. We may
terminate the agreement if we determine that commercialization
of the products incorporating the licensed patents is not in our
best commercial interests.
</FONT>

<P align="left">
<B><I><FONT size="2">Memorial Sloan Kettering</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In January 2001, we entered into a license
agreement with Memorial Sloan Kettering Institute for Cancer
Research, or MSK, under which MSK granted us an exclusive
license to certain patent applications related to topical
anesthetics involving opioids for the treatment of pain
associated with the skin and mucosal surfaces. We are required
to pay MSK royalties based on the net sales generated from
products utilizing the licensed patents. The agreement provides
for minimum royalties of $25,000&nbsp;per year starting from the
first sale of product and increases by $25,000&nbsp;per year, up
to a maximum of $125,000&nbsp;per
</FONT>

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<FONT size="2">year. The royalty obligations terminate upon the
last to expire of the licensed patents. MSK may terminate the
agreement if we become insolvent or if we fail to make royalty
payments when due after a specified period. We may terminate the
agreement if we determine that the commercialization of products
incorporating the licensed patent is not in our best interests.
Either of us may terminate the agreement upon a material uncured
breach of the other.
</FONT>
</DIV>

<P align="left">
<B><I><FONT size="2">Cassel</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In October 1999, we acquired from Dr.&nbsp;R.
Douglas Cassel certain patent applications relating to
technology for the treatment of surgical incision pain. On
July&nbsp;16, 2003, this royalty agreement was amended. Pursuant
to this agreement, we have agreed to pay Dr.&nbsp;Cassel a fee
of $4,000&nbsp;per month until July 2006. We will also pay
Dr.&nbsp;Cassel royalties based on the net sales of any of our
products for the treatment of pain associated with surgically
closed wounds. The $4,000&nbsp;per month fee will be credited
towards these royalty payments. The royalty obligations will
terminate upon the expiration of the last to expire acquired
patent. As part of the royalty arrangement, we have engaged
Dr.&nbsp;Cassel as a consultant, for which he is paid on a per
diem basis. Dr.&nbsp;Cassel provides us with general scientific
consulting services, particularly with respect to the
development and commercialization of LidoPAIN SP.
Dr.&nbsp;Cassel has also granted us an option to obtain, on
mutually agreeable terms, an exclusive, worldwide license to any
technology discovered by Dr.&nbsp;Cassel outside of his
performance of services for us.
</FONT>

<P align="left">
<B><I><FONT size="2">Epitome</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In August 1999, we entered into a sublicense
agreement with Epitome Pharmaceuticals Limited under which we
have an exclusive license to certain patents for the topical use
of tricyclic anti-depressants and NMDA antagonists as topical
analgesics for neuralgia. This technology has been incorporated
into EpiCept NP-1. We have been granted worldwide rights to
make, use, develop, sell and market products utilizing the
licensed technology in connection with passive dermal
applications. We are obligated to make payments to Epitome upon
achievement of specified milestones and to pay royalties based
on annual net sales derived from the products incorporating the
licensed technology. At the end of each year in which there has
been no commercially sold products, we will be obligated to pay
to Epitome a maintenance fee that is equal to twice the fee paid
in the previous year, or Epitome will have the option to
terminate the contract. The sublicense terminates upon the
expiration of the last to expire licensed patents. The
sublicense may be terminated earlier under specified
circumstances, such as breaches, lack of commercial feasibility
and regulatory issues.
</FONT>

<P align="center">
<B><FONT size="2">Government Regulation</FONT></B>

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    <B><I><FONT size="2">United States</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The U.S.&nbsp;Food and Drug Administration and
comparable state and local regulatory agencies impose
substantial requirements upon the clinical development,
manufacture, marketing and distribution of drugs. These agencies
and other federal, state and local entities regulate research
and development activities and the testing, manufacture, quality
control, safety, effectiveness, labeling, storage, record
keeping, approval, advertising and promotion of our product
candidates. In the United States, the FDA regulates drugs under
the Federal Food, Drug, and Cosmetic Act, or FFDCA, and
implementing regulations. The process required by the FDA before
our product candidates may be marketed in the United States
generally involves the following:
</FONT>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
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    <FONT size="2">completion of extensive pre-clinical laboratory
    tests, pre-clinical animal studies and formulation studies all
    performed in accordance with the FDA&#146;s good laboratory
    practice, or GLP, regulations;
    </FONT></TD>
</TR>

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    <TD>&nbsp;</TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">submission to the FDA of an IND application that
    must become effective before clinical trials may begin;
    </FONT></TD>
</TR>

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    <TD>&nbsp;</TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">performance of adequate and well-controlled
    clinical trials to establish the safety and efficacy of the
    product candidate for each proposed indication;
    </FONT></TD>
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    <FONT size="2">submission of an NDA to the FDA;
    </FONT></TD>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
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    <FONT size="2">satisfactory completion of an FDA pre-approval
    inspection of the manufacturing facilities at which the product
    is produced to assess compliance with current GMP, or cGMP,
    regulations;&nbsp;and
    </FONT></TD>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">FDA review and approval of the NDA prior to any
    commercial marketing, sale or shipment of the drug.
    </FONT></TD>
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<P align="left">
<FONT size="2">The testing and approval process requires
substantial time, effort and financial resources, and we cannot
be certain that any approvals for our product candidates will be
granted on a timely basis, if at all.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Pre-clinical
Activities.</FONT></I></B><FONT size="2"> Pre-clinical
activities include laboratory evaluation of product chemistry,
formulation and stability, as well as studies to evaluate
toxicity in animals. The results of pre-clinical tests, together
with manufacturing information and analytical data, are
submitted as part of an IND application to the FDA. The IND
automatically becomes effective 30&nbsp;days after receipt by
the FDA, unless the FDA, within the 30-day time period, raises
concerns or questions about the conduct of the clinical trial,
including concerns that human research subjects will be exposed
to unreasonable health risks. In such a case, the IND sponsor
and the FDA must resolve any outstanding concerns before the
clinical trial can begin. Our submission of an IND, or those of
our collaborators, may not result in FDA authorization to
commence a clinical trial. A separate submission to an existing
IND must also be made for each successive clinical trial
conducted during product development, and the FDA must grant
permission before each clinical trial can begin. Further, an
independent institutional review board, or IRB, for each medical
center proposing to conduct the clinical trial must review and
approve the plan for any clinical trial before it commences at
that center, and it must monitor the study until completed. The
FDA, the IRB or the sponsor may suspend a clinical trial at any
time on various grounds, including a finding that the subjects
or patients are being exposed to an unacceptable health risk.
Clinical testing also must satisfy extensive Good Clinical
Practice, or GCP, regulations and regulations for informed
consent of subjects.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Clinical
Trials.</FONT></I></B><FONT size="2"> For purposes of NDA
submission and approval, clinical trials are typically conducted
in the following three sequential phases, which may overlap:
</FONT>
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    <B><I><FONT size="2">Phase&nbsp;I:</FONT></I></B><FONT size="2">
    Studies are initially conducted in a limited population to test
    the drug candidate for safety, dose tolerance, absorption,
    metabolism, distribution and excretion in healthy humans or, on
    occasion, in subjects. In some cases, a sponsor may decide to
    run what is referred to as a &#147;Phase&nbsp;Ib&#148;
    evaluation, which is a second safety-focused Phase&nbsp;I
    clinical trial typically designed to evaluate the impact of the
    drug candidate in combination with currently approved drugs.
    </FONT></TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Phase&nbsp;II:</FONT></I></B><FONT size="2">
    Studies are generally conducted in a limited patient population
    to identify possible adverse effects and safety risks, to
    determine the efficacy of the drug candidate for specific
    targeted indications and to determine dose tolerance and optimal
    dosage. Multiple Phase&nbsp;II clinical trials may be conducted
    by the sponsor to obtain information prior to beginning larger
    and more expensive Phase&nbsp;III clinical trials. In some
    instances, a sponsor may decide to run what is referred to as a
    &#147;Phase&nbsp;IIa&#148; clinical trial, which is designed to
    provide dose-ranging and additional safety and pharmaceutical
    data. In other cases, a sponsor may decide to run what is
    referred to as a &#147;Phase&nbsp;IIb&#148; evaluation, which is
    a second, confirmatory Phase&nbsp;II clinical trial that could,
    if positive and accepted by the FDA, serve as a pivotal clinical
    trial in the approval of a drug candidate.
    </FONT></TD>
</TR>

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    <TD>&nbsp;</TD>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <B><I><FONT size="2">Phase&nbsp;III:</FONT></I></B><FONT size="2">
    These are commonly referred to as pivotal studies. When
    Phase&nbsp;II clinical trials demonstrate that a dose range of
    the drug candidate is effective and has an acceptable safety
    profile, Phase&nbsp;III clinical trials are undertaken in large
    patient populations to further evaluate dosage, to provide
    substantial evidence of clinical efficacy and to further test
    for safety in an expanded and diverse patient population at
    multiple, geographically dispersed clinical trial sites.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In some cases, the FDA may condition approval of
an NDA for a drug candidate on the sponsor&#146;s agreement to
conduct additional clinical trials to further assess the
drug&#146;s safety and effectiveness after NDA approval. Such
post-approval trials are typically referred to as Phase&nbsp;IV
clinical trials.
</FONT>

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<B><I><FONT size="2">New Drug
Application.</FONT></I></B><FONT size="2"> The results of drug
candidate development, pre-clinical testing, chemistry and
manufacturing controls and clinical trials are submitted to the
FDA as part of an NDA. The NDA also must contain extensive
manufacturing information. Once the submission has been accepted
for filing, by law the FDA has 180&nbsp;days to review the
application and respond to the applicant. The review process is
often significantly extended by FDA requests for additional
information or clarification. The FDA may refer the NDA to an
advisory committee for review, evaluation and recommendation as
to whether the application should be approved. The FDA is not
bound by the recommendation of an advisory committee, but it
generally follows such recommendations. The FDA may deny
approval of an NDA if the applicable regulatory criteria are not
satisfied, or it may require additional clinical data or an
additional pivotal Phase&nbsp;III clinical trial. Even if such
data is submitted, the FDA may ultimately decide that the NDA
does not satisfy the criteria for approval. Data from clinical
trials are not always conclusive and the FDA may interpret data
differently than we interpret data. Once issued, the FDA may
withdraw drug approval if ongoing regulatory requirements are
not met or if safety problems occur after the drug reaches the
market. In addition, the FDA may require testing, including
Phase&nbsp;IV clinical trials, and surveillance programs to
monitor the effect of approved products that have been
commercialized, and the FDA has the power to prevent or limit
further marketing of a drug based on the results of these
post-marketing programs. Drugs may be marketed only for the
approved indications and in accordance with the provisions of
the approved label. Further, if there are any modifications to
the drug, including changes in indications, labeling or
manufacturing processes or facilities, we may be required to
submit and obtain FDA approval of a new NDA or NDA supplement,
which may require us to develop additional data or conduct
additional pre-clinical studies and clinical trials.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Satisfaction of FDA regulations and requirements
or similar requirements of state, local and foreign regulatory
agencies typically takes several years, and the actual time
required may vary substantially based upon the type, complexity
and novelty of the product or disease. Government regulation may
delay or prevent marketing of drug candidates for a considerable
period of time and impose costly procedures upon our activities.
The FDA or any other regulatory agency may not grant approvals
for new indications for our drug candidates on a timely basis,
if at all. Even if a drug candidate receives regulatory
approval, the approval may be significantly limited to specific
usages, patient populations and dosages. Further, even after
regulatory approval is obtained, later discovery of previously
unknown problems with a drug may result in restrictions on the
drug or even complete withdrawal of the drug from the market.
Delays in obtaining, or failures to obtain, regulatory approvals
for any of our drug candidates would harm our business. In
addition, we cannot predict what additional governmental
regulations may arise from future U.S.&nbsp;governmental action.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Any drugs manufactured or distributed by us or
our collaborators pursuant to FDA approvals are subject to
continuing regulation by the FDA, including record keeping
requirements and reporting of adverse experiences associated
with the drug. Drug manufacturers and their subcontractors are
required to register their establishments with the FDA and
certain state agencies and are subject to periodic unannounced
inspections by the FDA and certain state agencies for compliance
with ongoing regulatory requirements, including cGMPs, which
impose certain procedural and documentation requirements upon us
and our third-party manufacturers. Failure to comply with the
statutory and regulatory requirements can subject a manufacturer
to potential legal or regulatory action, such as warning
letters, suspension of manufacturing, seizure of product,
injunctive action or civil penalties. We cannot be certain that
we or our present or future third-party manufacturers or
suppliers, will be able to comply with the cGMP regulations and
other ongoing FDA regulatory requirements. If our present or
future third-party manufacturers or suppliers are not able to
comply with these requirements, the FDA may halt our clinical
trials, require us to recall a drug from distribution, or
withdraw approval of the NDA for that drug.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The FDA closely regulates the post-approval
marketing and promotion of drugs, including standards and
regulations for direct-to-consumer advertising, off-label
promotion, industry-sponsored scientific and educational
activities and promotional activities involving the Internet. A
company can make only those claims relating to safety and
efficacy that are approved by the FDA. Failure to comply with
these requirements can result in adverse publicity, warning
letters, corrective advertising and potential civil and
</FONT>

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<FONT size="2">criminal penalties. Physicians may prescribe
legally available drugs for uses that are not described in the
drug&#146;s labeling and that differ from those tested by us and
approved by the FDA. Such off-label uses are common across
medical specialties. Physicians may believe that such off-label
uses are the best treatment for many patients in varied
circumstances. The FDA does not regulate the behavior of
physicians in their choice of treatments. The FDA does, however,
impose stringent restrictions on manufacturers&#146;
communications regarding off-label use.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Section&nbsp;505(b)(2) Drug
Applications.</FONT></I></B><FONT size="2"> As an alternate path
to FDA approval for new or improved formulations of previously
approved products, a company may file a Section&nbsp;505(b)(2)
NDA. Section&nbsp;505(b)(2) permits the filing of an NDA where
at least some of the information required for approval comes
from studies not conducted by or for the applicant and for which
the applicant has not obtained a right of reference. The rule
permits the applicant to rely upon certain pre-clinical or
clinical studies conducted for an approved product. The FDA may
also require companies to perform additional studies or
measurements to support the change from the approved product.
The FDA may then approve the new product candidate for all or
some of the label indications for which the referenced product
has been approved, as well as for any new indication sought by
the Section&nbsp;505(b)(2) applicant.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To the extent that the Section&nbsp;505(b)(2)
applicant is relying on studies conducted for an already
approved product, the applicant is required to certify to the
FDA concerning any patents listed for the approved product in
the FDA&#146;s Orange Book publication. Specifically, the
applicant must certify that:&nbsp;(i)&nbsp;the required patent
information has not been filed; (ii)&nbsp;the listed patent has
expired; (iii)&nbsp;the listed patent has not expired, but will
expire on a particular date and approval is sought after patent
expiration; or (iv)&nbsp;the listed patent is invalid or will
not be infringed by the new product. If the applicant does not
challenge the listed patents, the Section&nbsp;505(b)(2)
application will not be approved until all the listed patents
claiming the referenced product have expired. The
Section&nbsp;505(b)(2) application also will not be approved
until any non-patent exclusivity, such as exclusivity for
obtaining approval of a new chemical entity, listed in the
Orange Book for the referenced product has expired.
</FONT>

<DIV>&nbsp;</DIV>

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    <TD>
    <B><I><FONT size="2">Foreign Regulation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Whether or not we obtain FDA&nbsp;approval for a
product, we must obtain approval of a product by the comparable
regulatory authorities of foreign countries before we can
commence clinical trials or marketing of the product in those
countries. The approval process varies from country to country,
and the time may be longer or shorter than that required for
FDA&nbsp;approval. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement
also vary greatly from country to country. Although governed by
the applicable country, clinical trials conducted outside of the
United States typically are administered with the three-phase
sequential process that is discussed above under
&#147;Government Regulation&nbsp;&#151; United States.&#148;
However, the foreign equivalent of an IND is not a prerequisite
to performing pilot studies or Phase&nbsp;I clinical trials.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under European Union regulatory systems, we may
submit marketing authorization applications either under a
centralized or decentralized procedure. The centralized
procedure, which is available for medicines produced by
biotechnology or which are highly innovative, provides for the
grant of a single marketing authorization that is valid for all
EU&nbsp;member states. This authorization is a marketing
authorization approval, or MAA. The decentralized procedure
provides for mutual recognition of national approval decisions.
Under this procedure, the holder of a national marketing
authorization may submit an application to the remaining member
states. Within 90&nbsp;days of receiving the applications and
assessment report, each member state must decide whether to
recognize approval. This procedure is referred to as the mutual
recognition procedure, or MRP.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, regulatory approval of prices is
required in most countries other than the United States. We face
the risk that the resulting prices would be insufficient to
generate an acceptable return to us or our collaborators.
</FONT>

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<P align="center">
<B><FONT size="2">Competition</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The pharmaceutical industry, and the pain
management sector specifically, is highly competitive and
includes a number of established, large and mid-sized
pharmaceutical and specialty pharmaceutical companies, as well
as smaller emerging companies, whose activities are directly
focused on our target markets and areas of expertise. These
organizations also compete with us to attract qualified
personnel and potential parties for acquisitions, joint ventures
or other strategic alliances. Many of our competitors have
significantly greater financial, manufacturing, marketing and
drug development resources than we do. Large pharmaceutical
companies in particular have extensive experience in clinical
testing, obtaining regulatory approvals and drug
commercialization. If approved, our product candidates will
compete with a large number of products that include
over-the-counter treatments, prescription drugs specifically
indicated for pain management and prescription drugs that are
prescribed off-label. In addition, new developments occur in the
pharmaceutical industry at a rapid pace.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If approved, each of our product candidates will
compete for a share of the existing market with products that
have become standard treatments recommended or prescribed by
physicians.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that the primary competition for our
lead product candidates are as follows:
</FONT>
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    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <B><I><FONT size="2">EpiCept NP-1.</FONT></I></B><FONT size="2">
    The primary competition for EpiCept NP-1 in the area of
    post-herpetic neuralgia is Neurontin (gabapentin), which is
    currently marketed by Pfizer. Gabapentin, the generic equivalent
    of Neurontin, is now available at a cost substantially below the
    price of Neurontin. Pfizer has developed a successor product
    candidate to Neurontin called Lyrica or pregabalin, which has
    been shown in Phase&nbsp;III clinical trials to effectively
    treat subjects with neuropathic pain. We also face competition
    from Endo&#146;s Lidoderm patch, which is currently indicated
    for post-herpetic neuralgia.
    </FONT></TD>
</TR>

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</TR>

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    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <B><I><FONT size="2">LidoPAIN SP.</FONT></I></B><FONT size="2">
    The primary competition in the market for acute post-operative
    pain are narcotic analgesics. Several competitors are seeking
    product candidates that would be used in combination with
    opioids to mitigate one or more of the adverse side effects
    associated with their use. For example, Endo recently announced
    that the FDA has approved Skyepharma&#146;s NDA for DepoDur for
    the treatment of pain following major surgery, to which product
    Endo has licensed the commercial rights. Previously referred to
    as DepoMorphine, DepoDur is a single dose sustained-release
    injectable formulation of morphine. Other competitors include
    Purdue Pharmaceuticals and Ortho-McNeil Pharmaceutical, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <B><I><FONT size="2">LidoPAIN BP.</FONT></I></B><FONT size="2">
    There are a number of competitive products that are used to
    treat acute lower back pain. We compete with fully-integrated
    pharmaceutical companies, smaller companies that are
    collaborating with larger pharmaceutical companies, academic
    institutions, government agencies and other public and private
    research organizations. Many of these competitors have drugs
    already approved by the FDA or in development and operate larger
    research and development programs in these fields than we do.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Although we believe that, if approved, our
product candidates will have favorable features for the
treatment of their intended indications, existing treatments or
treatments currently under clinical development that also
receive regulatory approval may possess advantages in competing
for market share.
</FONT>

<P align="center">
<B><FONT size="2">Legal Proceedings</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are not currently involved in any material
legal proceedings.
</FONT>

<P align="center">
<B><FONT size="2">Facilities</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our facilities consist of approximately
12,700&nbsp;square feet of research and office space. We lease
9600&nbsp;square feet located at 270&nbsp;Sylvan Avenue in
Englewood Cliffs, New Jersey until September 2005 with an option
to renew until September 2010. We also lease 2,766&nbsp;square
feet in Munich, Germany until August 2007, with an automatic
year-long extension for an additional three years.
</FONT>

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<P align="center">
<B><FONT size="2">Employees</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our workforce consists of 13&nbsp;full-time
employees, three of whom hold a Ph.D. or M.D., and one of whom
holds other advanced degrees. Of our total workforce, six are
engaged in research and development, and seven are engaged in
business development, finance and administration. We have no
collective bargaining agreements with our employees, and we have
not experienced any work stoppages. We believe that our
relations with our employees are good.
</FONT>

<P align="center"><FONT size="2">63
</FONT>

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<DIV align="left">
<A name='111'></A>
</DIV>

<!-- link1 "MANAGEMENT" -->

<P align="center">
<B><FONT size="2">MANAGEMENT</FONT></B>

<P align="center">
<B><FONT size="2">Management and Board of Directors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">EpiCept has a strong team of experienced business
executives, scientific professionals and medical specialists.
Our executive officers and directors, their ages and positions,
as of January&nbsp;6, 2005, are as follows:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="42%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="48%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Age</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Position/Affiliation</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">John V. Talley
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">48</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">President, Chief Executive Officer and Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Robert W. Cook
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">49</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Chief Financial Officer&nbsp;&#151; Senior Vice
    President, Finance and Administration
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dov Elefant
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">37</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Controller&nbsp;&#151; Vice President, Finance
    and Administration
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Earle Lockhart, M.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">63</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Vice President, Clinical and Regulatory Affairs
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Scott B. Kozak
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">39</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Vice President, Business Development
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oliver Wiedemann, M.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">45</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Managing Director&nbsp;&#151; Medical Affairs,
    EpiCept GmbH
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dileep Bhagwat,&nbsp;Ph.D., M.B.A.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">54</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Senior Vice President, Pharmaceutical Development
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Robert G. Savage
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">51</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Chairman of the Board
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ernst-Gunter Afting,&nbsp;M.D., Ph.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">62</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gert Caspritz,&nbsp;Ph.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">55</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Mark Docherty
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">40</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Guy C. Jackson
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">62</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reiner Ponschab, Ph.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">61</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Thorlef Spickschen, Ph.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">63</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Director
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center">
<B><FONT size="2">Executive Officers and Key Employees</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">John V. Talley
</FONT></I></B><FONT size="2">has been our President, Chief
Executive Officer and a Director since October 2001.
Mr.&nbsp;Talley has more than 23&nbsp;years of experience in the
pharmaceutical industry. Prior to joining us, Mr.&nbsp;Talley
was the Chief Executive Officer of Consensus Pharmaceuticals, a
biotechnology drug discovery start-up company that developed a
proprietary peptide-based combinatorial library screening
process. Prior to joining Consensus, Mr.&nbsp;Talley led Penwest
Ltd.&#146;s efforts in its spin-off of its subsidiary Penwest
Pharmaceuticals Co. in 1998 and served as President and Chief
Operating Officer of Penwest Pharmaceuticals. Mr.&nbsp;Talley
started his career at Sterling Drug Inc., where he was
responsible for all U.S.&nbsp;marketing activities for
prescription drugs, helped launch various new pharmaceutical
products and participated in the 1988 acquisition of Sterling
Drug by Eastman Kodak Co. Mr.&nbsp;Talley received his B.S. in
Chemistry from the University of Connecticut and completed
coursework towards an M.B.A. in Marketing from New York
University, Graduate School of Business.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Robert W. Cook
</FONT></I></B><FONT size="2">has been our Chief Financial
Officer and Senior Vice President, Finance and Administration
since April 2004. Prior to joining us, Mr.&nbsp;Cook was Vice
President, Finance and Chief Financial Officer of Pharmos
Corporation since January 1998 and became Executive Vice
President of Pharmos in February 2001. From May 1995 until his
appointment as Pharmos&#146;s Chief Financial Officer, he was a
vice president in GE Capital&#146;s commercial finance
subsidiary, based in New York. From 1977 until 1995,
Mr.&nbsp;Cook held a variety of corporate finance and capital
markets positions at The Chase Manhattan Bank, both in the
United States and in several overseas locations. He was named a
managing director of Chase and several of its affiliates in
January 1986. Mr.&nbsp;Cook received his B.S. in International
Finance from The American University, Washington,&nbsp;D.C.
</FONT>

<P align="center"><FONT size="2">64
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Dov S. Elefant
</FONT></I></B><FONT size="2">has been our Controller and Vice
President of Finance and Administration since April 2004. Prior
to being named our Controller and Vice President of Finance and
Administration, Mr.&nbsp;Elefant was our Controller from
December 1999 through September 2000, our Chief Financial
Officer from October 2000 through January 2001 and our Chief
Financial Officer and Vice President of Finance and
Administration from January 2001 until April 2004. From October
1998 until December 1999, Mr.&nbsp;Elefant was Assistant
Controller of Alteon Inc., a publicly traded biotechnology
company. Prior to that, he served as Director of Accounting and
Finance of Innapharma, Inc., a pharmaceutical contract research
organization. Mr.&nbsp;Elefant received his B.S. in Accounting
from the Sy&nbsp;Syms School of Business of Yeshiva University
in New York.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Earle A. Lockhart,&nbsp;M.D.,
</FONT></I></B><FONT size="2">has been our Vice President of
Clinical and Regulatory Affairs since 2000, and prior to that
served as our Director of Clinical Research and Medical Affairs
since 1998. From 1996 until joining us, Dr.&nbsp;Lockhart was
Medical Director supporting the launch and marketing of a
controlled release oxycodone (OxyContin) for The Purdue
Frederick Company. From 1991 until 1996, Dr.&nbsp;Lockhart
served as Senior Medical Director in the OTC Division of
American Home Products Corporation. From 1986 to 1991,
Dr.&nbsp;Lockhart served as Senior Medical Director of Medical
Affairs at Sterling Drug. From 1981 until 1986,
Dr.&nbsp;Lockhart held various positions in clinical research at
Bristol-Myers Squibb Company and Janssen Pharmaceutica Products,
L.P. Dr.&nbsp;Lockhart received his M.D. from the University of
Toronto and is Board Certified in both Pediatrics and
Nephrology. He has been Associate Professor of Pediatrics at New
York Medical College in Valhalla, N.Y. and is currently Clinical
Assistant Professor at Albert Einstein College of Medicine in
New York.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Scott B. Kozak
</FONT></I></B><FONT size="2">has been our Vice President of
Business Development since April 2002 and has more than
14&nbsp;years of experience in the pharmaceutical industry.
Prior to joining us, Mr.&nbsp;Kozak was the Director of
Licensing at Forest Laboratories, Inc. Before joining Forest in
September 1999, Mr.&nbsp;Kozak was Assistant Director, Global
Licensing and Corporate Development at Hoffmann-La&nbsp;Roche
Inc., where he was responsible for the licensing efforts in the
Metabolic and Drug Delivery areas and was a member of the
Metabolic Therapeutic Area Strategy Team responsible for global
planning. From 1989 to 1997, Mr.&nbsp;Kozak held various sales,
marketing, and licensing and acquisition positions at Solvay
Pharmaceuticals. Mr.&nbsp;Kozak received his B.S. in Marketing
from the University of Connecticut and his M.B.A. in Marketing
from Kennesaw State University&#146;s Michael J. Coles College
of Business.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Oliver Wiedemann,&nbsp;M.D.,
</FONT></I></B><FONT size="2">joined our subsidiary EpiCept GmbH
in October 1998 as Director of Medical Affairs. Since July 1999,
he has been the Managing Director at EpiCept GmbH. From January
1992 until joining us, he was the Department Head CNS/ Muscle of
the Medical Department of Sanofi Winthrop, Munich. Prior to
that, Dr.&nbsp;Widemann worked as a surgeon at the
Olympiapark-Klinik, Munich. He is the author of several
scientific publications in the pain area. Dr.&nbsp;Wiedemann
received his Medical Doctorate Degree from the University of
Munich.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Dileep Bhagwat,&nbsp;Ph.D., M.B.A.,
</FONT></I></B><FONT size="2">has been our Senior Vice President
of Pharmaceutical Development since February 2004 and has more
than 20&nbsp;years of pharmaceutical experience developing and
commercializing various dosage forms. Prior to joining EpiCept
in 2004, Dr.&nbsp;Bhagwat worked at Bradley Pharmaceuticals, as
Vice President, Research and Development and Chief Scientific
Officer. From November 1994 through September 1999,
Dr.&nbsp;Bhagwat was employed at Penwest Pharmaceuticals in
various capacities, including Vice President, Scientific
Development and Regulatory Affairs and at Purdue Frederick
Research Center as Assistant Director of Pharmaceutical
Development. Dr.&nbsp;Bhagwat holds many U.S. and foreign
patents and has presented and published on dosage form
development and drug delivery. Dr.&nbsp;Bhagwat holds a B.S. in
Pharmacy from Bombay University, an M.S. and Ph.D. in Industrial
Pharmacy from St. John&#146;s University in New York and an
M.B.A. in International Business from Pace University in New
York.
</FONT>

<P align="center">
<B><FONT size="2">Board of Directors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Robert G. Savage
</FONT></I></B><FONT size="2">has been a member of our Board
since December 2004 and serves as the Chairman. Mr.&nbsp;Savage
has been a pharmaceutical executive for almost 20&nbsp;years. He
held the position of Worldwide
</FONT>

<P align="center"><FONT size="2">65
</FONT>

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<DIV align="left">
<FONT size="2">Chairman of the Pharmaceuticals Group at
Johnson&nbsp;&#38; Johnson and was both a company officer and a
member of the Executive Committee. He also served
Johnson&nbsp;&#38; Johnson in the capacity of a Company Group
Chairman and President of Ortho-McNeil Pharmaceuticals. Most
recently, Mr.&nbsp;Savage was President for the General
Therapeutics and Inflammation Business for Pharmacia Corporation
where he was President of the Worldwide Inflammation Group. He
has held multiple positions leading marketing, business
development and strategic planning at Hoffmann-La&nbsp;Roche and
Sterling Drug. Mr.&nbsp;Savage is a director of The Medicines
Company, a specialty pharmaceutical company, Noven
Pharmaceuticals, a drug delivery company, and NovaDel Pharma,
Inc., a privately-held drug delivery company. Mr.&nbsp;Savage
received a B.S. in Biology from Upsala College and an M.B.A.
from Rutgers University.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Ernst-G&#252;nter
Afting,&nbsp;M.D.,&nbsp;Ph.D.,</FONT></I></B><FONT size="2"> has
been a member of our board since 1998. Since 1995, Professor
Afting has been President and Chief Executive Officer of
Munich-based GSF-National Research Center for Environment and
Health, a large medical research organization. From 1993 until
1995, he was President and Chief Executive Officer of Roussel
Uclaf, a French pharmaceutical company, which was majority owned
by Hoechst AG. Professor Afting had previously held various
positions with Hoechst AG since 1984, including Chief Executive
Officer of the Pharmaceutical Division of the Hoechst Group and
Chairman of the Divisional Pharmaceutical Board. He was a member
of the Advisory Committee on Science and Technology to the
German Chancellor and serves on several boards of
entrepreneurial biotechnology companies in Europe and the United
States. Professor Afting has been a member of the faculty at the
University G&#246;ttingen since 1985. Professor Afting received
his M.D. and Ph.D. from the University of Freiburg, Germany.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Gert Caspritz,&nbsp;Ph.D.,
</FONT></I></B><FONT size="2">has been a member of our board
since 1999 and served as our Chairman from July 2002 until
December 2004. Dr.&nbsp;Caspritz joined Techno Venture
Management, or &#147;TVM,&#148; in 1999 as an Investment Manager
in the healthcare and life sciences group and has been a General
Partner since 2000. Prior to that, Dr.&nbsp;Caspritz held
various positions with Hoechst&nbsp;AG. Most recently he was
Vice President, New Technologies Licensing at Hoechst Marion
Roussel, the pharmaceutical subsidiary of Hoechst, where he had
primary global responsibility for identifying business
opportunities in the areas of biotechnology, enabling
technologies and early-stage products in both the biotech
industry and academia. Additionally, he supervised HMR&#146;s
various venture capital investments and was a member of their
strategy teams for oncology and bone diseases and the oncology
opportunity review team. Dr.&nbsp;Caspritz was previously
Assistant to the Head of Hoechst&#146;s worldwide pharmaceutical
research and established or led a number of immuno and
neuropharmacology laboratories as well as a drug discovery
group. Dr.&nbsp;Caspritz received degrees in Biology and
Microbiology from the University of Mainz, Germany where he
wrote his doctoral thesis.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Mark Docherty
</FONT></I></B><FONT size="2">has been a member of our board
since July 2003. Mr.&nbsp;Docherty is a founding director of
Merlin Biosciences Limited and serves as an Investment Director.
He has worked on a large number of initial investments and
refinancings of biotechnology companies. He was previously
associated with Arthur Andersen&nbsp;(UK) in the Corporate
Finance Group based in the United Kingdom. Mr.&nbsp;Docherty is
a Chartered Accountant and holds a B.Eng. in Mechanical
Engineering from Sheffield University in the United Kingdom.
Mr.&nbsp;Docherty also holds a number of non-executive
directorships on the boards of directors of various private
biotechnology companies.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Guy C.
Jackson</FONT></I></B><FONT size="2"> has been a member of our
Board since December 2004. In June 2003, Mr.&nbsp;Jackson
retired from the Minneapolis office of the accounting firm of
Ernst&nbsp;&#38; Young LLP, after 35&nbsp;years with the firm
and one of its predecessors, Arthur Young&nbsp;&#38; Company.
During his career, he served as audit partner for numerous
public companies in Ernst&nbsp;&#38; Young&#146;s New York and
Minneapolis offices. Mr.&nbsp;Jackson also serves as a director
and member of the audit committee of Cyberonics, Inc, Digi
International Inc., Life Time Fitness, Inc. and Urologix, Inc.
Mr.&nbsp;Jackson received a B.S. in Business Administration from
Pennsylvania State University and a M.B.A. from the Harvard
Business School.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Reiner
Ponschab,&nbsp;Ph.D.,</FONT></I></B><FONT size="2"> has been a
member of our board since June 1999. Dr.&nbsp;Ponschab is an of
counsel with Heussen Rechtsanwaltsgesellschaft mbH in Munich,
working as a lawyer in the field of commercial law with the main
emphasis in the areas of corporate law, merger and acquisitions,
venture
</FONT>

<P align="center"><FONT size="2">66
</FONT>

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<DIV align="left">
<FONT size="2">capital and structuring of companies since 1976,
and prior to that working in the tax department of Peat Marwick
Mitchell&nbsp;&#38; Co. since 1974. Dr.&nbsp;Ponschab is the
Chairman of the Committee for Alternative Dispute Resolution of
the German Bar Association and President of the Society of
Business Mediation and Conflict Management, and since 1996 he
has been conducting a teaching assignment with the University of
Passau.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Thorlef
Spickschen,&nbsp;Ph.D.,</FONT></I></B><FONT size="2"> has been a
member of our board since November 2001. He has worked as a
senior executive in the pharmaceutical industry for over
30&nbsp;years. From 1994 until 2001, he served as Chairman and
Chief Executive Officer of BASF Pharma-Knoll AS. From 1991 until
1993, he was Chairman and CEO of Boehringer Mannheim GmbH.
Earlier in his career, he held business positions at Eli Lilly
and Company and McKinsey&nbsp;&#38; Company. Dr.&nbsp;Spickschen
serves on the boards of BioVisioN AG (Vice Chairman), Heidelberg
Innovation GmbH (Chairman), Pharmion Corporation, Weston Medical
CYTOS Biotechnology&nbsp;AG and GfK AG, as well as several
academic and social institutions. Dr.&nbsp;Spickschen received a
Doctorate in Business Management from the University of Cologne.
</FONT>

<P align="center">
<B><FONT size="2">Scientific and Medical Advisory
Board</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Scientific and Medical Advisory Board is
composed of individuals with expertise in clinical pharmacology,
clinical medicine and regulatory matters. Advisory board members
assist us in identifying scientific and product development
opportunities and in reviewing with management progress of the
our projects.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Dr.&nbsp;Gavril Pasternak,
</FONT></I></B><FONT size="2"><I>Chief Advisor</I>, is a
recognized authority on opioid receptor mechanisms. He has
published a substantial body of literature on the subject, and
he is on the editorial boards of numerous journals related to
the subjects of neuropharmacology and pain. Dr.&nbsp;Pasternak
is a Member and attending Neurologist at Memorial
Sloan-Kettering Cancer Center and is Professor of Neurology and
Neuroscience, Pharmacology and Psychiatry at Cornell University
Medical College and Graduate School of Medical Sciences.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Prof.&nbsp;Dr.&nbsp;Christoph Stein
</FONT></I></B><FONT size="2">is a recognized authority in
experimental and clinical pain research. He has studied
mechanisms of peripherally mediated opioid analgesia for over
16&nbsp;years and has published an extensive body of literature
on this topic. He is on editorial boards of several journals
related to pain, anesthesia and analgesia. Dr.&nbsp;Stein is
Professor and Chairman of the Department of Anesthesiology at
Charit&#233;&nbsp;&#151; Campus Benjamin Franklin, Freie
Universit&#228;t Berlin, Germany, and Adjunct Professor at Johns
Hopkins University.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Bruce F. Mackler, Ph.D., J.D.,
M.S.,</FONT></I></B><FONT size="2"> received his J.D. from the
South Texas College of Law of the Texas A&#38;M University, his
Ph.D. from the University of Oregon Medical School, his M.S.
from Pennsylvania State University and his B.A. from Temple
University. He is a member of the District of Columbia Bar and
admitted to practice before the Federal District and Appeals
Court and before the Supreme Court. He has published some 100
scientific articles, abstracts and books during his tenure as a
scientist and has been an attorney in the food and drug area for
25&nbsp;years.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Dr.&nbsp;Howard Maibach
</FONT></I></B><FONT size="2">is a dermatologist whose research
area is dermatology, dermatopharmacology and dermatotoxicology.
Dr.&nbsp;Maibach has published over 1900 articles on various
dermatology-related subjects and is a frequent lecturer on
various subjects related to dermatology. Dr.&nbsp;Maibach is
currently professor in the Department of Dermatology, School of
Medicine, at the University of California in San&nbsp;Francisco.
</FONT>

<P align="center">
<B><FONT size="2">Board Composition</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to the closing of this offering, our board
of directors will be divided into three classes, with each
director serving a three-year term and one class being elected
at each year&#146;s annual meeting of stockholders. A majority
of the members of our board of directors are
&#147;independent&#148; of us and our
</FONT>

<P align="center"><FONT size="2">67
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2">management. Directors Savage and Caspritz will be
in the class of directors whose initial term expires at the 2005
annual meeting of stockholders. Directors Spickschen, Ponschab
and Jackson will be in the class of directors whose initial term
expires at the 2006 annual meeting of the stockholders.
Directors Talley and Afting will be in the class of directors
whose initial term expires at the 2007 annual meeting of
stockholders. This classification of our board of directors will
make it more difficult for a third party to acquire control of
our company. Director Docherty intends to resign upon
consummation of this offering.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A majority of our directors are non-U.S.
residents and a substantial portion of the assets of those
directors are located outside the United States. As a result,
you may not be able to effect service of process within the
United States upon these persons or to enforce, in
U.S.&nbsp;courts, against these persons judgments of
U.S.&nbsp;courts predicated upon any civil liability provisions
of the U.S.&nbsp;federal or state securities laws against those
directors.
</FONT>

<P align="center">
<B><FONT size="2">Committees of the Board</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our board of directors has established three
standing committees: the audit committee, the compensation
committee and the corporate governance and nominating committee.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Audit
Committee.</FONT></I></B><FONT size="2"> Our audit committee is
responsible for preparing such reports, statements or charters
as may be required by The Nasdaq Stock Market or federal
securities laws, as well as, among other things:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">overseeing and monitoring the integrity of our
    financial statements, our compliance with legal and regulatory
    requirements as they relate to financial statements or
    accounting matters and our internal accounting and financial
    controls;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">preparing the report that SEC rules require be
    included in our annual proxy statement;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">overseeing and monitoring our independent
    auditor&#146;s qualifications, independence and performance;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">providing the board with the results of its
    monitoring and recommendations;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">providing to the board additional information and
    materials as it deems necessary to make the board aware of
    significant financial matters that require the attention of the
    board.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Directors Jackson, Savage and Afting are
currently members of the audit committee, each of whom is a
non-employee member of our board of directors. Mr.&nbsp;Jackson
serves as Chairman of the audit committee and also qualifies as
a financial expert, as that term is defined under the SEC rules
implementing Section&nbsp;407 of the Sarbanes-Oxley Act. Our
board has determined that each member of our audit committee
meets the current independence and financial literacy
requirements under the Sarbanes-Oxley Act, The Nasdaq Stock
Market, Inc. and SEC rules and regulations. We intend to comply
with future requirements to the extent they become applicable to
us.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Compensation
Committee.</FONT></I></B><FONT size="2"> Our compensation
committee is composed of Directors Savage, Spickschen and
Jackson, each of whom is a non-employee member of our board of
directors. Mr.&nbsp;Savage serves as Chairman of our
compensation committee. Each member of our compensation
committee is an &#147;outside director&#148; as that term is
defined in Section&nbsp;162(m) of the Internal Revenue Code of
1986 and a &#147;non-employee&#148; director within the meaning
of Rule&nbsp;16b-3 of the rules promulgated under the Securities
Exchange Act of 1934 and the rules of the Nasdaq Stock Market,
Inc.. The compensation committee is responsible for, among other
things:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reviewing and approving for our chief executive
    officer and other executive officers (a)&nbsp;the annual base
    salary, (b)&nbsp;the annual incentive bonus, including the
    specific goals and amount, (c)&nbsp;equity compensation,
    (d)&nbsp;employment agreements, severance arrangements and
    change in control arrangements, and (e)&nbsp;any other benefits,
    compensations, compensation policies or arrangements;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reviewing and making recommendations to our board
    regarding the compensation policy for such other officers as
    directed by the board;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">68
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">preparing a report to be included in our annual
    proxy statement that describes: (a)&nbsp;the criteria on which
    compensation paid to our chief executive officer for the last
    completed fiscal year is based; (b)&nbsp;the relationship of
    such compensation to our performance; and (c)&nbsp;the
    committee&#146;s executive compensation policies applicable to
    executive officers;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">acting as administrator of our current benefit
    plans and making recommendations to the board with respect to
    amendments to the plans, changes in the number of shares
    reserved for issuance thereunder and regarding other benefit
    plans proposed for adoption.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Corporate Governance and Nominating
Committee.</FONT></I></B><FONT size="2"> Our corporate
governance and nominating committee is composed of Directors
Savage, Ponschab and Spickschen, each of whom is a non-employee
member of our board of directors and independent in accordance
with the applicable rules of the Sarbanes-Oxley Act and The
Nasdaq Stock Market, Inc. Mr.&nbsp;Savage serves as Chairman of
our Corporate Governance and Nominating Committee. The corporate
governance and nominating committee is responsible for, among
other things:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reviewing board structure, composition and
    practices, and making recommendations on these matters to the
    board;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">reviewing, soliciting and making recommendations
    to the board and stockholders with respect to candidates for
    election to the board;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">overseeing compliance by our chief executive
    officer and senior financial officers with our Code of Ethics
    for the Chief Executive Officer and Senior Financial
    Officers;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">overseeing compliance by employees with our Code
    of Business Conduct and Ethics.
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<B><FONT size="2">Director Compensation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We reimburse our non-employee directors for their
expenses incurred in connection with attending board and
committee meetings and for their services as board or committee
members. We have in the past granted non-employee directors
options to purchase our common stock pursuant to the terms of
our 1995 Stock Option Plan, and our board continues to have the
discretion to grant options to new and continuing non-employee
directors.
In &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2005,
our stockholders approved our 2005 Equity Incentive Plan, the
terms of which also include the grant of stock options to
directors who are not our officers or employees.
</FONT>

<P align="center"><FONT size="2">69
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">Executive Compensation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth the compensation
earned for services rendered to us in all capacities by our
chief executive officer and our executive officers whose total
cash compensation exceeded $100,000 for the year ended
December&nbsp;31, 2003, collectively referred to in this
prospectus as the &#147;named executive officers.&#148;
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="25%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Securities</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Other Annual</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Restricted</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Underlying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">All Other</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Salary</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Bonus</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stock Awards</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options/SARs</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">LTIP Payouts</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Name and Principal Position</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(#)(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($)(2)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">John V. Talley
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">250,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">200,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,815</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">President and Chief Executive Officer
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Robert W. Cook(4)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Chief Financial Officer, Senior Vice President,
    Finance and Administration
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dileep Bhagwat(5)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Senior Vice President, Pharmaceutical Development
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dov Elefant
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">160,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,981</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(6)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,800</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Controller and Vice President, Finance and
    Administration
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Earle Lockhart
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">195,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,686</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(7)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,850</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Vice President, Clinical and Regulatory Affairs
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Scott Kozak
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">165,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,126</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(8)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,237</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Vice President, Business Development
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oliver Wiedemann(9)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">162,287</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,630</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(10)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,628</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Managing Director&nbsp;&#151; Medical Affairs,
    EpiCept GmbH
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="4%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Represents the number of shares of common stock
    on an as converted basis.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes the contributions made by us to the
    account of the executive officer under our 401(k) plan.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes $17,354 for premiums for health benefits
    and for life and disability insurance paid on behalf of
    Mr.&nbsp;Talley and $12,461 for an automobile allowance.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Mr.&nbsp;Cook joined us in April 2004.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(5)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Dr.&nbsp;Bhagwat joined us in February 2004.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(6)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes premiums for health benefits and for
    life and disability insurance paid on behalf of Mr.&nbsp;Elefant.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(7)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes premiums for health benefits and for
    life and disability insurance paid on behalf of
    Dr.&nbsp;Lockhart.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(8)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes premiums for health benefits and for
    life and disability insurance paid on behalf of Mr.&nbsp;Kozak.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(9)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Mr.&nbsp;Wiedemann&#146;s compensation was
    translated from euros to the U.S. dollar using the exchange rate
    as of December&nbsp;31, 2003.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><FONT size="2">(10)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes premiums for health benefits and for
    life and disability insurance paid on behalf of
    Mr.&nbsp;Wiedemann.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">70
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">Option Grants in 2003</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We did not grant any stock options to any of the
named executive officers during 2003.
</FONT>

<P align="center">
<B><FONT size="2">Aggregate Option Exercises in 2003 and Values
at December&nbsp;31, 2003</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth information
concerning exercisable and unexercisable stock options held by
the named executive officers at December&nbsp;31, 2003. The
value of unexercised in-the-money options is based on an assumed
initial offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;share
less the actual exercise prices. All options were granted under
our 1995 Stock Option Plan, as amended. Except as otherwise
noted, these options vest over three years and otherwise
generally conform to the terms of our 1995 Stock Option Plan, as
amended.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="27%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
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    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Number of Securities</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Underlying Unexercised</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Value of Unexercised</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Options at</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">In-the-Money Options at</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Acquired</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Value</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31, 2003 (#)</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31, 2003 ($)(2)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">on</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Realized</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($)(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercisable</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Unexercisable</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercisable</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Unexercisable</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">John V. Talley
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Robert Cook
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dileep Bhagwat
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Earle Lockhart
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dov Elefant
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Scott Kozak
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oliver Wiedemann
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Based upon the assumed initial public offering
    price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share less the exercise price per share.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Value is determined by subtracting the exercise
    price of an option from an assumed
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share fair market value of our common stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<B><FONT size="2">Employment Agreements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have entered into employment agreements with
Messrs.&nbsp;John V. Talley and Robert W. Cook, each dated as of
October 28, 2004. Pursuant to their employment contracts,
Messrs.&nbsp;Talley and Cook currently receive base salaries of
$275,000 and $225,000, respectively. Upon the completion of this
initial public offering of our common stock,
Mr.&nbsp;Talley&#146;s base salary will be $350,000 and
Mr.&nbsp;Cook&#146;s base salary will be $250,000. Each
employment agreement also provides for discretionary bonuses and
stock option awards and reimbursement of reasonable expenses
incurred in connection with services performed under each
officer&#146;s respective employment agreement. In addition,
Mr.&nbsp;Talley&#146;s employment agreement provides for
automobile benefits and term life and long-term disability
insurance coverage. Both employment agreements expire on
December&nbsp;31, 2006 but are automatically extended for
unlimited additional one-year periods. Upon termination for any
reason and in addition to any other payments disbursed in
connection with termination, Mr.&nbsp;Talley and Mr.&nbsp;Cook
will receive payment of his applicable base salary through the
termination date, the balance of any annual, long-term or
incentive award earned in any period prior to the termination
date and a lump-sum payment for any accrued but unused vacation
days.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2"> If Mr.&nbsp;Talley dies or becomes disabled, he
is entitled to (i)&nbsp;receive a lump-sum payment equal to
(a)&nbsp;one-third of his base salary times (b)&nbsp;a fraction,
the numerator being the number of days he was employed in the
calendar year of termination and the denominator being the
number of days in that year and (ii)&nbsp;have (a)&nbsp;50% of
outstanding stock options that are not then vested or
exercisable become vested and exercisable as of the termination
date; (b)&nbsp;the remaining outstanding stock options that are
not then vested or exercisable become vested and exercisable
ratably and quarterly for two years following the termination
date; and (c)&nbsp;each outstanding stock option remain
exercisable for all securities for the later of (x)&nbsp;the
90th day following the date that the option becomes fully vested
and exercisable and (y)&nbsp;the first anniversary of the
termination date. If Mr.&nbsp;Cook dies or becomes disabled, he
is entitled to the same
</FONT>

<P align="center"><FONT size="2">71
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2">benefits as Mr.&nbsp;Talley, except the equation
for his lump-sum payment is based on one-fourth of his base
salary.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If Mr.&nbsp;Talley is terminated without cause or
the term of his agreement is not extended pursuant to the
employment agreement, he is entitled to the same benefits as if
he were terminated due to death or disability and to receive a
lump-sum payment equal to (a)&nbsp;one and one-third times
(b)&nbsp;his base salary times (c)&nbsp;the number of whole and
partial months remaining in the term of the agreement (but no
more than 12 and no less than 6)&nbsp;divided by (d)&nbsp;12. If
Mr.&nbsp;Cook is terminated without cause or the term of his
agreement is not extended pursuant to the employment agreement,
he is entitled to the same benefits as Mr.&nbsp;Talley, but the
equation for his lump-sum payment is based on one and one-fourth
times his base salary.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If Mr.&nbsp;Talley is terminated after an initial
public offering or in anticipation of, or within one year
following, a change of control, he is entitled to:
(i)&nbsp;receive a lump-sum payment equal to (a)&nbsp;one and
one third times (b)&nbsp;his base salary times (c)&nbsp;the
number of whole and partial months remaining in the term of the
agreement (but not less than 24) divided by (d)&nbsp;12 and
(ii)&nbsp;have (a)&nbsp;50% of outstanding stock options that
are not then vested or exercisable become vested and exercisable
as of the termination date; (b)&nbsp;the remaining outstanding
stock options that are not then vested or exercisable become
vested and exercisable ratably and monthly for the first year
following the termination date; and (c)&nbsp;each outstanding
stock option remain exercisable for all securities for the later
of (x)&nbsp;the 90th day following the date that the option
becomes fully vested and exercisable and (y)&nbsp;the first
anniversary of the termination date. If Mr.&nbsp;Cook is
terminated after an initial public offering or in anticipation
of, or within one year following, a change of control, he is
entitled to the same benefits as Mr.&nbsp;Talley, except his
lump sum is equal to (a)&nbsp;one and one-fourth times
(b)&nbsp;his base salary times (c)&nbsp;the number of whole and
partial months remaining in the term of the agreement (but no
more than 18 and no less than 12)&nbsp;divided by (d)&nbsp;12.
</FONT>

<P align="center">
<B><FONT size="2">Stock Plans</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">1995 Stock Option Plan</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our 1995 Stock Option Plan, as amended, was
approved by our board of directors in December 1995, and
subsequently amended in April 1997, March 1999, February 2002
and June 2002. As of November&nbsp;10, 2004, 947,770&nbsp;shares
were available for issuance under the 1995 Stock Option Plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The purpose of the 1995 Stock Option Plan is to
provide us and our shareholders the benefits arising out of
capital stock ownership by our employees, officers, directors,
consultants and advisors and any of our subsidiaries, who are
expected to contribute to our future growth and success. Our
1995 Stock Option Plan provides for the grant of non-statutory
stock options to our (and our majority-owned subsidiaries&#146;)
employees, officers, directors, consultants or advisors, and for
the grant of incentive stock options meeting the requirements of
Section&nbsp;422 of the Internal Revenue Code to our employees
and employees of our majority-controlled subsidiaries.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A total of 3,188,320&nbsp;shares of our common
stock are authorized for issuance under the 1995 Stock Option
Plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A committee duly appointed by our board of
directors administers the 1995 Stock Option Plan. The committee
has the authority to (a)&nbsp;construe the respective option
agreements and the terms of the plan; (b)&nbsp;prescribe, amend
and rescind rules and regulations relating to the plan;
(c)&nbsp;determine the terms and provisions of the respective
option agreements, which need not be identical; (d)&nbsp;make
all other determinations in the judgment of the committee
necessary or desirable for the administration of the plan. From
and after the registration of our common stock under the
Securities Exchange Act of 1934, the selection of a director or
an officer who is a &#147;reporting person&#148; under
Section&nbsp;16(a) of the Exchange Act as a recipient of an
option, the timing of the option grant, the exercise price of
the option and the number of shares subject to the option shall
be determined by (a)&nbsp;the committee of the Board, each of
which members shall be an outside director or (b)&nbsp;by a
committee consisting of two or more directors having full
authority to act in the matter, each of whom shall be an outside
director.
</FONT>

<P align="center"><FONT size="2">72
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The committee shall determine the exercise price
of stock options granted under the 1995 Stock Option Plan, but
with respect to all incentive stock options, the exercise price
must be at least equal to the fair market value of our common
stock on the date of the grant or, in the case of grants of
incentive stock options to holders of more than 10% of the total
combined voting power of all classes of our stock (&#147;10%
owners&#148;), at least equal to 110% of the fair market value
of our common stock on the date of the grant.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The committee shall determine the term of stock
options granted under the 1995 Stock Option Plan, but such date
shall not be later than 10&nbsp;years after the date of the
grant, except in the case of incentive stock options granted to
10% owners in which case such date shall not be later than five
years after the date of the grant.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each option granted under the 1995 Stock Option
Plan is exercisable in full or in installments at such time or
times and during such period as is set forth in the option
agreement evidencing such option, but no option granted to a
&#147;reporting person&#148; shall be exercisable during the
first six months after the grant.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">No optionee may be granted an option to purchase
more than 350,000&nbsp;shares in any fiscal year. In addition,
no incentive stock option may be exercisable for the first time
in any one calendar year for shares of common stock with an
aggregate fair market value (as of the date of the grant) of
more than $100,000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our 1995 Stock Option Plan generally does not
allow for the transfer of options and only the optionee may
exercise an option during his or her lifetime.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">An optionee may exercise an option at any time
within three months following the termination of the
optionee&#146;s employment or other relationship with us or
within one year if such termination was due to the death or
disability of the optionee, but except in the case of the
optionee&#146;s death, in no event later than the expiration
date of the option. If the termination of the optionee&#146;s
employment is for cause, the option expires immediately upon
termination.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our 1995 Stock Option Plan will automatically
terminate upon the earlier of, 2005 or the date on which all
shares available for issuance under the plan shall have been
issued.
</FONT>

<P align="left">
<B><I><FONT size="2">2005 Equity Incentive Plan</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our board of directors adopted our 2005 Equity
Incentive Plan on July&nbsp;13, 2004, subject to stockholder
approval. Our Equity Incentive Plan provides for the grant of
incentive stock options, within the meaning of Section&nbsp;422
of the Internal Revenue Code, to our employees and our parent
and subsidiary corporations&#146; employees, and for the grant
of nonstatutory stock options, stock purchase rights, restricted
stock, stock appreciation rights, stock units and performance
shares and cash awards to our employees, directors and
consultants and our parent and subsidiary corporations&#146;
employees and consultants.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005, a total
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock were reserved for issuance pursuant to the
Equity Incentive Plan, of which no options were issued and
outstanding as of that date. The Equity Incentive Plan will
become effective on the day prior to the completion of this
offering. No optionee may be granted an option to purchase more
than &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
in any fiscal year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our board of directors or a committee of our
board administers our Equity Incentive Plan. In the case of
options intended to qualify as &#147;performance-based
compensation&#148; within the meaning of Section&nbsp;162(m) of
the Internal Revenue Code, the committee will consist of two or
more &#147;outside directors&#148; within the meaning of
Section&nbsp;162(m) of the Code. The administrator has the power
to determine the terms of the awards, including the exercise
price, the number of shares subject to each such award, the
exercisability of the awards and the form of consideration, if
any, payable upon exercise. The administrator also has the
authority to institute an exchange program by which outstanding
awards may be surrendered in exchange for awards with a lower
exercise price.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The administrator will determine the exercise
price of options granted under our Equity Incentive Plan, but
with respect to nonstatutory stock options intended to qualify
as &#147;performance-based compensation&#148; within the meaning
of Section&nbsp;162(m) of the Code and all incentive stock
options, the exercise price must at least be equal to the fair
market value of our common stock on the date of grant.
</FONT>

<P align="center"><FONT size="2">73
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<DIV align="left">
<FONT size="2">The term of an incentive stock option may not
exceed ten years, except that with respect to any participant
who owns 10% of the voting power of all classes of our
outstanding stock, the term must not exceed five years and the
exercise price must equal at least 110% of the fair market value
on the grant date. The administrator determines the term of all
other options.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Stock appreciation rights may be granted under
our Equity Incentive Plan. Stock appreciation rights allow the
recipient to receive the appreciation in the fair market value
of our common stock between the exercise date and the date of
grant. The administrator will determine the terms of stock
appreciation rights, including when such rights become
exercisable and whether to pay the increased appreciation in
cash or with shares of our common stock, or a combination
thereof.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Restricted stock may be granted under our Equity
Incentive Plan. Restricted stock awards are shares of our common
stock that vest in accordance with terms and conditions
established by the administrator. The administrator will
determine the number of shares of restricted stock granted to
any employee. The administrator may impose whatever conditions
to vesting it determines to be appropriate. For example, the
administrator may set restrictions based on the achievement of
specific performance goals. Shares of restricted stock that do
not vest are subject to our right of repurchase or forfeiture.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Stock units and performance shares may be granted
under our Equity Incentive Plan. Stock units and performance
shares are awards that will result in a payment to a participant
only if performance goals established by the administrator are
achieved or the awards otherwise vest. The administrator will
establish organizational or individual performance goals in its
discretion, which, depending on the extent to which they are
met, will determine the number and/or the value of performance
units and performance shares to be paid out to participants.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Equity Incentive Plan generally does not
allow for the transfer of awards and only the recipient of an
award may exercise an award during his or her lifetime.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Equity Incentive Plan will provide that if we
experience a Change of Control (as defined), the administrator
may provide at anytime prior to the Change of Control that all
then outstanding stock options, stock appreciation rights and
stock units and unvested cash awards shall immediately vest and
become exercisable and any restrictions on restricted stock
awards or stock units shall immediately lapse. In addition, the
administrator may provide that all awards held by participants
who are at the time of the Change of Control in our service or
the service of a subsidiary or an affiliate of ours shall remain
exercisable for the remainder of their terms notwithstanding any
subsequent termination of a participant&#146;s service. All
awards will be subject to the terms of any agreement effecting
the Change of Control, which agreement may provide, without
limitation, that in lieu of continuing the awards, each
outstanding stock option and stock appreciation right shall
terminate within a specified number of days after notice to the
holder, and that such holder shall receive, with respect to each
share of common stock subject to such stock option or stock
appreciation right, an amount equal to the excess of the fair
market value of such shares of common stock immediately prior to
the occurrence of such Change of Control over the exercise price
(or base price) per share underlying such stock option or stock
appreciation right with such amount payable in cash, in one or
more kinds of property (including the property, if any, payable
in the transaction) or in a combination thereof, as the
administrator, in its discretion, shall determine. A provision
like the one contained in the preceding sentence shall be
inapplicable to a stock option or stock appreciation right
granted within 6 months before the occurrence of a Change of
Control if the holder of such stock option or stock appreciation
right is subject to the reporting requirements of Section 16(a)
of the Exchange Act and no exception from liability under
Section 16(b) of the Exchange Act is otherwise available to such
holder.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Equity Incentive Plan will automatically
terminate
in &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2015,
unless we terminate it sooner. In addition, our board of
directors has the authority to amend, suspend or terminate the
Equity Incentive Plan provided such action does not impair the
rights of any participant.
</FONT>

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<P align="left">
<B><I><FONT size="2">2005 Employee Stock Purchase
Plan</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our board of directors adopted our 2005 Employee
Stock Purchase Plan on July&nbsp;13, 2004, subject to
stockholder approval. The Employee Stock Purchase Plan will
become effective on the day prior to the completion of this
offering and a total
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock will be made available for sale.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our board of directors or a committee of our
board will administer our Employee Stock Purchase Plan. Our
board of directors or the committee will have full and exclusive
authority to interpret the terms of our Employee Stock Purchase
Plan and determine eligibility.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All of our employees are eligible to participate
if they are customarily employed by us or any participating
subsidiary for at least 20&nbsp;hours per week and more than
five months in any calendar year. However, an employee may not
be granted an option to purchase stock if such employee:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">immediately after the grant owns stock possessing
    5% or more of the total combined voting power or value of all
    classes of our capital stock,&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">whose rights to purchase stock under all of our
    employee stock purchase plans accrues at a rate that exceeds
    $25,000 worth of stock for each calendar year.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Employee Stock Purchase Plan is intended to
qualify under Section&nbsp;423 of the Internal Revenue Code and
provides for consecutive, overlapping 24-month offering periods.
Each offering period includes four six-month purchase periods
beginning on January&nbsp;1 and July&nbsp;1 of each calendar
year, commencing
on &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Employee Stock Purchase Plan permits
participants to purchase common stock through payroll deductions
from their eligible compensation which includes a
participant&#146;s base salary, wages, overtime pay, shift
premium and recurring commissions, but does not include payments
for incentive compensation or bonuses. A participant may
purchase a maximum
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
during a six-month purchase period.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Amounts deducted and accumulated by the
participant are used to purchase shares of our common stock at
the end of each six-month purchase period. The price is 85% of
the lower of the fair market value of our common stock at the
beginning of an offering period or after a purchase period end.
If the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering
period, participants will be withdrawn from the current offering
period following their purchase of shares on the purchase date
and will be automatically re-enrolled in a new offering period.
Participants may end their participation at any time during an
offering period, and will be paid their payroll deductions to
date. Participation ends automatically upon termination of
employment with us.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A participant may not transfer rights granted
under the Employee Stock Purchase Plan other than by will, the
laws of descent and distribution or as otherwise provided under
the Employee Stock Purchase Plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our board of directors has the authority to amend
or terminate our Employee Stock Purchase Plan, except that,
subject to certain exceptions described in the Employee Stock
Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our Employee Stock
Purchase Plan.
</FONT>

<P align="left">
<B><I><FONT size="2">401(k) Plan</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In 1998, we adopted a Retirement Savings and
Investment Plan, the 401(k) Plan, covering our full-time
employees located in the United States. The 401(k) Plan is
intended to qualify under Section&nbsp;401(k) of the Internal
Revenues Code, so that contributions to the 401(k) Plan by
employees or by us, and the investment earnings thereon, are not
taxable to the employees until withdrawn. If our 401(k) Plan
qualifies under Section&nbsp;401(k) of the Internal Revenues
Code, our contributions will be tax deductible by us when made.
Our employees may elect to reduce their current compensation by
up to the statutorily prescribed annual limit of $14,000 if
under 50&nbsp;years old and $18,000 if over 50&nbsp;years old in
2004 and to have those
</FONT>

<P align="center"><FONT size="2">75
</FONT>

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<DIV align="left">
<FONT size="2">funds contributed to the 401(k) Plan. The 401(k)
Plan permits us, but does not require us, to make additional
matching contributions on behalf of all participants.
</FONT>
</DIV>

<P align="center">
<B><FONT size="2">Compensation Committee Interlocks and Insider
Participation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">None of the members of our compensation committee
has at any time been one of our officers or employees. None of
our executive officers currently serves, or in the past fiscal
year has served, as a member of the Board of Directors or
compensation committee of any entity that has one or more
executive officers serving on our Board of Directors or
compensation committee.
</FONT>

<P align="center"><FONT size="2">76
</FONT>

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<P align="left">
<A name='112'></A>

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<P align="center">
<B><FONT size="2">CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have a policy requiring that any material
transaction that we enter into with our officers, directors or
principal stockholders and their affiliates be on terms no less
favorable to us than reasonably could have been obtained in an
arms&#146; length transaction with independent third parties.
Any other matters involving potential conflicts of interests are
to be resolved on a case-by-case basis.
</FONT>

<P align="center">
<B><FONT size="2">Preferred Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In April 1997, we sold a total of
2,330,218&nbsp;shares of our Series&nbsp;A convertible preferred
stock at a price of $2.02&nbsp;per share to TVM III Limited
Partnership (&#147;TVM&nbsp;III&#148;) and Alpinvest
International B.V. (&#147;Alpinvest&#148;). Dr.&nbsp;Gert
Caspritz, a member of our Board of Directors, is a general
partner of Techno Venture Management (&#147;TVM&#148;), an
affiliate of TVM&nbsp;III. In January 2000, we sold a total of
1,240,333&nbsp;shares of our Series&nbsp;B redeemable
convertible preferred stock at a price of $1.50&nbsp;per share
to TVM&nbsp;III, Alpinvest and KB Lux Venture Capital Fund
(&#147;KB Lux&#148;). In December 2000 and January 2001, we sold
a total of 8,939,573&nbsp;shares of our Series&nbsp;C redeemable
convertible preferred stock at a price of $1.50&nbsp;per share
to TVM IV GmbH&nbsp;&#38; Co. KG (&#147;TVM IV&#148;),
Alpinvest, KB Lux, The Merlin Biosciences Fund L.P.
(&#147;Merlin L.P.&#148;) and The Merlin Biosciences Fund GbR
(&#147;Merlin&#148;), Private Equity US Direct Finance and
Gold-Zack. Dr.&nbsp;Gert Caspritz, a member of our Board of
Directors, is a general partner of TVM, an affiliate of TVM IV.
Mr.&nbsp;Mark Docherty, a member of our Board of Directors, is a
director of Merlin Biosciences Limited (&#147;Merlin&#148;),
investment advisor to the general partner of Merlin L.P. and the
managing partner of Merlin GbR. Each of these investors is a
greater than 5% stockholder of EpiCept.
</FONT>

<P align="center">
<B><FONT size="2">Amended and Restated Registration Rights
Agreement</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have entered into an agreement pursuant to
which holders of our convertible preferred stock and certain
other individuals have registration rights with respect to their
shares of common stock following this offering. For a
description of these registration rights, see &#147;Description
of Capital Stock.&#148; Concurrently with the completion of this
offering, all shares of our outstanding preferred stock will be
automatically converted into an equal number of shares of common
stock.
</FONT>

<P align="center">
<B><FONT size="2">Convertible Bridge Loan Due 2005</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In November 2002, we entered into a convertible
bridge loan in an aggregate amount of up to $5,000,000. The
lenders under that facility included Mr.&nbsp;John V. Talley,
our President and Chief Executive Officer, and certain holders
of our preferred stock, including TVM&nbsp;IV, Private Equity
U.S.&nbsp;Direct Finance, Merlin L.P., Merlin GbR and Gold-Zack
Partners I B.V. The convertible bridge loan bears interest at
8%&nbsp;per annum and matures on October&nbsp;30, 2005. Each of
the lenders received a convertible bridge note which is, under
certain circumstances, convertible into our convertible
preferred stock, which in turn is convertible into our common
stock. We plan to use a portion of the proceeds from this
offering to repay this convertible bridge loan in full. See
&#147;Use of Proceeds.&#148; In connection with the purchase of
a convertible note, each investor also received a preferred
stock purchase warrant, which we refer to in this prospectus as
the &#147;bridge warrants,&#148; entitling that investor to
purchase a specified amount of our preferred stock or common
stock under certain specified circumstances. The bridge warrants
expire upon consummation of our initial public offering. Upon a
prepayment of the convertible term notes, the bridge warrants
are exercisable
into &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock at an exercise price of $0.157&nbsp;per
share.
</FONT>

<P align="center">
<B><FONT size="2">tbg Loans</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In August 1997 and February 1998, our German
subsidiary entered into two 10-year non-amortizing loans with
tbg, one of our greater than 5% stockholders. For a description
of these loans, please see &#147;Management&#146;s Discussion
and Analysis of Financial Condition and Results of
Operations&nbsp;&#151; Liquidity and Capital Resources.&#148;
</FONT>

<P align="center">
<B><FONT size="2">Employment Agreements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As described under &#147;Executive
Compensation&nbsp;&#151; Employment Agreements,&#148; we have
employment agreements with Mr.&nbsp;John V. Talley, our
President and Chief Executive Officer and Mr.&nbsp;Robert Cook,
our Chief Financial Officer.
</FONT>

<P align="center"><FONT size="2">77
</FONT>

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</DIV>

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

<P align="center">
<B><FONT size="2">PRINCIPAL STOCKHOLDERS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth information known
to us with respect to the beneficial ownership of our common
stock as
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005 as adjusted to reflect the sale of common stock offered
hereby by:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">each stockholder known by us to own beneficially
    more than five percent of our common stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">each of the named executive officers;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">each of our directors;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">all of our directors and the named executive
    officers as a group.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them.
Unless otherwise indicated, the principal address of each of the
stockholders below is in care of EpiCept Corporation, 270 Sylvan
Avenue, Englewood Cliffs, New Jersey 07632.
</FONT>

<CENTER>
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<TR>
    <TD width="57%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
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    <TD colspan="7"></TD>
</TR>

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    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Percent of Shares</FONT></B></TD>
</TR>

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    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Beneficially Owned(2)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Beneficially Owned</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

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    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Prior to the</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Before</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">After</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name and Address of Beneficial Owner</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Offering</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Offering(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Offering</FONT></B></TD>
</TR>

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    <TD align="center" nowrap><HR size="1" noshade></TD>
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    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">5% Stockholders</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">TVM Techno Venture Management(3)
    </FONT></DIV>
    </TD>
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    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Merlin General Partner&nbsp;II Limited(4)
    </FONT></DIV>
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    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Private Equity US Direct Finance(5)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">GZ Paul Partners B.V.(6)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">IKB Private Equity GmbH(7)
    </FONT></DIV>
    </TD>
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</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dr.&nbsp;Rainer Liedtke(8)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Technologie-Beteiligungs Gesellschaft mbH(9)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Executive Officers and Directors</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">John V. Talley(10)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dr.&nbsp;Gert Caspritz(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Mark Docherty(4)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dr.&nbsp;Thorlef Spickschen(11)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Prof.&nbsp;Ernst-Gunter Afting(12)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dr.&nbsp;Reiner Ponschab(13)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">All directors and named executive officers as a
    group<BR>
    (&nbsp;&nbsp;persons)(14)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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    <TD><FONT size="2">&nbsp;</FONT></TD>
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    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
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</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="2%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Represents beneficial ownership of less than one
    percent (1%) of the outstanding shares of our common stock.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="5%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(1)</FONT></TD>
    <TD align="left">
    <FONT size="2">Beneficial ownership is determined with the rules
    of the Securities and Exchange Commission and generally includes
    voting or investment power with respect to securities. Shares of
    common stock subject to stock options and warrants currently
    exercisable or exercisable within 60&nbsp;days are deemed to be
    outstanding for computing the percentage ownership of the person
    holding such options and the percentage ownership of any group
    of which the holder is a member, but are not deemed outstanding
    for computing the percentage of any other person. Except as
    indicated by footnote, the persons named in the table have sole
    voting and investment power with respect to all shares of common
    stock shown beneficially owned by them.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">78
</FONT>

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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="5%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(2)</FONT></TD>
    <TD align="left">
    <FONT size="2">Percentage ownership is based on
    the &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of common stock outstanding
    on &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
    after giving effect to the conversion of all of our preferred
    stock into shares of our common stock, the exercise of the
    bridge warrants and the conversion of the tbg convertible loan.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(3)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes &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 held by
    TVM&nbsp;III &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon the conversion of 2,666,667&nbsp;shares of
    Series&nbsp;C redeemable convertible preferred stock
    and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon the exercise of the bridge warrants held by TVM
    IV,
    and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon the conversion of 1,485,164&nbsp;shares of
    Series&nbsp;A convertible preferred stock, 333,333&nbsp;shares
    of Series&nbsp;B redeemable convertible preferred stock and
    490,731&nbsp;shares of Series&nbsp;C redeemable convertible
    preferred stock held by TVM&nbsp;III. Also
    includes &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 issuable upon the exercise of warrants that are
    exercisable within 60&nbsp;days held by TVM IV. For a
    description of these warrants, see &#147;Description of Capital
    Stock&nbsp;&#151; Warrants.&#148;
    Includes &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 issuable upon the exercise of stock options that
    are exercisable within 60&nbsp;days held by Mr.&nbsp;Gert
    Caspritz, one of our directors, who is a general partner of TVM,
    which is the general partner of each of TVM&nbsp;III and TVM IV
    and &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 issuable upon the exercise of stock options that
    are exercisable within 60&nbsp;days held by other partners of
    TVM (the &#147;TVM Partners&#148;). Mr.&nbsp;Caspritz disclaims
    beneficial ownership of the shares held by TVM&nbsp;III, TVM IV
    and the TVM Partners except to the extent of his pecuniary
    interest therein. The address of Mr.&nbsp;Caspritz, TVM,
    TVM&nbsp;III and TVM IV is c/o&nbsp;TVM Techno Venture
    Management, 101 Arch Street, Boston, Massachusetts, 02110.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(4)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes 33,135&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;&nbsp;shares
    issuable upon the conversion of 1,257,744&nbsp;shares of
    Series&nbsp;C redeemable convertible preferred stock
    and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon the exercise of the bridge warrants beneficially
    owned by Merlin L.P. and held by Merlin. Also includes
    1,991&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;&nbsp;shares
    issuable upon the conversion of 75,589&nbsp;shares of
    Series&nbsp;C convertible preferred stock
    and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon the exercise of the bridge warrants beneficially
    owned by Merlin GbR and held by Merlin.
    Includes &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 issuable upon the exercise of stock options that
    are exercisable within 60&nbsp;days held by Mr.&nbsp;Mark
    Docherty, one of our directors, who is a director of Merlin,
    which is investment advisor to the general partner of each of
    Merlin L.P. and Merlin GbR. Mr.&nbsp;Docherty disclaims
    beneficial ownership of the shares held by Merlin, Merlin L.P.
    and Merlin GbR except to the extent of his pecuniary interest
    therein. The address of Mr.&nbsp;Docherty, Merlin, Merlin L.P.
    and Merlin GbR is c/o&nbsp;Merlin Biosciences Limited, 33 King
    Street, St. James&#146;s, London, SW1Y 6RJ, United Kingdom.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(5)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes &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 issuable upon conversion of
    1,338,155&nbsp;shares of our Series&nbsp;C redeemable
    convertible preferred
    stock, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon the exercise of the bridge warrants
    and &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 issuable upon the exercise of warrants that are
    exercisable within 60&nbsp;days. For a description of these
    warrants, see &#147;Description of Capital Stock&nbsp;&#151;
    Warrants.&#148; The address of this fund is
    c/o&nbsp;Mr.&nbsp;Guy Myint-Maung, ALPHA Associates AG,
    Talstrasse 66, P.O. Box&nbsp;1081, CH-8039, Zurich, Switzerland.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(6)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes &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 issuable upon conversion of
    1,666,667&nbsp;shares of our Series&nbsp;C redeemable
    convertible preferred stock
    and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon the exercise of the bridge warrants. The address
    of GZ Paul Partners is c/o&nbsp;GZ Paul Management Services
    GmbH, Lindenstrasse 43, D-60325 Frankfurt, Germany.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(7)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon the conversion of 1,866,403&nbsp;shares of
    Series&nbsp;B redeemable convertible preferred stock. The
    address of IKB is Wilhelm-B&#246;tzkes-Strasse&nbsp;1, 40002
    D&#252;sseldorf, Germany.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(8)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes &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 held by
    Dr.&nbsp;Liedtke, &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 held by Ms.&nbsp;Hanne Liedtke, his spouse,
    and &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 held by Dr.&nbsp;Liedtke&#146;s children. Also
    includes &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 issuable upon conversion of our Series&nbsp;A
    convertible preferred stock
    and &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 issuable upon conversion of our Series&nbsp;C
    redeemable convertible preferred stock, each held by pharmed
    Holding GmbH, which is an entity controlled by Dr.&nbsp;Liedtke.
    Dr.&nbsp;Liedtke disclaims beneficial ownership of
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">79
</FONT>

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<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="5%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD align="left">
    <FONT size="2">the shares held by his wife, his children and
    pharmed Holding GmbH except to the extent of his pecuniary
    interest therein. The address of Dr.&nbsp;Liedtke, his wife, his
    children and pharmed Holding GmbH is c/o&nbsp;pharmed Holding
    GmbH, P.O. Box&nbsp;1306, 82027 Gr&#252;nwald/ M&#252;nchen,
    Germany.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(9)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes &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 issuable upon conversion of 829,901&nbsp;shares
    of Series&nbsp;A convertible stock. Pursuant to the terms of the
    convertible loan described under &#147;Certain Relationships and
    Related Party Transactions,&#148; tbg will receive an
    additional &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
    of common stock. The address of tbg is
    c/o&nbsp;Technologie-Beteiligungs-Gesellschaft mbH, Ludwig-
    Erhard-Platz&nbsp;1, 5319 Bonn, Germany.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(10)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes 1,000 shares of common
    stock, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon exercise of the bridge warrants
    and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    exercisable upon the exercise of options that are exercisable
    within 60 days.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(11)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes &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 &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon exercise of stock options that are exercisable
    within 60&nbsp;days.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(12)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes &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, &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 issuable upon the conversion of
    27,000&nbsp;shares of Series&nbsp;B convertible stock
    and &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 issuable upon the exercise of options that are
    exercisable within 60&nbsp;days.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(13)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes &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 held by
    Dr.&nbsp;Ponschab, &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 held by Dr.&nbsp;Ponschab&#146;s wife
    and &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 issuable upon the exercise of options that are
    exercisable within 60&nbsp;days. Dr.&nbsp;Ponschab disclaims
    beneficial ownership of the shares of stock held by his wife
    except to the extent of his pecuniary interest therein.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(14)</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes an aggregate
    of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon exercise of options
    and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    issuable upon the exercise of warrants.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">80
</FONT>

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<DIV align="left">
<A name='114'></A>
</DIV>

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<P align="center">
<B><FONT size="2">DESCRIPTION OF CAPITAL STOCK</FONT></B>

<P align="center">
<B><FONT size="2">General</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">After the completion of this offering, our
restated certificate of incorporation will
authorize &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock, $0.0001&nbsp;par value,
and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of undesignated preferred stock, $0.0001&nbsp;par value. The
foregoing and the following description of capital stock give
effect to the restated certificate of incorporation and is
subject to and qualified by our restated certificate of
incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part,
and by the provisions of the applicable Delaware law.
</FONT>

<P align="center">
<B><FONT size="2">Common Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Assuming the conversion of all of our preferred
stock and the exercise of the bridge warrants
into &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock at the closing of this offering, as
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005 we
had &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock outstanding that were held of record by
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;stockholders.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The holders of common stock are entitled to one
vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to
any outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends that may be declared
from time to time by the board of directors out of funds legally
available for that purpose. In the event of our liquidation,
dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior distribution rights of
preferred stock then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to
be issued upon the closing of this offering will be fully paid
and nonassessable.
</FONT>

<P align="center">
<B><FONT size="2">Preferred Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon the closing of this offering, our board of
directors will have the authority, without action by our
stockholders, to designate and issue up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of preferred stock in one or more series. The board of directors
may also designate the rights, preferences and privileges of
each series of preferred stock; any or all of which may be
greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of
preferred stock upon the rights of holders of the common stock
until the board of directors determines the specific rights of
the holders of the preferred stock. However, these effects might
include:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">restricting dividends on the common stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">diluting the voting power of the common stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">impairing the liquidation rights of the common
    stock;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">delaying or preventing a change in control of our
    company without further action by the stockholders.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have no present plans to issue any shares of
preferred stock.
</FONT>

<P align="center">
<B><FONT size="2">Warrants</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As
of &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, the following warrants were outstanding:
</FONT>
<P>

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">In August 2000, in connection with the issuance
    of convertible term notes, we issued two warrants to purchase an
    aggregate of 333,333&nbsp;shares of our Series&nbsp;B redeemable
    convertible preferred stock at an exercise price of
    $1.50&nbsp;per share to Alpinvest International&nbsp;B.V. and
    TVM&nbsp;Techno Ventures Enterprises No.&nbsp;III Limited
    Partnership (now known as TVM&nbsp;III Limited Partnership). The
    expiration date of these warrants is August&nbsp;15, 2010. Upon
    automatic conversion of our Series&nbsp;B
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">81
</FONT>

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<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD></TD>
    <TD align="left">
    <FONT size="2">redeemable convertible preferred stock in
    connection with our initial public offering, these warrants will
    represent the right to
    purchase &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 at an exercise price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
    The exercise price and the number of shares of common stock
    issuable upon exercise of the warrant are subject to adjustment
    upon the occurrence of certain anti-dilution events.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">In November 2000, in connection with the issuance
    of a convertible term note, we issued a warrants to purchase an
    aggregate of 750,000&nbsp;shares of our Series&nbsp;C redeemable
    convertible preferred stock at an exercise price of
    $1.50&nbsp;per share to Private Equity US&nbsp;Direct Finance.
    The expiration date of these warrants is November&nbsp;30, 2010.
    Upon automatic conversion of our Series&nbsp;C redeemable
    convertible preferred stock in connection with our initial
    public offering, these warrants will represent the right to
    purchase &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 at an exercise price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
    The exercise price and the number of shares of common stock
    issuable upon exercise of the warrants are subject to adjustment
    upon the occurrence of certain anti-dilution events.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">In November 2002, in connection with the bridge
    financing, we issued stock purchase warrants to the lenders
    thereunder entitling them to purchase a number of shares of
    common stock equal to 50% of the greatest principal amount
    outstanding under the convertible bridge loan, divided by the
    applicable exercise price as defined in the warrant. The
    warrants are exercisable into preferred stock or common stock at
    any time through November 2012 and possess certain anti-dilutive
    rights. Upon consummation of our initial public offering, the
    warrants will be exercisable into 15,445,858&nbsp;shares of
    common stock at an exercise price of $0.157&nbsp;per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<B><FONT size="2">Registration Rights</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon completion of this offering, under our
amended and restated registration rights agreement, the holders
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock will be entitled to rights with respect to
the registration of their shares under the Securities Act of
1933, as amended. These rights include demand, piggyback and
Form&nbsp;S-3 registration rights.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Demand Registration
Rights.</FONT></I></B><FONT size="2"> Demand registration rights
are rights that entitle holders to require us to register some
or all of their shares of our common stock under the Securities
Act at such holder&#146;s election. Generally, the following
groups of holders may require us to register their shares
pursuant to these demand registration rights, subject to
applicable minimum thresholds to be included in the requested
registration:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">holders of at least 25% of the then outstanding
    common stock issued upon conversion of our Series&nbsp;C
    Preferred Stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">holders of at least 25% of the then outstanding
    common stock issued upon conversion of our Series&nbsp;B
    Preferred Stock;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">holders of at least 50% of the then outstanding
    common stock issued upon conversion of our Series&nbsp;A
    Preferred Stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Collectively, there are a total
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock that are subject to these demand registration
rights. We are not obligated to effect more than two
registrations on behalf of any of the aforementioned groups
pursuant to their demand registration rights. We have the right,
under various circumstances, to delay the registration of the
requesting holders&#146; shares for a limited time period. We
generally must pay all expenses, except for underwriters&#146;
discounts and commissions, incurred in connection with the
exercise of these demand registration rights.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Piggyback Registration
Rights.</FONT></I></B><FONT size="2"> Piggyback registration
rights are rights that entitle holders to require us to register
some or all of their shares of our common stock under the
Securities Act if we register any securities for public sale,
subject to specified exceptions. The underwriters of any
underwritten offering may have the right to limit the number of
shares registered by these holders due to marketing conditions.
There are a total
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock that are subject to these piggyback registration
rights. We generally must pay all expenses, except for
underwriters&#146; discounts and commissions, incurred in
</FONT>

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<DIV align="left">
<FONT size="2">connection with the exercise of these piggyback
registration rights. All of the holders of registration rights
in connection with this offering have waived their piggyback
rights with respect to this offering.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Form&nbsp;S-3 Registration
Rights.</FONT></I></B><FONT size="2"> If we are eligible to file
a registration statement on Form&nbsp;S-3, holders of at least
25% of the shares of our common stock issued upon conversion of
our series&nbsp;A convertible preferred stock, series&nbsp;B
convertible preferred stock or series&nbsp;C convertible
preferred stock, as applicable, can request that we register
their shares under the Securities Act on Form&nbsp;S-3, provided
that the total proceeds of the shares of common stock offered to
the public is at least $250,000. We generally must pay all
expenses, except for underwriters&#146; discounts and
commissions, incurred in connection with the exercise of these
Form&nbsp;S-3 registration rights.
</FONT>

<P align="center">
<B><FONT size="2">Anti-Takeover Provisions</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Provisions of Delaware law and our amended and
restated certificate of incorporation and amended bylaws to be
in effect upon the closing of this offering could make the
acquisition of our company through a tender offer, a proxy
contest or other means more difficult and could make the removal
of incumbent officers and directors more difficult. We expect
these provisions to discourage coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to
acquire control of our company to first negotiate with our board
of directors. We believe that the benefits provided by our
ability to negotiate with the proponent of an unfriendly or
unsolicited proposal outweigh the disadvantages of discouraging
these proposals. We believe the negotiation of an unfriendly or
unsolicited proposal could result in an improvement of its terms.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Effects of Some Provisions of Delaware
Law.</FONT></I></B><FONT size="2"> Upon the closing of this
offering, we will be subject to Section&nbsp;203 of the Delaware
General Corporation Law, an anti-takeover law. In general,
Section&nbsp;203 prohibits a publicly held Delaware corporation
from engaging in a &#147;business combination&#148; with an
&#147;interested stockholder&#148; for a period of three years
following the date the person became an interested stockholder,
unless:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">prior to the date of the transaction, the board
    of directors of the corporation approved either the business
    combination or the transaction which resulted in the stockholder
    becoming an interested stockholder;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the stockholder owned at least 85% of the voting
    stock of the corporation outstanding at the time the transaction
    commenced, excluding for purposes of determining the number of
    shares outstanding (a)&nbsp;shares owned by persons who are
    directors and also officers, and (b)&nbsp;shares owned by
    employee stock plans in which employee participants do not have
    the right to determine confidentially whether shares held
    subject to the plan will be tendered in a tender or exchange
    offer;&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">on or subsequent to the date of the transaction,
    the business combination is approved by the board and authorized
    at an annual or special meeting of stockholders, and not by
    written consent, by the affirmative vote of at least 66% of the
    outstanding voting stock which is not owned by the interested
    stockholder.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Generally, a &#147;business combination&#148; for
these purposes includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested
stockholder. An &#147;interested stockholder&#148; for these
purposes 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 outstanding voting securities. We
expect the existence of this provision to have an anti-takeover
effect with respect to transactions our board of directors does
not approve in advance. We also anticipate that Section&nbsp;203
may also discourage attempts that might result in a premium over
the market price for the shares of common stock held by
stockholders.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Anti-Takeover Effects of Provisions of Our
Charter Documents.</FONT></I></B><FONT size="2"> Our amended and
restated certificate of incorporation to be in effect upon the
closing of this offering provides for our board of directors to
be divided into three classes serving staggered terms.
Approximately one-third of the board of directors will be
elected each year. The provision for a classified board could
prevent a party who acquires control of a
</FONT>

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<DIV align="left">
<FONT size="2">majority of the outstanding voting stock from
obtaining control of the board of directors until the second
annual stockholders meeting following the date the acquiring
party obtains the controlling stock interest. The classified
board provision could discourage a potential acquiror from
making a tender offer or otherwise attempting to obtain control
of our company and could increase the likelihood that incumbent
directors will retain their positions. Our amended and restated
certificate of incorporation to be in effect upon the closing of
this offering also provides that directors may be removed with
cause by the affirmative vote of the holders of the outstanding
shares of common stock.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our amended and restated bylaws to be in effect
upon the closing of this offering establish an advance notice
procedure for stockholder proposals to be brought before an
annual meeting of our stockholders, including proposed
nominations of persons for election to the board of directors.
At an annual meeting, stockholders may only consider proposals
or nominations specified in the notice of meeting or brought
before the meeting by or at the direction of the board of
directors. Stockholders may also consider a proposal or
nomination by a person who was a stockholder of record on the
record date for the meeting, who is entitled to vote at the
meeting and who has given to our Secretary timely written
notice, in proper form, of his or her intention to bring that
business before the meeting. The amended bylaws do not give the
board of directors the power to approve or disapprove
stockholder nominations of candidates or proposals regarding
other business to be conducted at a special or annual meeting of
the stockholders. However, our bylaws may have the effect of
precluding the conduct of business at a meeting if the proper
procedures are not followed. These provisions may also
discourage or deter a potential acquiror from conducting a
solicitation of proxies to elect the acquiror&#146;s own slate
of directors or otherwise attempting to obtain control of our
company.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under Delaware law, a special meeting of
stockholders may be called by the board of directors or by any
other person authorized to do so in the amended and restated
certificate of incorporation or the amended and restated bylaws.
Our amended and restated bylaws authorize a majority of our
board of directors, the chairman of the board or the chief
executive officer to call a special meeting of stockholders.
Because our stockholders do not have the right to call a special
meeting, a stockholder could not force stockholder consideration
of a proposal over the opposition of the board of directors by
calling a special meeting of stockholders prior to such time as
a majority of the board of directors believed or the chief
executive officer believed the matter should be considered or
until the next annual meeting provided that the requestor met
the notice requirements. The restriction on the ability of
stockholders to call a special meeting means that a proposal to
replace the board also could be delayed until the next annual
meeting.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Delaware law provides that stockholders may
execute an action by written consent in lieu of a stockholder
meeting. However, Delaware law also allows us to eliminate
stockholder actions by written consent. Elimination of written
consents of stockholders may lengthen the amount of time
required to take stockholder actions since actions by written
consent are not subject to the minimum notice requirement of a
stockholder&#146;s meeting. However, we believe that the
elimination of stockholders&#146; written consents may deter
hostile takeover attempts. Without the availability of
stockholders&#146; actions by written consent, a holder
controlling a majority of our capital stock would not be able to
amend our bylaws or remove directors without holding a
stockholders meeting. The holder would have to obtain the
consent of a majority of the board of directors, the chairman of
the board or the chief executive officer to call a stockholders
meeting and satisfy the notice periods determined by the board
of directors. Our amended and restated certificate of
incorporation to be in effect upon the closing of this offering
provides for the elimination of actions by written consent of
stockholders upon the closing of this offering.
</FONT>

<P align="center">
<B><FONT size="2">Transfer Agent and Registrar</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The transfer agent and registrar for our common
stock
is &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
located
at &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;.
</FONT>

<P align="center">
<B><FONT size="2">Nasdaq Stock Market Listing</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We intend to apply to have our common stock
listed on the Nasdaq National Market for quotation under the
symbol &#147;EPCT.&#148;
</FONT>

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<A name='115'></A>
</DIV>

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<P align="center">
<B><FONT size="2">SHARES ELIGIBLE FOR FUTURE SALE</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to this offering, there has been no public
market for our stock. Future sales of substantial amounts of our
common stock in the public market following this offering or the
possibility of these sales occurring could adversely affect
prevailing market prices for our common stock or could impair
our ability to raise capital through an offering of equity
securities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon the closing of this
offering, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock will be outstanding, based on the number of
shares outstanding on September&nbsp;30, 2004. All of the shares
sold in this offering will be freely tradable without
restriction under the Securities Act except for any shares
purchased by our affiliates as that term is defined in
Rule&nbsp;144 under the Securities Act. The
remaining &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock held by existing stockholders as of
September&nbsp;30, 2004 are restricted shares as that term is
defined in Rule&nbsp;144 under the Securities Act or if they
qualify for an exemption from registration, such as the
exemptions provided under Rule&nbsp;144 or 701 under the
Securities Act, which are summarized below.
</FONT>

<P align="center">
<B><FONT size="2">Rule&nbsp;144</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Sales by
Affiliates.</FONT></I></B><FONT size="2"> After the expiration
of the lock-up agreements, described below under &#147;Lock-up
Agreements,&#148; the holders
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock will be eligible to sell their shares under
Rule&nbsp;144. All shares of our common stock held by our
affiliates, other than shares eligible for resale under
Rule&nbsp;701, have Rule&nbsp;144 holding periods that exceed
one year. As a result, under Rule&nbsp;144, our affiliates will
be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">One percent 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;shares
    immediately after the offering;&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The average weekly trading volume of our common
    stock during the four calendar weeks preceding the date on which
    notice of the sale is filed.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Sales under Rule&nbsp;144 are also subject to
certain manner of sale provisions and notice requirements and to
the availability of current public information about us.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Sales by
Non-affiliates.</FONT></I></B><FONT size="2"> Subject to the
lock-up agreements described below, Rule&nbsp;144(k) is
available immediately upon effectiveness of the offering for any
person, other than a person deemed to have been an affiliate of
our company at any time during the three months preceding a
sale, who is selling shares that have a Rule&nbsp;144 holding
period that exceeds two years. As of September&nbsp;30, 2004,
all of the outstanding shares held by non&#150;affiliates have a
Rule&nbsp;144 holding period that exceeds two years, other than
shares that are eligible for resale under Rule&nbsp;701. As a
result, our non-affiliates may sell these shares under
Rule&nbsp;144(k) without complying with the manner of sale,
public information, volume limitation or notice provisions of
Rule&nbsp;144.
</FONT>

<P align="center">
<B><FONT size="2">Rule&nbsp;701</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Subject to the lock-up agreements described
below, all sales of our common stock effected under
Rule&nbsp;701 may be made beginning 90&nbsp;days after the
effectiveness of this offering. Rule&nbsp;701 applies to shares
of our common stock outstanding before the effectiveness of this
offering that were acquired pursuant to our stock plans. These
shares may be resold without compliance with
Rule&nbsp;144&#146;s one-year holding period:
</FONT>
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<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">By persons other than affiliates, subject only to
    the manner-of-sale provisions of Rule&nbsp;144;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">By affiliates, subject to the manner-of-sale,
    current public information and filing requirements of
    Rule&nbsp;144.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">85
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<P align="center">
<B><FONT size="2">Form&nbsp;S-8 Registration
Statements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Shortly after the effectiveness of the offering,
we intend to file a registration statement on Form&nbsp;S-8
under the Securities Act to register an aggregate
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock reserved for issuance under our 1995 Stock
Option Plan, 2004&nbsp;Equity Incentive Plan and our
2004&nbsp;Employee Stock Purchase Plan. Shares of common stock
issued upon exercise of options under the Form&nbsp;S-8 will be
available for sale in the public market, subject to
Rule&nbsp;144 volume limitations applicable to affiliates and
subject to the lock-up agreements described below.
</FONT>

<P align="center">
<B><FONT size="2">Lock-up Agreements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our directors, executive officers and certain of
our stockholders, who will, after the offering, collectively
hold an aggregate
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
have agreed to enter into lock-up agreements with us or the
underwriters in connection with this offering. These lock-up
agreements will provide that, with limited exceptions, these
persons and entities will not offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of any of our
shares for a period of 180&nbsp;days after the effective date of
this offering. Wachovia Capital Markets, LLC may, in its sole
discretion and at any time without prior notice, release all or
any portion of the shares subject to these lock-up agreements.
We have also entered into an agreement with Wachovia Capital
Markets, LLC that, with certain exceptions, we will not offer,
sell or otherwise dispose of our common stock until
180&nbsp;days after the date of this prospectus.
</FONT>

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<P align="center">
<B><FONT size="2">MATERIAL U.S.&nbsp;FEDERAL INCOME TAX
CONSEQUENCES</FONT></B>

<P align="center">
<B><FONT size="2">General</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following is a general discussion of the
material U.S.&nbsp;federal income and estate tax consequences of
the ownership and disposition of common stock that may be
relevant to you if you are a non-U.S.&nbsp;Holder. For purposes
of this discussion, a &#147;non-U.S.&nbsp;Holder&#148; is any
person or entity that is, for U.S.&nbsp;federal income tax
purposes, a foreign corporation, a nonresident alien individual,
a foreign estate or a foreign trust. This discussion is based on
current law, which is subject to change, possibly with
retroactive effect, or different interpretations. This
discussion is limited to non-U.S.&nbsp;Holders who hold shares
of common stock as capital assets. Moreover, this discussion is
for general information only and does not address all the tax
consequences that may be relevant to you in light of your
personal circumstances. In particular, this discussion does not
address the U.S.&nbsp;federal income tax consequences to certain
holders that are subject to special treatment (such as holders
who are broker dealers, insurance companies, tax-exempt
organizations, banks, financial institutions, or &#147;financial
services entities&#148;); holders of our common stock held as
part of a &#147;straddle,&#148; &#147;hedge,&#148;
&#147;constructive sale&#148; or &#147;conversion
transaction&#148; with other investments; holders who received
our common stock as compensation; holders who have elected
mark-to-market accounting; and certain expatriates or former
long-term residents of the United States. Additionally, the
discussion does not consider the tax treatment of holders who
are partnerships or pass-through entities for U.S.&nbsp;federal
income tax purposes, or persons who hold our common stock
through a partnership or other pass-through entity. If a
partnership holds shares of the common stock, the
U.S.&nbsp;federal income tax treatment of a partner in the
partnership will generally depend on the status of the partner
and the activities of the partnership. In addition, this
discussion does not consider any aspect of state, local or
non-U.S.&nbsp;tax laws.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you are an individual, you may, in many cases,
be deemed to be a resident alien, as opposed to a nonresident
alien, by virtue of being present in the United States for at
least 31&nbsp;days in the calendar year and for an aggregate of
at least 183&nbsp;days during a three-year period ending in the
current calendar year. For these purposes all the days present
in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in
the second preceding year are counted. Resident aliens are
subject to U.S.&nbsp;federal income tax as if they were
U.S.&nbsp;citizens. Because U.S.&nbsp;federal tax law uses
different tests to determine whether an individual is a
non-resident alien for income tax purposes, some individuals may
be &#147;non-U.S.&nbsp;Holders&#148; for purposes of the
U.S.&nbsp;federal income tax discussion, but not for the purpose
of the U.S.&nbsp;federal estate tax discussion and vice versa.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS
ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND
POSSIBLE FUTURE TAX CONSEQUENCES OF PURCHASING, OWNING AND
DISPOSING OF OUR COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES
THAT MAY ARISE UNDER THE LAWS OF ANY U.S.&nbsp;STATE,
MUNICIPALITY OR OTHER TAXING JURISDICTION.
</FONT>

<P align="center">
<B><FONT size="2">Dividends</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In the event that distributions are paid by us,
such 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). If the amount of
a distribution exceeds our current and accumulated earnings and
profits, such excess first will be treated as a tax-free return
of capital to the extent of your tax basis in the common stock,
and thereafter will be treated as capital gain, as discussed
below under &#147;Dispositions of Common Stock.&#148; If
dividends for U.S.&nbsp;federal income tax purposes are paid, as
a non-U.S.&nbsp;Holder, you will be subject to U.S.&nbsp;federal
withholding tax at a 30% rate or a lower rate as may be
specified by an applicable income tax treaty. To claim the
benefit of a lower rate under an income tax treaty, you must
properly file with the payor an Internal Revenue Service
Form&nbsp;W-8BEN, or successor form, claiming an exemption from
or reduction in withholding under the applicable tax treaty. If
dividends are considered effectively connected with the conduct
of a trade or business by you within the United States and,
where a tax treaty applies, are attributable to a
</FONT>

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<DIV align="left">
<FONT size="2">U.S.&nbsp;permanent establishment those dividends
will be subject to U.S.&nbsp;federal income tax on a net basis
at regular U.S.&nbsp;federal income tax rates in the same manner
as a U.S.&nbsp;person but will not be subject to
U.S.&nbsp;federal withholding tax, provided an Internal Revenue
Service Form&nbsp;W-8ECI, or successor form, is filed with the
payor. If you are a foreign corporation, any effectively
connected dividends may, under certain circumstances, be subject
to an additional &#147;branch profits tax&#148; at a rate of 30%
or a lower rate as may be specified by an applicable income tax
treaty.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">You must comply with the certification procedures
described above, or, in the case of payments made outside the
United States with respect to an offshore account, certain
documentary evidence procedures, directly or under certain
circumstances through an intermediary, to obtain the benefits of
a reduced rate under an income tax treaty with respect to
dividends paid with respect to your common stock. In addition,
if you are required to provide an Internal Revenue Service
Form&nbsp;W-8ECI or successor form, as discussed above, you must
also provide your tax identification number.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you are eligible for a reduced rate of
U.S.&nbsp;federal withholding tax pursuant to an income tax
treaty, you may obtain a refund or credit of any excess amounts
withheld by timely filing an appropriate claim for refund with
the Internal Revenue Service.
</FONT>

<P align="center">
<B><FONT size="2">Dispositions of Common Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a non-U.S.&nbsp;Holder, you generally will not
be subject to U.S.&nbsp;federal income or withholding tax on any
gain recognized on the sale or other disposition of common stock
unless:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the gain is considered effectively connected with
    the conduct of a trade or business by you within the United
    States and, where a tax treaty applies, is attributable to a
    U.S.&nbsp;permanent establishment (and, in which case, if you
    are a foreign corporation, you may be subject to an additional
    branch profits tax equal to 30% or a lower rate as may be
    specified by an applicable income tax treaty);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">you are an individual who holds the common stock
    as a capital asset and are present in the United States for 183
    or more days in the taxable year of the sale or other
    disposition and other conditions are met;&nbsp;or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">we are or become a U.S.&nbsp;Real Property
    Holding Corporation (USRPHC). In general, a corporation is a
    USRPHC if the fair market value of its &#147;U.S.&nbsp;real
    property interests&#148; equals or exceeds 50% of the sum of the
    fair market value of its worldwide real property interests and
    its other assets used or held for use in a trade or business. We
    believe that we are not currently, and are not likely not to
    become, a USRPHC. If we were to become a USRPHC, then gain on
    the sale or other disposition of common stock by you generally
    would not be subject to U.S.&nbsp;federal income tax provided:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="1%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the common stock was &#147;regularly traded on an
    established securities market&#148;;&nbsp;and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">you do not actually or constructively own more
    than 5% of the common stock during the shorter of (i)&nbsp;the
    five-year period preceding the disposition or (ii)&nbsp;your
    holding period.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">No assurance can be given that we will not be a
USRPHC, or that our common stock will be considered regularly
traded, when you sell your shares of common stock.
</FONT>

<P align="center">
<B><FONT size="2">Federal Estate Tax</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you are an individual, common stock held at
the time of your death will be included in your 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.
</FONT>

<P align="center">
<B><FONT size="2">Information Reporting and Backup Withholding
Tax</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We must report annually to the Internal Revenue
Service and to each of you the amount of dividends paid to you
and the tax withheld with respect to those dividends, regardless
of whether withholding was
</FONT>

<P align="center"><FONT size="2">88
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<DIV align="left">
<FONT size="2">required. Copies of the information returns
reporting those dividends and withholding amounts may also be
made available to the tax authorities in the country in which
you reside under the provisions of an applicable income tax
treaty or other applicable agreements.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Backup withholding is generally imposed at a
current rate of 28% on certain payments to persons that fail to
furnish the necessary identifying information to the payor. You
generally will be subject to backup withholding tax (currently
28%) with respect to dividends paid on your common stock unless
you certify your non-U.S.&nbsp;status on Internal Revenue
Service Form&nbsp;W-8BEN (or successor form) or otherwise
establish an exemption.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The payment of proceeds of a sale of common stock
effected by or through a U.S.&nbsp;office of a broker is subject
to both backup withholding and information reporting unless you
provide the payor with your name and address and you certify
your non-U.S.&nbsp;status or you otherwise establish an
exemption. In general, backup withholding and information
reporting will not apply to the payment of the proceeds of a
sale of common stock by or through a foreign office of a broker.
If, however, such broker is, for U.S.&nbsp;federal income tax
purposes, a U.S.&nbsp;person, a controlled foreign corporation,
a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in
the United States or a foreign partnership that at any time
during its tax year either is engaged in the conduct of a trade
or business in the United States or has as partners one or more
U.S.&nbsp;persons that, in the aggregate, hold more than 50% of
the income or capital interest in the partnership, backup
withholding will not apply, but such payments will be subject to
information reporting, unless such broker has documentary
evidence in its records that you are a non-U.S.&nbsp;Holder and
certain other conditions are met or you otherwise establish an
exemption.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Backup withholding is not an additional tax. Any
amounts withheld under the backup withholding rules generally
will be allowed as a refund or a credit against your
U.S.&nbsp;federal income tax liability provided the required
information is furnished in a timely manner to the Internal
Revenue Service.
</FONT>

<P align="center"><FONT size="2">89
</FONT>

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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<A name='116'></A>
</DIV>

<!-- link1 "UNDERWRITING" -->

<P align="center">
<B><FONT size="2">UNDERWRITING</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell to the
underwriters named below and the underwriters have severally
agreed to purchase from us, the number of shares of common stock
appearing opposite their names below.
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="73%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Underwriter</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of Shares</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Wachovia Capital Markets, LLC
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">C.E.&nbsp;Unterberg, Towbin, LLC
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriters have agreed to purchase all of
the shares shown in the above table if any of those shares are
purchased. If an underwriter defaults, the underwriting
agreement provides that the purchase commitments of the
non-defaulting underwriter may be increased or the underwriting
agreement may be terminated.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The shares of common stock are offered by the
underwriters, subject to prior sale, when, as and if issued to
and accepted by them, subject to approval of legal matters by
counsel for the underwriters and other conditions contained in
the underwriting agreement, such as the receipt by the
underwriters of officers&#146; certificates and legal opinions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriters have advised us that they do not
intend to confirm sales to any account over which they exercise
discretionary authority.
</FONT>

<P align="center">
<B><FONT size="2">Commissions and Discounts</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriters have advised us that they
propose to offer the shares of our common stock to the public at
the public offering price falling within the range listed on the
cover page of this prospectus and to certain dealers at that
price less a concession of not more than
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, of which
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;may
be reallowed to other dealers. After completion of this initial
public offering, the public offering price, concession and
reallowance to dealers may be changed.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table shows the public offering
price, underwriting discount and proceeds, before expenses, to
us on a per share basis and in total, assuming either no
exercise or full exercise by the underwriters of their
over-allotment option.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="54%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Per Share</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Without Option</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">With Option</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Public offering price
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Underwriting discount
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds to us (before expenses)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We estimate that the expenses of this offering,
not including the underwriting discount, will be approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
are payable by us.
</FONT>

<P align="center">
<B><FONT size="2">Over-allotment Option</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this
prospectus, to purchase up to a total
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
shares of common stock at the public offering price per share
less the underwriting discounts and commissions per share shown
on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each of the underwriters will
have a firm commitment, subject to conditions, to purchase
approximately the same percentage of the additional shares that
the number of shares of common stock to be purchased by that
underwriter as shown in the above table represents as a
percentage of the total number of shares shown in that table.
</FONT>

<P align="center"><FONT size="2">90
</FONT>

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<P align="center">
<B><FONT size="2">Indemnity</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have agreed to indemnify the underwriters
against specified liabilities, including liabilities under the
Securities Act, or to contribute to payments that the
underwriters may be required to make in respect of those
liabilities.
</FONT>

<P align="center">
<B><FONT size="2">Lock-up Agreements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our directors and officers and the holders of
approximately &nbsp;of the shares of our 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 will agree, with limited exceptions, for a period of 180
days after the date of this prospectus, they will not, without
the prior written consent of Wachovia Capital Markets, LLC,
offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or other
capital stock or any securities convertible into, or exercisable
or exchangeable for, shares of our common or our other capital
stock, except that such directors, officers and stockholders
will be permitted to transfer any of these securities by gift,
will or intestate succession (so long as any recipient of those
securities enters into a similar lock-up agreement), the selling
stockholders will be permitted to distribute securities to their
partners (so long as any recipient of those securities enters
into a similar lock-up agreement).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, we have agreed that, for a period of
180 days after the date of this prospectus, we will not, without
the prior written consent of Wachovia Capital Markets, LLC,
offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or other
capital stock or any securities convertible into, or exercisable
or exchangeable for, shares of our common stock or other capital
stock, except for:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the shares of common stock being sold by us in
    this offering;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the issuance of shares of common stock and stock
    options pursuant to our stock option plans as in effect on the
    date of this prospectus; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the issuance of shares of common stock upon the
    exercise of stock options.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Wachovia Capital Markets, LLC may, in its sole
discretion and at any time or from time to time, without notice,
release all or any portion of the shares or other securities
subject to the lock-up agreements listed above.
</FONT>

<P align="center">
<B><FONT size="2">Stabilization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The representatives have advised us that,
pursuant to Regulation&nbsp;M under the Securities Exchange Act
of 1934, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which
may have the effect of stabilizing or maintaining the market
price of our common stock at a level above that which might
otherwise prevail in the open market.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">A &#147;stabilizing bid&#148; is a bid for or the
    purchase of the common stock on behalf of the underwriters for
    the purpose of fixing or maintaining the price of the common
    stock.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">A &#147;syndicate covering transaction&#148; is a
    bid for or the purchase of the common stock on behalf of the
    underwriters to reduce a short position incurred by the
    underwriters in connection with this offering.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">A &#147;penalty bid&#148; is an arrangement
    permitting the underwriters to reclaim the selling concession
    otherwise accruing to an underwriter or selling group member in
    connection with this offering if the common stock originally
    sold by that underwriter or selling group member is purchased by
    the underwriters in a syndicate covering transaction and has
    therefore not been effectively placed by that underwriter or
    selling group member.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">91
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriters have advised us that these
transactions may be effected on the Nasdaq National Market or
otherwise. Neither we nor any of the underwriters makes any
representation that the underwriters will engage in any of the
transactions described above, and these transactions, if
commenced, may be discontinued without notice. Neither we nor
any of the underwriters makes any representation or prediction
as to the direction or magnitude of the effect that the
transactions described above, if commenced, may have on the
market price of our common stock.
</FONT>

<P align="center">
<B><FONT size="2">Other Relationships</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">C.E. Unterberg, Towbin, LLC has performed
investment banking and advisory services for us from time to
time for which they received customary fees and expenses. The
underwriters may, from time to time, engage in transactions with
and perform services for us in the ordinary course of business.
</FONT>

<P align="center">
<B><FONT size="2">Pricing of this Offering</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public
offering price for the shares of our common stock will be
determined by negotiations between us and the underwriters. The
factors to be considered in determining the initial public
offering price include:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">prevailing market conditions;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our results of operations and financial condition;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">financial and operating information and market
    valuations with respect to other companies that we and the
    representatives of the underwriters believe to be comparable to
    us;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the present state of our business; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our future prospects.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">An active trading market for our common stock may
not develop. It is possible that the market price of our common
stock after this offering may be less than the initial public
offering price. In addition, the estimated initial public
offering price range appearing on the cover of this preliminary
prospectus is subject to change as a result of market conditions
or other factors.
</FONT>

<P align="center">
<B><FONT size="2">Quotation on the Nasdaq National
Market</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We intend to file an application for our common
stock to be quoted on the Nasdaq National Market under the
symbol &#147;EPCT.&#148;
</FONT>

<P align="center">
<B><FONT size="2">Electronic Prospectus</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with this offering, certain of the
underwriters or securities dealers may distribute this
prospectus electronically.
</FONT>

<P align="left">
<A name='117'></A>

<!-- link1 "VALIDITY OF SECURITIES" -->

<P align="center">
<B><FONT size="2">VALIDITY OF SECURITIES</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Weil, Gotshal&nbsp;&#38; Manges LLP, New York,
New York has passed upon the validity of the common stock
offered hereby on behalf of us. Shearman&nbsp;&#38; Sterling
LLP, New York, New York has passed upon the validity of the
common stock offered hereby on behalf of the underwriters.
</FONT>

<P align="left">
<A name='118'></A>

<!-- link1 "EXPERTS" -->

<P align="center">
<B><FONT size="2">EXPERTS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The consolidated financial statements as of
December&nbsp;31, 2003 and 2002 and September&nbsp;30, 2004, and
for each of the three years in the period ended
December&nbsp;31, 2003 and for the nine months ended
September&nbsp;30, 2004, included in this prospectus have been
audited by Deloitte&nbsp;&#38; Touche LLP, an
</FONT>

<P align="center"><FONT size="2">92
</FONT>

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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2">independent registered public accounting firm, as
stated in their report appearing herein (which report expresses
an unqualified opinion and includes explanatory paragraphs
relating to the Company&#146;s ability to continue as a going
concern as discussed in Note&nbsp;1 and the restatement
discussed in Note&nbsp;11), and have been so included in
reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
</FONT>
</DIV>

<DIV align="left">
<A name='121'></A>
</DIV>

<!-- link1 "CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM" -->

<P align="center">
<B><FONT size="2">CHANGE IN INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our consolidated balance sheets as of
December&nbsp;31, 2001 and 2000 and the related consolidated
statements of operations, stockholders&#146; (deficiency) equity
and cash flows for the years then ended and the period from
March&nbsp;9, 1993 (inception) through December&nbsp;31, 2001
were previously audited by Ernst &#38; Young LLP, an independent
registered public accounting firm. In May 2004, Ernst&nbsp;&#38;
Young LLP resigned.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On July&nbsp;13, 2004, our board of directors
approved the appointment of Deloitte&nbsp;&#38; Touche LLP to
serve as our independent registered public accounting firm. We
engaged Deloitte&nbsp;&#38; Touche LLP to audit our consolidated
financial statements as of December&nbsp;31, 2003 and 2002, and
for the years then ended, and to re-audit our consolidated
financial statements for the year ended December&nbsp;31, 2001.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the audits of our financial
statements for the years ended December 31, 2000 and 2001 and in
the subsequent period through the date of Ernst &#38; Young
LLP&#146;s resignation, there were no disagreements with
Ernst&nbsp;&#38; Young LLP on any matters of accounting
principles or practices, financial statement disclosure or
auditing scope and procedures, which if not resolved to the
satisfaction of Ernst &#38; Young LLP would have caused Ernst
&#38; Young LLP to make reference to the matter in their report.
Except for a paragraph relating to a going concern uncertainty,
the audit report of Ernst &#38; Young LLP on our consolidated
financial statements described above did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the reaudit of our financial
statement for the year ended December 31, 2001, we determined
that a restatement of this financial statement was required for
certain items as disclosed in Note 11 to the financial
statements, and we informed Ernst &#38; Young LLP about these
matters.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have requested Ernst &#38; Young LLP to
furnish a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the above statements.
A copy of that letter confirming its agreement, dated November
11, 2004, is filed as Exhibit 16.1.
</FONT>

<DIV align="left">
<A name='119'></A>
</DIV>

<!-- link1 "WHERE YOU CAN FIND ADDITIONAL INFORMATION" -->

<P align="center">
<B><FONT size="2">WHERE YOU CAN FIND ADDITIONAL
INFORMATION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have filed with the Securities and Exchange
Commission a registration statement on Form&nbsp;S-1 under the
Securities Act with respect to the common stock offered hereby.
This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to
EpiCept Corporation and the common stock offered hereby, you
should refer to the registration statement and to the exhibits
and schedules filed therewith. Statements contained in this
prospectus regarding the contents of any contract or any other
document that is filed as an exhibit to the registration
statement are not necessarily complete, and each such statement
is qualified in all respects by reference to the full text of
such contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and
the exhibits and schedules therewith may be inspected without
charge at the public reference room maintained by the SEC
located at 450&nbsp;Fifth Street, N.W., Washington,&nbsp;D.C.
20549. Copies of all or any portion of the registration
statement may be obtained from such offices upon payment of
prescribed fees. The public may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC maintains a website at www.sec.gov that
contains reports, proxy and information statements and other
information regarding registrants that file electronically with
the SEC.
</FONT>

<P align="center"><FONT size="2">93
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED FINANCIAL STATEMENTS</FONT></B>

<P align="center">
<B><FONT size="2">CONTENTS</FONT></B>

<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="93%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Report of Independent Registered Public
    Accounting Firm
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Balance Sheets as of
    December&nbsp;31, 2003 and 2002 and September&nbsp;30, 2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Statements of Operations for the
    Years Ended December&nbsp;31, 2003, 2002, and 2001 and for the
    Nine Months Ended September&nbsp;30, 2004 and 2003 (Unaudited)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Statements of Preferred Stock and
    Stockholders&#146; Deficit for the Years Ended December&nbsp;31,
    2001, 2002 and 2003 and the Nine Months Ended September&nbsp;30,
    2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Statements of Cash Flows for the
    Years Ended December&nbsp;31, 2003, 2002, and 2001 and for the
    Nine Months Ended September&nbsp;30, 2004 and 2003 (Unaudited)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Notes to Consolidated Financial Statements
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-1
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM</FONT></B>

<P align="left">
<FONT size="2">To the Board of Directors and Stockholders of
</FONT>

<DIV align="left">
<FONT size="2">EpiCept Corporation and subsidiary:
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have audited the accompanying consolidated
balance sheets of EpiCept Corporation and subsidiary (the
&#147;Company&#148;) as of December&nbsp;31, 2003, 2002 and
September&nbsp;30, 2004, and the related consolidated statements
of operations, preferred stock and stockholders&#146; deficit,
and cash flows for each of the three years in the period ended
December&nbsp;31, 2003 and for the nine months ended
September&nbsp;30, 2004. These financial statements are the
responsibility of the Company&#146;s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We conducted our audits in accordance with
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 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of EpiCept Corporation and subsidiary as of
December&nbsp;31, 2003 and 2002 and September&nbsp;30, 2004, and
the results of their operations and their cash flows for each of
the three years in the period ended December&nbsp;31, 2003 and
for the nine months ended September&nbsp;30, 2004 in conformity
with accounting principles generally accepted in the United
States of America.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note&nbsp;1 to the
consolidated financial statements, the Company&#146;s recurring
losses from operations and the stockholders&#146; deficit raise
substantial doubt about its ability to continue as a going
concern. Management&#146;s plans concerning these matters are
also described in Note&nbsp;1. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in Note&nbsp;11, the accompanying
2001 consolidated financial statements have been restated.
</FONT>

<P align="left">
<FONT size="2">DELOITTE&nbsp;&#38; TOUCHE LLP
</FONT>

<P align="left">
<FONT size="2">Parsippany, New Jersey
</FONT>

<DIV align="left">
<FONT size="2">January&nbsp;10, 2005
</FONT>
</DIV>

<P align="center"><FONT size="2">F-2
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED BALANCE SHEETS</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="47%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Pro Forma</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Liabilities and</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stockholders&#146;</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deficit</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004 (Note&nbsp;2)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="17" align="center" valign="top">
    <B><FONT size="2">ASSETS</FONT></B></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current assets:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,007,187</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">619,552</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,026,176</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Prepaid expenses and other current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,285</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,738</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">66,815</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,043,472</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">656,290</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,092,991</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">110,135</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">169,390</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">97,816</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred financing and initial public offering
    costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,552</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">114,209</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">712,743</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,345</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,832</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,735</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,195,504</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">950,721</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,939,285</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="17"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="17" align="center" valign="top">
    <B><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146;
    DEFICIT</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">387,230</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">542,955</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,446,108</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued research contract costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">114,537</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">584,343</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">105,333</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">419,597</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42,329</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">681,535</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other accrued liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">478,490</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">419,896</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">440,457</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Notes and loans payable, current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,010,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">986,960</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred revenue, current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,500,508</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,500,508</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,910,762</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,589,523</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,160,901</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Notes and loans payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,272,177</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,085,258</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,692,170</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,169,047</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,065,682</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,190,302</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">343,654</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">279,561</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">395,060</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Contingent interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">483,173</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">299,927</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">592,557</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred rent and other noncurrent liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31,578</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,215</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,045</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total long term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,196,264</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,707,961</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,888,134</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,365,011</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,107,026</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,297,484</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,049,035</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,525,912</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Commitments (Note&nbsp;7)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;B Redeemable Convertible Preferred
    Stock, $0.0001&nbsp;par value; authorized 3,440,069&nbsp;shares;
    issued and outstanding 3,106,736&nbsp;shares ($9,320,208
    liquidation preference at December&nbsp;31, 2003 and 2002 and
    September&nbsp;30, 2004)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,421,845</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,474,291</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,666,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;C Redeemable Convertible Preferred
    Stock, $0.0001&nbsp;par value; authorized
    12,769,573&nbsp;shares; issued and outstanding
    8,839,573&nbsp;shares ($26,518,719 liquidation preference at
    December&nbsp;31, 2003 and 2002 and September&nbsp;30, 2004)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,677,607</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,981,538</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,373,807</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Warrants
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,583,974</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,627,337</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,583,974</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; Deficit:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;A Convertible Preferred Stock,
    $0.0001&nbsp;par value; authorized 3,422,620&nbsp;shares, issued
    and outstanding 3,315,160&nbsp;shares at December&nbsp;31, 2003
    and 2002; 3,368,385&nbsp;shares at September&nbsp;30, 2004;
    (liquidation preference of $6,696,623 at December&nbsp;31, 2003
    and 2002 and $6,804,138 at September&nbsp;30, 2004)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,191,840</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,274,762</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,225,806</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock, $0.0001&nbsp;par value; authorized
    31,000,000&nbsp;shares; issued and outstanding 6,603,359,
    6,601,359 and 6,798,485&nbsp;shares at December&nbsp;31, 2003
    and 2002 and September&nbsp;30, 2004, and 26,220,770&nbsp;shares
    pro forma at September&nbsp;30, 2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">660</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">660</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">680</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,622</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Additional paid-in capital
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,966</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,493,932</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40,521,268</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred stock compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(394,972</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,065,806</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(89,722</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(89,722</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(50,353,727</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(39,664,321</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(55,992,782</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(55,992,782</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated other comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(997,715</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(394,156</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(953,013</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(953,013</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Treasury stock, at cost (50,000&nbsp;shares)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(43,594,948</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(31,429,929</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(48,734,031</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(16,586,627</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities and stockholders&#146; deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,195,504</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">950,721</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,939,285</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">See accompanying notes.
</FONT>

<P align="center"><FONT size="2">F-3
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF
OPERATIONS</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="29%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(As Restated,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">See Note&nbsp;11)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">433,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&nbsp;&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,875,380</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">160,274</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Operating expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">General and administrative
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,406,648</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,492,928</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,393,797</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,148,206</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,131,355</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Research and development
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,640,955</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,873,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,085,258</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,271,782</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,182,547</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,047,603</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,366,927</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,479,055</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,419,988</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,313,902</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss from operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,613,793</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,366,927</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,479,055</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,544,608</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,153,628</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other income (expense):
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,978</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">400,129</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,153</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,357</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Foreign exchange gain (loss)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(770,777</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(728,167</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">283,968</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125,203</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(405,104</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,593,180</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(823,389</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(488,930</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,284,270</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,208,479</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other income (expense), net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,363,957</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,509,578</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">185,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,122,914</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,613,583</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss before benefit for income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,977,750</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,876,505</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,293,245</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,667,522</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,767,211</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Benefit for income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">74,454</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">225,343</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">277,993</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,903,296</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,651,162</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,015,252</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,667,522</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,767,211</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Warrant deemed dividend and redeemable
    convertible preferred stock dividends
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,254,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,288,328</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,254,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,090,855</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(940,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss attributable to common stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,157,658</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,939,490</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,269,614</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,758,377</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,707,981</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per common share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.69</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.66</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.26</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.86</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,602,871</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,597,638</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,551,622</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,710,741</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,602,707</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Unaudited pro forma basic and diluted loss per
    common share (Note&nbsp;2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.24</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.12</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares used in computing unaudited pro forma
    basic and diluted loss per common share (Note&nbsp;2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,486,162</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,666,628</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">See accompanying notes.
</FONT>

<P align="center"><FONT size="2">F-4
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND
STOCKHOLDERS&#146; DEFICIT</FONT></B>

<DIV align="center">
<B><FONT size="2">For the Years Ended December&nbsp;31, 2001,
2002, and 2003</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">and the Nine Months Ended September&nbsp;30,
2004</FONT></B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="22%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Series&nbsp;B Redeemable</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Series&nbsp;C Redeemable</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Convertible Preferred</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Convertible Preferred</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Series&nbsp;A Convertible</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Preferred Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Common Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Additional</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deferred</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Other</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Paid-In</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Comprehensive</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Treasury</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stockholders&#146;</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Comprehensive</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Warrants</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Capital</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deficit</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Loss)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deficit</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Loss</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at December&nbsp;31, 2000&nbsp;&#151; As
    previously reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,106,736</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,520,625</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,306,239</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">12,315,056</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,493,707</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,938,627</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,507,323</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">651</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,796,977</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,734,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(21,229,977</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(123,169</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(12,426,558</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Prior period adjustments (Note&nbsp;11)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">301,252</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">10,172</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">949,957</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">890,483</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(627,381</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,767,930</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,504,828</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at December&nbsp;31, 2000&nbsp;&#151; as
    restated, see Note&nbsp;11
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,106,736</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,821,877</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,306,239</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">12,325,228</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">949,957</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,493,707</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,829,110</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,507,323</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">651</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,169,596</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,734,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(22,997,907</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(123,169</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(13,931,386</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of common stock in connection with
    conversion of Series&nbsp;A Convertible Preferred Stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(8,448</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(17,065</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">9,945</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,064</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Exercise of stock options
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">55,500</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,994</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,999</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of Series&nbsp;A Convertible Preferred
    Stock for minority interest equity conversion
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">829,901</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,462,717</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,431,852</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">30,865</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of Series&nbsp;C Redeemable Convertible
    Preferred Stock for cash
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">633,334</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">950,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Accretion of preferred stock
    dividends&nbsp;&#151; as restated, see Note&nbsp;11
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">326,207</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">928,155</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,254,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,254,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Acquisition of Series&nbsp;C Redeemable
    Convertible Preferred Stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(100,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(150,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Deferred stock compensation related to employee
    stock options&nbsp;&#151; as restated, see Note&nbsp;11
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">379,963</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(379,963</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Amortization of deferred stock compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">763,686</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">763,686</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Stock-based compensation to third
    parties&nbsp;&#151; as restated, see Note&nbsp;11
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">220,434</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">220,434</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Foreign currency translation adjustment
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(5,648</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(5,648</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(5,648</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss&nbsp;&#151; as restated, see Note&nbsp;11
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(7,015,252</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(7,015,252</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(7,015,252</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at December&nbsp;31, 2001&nbsp;&#151; as
    restated, see Note&nbsp;11
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,106,736</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,148,084</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,839,573</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">14,053,383</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">949,957</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,315,160</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">7,274,762</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,572,768</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">657</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,118,837</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,350,944</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(30,013,159</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(128,817</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(21,173,664</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(7,020,900</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Exercise of stock options
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">28,591</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,575</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,578</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Accretion of preferred stock dividends
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">326,207</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">928,155</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,254,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,254,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of Series&nbsp;A Convertible Preferred
    Stock warrants to investor
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">33,966</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">33,966</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Series&nbsp;A Convertible Preferred Stock warrant
    deemed dividend
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(33,966</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(33,966</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Deferred stock compensation related to employee
    stock options
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">573,770</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(573,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-5
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND
STOCKHOLDERS&#146;
DEFICIT&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="16%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Series&nbsp;B Redeemable</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Series&nbsp;C Redeemable</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Convertible Preferred</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Convertible Preferred</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Series&nbsp;A Convertible</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Preferred Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Common Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Additional</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deferred</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Other</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Paid-In</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Comprehensive</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Treasury</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stockholders&#146;</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Comprehensive</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Warrants</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Capital</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deficit</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Loss)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deficit</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Loss</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Amortization of deferred stock compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">858,908</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">858,908</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Stock-based compensation to third parties
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">47,112</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">47,112</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Sale of warrants
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,677,380</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Foreign currency translation adjustment
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(265,339</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(265,339</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(265,339</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(9,651,162</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(9,651,162</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(9,651,162</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,106,736</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,474,291</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,839,573</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">14,981,538</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,627,337</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,315,160</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">7,274,762</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,601,359</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">660</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,493,932</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,065,806</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(39,664,321</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(394,156</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(31,429,929</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(9,916,501</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Exercise of stock options
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">600</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">600</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Accretion of preferred stock dividends
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">326,207</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">928,155</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(771,960</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(482,402</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,254,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Beneficial conversion feature related to
    preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">621,347</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,767,914</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">917,078</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(3,081,595</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(224,744</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(2,389,261</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Deferred stock compensation related to employee
    stock options
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,552</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">80,516</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(78,964</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Amortization of deferred stock compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">590,318</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">590,318</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Stock-based compensation to third parties
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">178,558</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">178,558</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Sale of warrants
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,956,637</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Beneficial conversion feature related to
    convertible term notes
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,215,983</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,215,983</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Foreign currency translation adjustment
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(603,559</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(603,559</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(603,559</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(9,903,296</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(9,903,296</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(9,903,296</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at December&nbsp;31, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,106,736</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,421,845</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,839,573</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,677,607</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,583,974</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,315,160</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,191,840</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,603,359</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">660</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">33,966</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(394,972</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(50,353,727</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(997,715</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(43,594,948</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(10,506,855</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Exercise of stock options
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
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    <TD><FONT size="1">&nbsp;</FONT></TD>
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    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">69,018</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
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    <TD><FONT size="1">&nbsp;</FONT></TD>
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    <TD><FONT size="1">&nbsp;</FONT></TD>
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    <TD><FONT size="1">&nbsp;</FONT></TD>
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    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
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    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Exercise of Series&nbsp;A Convertible Preferred
    Stock warrants
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">53,225</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">33,966</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(33,966</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Beneficial conversion feature related to
    Series&nbsp;A Convertible Preferred Stock warrant exercise
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">150,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(150,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Accretion of preferred stock dividends
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">244,655</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">696,200</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(119,322</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(821,533</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(940,855</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Amortization of deferred stock compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">305,250</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">305,250</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Stock-based compensation to third parties
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">50,304</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">50,304</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Foreign currency translation adjustment
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">44,702</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">44,702</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">44,702</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4,667,522</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4,667,522</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4,667,522</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at September&nbsp;30, 2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,106,736</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,666,500</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,839,573</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">18,373,807</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,583,974</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,368,385</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,225,806</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">6,798,485</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">680</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">150,000</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(89,722</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(55,992,782</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(953,013</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(48,734,031</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4,622,820</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">See accompanying notes.
</FONT>

<P align="center"><FONT size="2">F-6
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF CASH
FLOWS</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="42%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="3" align="center"><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(As Restated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">See Note&nbsp;11)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Cash flows from operating
    activities:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,903,296</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,651,162</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,015,252</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,667,522</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,767,211</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,424</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">97,143</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">91,439</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40,769</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">60,303</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss (gain)&nbsp;on disposal of assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,895</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Foreign exchange loss (gain)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">770,777</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">728,167</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(283,968</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(125,203</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">405,104</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">768,876</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">906,020</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">984,120</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">355,554</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">488,688</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Amortization of deferred financing costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">85,657</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,276</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,552</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">57,105</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,357</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accretion of discount on loans
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,356,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">177,057</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,316,543</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,375,972</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Change in operating assets and
    liabilities&nbsp;&#151;
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Decrease (increase) in prepaid expenses and other
    current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">453</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,324</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,771</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,530</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(16,069</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">(Increase) decrease in other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,513</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,041</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">82,874</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(22,390</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,322</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">(Decrease) increase in accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(155,725</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">377,733</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,588</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,058,878</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,530</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">(Decrease) increase in accrued research contract
    costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(469,806</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">277,887</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,130</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,204</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(433,208</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase in accrued interest&nbsp;&#151; current
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">377,268</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,051</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,278</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">261,938</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">363,608</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase (decrease) in other accrued liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58,594</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">109,624</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(125,127</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(38,033</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(345,838</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase in deferred revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,000,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Amortization of deferred revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(433,810</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,875,380</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(160,274</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase in accrued interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">64,093</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">53,425</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50,626</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,406</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,221</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Increase in contingent interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">183,246</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">111,442</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">39,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">109,384</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">114,445</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">(Decrease) in other liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,637</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,546</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,533</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,126</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) operating
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,767,001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,788,135</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,176,874</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,560,666</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,310,072</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Cash flows from investing
    activities:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchase of property and equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,357</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,933</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(56,769</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(26,198</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,817</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from sale of property and equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,092</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash used in investing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,357</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,933</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(52,677</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(25,199</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,817</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Cash flows from financing
    activities:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">600</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,578</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">69,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from bridge loans and warrants
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,654,546</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,195,454</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,654,546</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net proceeds from sale of convertible preferred
    stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">950,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Acquisition of Series&nbsp;C Redeemable
    Convertible Preferred Stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(150,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Repayment of loan
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(729,340</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred financing and initial public offering
    costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(128,485</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(712,743</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) financing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,655,146</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,075,547</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">817,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,373,045</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,654,546</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net increase (decrease) in cash and cash
    equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,404,790</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,722,521</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,411,552</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,958,910</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,342,657</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Effect of exchange rate changes on cash
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,155</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14,371</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(23,264</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(22,101</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,627</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents at beginning of period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">619,552</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,356,444</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,791,260</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,007,187</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">619,552</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents at end of period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,007,187</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">619,552</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,356,444</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,026,176</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,953,582</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Supplemental disclosure of cash flow
    information</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash paid for interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">493,579</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">453,333</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">391,374</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">654,230</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300,402</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Supplemental disclosure of non-cash investing
    and financing activities</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Warrant deemed dividend and redeemable
    convertible preferred stock dividends
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,254,362</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,288,328</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,254,362</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,090,855</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">940,770</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Beneficial conversion feature related to
    preferred stock or warrant exercise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,306,339</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,306,339</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Beneficial conversion feature related to
    convertible term notes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,215,983</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,215,983</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minority interest conversion into Series&nbsp;A
    Convertible Preferred Stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,462,717</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">See accompanying notes.
</FONT>

<P align="center"><FONT size="2">F-7
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>

<DIV align="center">
<B><FONT size="2">Years Ended December&nbsp;31, 2003, 2002 and
2001 and Nine Months Ended</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">September&nbsp;30, 2004 and 2003
(Unaudited)</FONT></B>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">1.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Organization and Description of
    Business</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">EpiCept Corporation (&#147;EpiCept&#148; or the
&#147;Company&#148;) is a specialty pharmaceutical company
focused on the development and commercialization of topically
delivered prescription pain management therapeutics. The Company
has six product candidates in clinical development, three of
which are in late-stage clinical development and ready to enter,
or which have entered, Phase&nbsp;IIb or Phase&nbsp;III clinical
trials. EpiCept&#146;s product candidates target
moderate-to-severe pain that is influenced, or mediated, by
nerve receptors located just beneath the skin&#146;s surface.
The Company&#146;s product candidates utilize several
proprietary formulations and topical delivery technologies to
administer established, FDA-approved pain management
therapeutics, or analgesics.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s late stage product candidates
are EpiCept NP-1, a prescription topical analgesic cream
designed to provide effective long-term relief of peripheral
neuropathies; LidoPAIN SP, a sterile prescription analgesic
patch designed to provide sustained topical delivery of
lidocaine to a post-surgical or post-traumatic sutured wound
while also providing a sterile protective covering for the
wound; and LidoPAIN BP, a prescription analgesic non-sterile
patch designed to provide sustained topical delivery of
lidocaine for the treatment of acute or recurrent lower back
pain.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has yet to generate product revenues
from any of its product candidates in development. During 2003,
the Company entered into two strategic alliances, the first in
July 2003 with Adolor Corporation (&#147;Adolor&#148;) for the
development and commercialization of certain products, including
LidoPAIN SP in North America, and the second in December 2003
with Endo Pharmaceuticals, Inc. (&#147;Endo&#148;) for the
worldwide commercialization of LidoPAIN BP. The Company received
a total of $10.0&nbsp;million in upfront non-refundable license
fees upon the closing of these license agreements. Under these
relationships, the Company is eligible to receive an additional
$102.5&nbsp;million in milestone payments and, upon receipt of
appropriate regulatory approvals, the Company will earn
royalties based on net sales of products. There is no assurance
that any of these milestones will be earned or any royalties
paid. The Company&#146;s ability to generate additional revenue
in the future will depend on its ability to meet development or
regulatory milestones under its existing license agreements that
trigger additional payments, to enter into new license
agreements for other products or territories, and to receive
regulatory approvals for, and successfully commercialize, its
product candidates either directly or through commercial
partners.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is subject to a number of risks
associated with companies in the specialty pharmaceutical
industry. Principal among these are risks associated with the
Company&#146;s dependence on collaborative arrangements,
development by the Company or its competitors of new
technological innovations, dependence on key personnel,
protection of proprietary technology, compliance with the
U.S.&nbsp;Food and Drug Administration and other governmental
regulations and approval requirements, as well as the ability to
grow the Company&#146;s business and the need to obtain adequate
financing to fund this growth.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has prepared its financial statements
under the assumption that it is a going concern. The Company has
devoted substantially all of its cash resources to research and
development programs and general and administrative expenses,
and to date it has not generated any meaningful revenues from
the sale of products and does not expect to generate any such
revenues for a number of years, if at all. As a result, the
Company has incurred an accumulated deficit of $50.4 and
$56.0&nbsp;million as of December&nbsp;31, 2003 and
September&nbsp;30, 2004, respectively, and expects to incur
operating losses, potentially greater than losses in prior
years, for a number of years. The Company&#146;s recurring
losses from operations and the accumulated deficit raise
substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The
Company has financed its operations through the proceeds from
the sales of common and preferred equity
</FONT>

<P align="center"><FONT size="2">F-8
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">securities, debt, revenue from collaborative
relationships, investment income earned on cash balances and
short-term investments and the sales of a portion of its New
Jersey net operating loss carryforwards.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company expects to utilize its cash and cash
equivalents to fund its operations, including research and
development of its product candidates, primarily for clinical
trials. Based upon the projected spending levels for the
Company, the Company does not currently have adequate cash and
cash equivalents to complete the trials and therefore will
require additional funding. The Company believes that its
existing cash and cash equivalents plus anticipated milestone
payments will be adequate to satisfy its working capital
requirements for its current operations until the fourth quarter
of 2005. As a result, the Company intends to monitor its
liquidity position and the status of its clinical trials and to
continue to actively pursue fund-raising possibilities through
the sale of its equity securities. If the Company is
unsuccessful in its efforts to raise additional funds through
the sale of its equity securities or achievement of development
milestones, it may be required to significantly reduce or
curtail its research and development activities and other
operations if its level of cash and cash equivalents falls below
pre-determined levels.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company will require, over the long-term,
substantial new funding to pursue development and
commercialization of its product candidates and continue its
operations. The Company believes that satisfying these capital
requirements over the long-term will require successful
commercialization of its product candidates. However, it is
uncertain whether any products will be approved or will be
commercially successful. The amount of the Company&#146;s future
capital requirements will depend on numerous factors, including
the progress of its research and development programs, the
conduct of pre-clinical tests and clinical trials, the
development of regulatory submissions, the costs associated with
protecting patents and other proprietary rights, the development
of marketing and sales capabilities and the availability of
third-party funding.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">There can be no assurance that such funding will
be available at all or on terms acceptable to the Company. If
the Company obtains funds through arrangements with
collaborative partners or others, the Company may be required to
relinquish rights to certain of its technologies or product
candidates.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company was incorporated in Delaware in March
1993. A 100%-owned subsidiary, EpiCept GmbH, organized in
Munich, Germany, is engaged in research and development
activities on behalf of the Company. Prior to 2003, the Company
was a development stage company.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">2.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Summary of Significant Accounting
    Policies</FONT></B></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Consolidation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The accompanying consolidated financial
statements include the accounts of EpiCept Corporation and the
Company&#146;s 100%-owned subsidiary, EpiCept GmbH. All
significant intercompany transactions and balances have been
eliminated. In April 2001, in accordance with the original terms
of the agreement, the minority interest in EpiCept GmbH was
converted into 829,901&nbsp;shares of Series&nbsp;A convertible
preferred stock of the Company.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Interim Financial Statements</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The consolidated statements of operations and
consolidated statements of cash flows for the nine months ended
September&nbsp;30, 2003 and related disclosures contained in the
accompanying notes are unaudited. In the opinion of management,
all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of
operations and cash flows for the nine months ended
September&nbsp;30, 2003 have been made. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or
eliminated. The results for the nine months ended
</FONT>

<P align="center"><FONT size="2">F-9
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">September&nbsp;30, 2004 are not necessarily
indicative of the results to be expected for the year-ending
December&nbsp;31, 2004 or for any other year.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Use of Estimates</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. Estimates also affect
the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those
estimates.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Revenue Recognition</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company recognizes revenue relating to its
collaboration agreements in accordance with the Securities and
Exchange Commission&#146;s Staff Accounting
Bulletin&nbsp;No.&nbsp;104, <I>Revenue Recognition</I>, and
Emerging Issues Task Force (&#147;EITF&#148;) Issue
No.&nbsp;00-21, <I>Revenue Arrangements with Multiple
Deliverables</I>. Revenue under collaborative arrangements may
include the receipt of non-refundable license fees, milestone
payments, and research and development payments.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company evaluates its collaboration
agreements to determine units of accounting for revenue
recognition purposes. Revenue is deemed earned when all of the
following have occurred: all obligations of the Company relating
to the revenue have been met and the earnings process is
complete; the monies received or receivable are not refundable
irrespective of research results; and there are neither future
obligations nor milestones to be met by the Company with respect
to such revenue. The Company recognizes revenue from
non-refundable, up-front licenses and related payments, not
specifically tied to a separate earnings process, ratably over
the development period in which the Company is obligated to
participate on a continuing and substantial basis in the
research and development activities outlined in each contract.
The Company periodically reviews the estimated development
period and, to the extent such estimates change, the impact of
such change is recorded at the time. When payments are
specifically tied to a separate earnings process, revenue will
be recognized when the specific performance obligation
associated with the payment has been satisfied. Performance
obligations typically consist of contracted services or
development milestones. Revenue from significant milestones in
the development lifecycle of the related technology, including
filing for and obtaining approvals with regulatory agencies,
will be considered earned when the payer acknowledges the
milestone achievement, generally by payment of amounts due.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Deferred revenue represents the excess of cash
received compared to revenue recognized to date under licensing
agreements.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Foreign Currency Translation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The financial statements of the Company&#146;s
foreign subsidiary are translated into U.S.&nbsp;dollars using
the year-end exchange rate for all balance sheet accounts and
the average exchange rates for expenses. Adjustments resulting
from translation have been reported in other comprehensive loss.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Gains or losses from foreign currency
transactions relating to intercompany debt are recorded in the
consolidated statements of operations in other income (expense).
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Stock-Based Compensation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As permitted by Statement of Financial Accounting
Standards (&#147;SFAS&#148;) No.&nbsp;123, <I>Accounting for
Stock-Based Compensation </I>(&#147;SFAS&nbsp;123&#148;), the
Company accounts for employee stock-based compensation in
accordance with Accounting Principles Board (&#147;APB&#148;)
Opinion No.&nbsp;25, <I>Accounting for Stock</I>
</FONT>

<P align="center"><FONT size="2">F-10
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<I><FONT size="2">Issued to Employees
</FONT></I><FONT size="2">(&#147;APB&nbsp;25&#148;), using
intrinsic values with appropriate disclosures using the fair
value based method.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pro forma information regarding net loss is
required by SFAS&nbsp;123, as amended by SFAS&nbsp;No.&nbsp;148
<I>Accounting for Stock-Based Compensation, Transition and
Disclosure </I>(&#147;SFAS&nbsp;148&#148;), and has been
determined as if the Company had accounted for its employee
stock options under the fair value method. As allowed by
SFAS&nbsp;123 and SFAS&nbsp;148, the Company has elected to
continue to apply the intrinsic-value-based method of accounting
for employee stock options described above, and has adopted only
the disclosure requirements of SFAS&nbsp;123. The following
table illustrates the effect on earnings as if the Company
applied the fair value method of accounting for stock-based
employee compensation under SFAS&nbsp;123:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="29%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,903,296</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,651,162</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,015,252</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,667,522</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,767,211</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Add back: Total stock-based employee compensation
    expense under the APB&nbsp;25 intrinsic value method
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">590,318</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">858,908</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">763,686</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">305,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">462,068</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deduct: Total stock-based employee compensation
    expense determined under fair value based method
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(634,148</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(869,844</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(772,434</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(312,111</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(514,530</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss&nbsp;&#151; pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,947,126</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,662,098</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,024,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,674,383</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,819,673</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Warrant deemed dividend and redeemable
    convertible preferred stock dividends
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,254,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,288,328</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,254,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,090,855</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(940,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma loss attributable to common stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,201,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,950,426</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,278,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,765,238</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,760,443</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per common share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">As reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.69</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.66</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.26</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.86</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.17</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.70</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.66</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.26</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.86</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.18</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The pro forma net loss may not be representative
of pro forma net loss in future years because the pro forma
results include the impact of previous grants and related
vesting, while subsequent years will include additional grants
and vesting.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The fair value of each option grant is estimated
on the date of the grant using the Black-Scholes option-pricing
model. The following weighted average assumptions were used for
grants in 2003, 2002 and 2001: dividend yield of 0%, risk free
interest rate of 2.87%, 3.81%-4.65% and 3.97%-4.89%, volatility
of 0% and expected life of 4&nbsp;years. No options were granted
during the nine months ended September&nbsp;30, 2004. The
weighted-average fair value of options granted was $1.05, $1.17
and $1.25 for the years ended December&nbsp;31, 2003, 2002 and
2001, respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Options issued to non-employees are valued using
the fair value method (Black-Scholes option pricing model) under
SFAS&nbsp;123 and EITF Issue&nbsp;96-18, <I>Accounting for
Equity Investments that are Issued to Other than Employees for
Acquiring or in Conjunction with Selling Goods or Services
</I>(&#147;EITF&nbsp;96-18&#148;).
</FONT>

<P align="center"><FONT size="2">F-11
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">The value of such options is periodically
remeasured and income or expense is recognized during the
vesting terms.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Income Taxes</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company accounts for its income taxes under
the asset and liability method. Under the asset and liability
method, deferred tax assets and liabilities are recognized based
upon the differences arising from carrying amounts of the
Company&#146;s assets and liabilities for tax and financial
reporting purposes using enacted tax rates in effect for the
year in which the differences are expected to reverse. The
effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in the period when the change in tax
rates is enacted. A valuation allowance is established when it
is determined that it is more likely than not that some portion
or all of the deferred tax assets will not be realized. As of
September&nbsp;30, 2004, December&nbsp;31, 2003 and 2002, a full
valuation allowance has been applied against the Company&#146;s
deferred tax assets (See Note&nbsp;10).
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Loss Per Share</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Basic and diluted loss per share is computed by
dividing loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding
during the period. Diluted weighted average shares outstanding
excludes shares underlying the Series&nbsp;A convertible
preferred stock, the Series&nbsp;B redeemable convertible
preferred stock and the Series&nbsp;C redeemable convertible
preferred stock (collectively the &#147;Preferred Stock&#148;),
stock options and warrants, since the effects would be
anti-dilutive. Accordingly, basic and diluted loss per share is
the same. Such excluded shares are summarized as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="34%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">For the Nine Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">For the Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock options
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,061,626</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,574,641</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,318,391</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,866,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,061,626</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Warrants
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,601,284</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,601,284</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,199,886</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,499,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,601,284</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;A Convertible Preferred Stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,521,690</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,521,690</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,902,461</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,594,286</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,521,690</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Redeemable convertible preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;B
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,584,695</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,584,695</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,106,736</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,584,695</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,584,695</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;C
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,199,507</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,199,507</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,839,573</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,199,507</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,199,507</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total shares excluded from calculation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">45,968,802</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46,481,817</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,367,047</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">45,744,987</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">45,968,802</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Unaudited Pro Forma Loss Per
    Share</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Unaudited pro forma loss per share is computed
using the weighted average number of shares of common stock
outstanding, including the pro forma effects of the conversion
of the Company&#146;s Preferred Stock, conversion of the
Company&#146;s ten-year non-amortizing convertible loan and the
exercise of the bridge warrants (Note&nbsp;9) into shares of the
Company&#146;s common stock effective upon the assumed closing
of the Company&#146;s proposed initial public offering, as if
such conversion had occurred at January&nbsp;1, 2003.
</FONT>

<P align="center"><FONT size="2">F-12
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">The following table reconciles the loss
attributable to common stockholders used in the computation of
basic and diluted loss per share to the unaudited pro forma loss
attributable to common stockholders:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="57%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Year Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Nine Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31, 2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30, 2004</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss attributable to common stockholders, as
    reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,157,658</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,758,377</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reversal of preferred dividends
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,254,362</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">940,855</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Unaudited pro forma loss attributable to common
    stockholders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,903,296</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,817,522</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table reconciles the weighted
average number of common shares used in the computation of basic
and diluted weighted average common shares outstanding to the
unaudited pro forma basic and diluted weighted average number of
common shares outstanding:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="65%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Nine Months</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Year Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted weighted average number of
    common shares outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,602,871</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,710,741</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average number of common shares assuming
    the conversion of the Preferred Stock, conversion of the
    Company&#146;s ten-year non-amortizing convertible loan and
    exercise of bridge warrants at January&nbsp;1, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34,883,291</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34,955,887</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Unaudited pro forma basic and diluted weighted
    average common shares outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,486,162</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,666,628</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Pro Forma Liabilities and
    Stockholders&#146; Deficit</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The pro forma liabilities and stockholders&#146;
deficit as of September&nbsp;30, 2004 assumes the automatic
conversion of the Preferred Stock effective upon the assumed
close of the Company&#146;s proposed initial public offering of
common stock and the conversion of the Company&#146;s ten-year
non-amortizing convertible loan, as if such conversion had
occurred as of September&nbsp;30, 2004 and the reclassification
of the warrant value into additional paid-in capital. At the
time of the proposed initial public offering of common stock,
the warrants are only exercisable into common stock of the
Company (see Note&nbsp;9).
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Cash Equivalents</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Cash equivalents consist of money market mutual
funds, which invest in U.S.&nbsp;government securities and bank
deposits. The Company considers all highly liquid instruments
which have maturity of three months or less when acquired to be
cash equivalents.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Deferred Financing and Initial Public
    Offering Costs</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At December&nbsp;31, 2003 and 2002, deferred
financing costs represent legal and other costs and fees
incurred to negotiate and obtain financing. These costs are
capitalized and amortized on a straight-line basis (which
approximates the effective interest method) over the life of the
applicable financing (18&nbsp;months). As of September&nbsp;30,
2004, deferred financing and initial public offering costs
includes approximately $0.7&nbsp;million of costs incurred
relating to the Company&#146;s proposed initial public offering
of common stock. Such amount will be reclassified against the
proceeds received from the proposed initial public offering at
closing.
</FONT>

<P align="center"><FONT size="2">F-13
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Property and Equipment</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Property and equipment consists of office
furniture and equipment, laboratory equipment and leasehold
improvements stated at cost. Furniture and equipment are
depreciated on a straight-line basis over their estimated useful
lives ranging from five to seven&nbsp;years. Leasehold
improvements are amortized on a straight-line basis over the
shorter of the lease term or the estimated useful life of the
asset. Maintenance and repairs are charged to expense as
incurred.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Impairment of Long-Lived
    Assets</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Effective January&nbsp;1, 2002 the Company
adopted SFAS&nbsp;No.&nbsp;144, <I>Accounting for the Impairment
or Disposal of Long-Lived Assets.</I> In accordance with this
standard, the Company performs impairment tests on its
long-lived assets when circumstances indicate that their
carrying amounts may not be recoverable. If required,
recoverability is tested by comparing the estimated future
undiscounted cash flows of the asset or asset group to its
carrying value. If the carrying value is not recoverable, the
asset or asset group is written down to fair value. No such
impairments have been identified with respect to the
Company&#146;s long-lived assets, which consist primarily of
property and equipment.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Derivatives</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company accounts for its derivative
instruments in accordance with SFAS&nbsp;No.&nbsp;133
<I>&#147;Accounting for Derivative Instruments and Hedging
Activities,&#148; </I>as amended (&#147;SFAS&nbsp;133&#148;).
SFAS&nbsp;133 establishes accounting and reporting standards
requiring that derivative instruments, including derivative
instruments embedded in other contracts, be recorded on the
balance sheet as either an asset or liability measured at its
fair value. SFAS&nbsp;133 also requires that changes in the fair
value of derivative instruments be recognized currently in
results of operations unless specific hedge accounting criteria
are met. The Company does not enter into hedging activities. As
a result of certain financings (see Note&nbsp;6), derivative
instruments were created that are measured at fair value and
marked to market at each reporting period. Changes in the
derivative value are recorded as interest expense.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Comprehensive Loss</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s only element of comprehensive
loss other than net loss is foreign currency translation
adjustments.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Fair Value of Financial
    Instruments</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following methods and assumptions were used
to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Cash and Cash
Equivalents.</FONT></I></B><FONT size="2"> The estimated fair
value of cash and cash equivalents approximates its carrying
value due to the short-term nature of these instruments.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Non-Convertible
Loans.</FONT></I></B><FONT size="2"> The estimated fair value of
non-convertible loans is based on the present value of their
cash flows discounted at a rate that approximates current market
returns for issues of similar risk.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><I><FONT size="2">Convertible Loans and Redeemable
Convertible Preferred Stock.</FONT></I></B><FONT size="2"> The
fair value of the convertible loan, the convertible bridge
loans, and the two series of redeemable convertible preferred
stock is estimated based on the Company&#146;s estimated fair
value of its common stock that such instruments are convertible
into.
</FONT>

<P align="center"><FONT size="2">F-14
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The estimated fair values of the Company&#146;s
financial instruments are as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="52%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">At December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fair Value</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fair Value</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">(In millions)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Non-convertible loans
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Convertible bridge loans
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Redeemable Convertible Preferred Stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">55.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="71%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">At September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fair Value</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(In millions)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Non-convertible loans
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Convertible bridge loans
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Redeemable Convertible Preferred Stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">55.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Recent Accounting
    Pronouncements</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2004, the Financial Accounting
Standards Board (&#147;FASB&#148;) issued SFAS No.&nbsp;153,
<I>Exchanges of Nonmonetary Assets </I>(&#147;SFAS 153&#148;).
SFAS&nbsp;153 amends Accounting Policy Board (&#147;APB&#148;)
Opinion No.&nbsp;29 (&#147;APB&nbsp;29&#148;), <I>Accounting for
Nonmonetary Transactions,</I> which requires that exchanges of
nonmonetary assets be measured based on the fair value of the
assets exchanged, but which includes certain exceptions to that
principle. SFAS&nbsp;153 eliminates the exception from
APB&nbsp;29 for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have a commercial substance.
SFAS&nbsp;153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June&nbsp;15, 2005.
The adoption of SFAS&nbsp;153 is not expected to have a material
impact on the Company&#146;s consolidated financial position or
results of operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2004, the FASB issued a revision to
SFAS&nbsp;No.&nbsp;123, <I>Accounting for Stock-Based
Compensation </I>(&#147;SFAS&nbsp;123R&#148;). SFAS&nbsp;123R
replaces SFAS&nbsp;123 and supersedes APB Opinion No.&nbsp;25,
<I>Accounting for Stock Issued to Employees,</I> and establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services.
SFAS&nbsp;123R focuses primarily on accounting for transactions
in which an entity obtains employee services in share-based
payment transactions and is effective as of the beginning of the
first reporting period that begins after June&nbsp;15, 2005 for
public entities that do not file as small business issuers. The
Company has illustrated the impact on its earnings as if it had
adopted the fair value method of accounting for stock-based
compensation under SFAS&nbsp;123 in Note&nbsp;2 to the
Consolidated Financial Statements for the years ended
December&nbsp;31, 2001, 2002, and 2003 and for the nine months
ended September&nbsp;30, 2004. The fair value-based method of
SFAS&nbsp;123 is similar in most respects to the fair
value-based method under SFAS&nbsp;123R, although the election
of certain methods within the applicable transition rules of
SFAS&nbsp;123R may affect the impact on the Company&#146;s
consolidated financial position or results of operations. Such
impact, if any, on the Company&#146;s consolidated financial
position or results of operations has not been determined.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2003, the FASB issued Interpretation
No.&nbsp;46R, <I>Consolidation of Variable Interest Entities
</I>(&#147;FIN&nbsp;46R&#148;), which is an interpretation of
Accounting Research Bulletin&nbsp;No.&nbsp;51,
<I>Consolidated</I>
</FONT>

<P align="center"><FONT size="2">F-15
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<I><FONT size="2">Financial
Statements.</FONT></I><FONT size="2"> FIN&nbsp;46R requires that
if an entity has a controlling interest in a variable interest
entity, the assets, liabilities and results of activities of the
variable interest entity should be included in the consolidated
financial statements of the entity. FIN&nbsp;46R is effective
for all new variable interest entities created or acquired after
December&nbsp;31, 2003. The adoption of FIN&nbsp;46R did not
have a significant impact on the Company&#146;s consolidated
financial position or results of operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In May 2003, SFAS&nbsp;No.&nbsp;150,
<I>Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
</I>(&#147;SFAS&nbsp;150&#148;) was issued. This statement
establishes how a company classifies and measures certain
financial instruments with characteristics of both liabilities
and equity, including redeemable convertible preferred stock.
This statement is effective for financial instruments entered
into or modified after May&nbsp;31, 2003, and otherwise
effective at the beginning of the interim period commencing
July&nbsp;1, 2003, except for mandatorily redeemable financial
instruments of nonpublic companies. The Financial Accounting
Standards Board (&#147;FASB&#148;) has indefinitely deferred
implementation of certain provisions of SFAS&nbsp;150. The
adoption of SFAS&nbsp;150 did not have a significant impact on
the Company&#146;s consolidated financial position or results of
operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In April 2003, the FASB issued
SFAS&nbsp;No.&nbsp;149, <I>Amendment of Statement&nbsp;133 on
Derivative Instruments and Hedging Activities
</I>(&#147;SFAS&nbsp;149&#148;). SFAS&nbsp;149 clarifies under
what circumstances a contract with an initial net investment
meets the characteristics of a derivative as discussed in
Statement No.&nbsp;133. It also specifies when a derivative
contains a financing component that warrants special reporting
in the statement of cash flows. SFAS&nbsp;149 amends certain
other existing pronouncements in order to improve consistency in
reporting these types of transactions. The new guidance is
effective for contracts entered into or modified after
June&nbsp;30, 2003, and for hedging relationships designated
after June&nbsp;30, 2003. The adoption of this standard did not
have a significant impact on the Company&#146;s consolidated
financial position or results of operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In November 2002, the FASB issued Interpretation
No.&nbsp;45, <I>Guarantor&#146;s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others </I>(&#147;FIN&nbsp;45&#148;).
FIN&nbsp;45 requires a guarantor to recognize, at the inception
of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The accounting
provisions and new disclosure requirements of FIN&nbsp;45 are
required to be adopted for all guarantees issued or modified on
or after January&nbsp;1, 2003. The adoption of FIN&nbsp;45 had
no impact on the Company&#146;s consolidated financial position
or results of operations, as it does not enter into guarantees
with third parties.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2002, the FASB issued
SFAS&nbsp;No.&nbsp;146, <I>Accounting for Costs Associated with
Exit or Disposal Activities </I>(&#147;SFAS&nbsp;146&#148;).
SFAS&nbsp;146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability
is incurred, as opposed to when the entity commits to an exit
plan under previous guidance. This statement is effective for
exit or disposal activities initiated after December&nbsp;31,
2002. The adoption of SFAS&nbsp;146 did not have a significant
impact on the Company&#146;s consolidated financial position or
results of operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2001, the FASB issued
SFAS&nbsp;No.&nbsp;143, <I>Accounting for Asset Retirement
Obligations </I>(&#147;SFAS&nbsp;143&#148;). SFAS&nbsp;143
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement requires
that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. It applies
to legal obligations associated with the retirement of
long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees.
This statement is effective for financial statements issued for
fiscal years beginning after June&nbsp;15, 2002. The adoption of
SFAS&nbsp;143 did not have a significant impact on the
Company&#146;s consolidated financial position or results of
operations.
</FONT>

<P align="center"><FONT size="2">F-16
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Reclassifications</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Certain reclassifications have been made to
amounts reported in 2001 to conform to the current year&#146;s
presentation.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">3.</FONT></B></TD>
    <TD>
    <B><FONT size="2">License Agreements</FONT></B></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Adolor Corporation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2003, the Company entered into a license
agreement with Adolor under which it granted Adolor the
exclusive right to commercialize a sterile topical patch
containing an analgesic alone or, in combination, including
without limitation, LidoPAIN SP throughout North America. Upon
the execution of the Adolor agreement, the Company received a
non-refundable payment of $2.5&nbsp;million, which has been
deferred and is being recognized as revenue ratably over the
estimated product development period of three years. Under the
Adolor agreement, Adolor is obligated to pay the Company
additional non-refundable amounts of up to $15.0&nbsp;million
upon the achievement of various milestones relating to product
development and regulatory approval, and is also obligated to
pay royalties to the Company based on the net sales of licensed
products in North America on a country-by-country basis until
the last patent covering the licensed product expires or the
tenth anniversary of the first commercial sale of licensed
product, whichever is later. Adolor is also obligated to pay the
Company a one-time bonus payment of up to $5.0&nbsp;million upon
the achievement of specified net sales milestones of licensed
product. The total amount of upfront and milestone payments the
Company is eligible to receive from Adolor is $22.5&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the terms of the agreement, Adolor is
responsible for conducting further clinical trials and
completing the approval process in North America. At
Adolor&#146;s option, the Company may be required to supply or
to obtain supply of the clinical products necessary to complete
clinical trials. Alternatively, Adolor may choose to subcontract
these responsibilities to a third party. In North America,
Adolor is responsible for the supply and manufacture of LidoPAIN
SP for commercial use or, at its option, may subcontract these
responsibilities to third parties.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has the option to negotiate a
co-promotion arrangement with Adolor for LidoPAIN SP or similar
product in any country in which a New Drug Application
(&#147;NDA&#148;) (or foreign equivalent) filing has been made
within thirty days of such filing. However, neither EpiCept nor
Adolor is under any obligation to enter into any such agreement.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Endo Pharmaceuticals Inc.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2003, the Company entered into a
license agreement with Endo under which it granted Endo (and its
affiliates) the exclusive (including as to the Company and its
affiliates) worldwide right to commercialize LidoPAIN BP. The
Company also granted Endo worldwide rights to use certain of its
patents for the development of certain other non-sterile,
topical lidocaine containing patches, including Lidoderm,
Endo&#146;s topical lidocaine-containing patch for the treatment
of chronic lower back pain. Upon the execution of the Endo
agreement, the Company received a non-refundable payment of
$7.5&nbsp;million, which has been deferred and is being
recognized as revenue ratably over the estimated product
development period of 54&nbsp;months, and the Company may
receive payments of up to $52.5&nbsp;million upon the
achievement of various milestones relating to product
development, regulatory approval and commercial success for both
the Company&#146;s LidoPAIN BP product and licensed Endo
products, including Lidoderm, Endo&#146;s own back pain product
candidate, so long as, in the case of Endo&#146;s product
candidate, the Company&#146;s patents provide protection
thereof. The Company will also receive royalties from Endo based
on the net sales of LidoPAIN BP. These royalties are payable
until generic equivalents to the LidoPAIN BP product are
available or until expiration of the patents covering LidoPAIN
BP, whichever
</FONT>

<P align="center"><FONT size="2">F-17
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">is sooner. The Company is also eligible to
receive milestone payments from Endo of up to approximately
$30.0&nbsp;million upon the achievement of specified regulatory
and net sales milestones for licensed Endo products, including
Lidoderm, Endo&#146;s chronic lower back pain product candidate,
so long as our patents provide protection thereof. The total
amount of upfront and milestone payments the Company is eligible
to receive under the Endo agreement is $90.0&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is responsible for continuing and
completing the development of LidoPAIN BP, including the conduct
of all clinical trials and the supply of the clinical products
necessary for those trials and the preparation and submission of
the NDA in order to obtain regulatory approval for LidoPAIN BP.
It may subcontract with third parties for the manufacture and
supply of LidoPAIN BP. Endo remains responsible for continuing
and completing the development of Lidoderm for the treatment of
chronic lower back pain, including the conduct of all clinical
trials and the supply of the clinical products necessary for
those trials.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has the option to negotiate a
co-promotion arrangement with Endo for LidoPAIN BP or similar
product in any country in which an NDA (or foreign equivalent)
filing has been made within thirty days of such filing. The
Company also has the right to terminate its license to Endo with
respect to any territory in which Endo has failed to
commercialize LidoPAIN BP within three years of the receipt of
regulatory approval permitting such commercialization.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">4.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Property and Equipment</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Property and equipment consist of the following:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="58%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Furniture, office and laboratory equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,125</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">469,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">477,132</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Leasehold improvements
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125,834</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125,280</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">122,676</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">625,959</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">594,742</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">599,808</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less accumulated depreciation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(515,824</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(425,352</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(501,992</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">110,135</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">169,390</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">97,816</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Depreciation expense was approximately $78,000,
$97,000, $91,000, $41,000 and $60,000 for the years ended
December&nbsp;31, 2003, 2002 and 2001, and the nine months ended
September&nbsp;30, 2004 and 2003, respectively.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">5.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Other Accrued Liabilities</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Other accrued liabilities consist of the
following:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued professional fees
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">242,865</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">322,748</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">193,165</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">145,417</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">121,743</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">90,208</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">97,148</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125,549</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">478,490</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">419,896</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">440,457</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-18
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<B><FONT size="2">6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notes, Loans
and Financings</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is a party to several loan
agreements, the amounts, terms and descriptions of which are as
follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="52%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ten-year, non-amortizing loan due
    December&nbsp;31, 2007(A)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,937,285</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,597,532</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,892,343</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ten-year, non-amortizing convertible loan due
    December&nbsp;31, 2007(B)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,583,047</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,130,042</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,523,123</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Term loan due December&nbsp;31, 2006(C)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,228,808</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,662,553</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,413,664</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Convertible bridge loans due October&nbsp;30,
    2005(D)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,850,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,195,454</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,850,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total notes and loans payable, before debt
    discount
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,599,140</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,585,581</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,679,130</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less: debt discount(D)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,316,563</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,500,323</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total notes and loans payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,282,577</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,085,258</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,679,130</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less: Notes and loans payable, current portion
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,010,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">986,960</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Notes and loans payable, long-term
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,272,177</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,085,258</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,692,170</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

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

<TR>
    <TD valign="top">
    <FONT size="2">(A)
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">In August 1997, EpiCept GmbH entered into a
    ten-year non-amortizing loan in the amount of
    <FONT face="times new roman,times">&#128;</FONT>&nbsp;1.5&nbsp;million
    with Technologie-Beteiligungs Gesellschaft mbH der Deutschen
    Ausgleichsbank (&#147;tbg&#148;). Proceeds must be directed
    toward research, development, production and distribution of
    pharmaceutical products. The loan bears interest at 6%&nbsp;per
    annum. The lender also receives additional compensation equal to
    9% of the annual surplus (income before taxes, as defined in the
    agreement) of EpiCept GmbH, reduced by any other compensation
    received from EpiCept GmbH by virtue of other loans to or
    investments in EpiCept GmbH provided that tbg is an equity
    investor in EpiCept GmbH during that time period. To date,
    EpiCept GmbH has had no annual surplus. The Company considers
    the additional compensation element based on the surplus of
    EpiCept GmbH to be a derivative. The Company has assigned no
    value to the derivative at each reporting period as no surplus
    of EpiCept GmbH is anticipated over the term of the agreement.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">At the demand of tbg, additional amounts may be
    due at the end of the loan term up to 30% of the loan amount,
    plus 6% of the principal balance of the note for each year after
    the expiration of the fifth complete year of the loan period,
    such payments to be offset by the cumulative amount of all
    payments made to the lender from the annual surplus of EpiCept
    GmbH. The Company is accruing these additional amounts as
    additional interest up to the maximum amount due over the term
    of the loan. Accrued interest attributable to these additional
    amounts totaled $0.3, $0.3 and $0.4&nbsp;million at
    December&nbsp;31, 2003 and 2002 and September&nbsp;30, 2004,
    respectively. The effective rate of interest of this loan is
    9.7%.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">(B)
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">In February 1998, EpiCept GmbH entered into a
    ten-year non-amortizing convertible term loan in the amount of
    <FONT face="times new roman,times">&#128;</FONT>&nbsp;2.0&nbsp;million
    with tbg. The loan is non-interest bearing; however, the loan
    agreement provides for potential future annual payments from
    surplus of EpiCept GmbH up to 6% of the outstanding loan
    principal balance, not to exceed 9% of all payments made from
    surplus of EpiCept GmbH and limited to 7% of the total financing
    from tbg. To date, EpiCept GmbH has had no annual surplus. The
    Company considers the additional compensation element based on
    the surplus of EpiCept GmbH to be a derivative. The Company has
    assigned no value to the derivative at each reporting period as
    no surplus of EpiCept GmbH is anticipated over the term of the
    agreement.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">F-19
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

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

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">The loan is convertible into shares of the
    Company&#146;s common stock at any time by the holder at a
    conversion price of $7.07&nbsp;per share. The Company can
    require conversion upon a defined triggering event (such as a
    sale of substantially all assets of the Company, a public
    offering of the Company&#146;s securities, a sale of more than
    50% in voting power of outstanding equity securities of the
    Company, a merger, etc.) at a calculated conversion price
    ranging between $2.02 and $7.07 determined based on the
    applicable triggering event&#146;s proceeds.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">(C)
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">In March 1998, EpiCept GmbH entered into a term
    loan in the amount of
    <FONT face="times new roman,times">&#128;</FONT>&nbsp;2.6&nbsp;million
    with IKB Private Equity GmbH (&#147;IKB&#148;), guaranteed by
    the Company. The interest rate on the loan varies and was
    10.5%&nbsp;per annum from August&nbsp;1, 2000 through
    March&nbsp;31, 2001, 15%&nbsp;per annum through June&nbsp;30,
    2003 and 20%&nbsp;per annum thereafter. The loan was amended in
    November 2002 by extending the maturity to December&nbsp;31,
    2006 and incorporating a principal repayment schedule, which
    commenced April&nbsp;30, 2004. The first 11 quarterly principal
    payments are
    <FONT face="times new roman,times">&#128;</FONT>&nbsp;0.2&nbsp;million
    (approximately $0.2&nbsp;million as of September&nbsp;30, 2004)
    and the final quarterly principal payment will be approximately
    <FONT face="times new roman,times">&#128;</FONT>&nbsp;0.4&nbsp;million
    (approximately $0.4&nbsp;million as of September&nbsp;30, 2004).
    The loan agreement provides for contingent interest of
    4%&nbsp;per annum of the principal balance, becoming due only
    upon the Company&#146;s realization of a profit, as defined in
    the agreement. The Company has not realized a profit through
    September&nbsp;30, 2004. The Company values the contingent
    interest as a derivative using the fair value method in
    accordance with SFAS&nbsp;133. Changes in the fair value of the
    contingent interest are recorded as an adjustment to interest
    expense. The fair value of the contingent interest was
    approximately $0.5, $0.3 and $0.6&nbsp;million as of
    December&nbsp;31, 2003 and 2002 and September&nbsp;30, 2004,
    respectively.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">(D)
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">In November 2002, the Company entered into
    convertible bridge loans with several of its stockholders, in an
    aggregate amount of up to $5.0&nbsp;million. At
    December&nbsp;31, 2003 and 2002, the Company had borrowings
    outstanding of $4.8 and $2.2&nbsp;million, respectively. The
    convertible bridge loans bear interest at 8%&nbsp;per annum. The
    convertible bridge loans are convertible into the next round of
    preferred stock financing, and also have provisions for optional
    conversion into preferred stock or common stock. The conversion
    rate is equal to the lowest price per share paid by any
    purchaser in a financing of the next round of preferred stock,
    or at anti- dilutive conversion rates for optional conversion
    into preferred stock or common stock based upon the achievement
    of certain milestones. In addition, warrants to purchase
    preferred stock were issued to the lenders in connection with
    the convertible bridge loans (see Note&nbsp;9). Such warrants
    were valued utilizing the Black-Scholes options pricing model
    and resulted in recording warrants at $3.6&nbsp;million and a
    discount of $3.6&nbsp;million to the convertible bridge loans.
    The discount is being accreted over the term of the loan. During
    the years ended December&nbsp;31, 2003 and 2002 and the nine
    months ended September&nbsp;30, 2004 and 2003, the Company
    recognized approximately $2.5, $0.2, $0.9 and $1.9&nbsp;million,
    respectively, of non-cash interest expense related to the
    accretion of the debt discount. The term of the convertible
    bridge loans have been extended from April&nbsp;30, 2004 until
    October&nbsp;30, 2005.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">Emerging Issues Task Force Issue
    No.&nbsp;98-5<I>, Accounting for Convertible Securities with
    Beneficial Conversion Features or Contingently Adjustable
    Conversion Ratios,</I> as supplemented by EITF&nbsp;00-27,
    <I>Application of Issue No.&nbsp;98-5 to Certain Convertible
    Instruments, </I>requires the Company to compute the beneficial
    conversion feature (&#147;BCF&#148;). The Company computed the
    BCF of the convertible bridge loan as of the commitment date and
    accounted for it when certain clinical trial results became
    available in 2003 that determined the appropriate conversion
    rate. The BCF is being amortized as additional interest expense
    through the debt&#146;s redemption date. For these convertible
    bridge loans, the BCF was recorded in April 2003 at
    approximately $1.2&nbsp;million. For the year ended
    December&nbsp;31, 2003 and the nine months ended
    September&nbsp;30, 2004 and 2003, approximately $0.8, $0.4 and
    $0.5&nbsp;million of the BCF was amortized and included as
    interest expense, respectively.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">F-20
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Investors in the Company&#146;s common stock and
Preferred Stock hold all of the Company&#146;s notes, loans and
financings. For the years ended December&nbsp;31, 2003, 2002 and
2001 and the nine months ended September&nbsp;30, 2004 and 2003,
the interest expense related to these notes, loans and
financings was $1.2, $0.6, $0.5, $1.0 and $0.8&nbsp;million,
respectively. The above loans are unsecured. Accretion of the
discount of the loans approximated $3.4, $0.2, $0.0, $1.3 and
$2.4&nbsp;million for the years ended December&nbsp;31, 2003,
2002 and 2001 and the nine months ended September&nbsp;30, 2004
and 2003, respectively. Such amounts are included in interest
expense in the accompanying consolidated statements of
operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At December&nbsp;31, 2003 and September&nbsp;30,
2004, principal payments due on long-term debt are as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="64%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">As of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">As of</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Year Ending</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,010,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,740</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,860,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,836,960</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,208,008</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,179,964</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,520,332</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,415,466</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,599,140</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,679,130</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">7.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Commitments</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company leases facilities and certain
equipment under agreements through 2007 accounted for as
operating leases. The leases generally contain renewal options
and require the Company to pay all executory costs such as
maintenance and insurance. Rent expense was $0.3&nbsp;million
for each of the years ended December&nbsp;31, 2003, 2002 and
2001, and $0.2 and $0.2&nbsp;million for the nine months ended
September&nbsp;30, 2004 and 2003, respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Future minimum rental payments under
non-cancelable operating leases as of December&nbsp;31, 2003 and
September&nbsp;30, 2004 are as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="64%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">As of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">As of</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Year Ending</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">267,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">68,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">222,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">222,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">68,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">69,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">597,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">400,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company maintains a 401(k) plan covering
substantially all employees. The Company is not obligated to
make matching contributions to the plan. In 2003, the Company
made a contribution of approximately $35,000 to employees
participating in the 401(k) plan for plan year 2002 in order to
comply with the top-heavy provisions of Section&nbsp;416 of the
Internal Revenue Code.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is a party to a number of research,
consulting, and license agreements, which require the Company to
make payments to the other party to the agreement upon the other
party attaining certain milestones as defined in the agreements.
The Company paid approximately $1.5&nbsp;million in 2003, the
majority of which was in connection with milestones relating to
preclinical and clinical trials and manufacturing. As of
December&nbsp;31, 2003 the Company may be required to make
future milestone payments, totaling approximately
$4.1&nbsp;million, under these agreements, of which
approximately $0.5&nbsp;million is payable during 2004 and
approximately $0.4, $0.5, $1.2, and $0.5&nbsp;million from 2005
through
</FONT>

<P align="center"><FONT size="2">F-21
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">2008, and $1.0&nbsp;million thereafter. In 2004,
the Company entered into an additional clinical research
agreement totaling approximately $1.2&nbsp;million payable from
2004 to 2006. The Company is also obligated to make future
royalty payments to two of its collaborators under existing
license agreements, one based on net sales of EpiCept NP-1 and
the other based on net sales of LidoPAIN SP, to the extent
revenues on such products are realized. Under its agreement with
Epitome Pharmaceuticals, the Company is obligated to pay a
maintenance fee annually that is equal to twice the fee paid in
the previous year so long as no commercial product sales have
occurred and the Company desires to maintain its rights under
the license agreement. A maintenance fee payment of $100,000 was
paid in October 2004.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">8.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Preferred Stock and Stockholders&#146;
    Deficit</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is currently authorized to issue two
classes of stock: common stock and preferred stock. Pursuant to
the Company&#146;s Amended Restated Certificate of Incorporation
(the &#147;Certificate&#148;), preferred stockholders and common
stockholders vote together as a class on all matters presented
to the stockholders. Preferred stockholders have the right to
the number of votes equal to the number of shares of common
stock into which each such share of preferred stock held by such
holder could be converted on the date for determination of
stockholders entitled to vote. Pursuant to the terms of a voting
agreement, the preferred stockholders also have the right,
separately from the common stockholders, to elect three
directors to the Company&#146;s Board of Directors. The voting
agreement also fixes the number of directors to be at least
seven but no more than eight directors.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Preferred Stock</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has issued Preferred Stock, as of
December&nbsp;31, 2003, as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="43%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Common</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Liquidation</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares as if</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Preferred Stock Series</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Authorized</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Preference</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Converted</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">A
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,422,620</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,315,160</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,696,623</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,521,690</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">B
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,440,069</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,106,736</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,320,208</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,584,695</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">C
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,769,573</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,839,573</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26,518,719</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,199,507</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,632,262</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,261,469</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42,535,550</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,305,892</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of September 30, 2004, the number of Series A
Preferred Shares Outstanding increased by 53,225 (as a result of
a warrant exercise in April 2004&nbsp;&#151; Note&nbsp;9) to
3,368,385, the Liquidation Preference increased to $6,804,138
and the Common Shares as if Converted increased to 4,594,286.
There were no changes in the Preferred Stock Series B or C since
December&nbsp;31, 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A summary of the rights, preferences, and
privileges of the Preferred Stock is as follows:
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Liquidation Preference</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In the event of any liquidation, dissolution or
winding up of the affairs of the Company, whether voluntary or
involuntary, the holders of Series&nbsp;C redeemable convertible
preferred stock (&#147;Series&nbsp;C Preferred&#148;) are
entitled to be ratably paid first out of the assets of the
Company available for distribution an amount equal to
$3.00&nbsp;per share, plus all dividends accrued or declared
thereon but unpaid. The holders of Series&nbsp;B redeemable
convertible preferred stock (&#147;Series&nbsp;B
Preferred&#148;) are entitled to be ratably paid next in an
amount equal to $3.00&nbsp;per share, plus all dividends accrued
or declared thereon but unpaid. The holders of Series&nbsp;A
convertible preferred stock (&#147;Series&nbsp;A
Preferred&#148;) are entitled then to be ratably paid in an
amount equal to $2.02&nbsp;per share, plus all dividends accrued
or declared thereon but unpaid. No payment shall be made with
respect to any series of preferred stock unless and until full
payment has been made to the holders of the series of
convertible preferred stock with preferential rights of the
amounts that they are entitled to receive. After the payment in
full of the Series&nbsp;A Preferred, the
</FONT>

<P align="center"><FONT size="2">F-22
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">remaining assets and funds of the Company legally
available for distribution, if any, are distributable ratably
among the holders of common stock and the Preferred Stock in
proportion to the number of shares of common stock then held by
them or issuable to them upon conversion of the Preferred Stock
then held by them.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Conversion Rights</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each share of Preferred Stock is convertible,
without the payment of any additional consideration by the
holder thereof, at the option of the holder, subject to future
adjustments for stock splits, stock dividends, recapitalizations
or other similar events, as well as future dilutive issuances of
common stock. Future dilutive issuances of common stock or
Preferred Stock may result in additional beneficial conversion
features.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each share of Preferred Stock will automatically
be converted into shares of common stock upon the closing of a
firm commitment for an underwritten public offering pursuant to
an effective registration statement covering the offer and the
sale of the common stock at an offering price per share of not
less than $1.00 and with gross proceeds to the Company of not
less than $15&nbsp;million. The holders of Preferred Stock have
registration rights, under an amended and restated registration
rights agreement, which requires the Company, upon request, to
register 25% of the &#147;Registrable Securities&#148; as
defined in the registration rights agreement at any time after
the earlier of April&nbsp;28, 2002 or the date that is six
months after the closing of the Company&#146;s first public
offering of securities. In addition, the holders of the
Preferred Stock are entitled to &#147;piggy back&#148;
registration rights in conjunction with a public offering of the
Company&#146;s common stock.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Dividends</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The holders of Series&nbsp;B Preferred and
Series&nbsp;C Preferred are entitled to receive, when and as
declared by the Board of Directors, preferential cumulative
dividends in cash at the rate of 7%&nbsp;per annum of the
preferred stock&#146;s stated value of $1.50&nbsp;per share,
subject to adjustment as defined in the Certificate. Such
dividends accrue from the original issue date, as defined, of
each of the Series&nbsp;B Preferred and Series&nbsp;C Preferred.
Dividends are payable to the holders of Series&nbsp;B Preferred
only to the extent that holders of Series&nbsp;C Preferred first
receive the dividend payment to which they are entitled. The
Company&#146;s Board of Directors has not declared any dividend
payment on any class of preferred stock or common stock.
Dividends are being recorded as an addition to the preferred
stock carrying value through the earliest redemption date (see
&#147;Redemption&#148; below). The total amount of accreted
dividends was approximately $4.1, $2.8 and $5.0&nbsp;million as
of December&nbsp;31, 2003 and 2002 and September&nbsp;30, 2004,
respectively.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Redemption</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each holder of Series&nbsp;B Preferred and
Series&nbsp;C Preferred may request the Company to redeem for
cash such holder&#146;s preferred stock, ratably on each of
December&nbsp;31, 2005 and 2006, or in any amount thereafter at
$1.50&nbsp;per share plus all dividends accrued but unpaid, and
any and all other amounts owing with respect to the
holder&#146;s shares of such preferred stock. The redemption
price for each share of Series&nbsp;B Preferred or Series&nbsp;C
Preferred is subject to adjustment to take account of any stock
splits, stock dividend, combination of shares, or other similar
event.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Other</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In 1997, the Company sold 2,330,218 and 163,489
Series&nbsp;A Preferred at $2.02&nbsp;per share, respectively.
In April 2001, 8,448 of the Series&nbsp;A Preferred were
converted into 9,945&nbsp;shares of common stock.
</FONT>

<P align="center"><FONT size="2">F-23
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2000, the Company received net
proceeds of approximately $12.3&nbsp;million from a private
placement of 8,306,239&nbsp;shares of Series&nbsp;C Preferred at
a price of $1.50&nbsp;per share. Additionally, in January 2001,
the Company received additional proceeds of approximately
$1.0&nbsp;million from a private placement of
633,334&nbsp;shares of Series&nbsp;C Preferred at a price of
$1.50&nbsp;per share. In August 2001, the Company purchased
100,000&nbsp;shares of Series&nbsp;C Preferred at its cost of
approximately $0.2&nbsp;million, which has been recorded as a
reduction in the carrying value of the Series&nbsp;C Preferred
for accounting purposes.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the convertible bridge loans
(see Note&nbsp;6), the Company recorded BCF&#146;s related to
adjustments made to the conversion ratios of the Preferred
Stock. The adjustments to the conversion ratios entitled the
Preferred Stockholders to additional shares of common stock upon
conversion. The BCF approximated $3.3&nbsp;million, increasing
the carrying value of the Preferred Stock with a related charge
to additional paid-in capital, to the extent available, and to
accumulated deficit in 2003.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Common Stock</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In 1999, the Company repurchased
50,000&nbsp;shares of its common stock at a cost of $75,000,
which has been recorded as treasury stock for accounting
purposes.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">9.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Stock Options and Warrants</FONT></B></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Stock Options</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The EpiCept Corporation 1995 Stock Option Plan as
amended in 1997 and 1999 (the &#147;Plan&#148;) provides for the
granting of incentive stock options and non-qualified stock
options to purchase the Company&#146;s stock through the year
2005. A total of 3.2&nbsp;million shares of the Company&#146;s
common stock are authorized under the Plan. As of
December&nbsp;31, 2003 and September&nbsp;30, 2004, the number
of shares of common stock available for grant under the Plan is
947,770&nbsp;shares. Options are to be granted and vest as
determined by the Board of Directors, generally over a 3-year
period.
</FONT>

<P align="center"><FONT size="2">F-24
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Stock option activity under the Plan is as
follows:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="66%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Under</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Option</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise Price</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options outstanding at December&nbsp;31, 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,062,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.41</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options granted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">883,333</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options canceled/expired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(572,442</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.34</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(55,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options outstanding at December&nbsp;31, 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,318,391</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.39</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options granted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">646,667</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.39</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options canceled/expired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(361,826</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(28,591</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options outstanding at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,574,641</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.38</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options granted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">45,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options canceled/expired
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(556,015</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.46</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options outstanding at December&nbsp;31, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,061,626</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(195,126</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.35</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options outstanding at September&nbsp;30, 2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,866,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.37</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercisable at December&nbsp;31, 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,178,633</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.47</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercisable at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,550,805</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.41</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercisable at December&nbsp;31, 2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,665,851</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Options exercisable at September&nbsp;30, 2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,775,287</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes information about
stock options outstanding at December&nbsp;31, 2003:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Options Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Options Exercisable</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted-</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted-</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted-</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding at</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercisable at</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Range of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Remaining</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Contractual Life</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="right" valign="top"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,576,626</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">7.2&nbsp;years</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,317,430</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">0.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">340,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">8.5&nbsp;years</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">203,421</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">0.75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">145,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">5.5&nbsp;years</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">145,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,061,626</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,665,851</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-25
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes information about
stock options outstanding at September&nbsp;30, 2004:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Options Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Options Exercisable</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted-</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted-</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted-</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding at</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercisable at</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Range of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Remaining</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Contractual Life</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="right" valign="top"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,434,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">6.5&nbsp;years</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,390,638</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">0.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">287,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">7.7&nbsp;years</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">239,649</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">0.75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">145,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">4.8&nbsp;years</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">145,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.75</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,866,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.37</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,775,287</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2003, the Company granted options to
employees to purchase an aggregate of 45,000&nbsp;shares of
common stock at exercise prices that were considered to be below
the deemed fair value at the date of grant for financial
reporting purposes resulting in deferred stock compensation of
$45,000. Such amount is being amortized over the option vesting
period. The Company adjusted the deferred stock compensation by
$0.1&nbsp;million for stock option forfeitures during the year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2002, the Company granted options to
employees to purchase an aggregate of 646,667&nbsp;shares of
common stock at exercise prices, which were considered to be
below the deemed fair value at the date of grant for financial
reporting purposes resulting in deferred stock compensation of
approximately $0.7&nbsp;million. Such amount is being amortized
over the option vesting period. The Company adjusted the
deferred stock compensation by $0.1&nbsp;million for stock
option forfeitures during the year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2001, the Company granted options to
employees to purchase an aggregate of 883,333&nbsp;shares of
common stock at exercise prices that were considered to be below
the deemed fair value at the date of grant for financial
reporting purposes resulting in deferred stock compensation of
$0.9&nbsp;million. Such amount is being amortized to expense
over the option vesting periods. The Company adjusted the
deferred stock compensation by $0.5&nbsp;million for stock
option forfeitures during the year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Amortization of deferred stock compensation
approximated $0.6, $0.9, $0.8, $0.3 and $0.5&nbsp;million for
the years ended December&nbsp;31, 2003, 2002, and 2001 and for
the nine months ended September&nbsp;30, 2004 and 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The fair value of the Company&#146;s common stock
for options granted during 2003, 2002, and 2001 and for the
nine&nbsp;month period ended September&nbsp;30, 2004, was
determined contemporaneously at the time of the grant by the
board of directors, with input from management. Prior to the
completion of the Adolor license agreement in July 2003, the
Company utilized the value paid for each of its series of
preferred stock as an estimate of the fair value of its common
stock. During the period October&nbsp;1, 2003 through
September&nbsp;30, 2004, the Company granted no options to
employees.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Warrants</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the issuance of the
convertible bridge loans discussed in Note&nbsp;6, the Company
issued warrants in 2003 and 2002 entitling the lenders, subject
to adjustments as defined, to purchase a number of shares equal
to 50% of the greatest principal amount outstanding under the
loan divided by the applicable exercise price as described in
the warrant. The warrants are exercisable into preferred stock
or common stock, at any time through November 2012 and possess
certain anti-dilutive rights, as defined in the warrant. In the
event of an initial public offering of the Company&#146;s common
stock, the warrants are exercisable into 15,445,858&nbsp;shares
of common stock at an exercise price of $0.157&nbsp;per share,
however, such warrants will expire on the first business day
following the date of the consummation of an initial public
offering. The fair value ascribed to the warrants was
$1.9&nbsp;million in 2003 and $1.7&nbsp;million in 2002 and was
determined utilizing the Black-Scholes option pricing model. The
following assumptions were used:
</FONT>

<P align="center"><FONT size="2">F-26
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">dividend yield of zero (0%) percent; risk free
interest rate of 4.53%; volatility of 101%; and expected life of
4&nbsp;years.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The value of these warrants of $3.6&nbsp;million
has been recorded as temporary equity as the warrants are
potentially exercisable into redeemable preferred stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes shares issuable
upon exercise of warrants outstanding at December&nbsp;31, 2003:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="26%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="12%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="12%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Common</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Issuance Date</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Expiration Date</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares Issuable Upon Exercise</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares Issuable</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">April 1997
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">April 2004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap>&nbsp;&nbsp;&nbsp;<FONT size="2">&nbsp;74,259 Series&nbsp;A Preferred</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.48</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">101,285</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">August 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">August 2010</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap>&nbsp;&nbsp;<FONT size="2">&nbsp;333,333 Series&nbsp;B Preferred</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">384,615</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">November 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">November 2012</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap>&nbsp;&nbsp;<FONT size="2">&nbsp;750,000 Series&nbsp;C Preferred</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">865,384</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">November 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">November 2012</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom" nowrap>&nbsp;&nbsp;<FONT size="2">&nbsp;24,250,000 Common</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.10</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,250,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25,601,284</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of September&nbsp;30, 2004, there were no
Series&nbsp;A Preferred warrants outstanding, and the
Series&nbsp;B Preferred, Series&nbsp;C Preferred and Common
warrants remained the same.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The number of shares issuable upon the exercise
of the warrants is subject to adjustment to take account of any
stock splits, stock dividend, combination of shares, or other
similar event. In April 2002, warrants to
purchase&nbsp;24,753&nbsp;shares of Series&nbsp;A Preferred
expired unexercised. In April 2004, 74,259 warrants issued in
April 1997 were exercised via a net share issuance of
53,225&nbsp;shares of Series&nbsp;A Preferred. A BCF charge of
$0.2&nbsp;million was recorded to reflect a dividend deemed to
be paid at the exercise date.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Third Party Stock-Based
    Compensation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2002 and 2001, the Company granted options
to purchase the Company&#146;s common stock to third party
consultants in connection with service agreements. Compensation
expense relating to third party stock-based compensation was
approximately $0.2&nbsp;million, $47,000, $0.2&nbsp;million
$50,000 and $27,000 for the years ended December&nbsp;31, 2003,
2002 and 2001 and the nine months ended September&nbsp;30, 2004
and 2003, respectively. The Company values these options
utilizing the Black-Scholes option pricing model and remeasures
them during the vesting period.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">10.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Income Taxes</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has deferred tax assets of $16.9,
$13.6 and $18.5&nbsp;million as of December&nbsp;31, 2003 and
2002 and September&nbsp;30, 2004, respectively, for items
including: net operating losses, stock-based compensation,
deferred revenue, patent costs and accrued liabilities. As of
December&nbsp;31, 2003 and 2002, the Company has federal, state,
and foreign net operating loss carryforwards of approximately
$44.7 and $48.0&nbsp;million, respectively, available to reduce
future taxable income. The Company&#146;s federal and state net
operating losses expire in various intervals through 2023. In
the event of certain ownership changes, the Company&#146;s
ability to utilize the tax benefits from net operating loss
carryforwards could be substantially limited. The Company has
provided a valuation allowance for the full amount of its net
deferred tax assets since the realization of any future benefits
from deductible temporary differences and net operating loss
carryforwards cannot be sufficiently assured at
December&nbsp;31, 2003 and 2002 and September&nbsp;30, 2004.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The valuation allowance at December&nbsp;31, 2003
and 2002 and September&nbsp;30, 2004 was approximately $16.9,
$13.6 and $18.5&nbsp;million, respectively. For the years ended
December&nbsp;31, 2003, 2002 and 2001 and the nine months ended
September&nbsp;30, 2004, the valuation allowance increased by
$3.3, $3.6, $2.2 and $1.6&nbsp;million, respectively.
</FONT>

<P align="center"><FONT size="2">F-27
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A reconciliation of the federal statutory tax
rate and the effective tax rates for the years ended
December&nbsp;31, 2003, 2002, and 2001 and the nine months ended
September&nbsp;30, 2004 is as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="57%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">For the Year Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Nine Months</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Statutory tax rate
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(34.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(34.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(34.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(34.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">State income taxes, net of federal benefit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.5</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.5</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nondeductible expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Change in valuation allowance
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Effective tax rate
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3.8</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The principal differences between the
U.S.&nbsp;statutory tax benefit rate of 34% and the
Company&#146;s effective tax benefit rates of 0.7%, 2.3%, 3.8%
and 0.0% for the years ended December&nbsp;31, 2003, 2002 and
2001 and for the nine month period ended September&nbsp;30, 2004
are primarily due to the state income tax benefit from the sale
of state net operating loss carryforwards and the Company not
recognizing the benefit of its net operating loss carryforwards
incurred during the year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Federal income tax expense for the year ended
December&nbsp;31, 2003 is approximately $31,000. Federal income
tax expense is comprised of current alternative minimum tax.
State income benefit for the year ended December&nbsp;31, 2003
is $(105,000). The state income tax benefit is comprised of
current state income tax expense of $0.1&nbsp;million offset by
a state income tax benefit resulting from the sale of some state
NOLs of $0.2&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the years ended December&nbsp;31, 2003 and
2002, the Company sold a portion of its state NOLs resulting in
a state tax benefit of approximately $0.3&nbsp;million in each
of those years. The sales of cumulative net operating losses are
a result of New Jersey state law enacted January&nbsp;1, 1999
allowing emerging technology and biotechnology companies to
transfer or &#147;sell&#148; their unused New Jersey net
operating loss carryforwards and New Jersey research and
development tax credits to any profitable New Jersey company
qualified to purchase them for cash. The Company received
approval from the state of New Jersey to sell NOLs in November
2003 and November 2002 and entered into a contract with a third
party to sell the NOLs at a discount for approximately
$0.2&nbsp;million in each December of the year. Accordingly, the
valuation allowance was reduced by the gross amount of
$0.3&nbsp;million each as of December&nbsp;31, 2003 and
December&nbsp;31, 2002.
</FONT>

<P align="center"><FONT size="2">F-28
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The principal components of deferred tax assets,
liabilities and the valuation allowance are as follows:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="49%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred tax assets:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Patent costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">623,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">703,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">543,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,321,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,014,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,464,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">818,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">649,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">564,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Amortization of discount
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">167,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(35,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,103,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,528,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">64,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net operating loss carryforwards
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,833,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,257,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,391,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total deferred tax assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,929,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,616,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,548,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Valuation allowance
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(16,929,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,616,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(18,548,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net deferred tax asset
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&nbsp;&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">11.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Restatement of 2001 Financial
    Statements</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Subsequent to the issuance of the Company&#146;s
2001 consolidated financial statements, the Company determined
such statements contained errors relating to the accounting
treatment that had been applied to patents, redeemable preferred
stock, dividends, beneficial conversion features (BCF),
contingent interest and other individually insignificant items.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company had previously capitalized costs of
acquiring patent and trademark rights for drug candidates and
technology that had not received marketing approval from the
United States Food and Drug Administration or similar foreign
governmental authority. Such costs were being amortized to
general and administrative expense. The Company has subsequently
determined that such costs should have been expensed as research
and development as incurred, as the purchases were made for
research and development efforts and there is no assurance that
a product based on the acquired rights will ever be developed.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company did not record and accrete the
dividends on the Series&nbsp;B Preferred and Series&nbsp;C
Preferred in 2000 or 2001 of $0.3 and $1.3&nbsp;million,
respectively. The Company did not record a BCF of
$1.0&nbsp;million on the Series&nbsp;A convertible preferred
stock, which resulted from an adjustment to the conversion price
in connection with the issuance of the Series&nbsp;B Preferred
and Series&nbsp;C Preferred stock. The Company did not record a
BCF of $0.9&nbsp;million related to the bridge financing in 2000
and incorrectly calculated the value of its warrants issued with
such financing at fair value of $0.9&nbsp;million. Such warrants
were initially valued at $0.4&nbsp;million. In addition, the
Company incorrectly stated certain accrued items including
$146,467 of interest. As a result, the accompanying 2001
consolidated financial statements have been restated from the
amounts previously reported to correct the accounting for these
items. The following is a summary of the significant effects of
the restatement:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="66%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">As Previously</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reported</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">As Restated</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Research and development expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,950,215</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,085,258</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">General and administrative expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,486,415</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,393,797</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">538,842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">488,930</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,022,739</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,015,252</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-29
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">EPICEPT CORPORATION AND SUBSIDIARY</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following summarizes the effects of the
restatement by major items affecting the net loss for 2001:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="75%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss, as reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,022,739</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjustments&nbsp;&#151;
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Expensing of patents and reversal of amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(49,220</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,912</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,795</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss, as revised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,015,252</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">12.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Subsequent events</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On November&nbsp;10, 2004, the Company&#146;s
Board of Directors approved the following actions:
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Employment Agreements</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s Board of Directors ratified
the employment agreements between the Company and its chief
executive officer and chief financial officer dated as of
October&nbsp;28, 2004. The employment agreements cover an
initial term through December&nbsp;31, 2006, but may be extended
for unlimited additional one-year periods, and provide for base
salary, discretionary compensation, stock option awards, and
reimbursement of reasonable expenses in connection with services
performed under the employment agreements. The agreements also
compensate such officers in the event of their death or
disability, termination without cause, or termination within one
year of an initial public offering or a change of control, as
defined in the respective employment agreements.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Stock Options</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s Board of Directors approved
the establishment of a stock option pool under the
Company&#146;s 2004 Stock Option Plan (which will be implemented
upon consummation of the proposed initial public offering),
initially equal to 2% of the fully-diluted outstanding common
stock of the Company immediately following the consummation of
the Company&#146;s proposed initial public offering. The options
in the pool vest within four years of the date of the applicable
grant and their exercise price is equal to the initial offering
price. Options to employees under the pool were approved for
issuance upon successful completion of the initial public
offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s Board of Directors approved
the grant of stock options under the 1995 Stock Option Plan to
two of the Company&#146;s employees in exchange for such
employees joining the Company. The options enable such employees
to purchase&nbsp;525,000&nbsp;shares of the Company&#146;s
Common Stock in the aggregate and will be granted at the time of
the Company&#146;s initial public offering. The exercise price
of the grants is equal to the initial public offering price. One
half of the options will vest on the grant date and the
remainder will vest ratably on a monthly basis over a two-year
period.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Compensation Plan for Board of
    Directors</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A compensation plan for directors was approved by
the Board of Directors. This plan contemplates the payment of
annual retainers, meeting fees and the granting of stock options
and will be effective upon the consummation of the initial
public offering.
</FONT>

<P align="center"><FONT size="2">F-30
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<IMG src="e01897s1e0189704.gif" alt="(EPICEPT CORPORATION LOGO)">

<P align="center">
<B><FONT size="4" color="#00337F"> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shares</FONT></B>

<DIV align="center">
<B><FONT size="4" color="#00337F">Common Stock</FONT></B>
</DIV>

<P align="center">
<HR size="1" width="23%" align="center" noshade>

<P align="center">
<B><FONT size="2" color="#00337F">PROSPECTUS</FONT></B>

<P align="center">
<B><FONT size="2" color="#00337F">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005</FONT></B>

<P align="center">
<HR size="1" width="23%" align="center" noshade>

<P align="center">
<B><FONT size="4" color="#00337F">Wachovia Securities</FONT></B>

<DIV align="center">
<B><FONT size="4" color="#00337F">C.E. Unterberg,
Towbin</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Until &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005 (25&nbsp;days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This delivery is in addition to the dealer&#146;s
obligation to deliver a prospectus when acting as an underwriter
and with respect to their unsold allotments or subscriptions.
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">PART&nbsp;II</FONT></B>

<P align="center">
<B><FONT size="2">INFORMATION NOT REQUIRED IN
PROSPECTUS</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">Item&nbsp;13.</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Other Expenses of Issuance and
    Distribution.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth the costs and
expenses, other than the underwriting discounts, payable by the
Registrant in connection with the sale of the securities being
registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and The Nasdaq National
Market listing fee.
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="82%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">SEC Registration Fee
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,827.50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">NASD Filing Fee
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,000.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nasdaq National Market Listing Fee
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Printing costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Legal fees and expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounting fees and expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Blue Sky fees and expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Transfer Agent and Registrar fees
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Miscellaneous
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">Item&nbsp;14.</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Indemnification of Directors and
    Officers.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Section&nbsp;145 of the Delaware General
Corporation Law (&#147;Section&nbsp;145&#148;) permits
indemnification of officers and directors of the Company under
certain conditions and subject to certain limitations.
Section&nbsp;145 also provides that a corporation has the power
to maintain insurance on behalf of its officers and directors
against any liability asserted against such person and incurred
by him or her in such capacity, or arising out of his or her
status as such, whether or not the corporation would have the
power to indemnify him or her against such liability under the
provisions of Section&nbsp;145.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Article&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
Section&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
of the Registrant&#146;s Bylaws provides for mandatory
indemnification of its directors and officers and permissible
indemnification of employees and other agents to the maximum
extent not prohibited by the Delaware General Corporation Law.
The rights to indemnity thereunder continue as to a person who
has ceased to be a director, officer, employee or agent and
inure to the benefit of the heirs, executors and administrators
of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal,
administrative or investigative action, suit or proceeding by
reason of the fact that he or she is or was a director or
officer of the Registrant (or was serving at the
Registrant&#146;s request as a director or officer of another
corporation) shall be paid by the Registrant in advance of the
final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by
the Registrant as authorized by the relevant section of the
Delaware General Corporation Law.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As permitted by Section&nbsp;102(b)(7) of the
Delaware General Corporation Law, the Registrant&#146;s
Certificate of Incorporation provides that, pursuant to Delaware
law, its directors shall not be personally liable for monetary
damages for breach of the directors&#146; fiduciary duty as
directors to the Registrant and its stockholders. This provision
in the Certificate of Incorporation does not eliminate the
directors&#146; fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability
for breach of the director&#146;s duty of loyalty to the
Registrant for acts or omission not in good faith or involving
international misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director,
and for payment of dividends or approval of Stock repurchases or
redemptions that are unlawful under Section&nbsp;174 of the
Delaware General Corporation Law. The provision
</FONT>

<P align="center"><FONT size="2">II-1
</FONT>

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<DIV align="left">
<FONT size="2">also does not affect a director&#146;s
responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Registrant has entered into indemnification
agreements with each of its directors and executive officers.
Generally, the indemnification agreements attempt to provide the
maximum protection permitted by Delaware law as it may be
amended from time to time. Moreover, the indemnification
agreements provide for certain additional indemnification. Under
such additional indemnification provisions, however, an
individual will not receive indemnification for judgments,
settlements or expenses if he or she is found liable to the
Registrant (except to the extent the court determines he or she
is fairly and reasonably entitled to indemnity for expenses),
for settlements not approved by the Registrant or for
settlements and expenses if the settlement is not approved by
the court. The indemnification agreements provide for the
Registrant to advance to the individual any and all reasonable
expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding.
In order to receive an advance of expenses, the individual must
submit to the Registrant copies of invoices presented to him or
her for such expenses. Also, the individual must repay such
advances upon a final judicial decision that he or she is not
entitled to indemnification.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Registrant intends to enter into additional
indemnification agreements with each of its directors and
executive officers to effectuate these indemnity provisions and
to purchase directors&#146; and officers&#146; liability
insurance.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition to the foregoing, the Underwriting
Agreement contains certain provisions by which the Underwriters
have agreed to indemnify the Registrant, each person, if any,
who controls the Registrant within the meaning of
Section&nbsp;15 of the Securities Act, each director of the
Registrant, each officer of the Registrant who signs the
Registration Statement, with respect to information furnished in
writing by or on behalf of the Underwriters for use in the
Registration Statement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At present, there is no pending litigation or
proceeding involving a director, officer, employee or other
agent of the Registrant in which indemnification is being
sought, nor is the Registrant aware of any threatened litigation
that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">Item&nbsp;15.</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Recent Sales of Unregistered
    Securities.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since December&nbsp;31, 2000, we have sold and
issued the following securities:
</FONT>

<P align="left">
<B><FONT size="2">Preferred Stock and Debt Financings</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(1)&nbsp;In December 2000, we issued and sold
8,306,239&nbsp;shares of our Series&nbsp;C Redeemable
Convertible Preferred Stock at a price of $1.50&nbsp;per share
for net proceeds of approximately $12,315,000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(2)&nbsp;In January 2000, we repaid a bank note
and interest owed to IKB with the issuance of
1,866,403&nbsp;shares of Series&nbsp;B Redeemable Convertible
Preferred Stock in an amount totaling $2,799,605.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(3)&nbsp;In December 2000, we also repaid various
convertible bridge loans owed to TVM&nbsp;III Limited
Partnership, Alpinvest International B.V., and Private Equity US
Direct Finance, a portion of a note due to Pharmed Holding GmbH,
an affiliate and accrued interest with the issuance of
2,539,573&nbsp;share of Series&nbsp;C Redeemable Convertible
Preferred Stock in an amount totaling $3,089,359.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(4)&nbsp;In 2001, we granted options to executive
officers and directors to purchase an aggregate of 428,333
shares of our common stock under our 1995 Stock Option Plan at a
weighted average exercise price of $0.30 per share.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(5)&nbsp;In January 2001, we issued and sold
633,334&nbsp;shares of Series&nbsp;C Redeemable Convertible
Preferred Stock at a price of $1.50&nbsp;per share for net
proceeds of $950,000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(6)&nbsp;In April 2001, the 8.59% minority
interest our subsidiary, EpiCept GmbH was converted into
829,901&nbsp;shares of our Series&nbsp;A Convertible Preferred
Stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(7)&nbsp;In April 2001, we issued
9,945&nbsp;shares of common stock in connection with the
conversion of 8,448&nbsp;shares of our Series&nbsp;A Convertible
Preferred Stock.
</FONT>

<P align="center"><FONT size="2">II-2
</FONT>

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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(8)&nbsp;In 2002, we granted options to executive
officers and directors to purchase an aggregate of 566,667
shares of our common stock under our 1995 Stock Option Plan at a
weighted average exercise price of $0.30 per share.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(9)&nbsp;In November 2002, we entered into a
convertible bridge loan arrangement in an aggregate amount of up
to $5,000,000. At December&nbsp;31, 2003, we had received
$4,850,000. The loan bears interest at 8%&nbsp;per annum and
matures on April&nbsp;30, 2005. The loan is convertible into the
next round of preferred stock, and also has provisions for
optional conversion preferred stock or common stock. Such
conversion shall occur at the lowest price per share by any
purchaser in the qualifying financing of the next round of
preferred stock, or at anti-dilutive conversion rates for
optional conversion preferred stock or common stock based upon
the results of certain milestones.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(10)&nbsp;In connection with the issuance of the
convertible bridge loan, in November 2002, we also issued
warrants to purchase 24,250,000 shares of common stock entitling
the holders of the convertible bridge loan, subject to
adjustments as defined, to purchase a number of shares equal to
50% of the greatest principal amount that has been outstanding
under the note divided by the applicable exercise price as
described in the agreement. The warrants are convertible into
the next round of preferred stock, optional conversion preferred
stock or common stock. The warrants are exercisable at any time
through November 2012 and possess certain anti-dilutive rights
as defined in the agreement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(11)&nbsp;In 2003, we granted options to
executive officers and directors to purchase an aggregate of
45,000&nbsp;shares of our common stock under our 1995 Stock
Option Plan at a weighted average exercise price of $0.50 per
share.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The sales of the above securities were deemed to
be exempt from registration in reliance on Section&nbsp;4(2) of
the Securities Act or Regulation&nbsp;D or Regulation&nbsp;S
promulgated thereunder as transactions by an issuer not
involving any public offering. All recipients were either
accredited, sophisticated investors or non-U.S.&nbsp;persons, as
those terms are defined in the Securities Act and the
regulations promulgated thereunder.. The recipients of
securities in each such transaction represented their intention
to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof
and appropriate legends were affixed to the share certificates
and other instruments issued in such transactions. All
recipients either received adequate information about us or had
access, through employment or other relationships, to such
information.
</FONT>

<P align="left">
<B><FONT size="2">Stock Options and Stock Purchase
Rights</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(1)&nbsp;During 2002, we granted options to
employees to purchase an aggregate of 80,000&nbsp;shares of our
common stock under our 1995 Stock Option Plan at a weighted
average exercise price of $0.39&nbsp;per share. In 2002, 28,591
stock options were exercised.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(2)&nbsp;During 2001, we granted options to
employees to purchase an aggregate of 455,000&nbsp;shares of our
common stock under our 1995 Stock Option Plan at a weighted
average exercise price of $0.30&nbsp;per share. In 2001, 55,000
stock options were exercised.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The sales of the above securities were deemed to
be exempt from registration in reliance on Rule&nbsp;701
promulgated under Section&nbsp;3(b) under the Securities Act as
transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation.
</FONT>

<P align="center"><FONT size="2">II-3
</FONT>

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<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">Item&nbsp;16.</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Exhibits and Financial Statement
    Schedules</FONT></I></B></TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="84%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Description</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*1.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Underwriting Agreement.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;3.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amended and Restated Certificate of Incorporation
    of the Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;3.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Certificate of Incorporation of the
    Registrant to be in effect after the closing of the offering
    made under this Registration Statement.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;3.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Second Amended and Restated Bylaws of the
    Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;3.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Bylaws of the Registrant to be in effect
    after the closing of the offering made under this Registration
    Statement.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*4.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Specimen Common Stock Certificate.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;4.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">First Amendment to the Amended and Restated
    Registration Rights Agreement, dated as of December&nbsp;28,
    2000, among the Series&nbsp;A Investors, the Series&nbsp;B
    Investors, the Series&nbsp;C Investors, the Founders and the
    Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;4.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Third Amended and Restated Convertible
    Term Note.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;4.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Third Amended and Restated Stock Purchase
    Warrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*4.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Warrant for the purchase of Series&nbsp;C
    Convertible Preferred Stock, dated November&nbsp;30, 2000,
    issued by EpiCept Corporation to Private Equity US Direct
    Finance.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*4.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Warrant for the purchase of Series&nbsp;B
    Convertible Preferred Stock, dated August&nbsp;14, 2000, issued
    by EpiCept Corporation to Alpinvest International B.V.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*4.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Warrant for the purchase of Series&nbsp;B
    Convertible Preferred Stock, dated August&nbsp;9, 2000, issued
    by EpiCept Corporation to TVM Techno Ventures Enterprises
    No.&nbsp;III Limited Partnership.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*5.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Opinion of Weil, Gotshal&nbsp;&#38; Manges LLP.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Indemnification Agreement between the
    Registrant and each of its directors and officers.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">1995 Stock Option Plan.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2005 Equity Incentive Plan.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2005 Employee Stock Purchase Plan.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement, dated as of
    October&nbsp;28, 2004, between the Registrant and John V. Talley.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement, dated as of
    October&nbsp;28, 2004, between the Registrant and Robert Cook.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.7(1)</FONT></TD>
    <TD align="left" valign="top" nowrap>&nbsp;</TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">License Agreement, dated as of July&nbsp;23,
    2003, between Adolor Corporation and the Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amendment No.&nbsp;1 to License Agreement, dated
    as of October&nbsp;21, 2004, between Adolor Corporation and the
    Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.9(1)</FONT></TD>
    <TD align="left" valign="top" nowrap>&nbsp;</TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">License Agreement, dated as of December&nbsp;18,
    2003, between Endo Pharmaceuticals Inc. and the Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.10(1</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">)&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Royalty Agreement, dated as of July&nbsp;16,
    2003, between the Registrant and R.&nbsp;Douglas Cassel, M.D.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.11(1</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">)&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Sublicense Agreement, dated as of August&nbsp;27,
    1999, between Epitome Pharmaceuticals Limited and American
    Pharmed Labs, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.12</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Lease Agreement between Connecticut General Life
    Insurance Company, as Landlord, and American Pharmed Labs, Inc.,
    as Tenant, dated July&nbsp;31, 1997.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.13</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Cooperation Agreement between APL American
    Pharmed Labs, Inc. and Technologie-Beteiligungs-Gesellschaft
    mbH, dated August 1997.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.14</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Interest Agreement between Pharmed Labs GmbH and
    Technologie-Beteiligungs-Gesellschaft mbH, dated August 1997.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Participation Agreement among Pharmed Labs GmbH,
    American Pharmed Labs, Inc. and
    Technologie-Beteiligungs-Gesellschaft mbH, dated
    February&nbsp;17, 1998.
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-4
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="84%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Description</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Letter Agreement, dated March&nbsp;31, 1998,
    between Pharmed Labs GmbH and IKB Nachrangkapital GmbH.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.17</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Limited Guaranty, dated April&nbsp;27, 1998, by
    American Pharmed Labs, Inc. for the benefit of IKB
    Nachrangkaptial GmbH.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*11.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Statement Regarding Computation of Per Share
    Earnings.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">16.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Letter Regarding Change in Certifying Accountant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">21.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">List of Subsidiaries.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Deloitte&nbsp;&#38; Touche LLP.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*23.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Weil, Gotshal&nbsp;&#38; Manges LLP
    (included in Exhibit&nbsp;5.1).
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">24.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Power of Attorney (included on signature page).
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="4%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">*</FONT></TD>
    <TD align="left">
    <FONT size="2">To be filed by amendment.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#134;</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Pursuant to a request for confidential treatment,
    portions of the Exhibit have been redacted from the publicly
    filed document and have been furnished separately to the SEC as
    required by Rule&nbsp;406 under the Securities Act.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(b)&nbsp;Financial Statement Schedules
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Schedules not listed above have been omitted
because the information required to be set forth therein is not
applicable or is shown in the financial statements or notes
thereto.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">Item&nbsp;17.</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Undertakings.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The undersigned registrant hereby undertakes to
provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The undersigned registrant hereby undertakes that:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(1)&nbsp;For purposes of determining any
    liability under the Securities Act of 1933, the information
    omitted from the form of prospectus filed as part of this
    registration statement in reliance upon Rule&nbsp;430A and
    contained in a form of prospectus filed by the registrant
    pursuant to Rule&nbsp;424(b)(1) or (4)&nbsp;or 497(h) under the
    Securities Act shall be deemed to be part of this registration
    statement as of the time it was declared effective.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(2)&nbsp;For the purpose of determining any
    liability under the Securities Act of 1933, each post-effective
    amendment that contains a form of prospectus shall be deemed to
    be a new registration statement relating to the securities
    offered therein, and the offering of such securities at that
    time shall be deemed to be the initial bona fide offering
    thereof.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">II-5
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">SIGNATURES</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to the requirements of the Securities
Act, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Englewood Cliffs, state of New
Jersey, on January&nbsp;10, 2005.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">EPICEPT CORPORATION
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="2%"></TD>
    <TD width="58%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">By:&nbsp;</FONT></TD>
    <TD align="center">
    <FONT size="2">/s/ JOHN V. TALLEY
    </FONT></TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <HR size="1" align="left" noshade></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="center">
    <FONT size="2">John V. Talley
    </FONT></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="center">
    <I><FONT size="2">President and Chief Executive
    Officer</FONT></I></TD>
</TR>

</TABLE>

<P align="center">
<B><FONT size="2">POWER OF ATTORNEY</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below hereby constitutes and
appoints John V. Talley and Robert W. Cook and each of them
singly, as true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities to sign the
Registration Statement filed herewith and any or all amendments
to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to
Rule&nbsp;462 and otherwise), and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission granting unto said
attorneys-in-fact and agents the full power and authority to do
and perform each and every act and thing requisite and necessary
to be done in and about the foregoing, as to all intents and
purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his substitute, may lawfully do or
cause to be done by virtue hereof.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to the requirements of the Securities
Act, this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="37%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="33%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="15%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Signature</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Title</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Date</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT size="2">/s/ JOHN V. TALLEY<BR>
    <HR size="1" noshade>John V. Talley
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director, President and Chief Executive Officer
    (Principal Executive Officer)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top">
    <FONT size="2">January&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT size="2">/s/ ROBERT W. COOK<BR>
    <HR size="1" noshade>Robert W. Cook
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Chief Financial Officer (Principal Financial and
    Accounting Officer)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top">
    <FONT size="2">January&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT size="2">/s/ ROBERT G. SAVAGE<BR>
    <HR size="1" noshade>Robert G. Savage
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top">
    <FONT size="2">January&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT size="2">/s/ GERT CASPRITZ<BR>
    <HR size="1" noshade>Gert Caspritz
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top">
    <FONT size="2">January&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT size="2">/s/ ERNST-GUNTER AFTING<BR>
    <HR size="1" noshade>Ernst-Gunter Afting
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top">
    <FONT size="2">January&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT size="2">/s/ MARK DOCHERTY<BR>
    <HR size="1" noshade>Mark Docherty
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top">
    <FONT size="2">January&nbsp;10, 2005
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-6
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="37%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="33%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="15%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Signature</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Title</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Date</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="7"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT size="2">/s/ REINER PONSCHAB<BR>
    <HR size="1" noshade>Reiner Ponschab
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top">
    <FONT size="2">January&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT size="2">/s/ THORLEF SPICKSCHEN<BR>
    <HR size="1" noshade>Thorlef Spickschen
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top">
    <FONT size="2">January&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT size="2">/s/ GUY C. JACKSON<BR>
    <HR size="1" noshade>Guy C. Jackson
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top">
    <FONT size="2">January&nbsp;10, 2005
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-7
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<P align="center">
<B><FONT size="2">EXHIBIT INDEX</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="84%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Description</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*1.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Underwriting Agreement.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;3.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amended and Restated Certificate of Incorporation
    of the Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;3.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Certificate of Incorporation of the
    Registrant to be in effect after the closing of the offering
    made under this Registration Statement.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;3.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Second Amended and Restated Bylaws of the
    Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;3.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Bylaws of the Registrant to be in effect
    after the closing of the offering made under this Registration
    Statement.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*4.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Specimen Common Stock Certificate.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;4.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">First Amendment to the Amended and Restated
    Registration Rights Agreement, dated as of December&nbsp;28,
    2000, among the Series&nbsp;A Investors, the Series&nbsp;B
    Investors, the Series&nbsp;C Investors, the Founders and the
    Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;4.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Third Amended and Restated Convertible
    Term Note.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;4.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Third Amended and Restated Stock Purchase
    Warrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*4.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Warrant for the purchase of Series&nbsp;C
    Convertible Preferred Stock, dated November&nbsp;30, 2000,
    issued by EpiCept Corporation to Private Equity US Direct
    Finance.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*4.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Warrant for the purchase of Series&nbsp;B
    Convertible Preferred Stock, dated August&nbsp;14, 2000, issued
    by EpiCept Corporation to Alpinvest International B.V.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*4.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Warrant for the purchase of Series&nbsp;B
    Convertible Preferred Stock, dated August&nbsp;9, 2000, issued
    by EpiCept Corporation to TVM Techno Ventures Enterprises
    No.&nbsp;III Limited Partnership.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">&nbsp;*5.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Opinion of Weil, Gotshal&nbsp;&#38; Manges LLP.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Indemnification Agreement between the
    Registrant and each of its directors and officers.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">1995 Stock Option Plan.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2005 Equity Incentive Plan.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">2005 Employee Stock Purchase Plan.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement, dated as of
    October&nbsp;28, 2004, between the Registrant and John V. Talley.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Employment Agreement, dated as of
    October&nbsp;28, 2004, between the Registrant and Robert Cook.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.7(1)</FONT></TD>
    <TD align="left" valign="top" nowrap>&nbsp;</TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">License Agreement, dated as of July&nbsp;23,
    2003, between Adolor Corporation and the Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Amendment No.&nbsp;1 to License Agreement, dated
    as of October&nbsp;21, 2004, between Adolor Corporation and the
    Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.9(1)</FONT></TD>
    <TD align="left" valign="top" nowrap>&nbsp;</TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">License Agreement, dated as of December&nbsp;18,
    2003, between Endo Pharmaceuticals Inc. and the Registrant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.10(1</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">)&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Royalty Agreement, dated as of July&nbsp;16,
    2003, between the Registrant and R.&nbsp;Douglas Cassel, M.D.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.11(1</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT size="2">)&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Sublicense Agreement, dated as of August&nbsp;27,
    1999, between Epitome Pharmaceuticals Limited and American
    Pharmed Labs, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.12</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Lease Agreement between Connecticut General Life
    Insurance Company, as Landlord, and American Pharmed Labs, Inc.,
    as Tenant, dated July&nbsp;31, 1997.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.13</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Cooperation Agreement between APL American
    Pharmed Labs, Inc. and Technologie-Beteiligungs-Gesellschaft
    mbH, dated August 1997.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.14</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Interest Agreement between Pharmed Labs GmbH and
    Technologie-Beteiligungs-Gesellschaft mbH, dated August 1997.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Participation Agreement among Pharmed Labs GmbH,
    American Pharmed Labs, Inc. and
    Technologie-Beteiligungs-Gesellschaft mbH, dated
    February&nbsp;17, 1998.
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="84%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit</FONT></B></TD>
    <TD></TD>
    <TD></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Description</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Letter Agreement, dated March&nbsp;31, 1998,
    between Pharmed Labs GmbH and IKB Nachrangkapital GmbH.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*10.17</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Limited Guaranty, dated April&nbsp;27, 1998, by
    American Pharmed Labs, Inc. for the benefit of IKB
    Nachrangkaptial GmbH.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*11.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Statement Regarding Computation of Per Share
    Earnings.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">16.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Letter Regarding Change in Certifying Accountant.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">21.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">List of Subsidiaries.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Deloitte&nbsp;&#38; Touche LLP.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">*23.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Consent of Weil, Gotshal&nbsp;&#38; Manges LLP
    (included in Exhibit&nbsp;5.1).
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">24.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Power of Attorney (included on signature page).
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="4%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">*</FONT></TD>
    <TD align="left">
    <FONT size="2">To be filed by amendment.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#134;</FONT></TD>
    <TD align="left">
    <FONT size="2">Previously filed.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

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

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Pursuant to a request for confidential treatment,
    portions of the Exhibit have been redacted from the publicly
    filed document and have been furnished separately to the SEC as
    required by Rule&nbsp;406 under the Securities Act.
    </FONT></TD>
</TR>

</TABLE>
</BODY>
</HTML>
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{"company-data": {"conformed-name": "EPICEPT CORP", "cik": "0001208261", "irs-number": "000000000"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-121938", "film-number": "05521510"}, "business-address": {"street1": "270 SYLVAN AVENUE", "city": "ENGLEWOOD CLIFFS", "state": "CA", "zip": "07632", "phone": "2018948980"}}
FORM S-1
As filed with the Securities and Exchange
Commission on January 10, 2005
Registration
No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EpiCept Corporation
(Exact name of Registrant as specified in its
charter)
Delaware
2834
52-1841431
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
270 Sylvan Avenue
Englewood Cliffs, NJ 07632
(201) 894-8980
(Address, including zip code, and telephone
number,
including area code, of Registrant's
principal executive offices)
John V. Talley
Chief Executive Officer
EpiCept Corporation
270 Sylvan Avenue
Englewood Cliffs, NJ 07632
(201) 894-8980
(Name, address, including zip code, and
telephone number,
including area code, of agent for
service)
Copies to:
Alexander D. Lynch, Esq.
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153
(212) 310-8000
Danielle Carbone, Esq.
Shearman & Sterling LLP
599 Lexington Avenue
New York, NY 10022
(212) 848-4000
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
(the "Securities Act"), check the following
box.
o
If this form is filed to register additional
securities for an offering pursuant to Rule 462(b) under
the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.
o
If this form is a post-effective amendment filed
pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering.
o
If this form is a post-effective amendment filed
pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the
same
offering.
o
If delivery of the prospectus is expected to be
made pursuant to Rule 434, check the following
box.
o
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Proposed Maximum
Amount of
Securities to be Registered
Offering Price (1)
Registration Fee
Common Stock $0.0001 par value
$75,000,000
$8,827.50
(1)
Estimated solely for the purpose of computing the
    amount of the registration fee pursuant to Rule 457(o)
    under the Securities Act of 1933.
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 the
Registration Statement shall become effective on such date as
the Commission acting pursuant to said Section 8(a) may
determine.
The information in this
preliminary prospectus is not complete and may be changed. These
securities may not be sold until the registration statement
filed with the Securities and Exchange Commission is effective.
This preliminary prospectus is not an offer to sell nor does it
constitute an offer to buy these securities in any jurisdiction
where the offer or sale is not
permitted.
PROSPECTUS
SUBJECT TO COMPLETION,
DATED JANUARY 10, 2005
Shares
Common Stock
This is EpiCept
Corporation's initial public offering. We are
offering                      shares
of our common stock. We expect the initial public offering price
to be between
$                     and
$                     per
share.
Prior to this offering, there has
been no public market for our common stock. We intend to file an
application for our common stock to be quoted on The Nasdaq
National Market under the symbol "EPCT."
Investing in our common stock
involves risks. See "Risk Factors" beginning on
page 6.
Per Share
Total
Public Offering Price
$
$
Underwriting Discounts and Commissions
$
$
Proceeds to EpiCept (before expenses)
$
$
Delivery of the shares of common
stock will be made on or
about                   ,
2005.
Neither the Securities and
Exchange Commission, any state securities commission nor any
other regulatory body has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
We have granted the underwriters
an option to purchase up to a maximum
of                shares
of our common stock to cover over-allotments of shares,
exercisable at any time until 30 days after the date of this
prospectus.
Wachovia Securities
C.E. Unterberg, Towbin
The date of this prospectus
is                     ,
2005.
TABLE OF CONTENTS
Page
Prospectus Summary
1
Risk Factors
6
Special Note Regarding
    Forward-Looking Statements
22
Use of Proceeds
23
Dividend Policy
23
Capitalization
24
Dilution
25
Selected Consolidated
    Financial Data
26
Management's Discussion
    and Analysis of Financial Condition and Results of Operations
28
Business
42
Management
64
Certain Relationships and
    Related Party Transactions
77
Principal Stockholders
78
Description of Capital
    Stock
81
Shares Eligible for Future
    Sale
85
Material U.S. Federal
    Income Tax Consequences
87
Underwriting
90
Validity of Securities
92
Experts
92
Change in Independent
    Registered Public Accounting Firm
93
Where You Can Find
    Additional Information
93
Index to Financial
    Statements
F-1
i
PROSPECTUS SUMMARY
This summary highlights selected information
contained elsewhere in this prospectus. This summary does not
contain all of the information that you should consider before
making an investment decision. This prospectus contains
forward-looking statements that involve risks and uncertainties.
Our results could differ materially from those anticipated in
these forward-looking statements as a result of various factors,
including those set forth in "Risk Factors" and
elsewhere in this prospectus. Except as otherwise indicated, all
information in this prospectus assumes no exercise of the
underwriters' over-allotment option. References to
"we," "us," "our," and
"EpiCept" mean EpiCept Corporation and our subsidiary,
EpiCept GmbH. "EpiCept," the EpiCept logo and
"LidoPAIN" are our trademarks. Other service marks,
trademarks and trade names referred to in this prospectus are
the property of their respective owners.
OUR COMPANY
We are a specialty pharmaceutical company focused
on the development and commercialization of topically-delivered
prescription pain management therapeutics. We have six product
candidates in clinical development; three in late-stage clinical
development that are ready to enter, or have entered, pivotal
Phase IIb or Phase III clinical trials, and three that
have completed initial Phase II clinical trials. All of our
product candidates target moderate-to-severe pain that is
influenced, or mediated, by nerve receptors located just beneath
the skin's surface. Our product candidates utilize
proprietary formulations and several topical delivery
technologies to administer FDA-approved pain management
therapeutics, or analgesics. We believe using FDA-approved
analgesics reduces the risks associated with new drug
development, lowers our development costs and speeds
time-to-market. Our product candidates are designed to provide
effective pain relief with fewer adverse side effects than
systemically-delivered drugs, which are absorbed into the
bloodstream. None of our product candidates has been approved by
the U.S. Food and Drug Administration, or FDA, or any
comparable agency in another country. Consequently, we may not
sell our products for use by patients.
IMS Health has estimated that the total
U.S. market for prescription analgesics has increased from
$5.3 billion in 1998 to $14.7 billion in 2003,
representing an approximate 23% compounded annual growth rate.
In 2003, analgesics were the third most prescribed class of
medications in the United States with approximately
313 million prescriptions written. We believe that growth
in this market has been primarily attributable to:
•
increased physician recognition of the need for
    effective pain management;
•
patient demand for more effective pain treatments;
•
an aging population, with an increased prevalence
    of chronic pain conditions, such as cancer, arthritis,
    neuropathies and lower back pain;
•
increased number of surgeries;
•
introduction of new and reformulated branded
    products; and
•
increased active and healthy lifestyles,
    resulting in additional sports and fitness related injuries.
We are targeting peripheral nerve receptors using
topical analgesics as a novel mechanism to effectively treat
both acute and chronic pain, without the liabilities of
traditional systemically-delivered analgesics. We are developing
innovative topically-delivered analgesics using a combination of
our proprietary internally-developed and in-licensed
technologies and know-how to address the unmet medical needs and
adverse side effects associated with systemically-delivered
analgesics. Our topical delivery technologies and formulations
are designed to deliver FDA-approved analgesics safely,
effectively and conveniently to the appropriate peripheral
nerves while preventing or limiting the amount of drug that
enters the bloodstream. We utilize patch, cream and spray gel
matrix delivery methods to topically deliver the active
ingredients to the pain site. In some instances, we combine
existing FDA-approved analgesics to create a new product having
a therapeutic profile superior to either one of the standalone
analgesics.
1
Our Product Candidates
The following table summarizes the current status
of our principal development programs and product candidates:
Product
Topical
Initial
Candidates
Dosage Form
Indication
Clinical Status
Next Steps
Marketing Rights
EpiCept NP-1
Cream
Post- herpetic neuralgia
Phase II completed
Initiate Phase III during second half of 2005
EpiCept
LidoPAIN SP
Sterile patch
Surgical incision pain
Phase III initiated in Germany
Adolor has announced plans for Phase IIb and
    Phase III clinical trials in United States
Adolor Corporation in North America; EpiCept
    outside of North America; EpiCept retains right to negotiate
    future co-promotion agreement
LidoPAIN BP
Patch
(non-sterile)
Acute lower back pain
Phase II completed
Initiate pivotal Phase IIb clinical trial
    during second half of 2005
Endo Pharmaceuticals, Inc. worldwide; EpiCept
    retains right to negotiate future co-promotion agreement
EpiCept MP/ DP
Spray gel matrix
Oral mucositis; Dental pain
Phase II
Continue Phase II development
EpiCept
LidoPAIN TV
Patch
(non-sterile)
Tinnitus
Phase II in Europe
Continue Phase II development
EpiCept
LidoPAIN HM
Patch
(non-sterile)
Headache
Phase II
Continue Phase II development
EpiCept
EpiCept NP-1
Our lead late-stage product candidate, EpiCept
NP-1, is a prescription topical analgesic cream containing a
patented formulation, the contents of which include two
FDA-approved drugs, amitriptyline and ketamine. Amitriptyline is
a widely-used antidepressant, and ketamine is an NMDA, or
N-methyl-D-aspartate, antagonist that is used as an anesthetic.
EpiCept NP-1 is designed to provide effective, long-term relief
from the pain of peripheral neuropathies. We believe the topical
delivery of our patented combination represents a fundamentally
new approach for the treatment of pain associated with
peripheral neuropathy and will significantly reduce the risk of
adverse side effects associated with the systemic delivery of
the active ingredients. Peripheral neuropathies are medical
conditions caused by damage to the nerves in the nervous system.
The initial indication for this product candidate is
post-herpetic neuralgia, a specific type of peripheral
neuropathy associated with shingles, a condition caused by the
herpes zoster virus. We have completed Phase II clinical
trials in the United States and Canada that included 343
subjects and plan to commence a Phase III clinical trial in
the United States during the second half of 2005 that will
include at least 800 subjects.
LidoPAIN SP
LidoPAIN SP, our second late-stage product
candidate, is a sterile prescription analgesic patch designed to
provide sustained topical delivery of lidocaine to a
post-surgical or post-traumatic sutured wound while also
providing a sterile protective covering for the wound. If
approved, we believe that LidoPAIN SP would be the first sterile
prescription analgesic patch on the market. We have completed a
2
Phase II clinical trial in Germany that
included 221 subjects who underwent hernia repair and commenced
a Phase III clinical trial in Europe during the fourth
quarter of 2004 that will include at least 400 subjects who
have undergone hernia repair. In July 2003, we entered into an
agreement with Adolor Corporation for the development and
commercialization of LidoPAIN SP in North America.
LidoPAIN BP
Our third late-stage product candidate is
LidoPAIN BP, a prescription analgesic non-sterile patch designed
to provide sustained topical delivery of lidocaine for the
treatment of acute or recurrent lower back pain. We have
completed Phase IIa and Phase IIb clinical trials in
the United States that included 242 subjects and plan to
commence a pivotal Phase IIb clinical trial in the United
States during the second half of 2005 that will include at least
400 subjects. In December 2003, we entered into an agreement
with Endo Pharmaceuticals Inc. for the commercialization of
LidoPAIN BP worldwide.
Other Product Candidates
We have three earlier-stage product candidates in
clinical development: (1) EpiCept MP/ DP, a topical spray
gel matrix containing morphine and lidocaine for the treatment
of oral mucositis, an inflammation of the mucosa of the mouth
typically resulting from chemotherapy and radiation therapy, and
dental pain; (2) LidoPAIN TV, a topical lidocaine patch for
the treatment of tinnitus, a constant or intermittent buzzing or
ringing noise in the ear; and (3) LidoPAIN HM, a topical
anesthetic patch for the treatment of headache pain. We have
completed initial Phase II clinical trials and expect to
conduct additional Phase II clinical trials for each of
these product candidates.
Our Strategy
Our objective is to address unmet medical needs
in pain management by developing a broad portfolio of
topically-delivered prescription analgesics for the treatment of
moderate-to-severe pain where existing treatments are
ineffective or cause significant adverse side effects. To
achieve our objective, the three key elements of our strategy
are to:
•
focus our development efforts on
    topically-delivered analgesics targeting peripheral nerve
    receptors;
•
focus our development efforts on FDA-approved
    drugs; and
•
opportunistically enter into development and
    commercialization alliances for our products
Strategic Alliances
We have established strategic alliances with
Adolor with respect to our LidoPAIN SP product candidate for the
treatment of pain associated with surgical incisions and with
Endo with respect to our LidoPAIN BP product candidate for the
treatment of lower back pain. These strategic alliances are
designed to provide us with operating capital and marketing
capabilities and to supplement our development efforts. Under
these agreements, we have received $10.0 million and are
eligible to receive up to an additional $102.5 million in
milestone payments. The agreements also provide for royalty
payments from each of Adolor and Endo based on the net sales of
certain licensed products. We also intend to pursue other
strategic alliances as appropriate.
Risks Affecting Us
We are subject to a number of risks of which you
should be aware before you decide to buy our common stock. These
risks are discussed more fully under the heading "Risk
Factors." We have not received regulatory approval for, or
generated commercial revenues from, any of our product
candidates. All of our product candidates are in development. If
we do not successfully obtain regulatory approval for, and
commercialize any of our product candidates, we will be unable
to achieve our business objectives. As of September 30,
2004, we had an accumulated deficit of $56.0 million. We
expect to continue to incur increasing losses over the next
several years, and we may never become profitable.
Corporate Information
We were incorporated in Delaware in March 1993.
We have a 100%-owned subsidiary, EpiCept GmbH, based in Munich,
Germany, which is engaged in research and development activities
on our behalf. Our principal executive offices are located at
270 Sylvan Avenue, Englewood Cliffs, New Jersey, and our
telephone number is (201) 894-8980. Our website address is
www.epicept.com
. Our website, and the information
contained in our website, is not a part of this prospectus.
3
THE OFFERING
Common stock offered
shares
Common stock to be outstanding after this offering
shares
Use of proceeds
We intend to use the proceeds from this offering
    for working capital and general corporate purposes, including
    continuing our clinical trials and research and development
    efforts and the continued preparation for the manufacturing and
    commercialization of our product candidates. We will also repay
    approximately $5.8 million of our outstanding indebtedness
    (including accrued interest), which includes our convertible
    bridge loan and our loan from IKB Private Equity GmbH, or
    "IKB." The lenders under our convertible bridge loan
    include our President and Chief Executive Officer and affiliates
    of certain of our shareholders. See "Use of Proceeds."
Risk factors
See "Risk Factors" and other
    information in this prospectus for information you should
    consider before deciding whether to invest in shares of our
    common stock.
Proposed Nasdaq National Market symbol
EPCT
The number of shares of our common stock to be
outstanding after this offering is based on the number of shares
of our common stock outstanding as
of                               and
also reflects the automatic conversion of our outstanding
preferred stock
into                      shares
of common stock, the issuance
of                      shares
of common stock upon the exercise of warrants granted in
connection with our convertible bridge loan, which we refer to
in this prospectus as the bridge warrants, and the conversion of
a convertible term loan with Technologie-Beteiligungs
Gesellschaft mbH der Deutschen Ansgleichsbank, which we refer to
in this prospectus as the tbg convertible loan,
into                      shares
of common stock.
This number does not include, as
of                     ,           :
•
shares
    of our common stock issuable upon exercise of options
    outstanding, at a weighted average exercise price of
    $           per
    share; and
•
shares
    of our common stock reserved for issuance under our 1995 Stock
    Option Plan, our 2005 Equity Incentive Plan and our 2005
    Employee Stock Purchase Plan.
Except as otherwise indicated, all information in
this prospectus:
•
reflects the automatic conversion of our
    outstanding preferred stock
    into                      shares
    of common stock;
•
reflects the exercise of the bridge warrants
    into                     shares
    of common stock;
•
reflects the conversion of the tbg convertible
    loan
    into                      shares
    of common stock;
•
assumes an initial public offering price of
    $           per
    share, the midpoint of the offering range set forth on the cover
    of this prospectus;
•
gives effect to
    a           -for-          reverse
    split of our common stock;
•
gives effect to our amended and restated
    certificate of incorporation, which we will file immediately
    prior to the closing of this offering, and our amended and
    restated bylaws, which will be adopted effective immediately
    prior to the closing of this offering; and
•
assumes the underwriters do not exercise their
    option to
    purchase                     additional
    shares from us in this offering.
4
SUMMARY CONSOLIDATED FINANCIAL DATA
You should read the following financial
information together with the information under "Selected
Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and
the notes thereto included elsewhere in this
prospectus.
The following tables present our summary
consolidated balance sheet and statement of operations data as
of and for the fiscal years ended December 31, 2001, 2002
and 2003 and the nine months ended September 30, 2003 and
2004. Our consolidated balance sheet data as of
September 30, 2004 is presented on an actual basis and as
adjusted to reflect the sale
of            shares
of our common stock in this offering at an assumed public
offering price of
$           per
share, after deducting the estimated underwriting discounts and
commissions and the estimated offering expenses. Our
consolidated statement of operations data for the fiscal years
ended December 31, 2001, 2002 and 2003 and our consolidated
balance sheet data as of September 30, 2004 and our
consolidated statement of operations data for the nine months
ended September 30, 2004 were derived from our audited
consolidated financial statements included elsewhere in this
prospectus. Our consolidated statement of operations data for
the nine months ended September 30, 2003 were derived from
our unaudited consolidated financial statements included
elsewhere in this prospectus. Operating results for the nine
months ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the full
fiscal year ending December 31, 2004.
Nine Months
Year Ended December 31,
Ended September 30,
2001(1)
2002
2003
2003
2004
(Dollars in thousands, except per share data)
Consolidated Statements of Operations
    Data:
Revenue
$
—
$
—
$
434
$
160
$
1,875
Operating expenses:
General and administrative
3,394
3,493
3,407
2,131
3,148
Research and development
4,085
4,874
1,641
1,183
1,272
Total operating expenses
7,479
8,367
5,048
3,314
4,420
Loss from operations
(7,479
)
(8,367
)
(4,614
)
(3,154
)
(2,545
)
Other income (expense), net
186
(1,509
)
(5,364
)
(3,613
)
(2,123
)
Loss before benefit for income taxes
(7,293
)
(9,876
)
(9,978
)
(6,767
)
(4,668
)
Benefit for income taxes
278
225
75
—
—
Net loss
(7,015
)
(9,651
)
(9,903
)
(6,767
)
(4,668
)
Warrant deemed dividend and redeemable
    convertible preferred stock dividends
(1,254
)
(1,288
)
(1,254
)
(941
)
(1,091
)
Loss attributable to common stockholders
$
(8,269
)
$
(10,939
)
$
(11,157
)
$
(7,708
)
$
(5,759
)
Basic and diluted loss per common share
$
(1.26
)
$
(1.66
)
$
(1.69
)
$
(1.17
)
$
(0.86
)
Weighted average shares outstanding
6,551,622
6,597,638
6,602,871
6,602,707
6,710,741
Unaudited pro forma basic and diluted loss per
    common
share(2)
$
(0.24
)
$
(0.12
)
Shares used in computing unaudited pro forma
    basic and diluted loss per common share(2)
41,486,162
41,666,628
As of September 30,
2004
Pro Forma
Actual
as Adjusted
(Dollars in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents
$
3,026
Working capital (deficit)
(3,068
)
Total assets
3,939
Long-term debt, net of current portion
10,692
Redeemable convertible preferred stock
25,040
Accumulated deficit
(55,993
)
Total stockholders' deficit
(48,734
)
(1)
As discussed in Note 11 to our consolidated
    financial statements, the 2001 consolidated financial statements
    were restated.
(2)
For a discussion of the calculation of unaudited
    pro forma loss per share, see Note 2 to our consolidated
    financial statements.
5
RISK FACTORS
Any investment in our common stock involves a
high degree of risk. You should carefully consider the risks
described below together with all of the other information
included in this prospectus before making an investment
decision. The risks and uncertainties described below are not
the only ones we face. If any of the following risks actually
occurs, our business, results of operations or financial
condition would likely suffer. In such an event, the trading
price of our common stock could decline and you could lose all
or part of your investment.
Clinical and Regulatory Risks
If we are unable to successfully design,
conduct and complete clinical trials, we will not be able to
obtain regulatory approval for our product candidates, which
could delay or prevent us from being able to generate revenue
from product sales.
We currently have no products for sale, and we
cannot guarantee you that we will ever have marketable products.
Before our product candidates can be commercialized, we or our
partners must submit a New Drug Application, or NDA, to the FDA.
The NDA must demonstrate that the product candidate is safe and
effective in humans for its intended use. To support our NDAs,
we or our partners must conduct extensive human tests, which are
referred to as clinical trials. Satisfaction of all regulatory
requirements typically takes many years and requires the
expenditure of substantial resources.
We currently have several product candidates in
various stages of clinical testing. The results of pre-clinical
studies and early-stage clinical trials do not necessarily
predict the results of later-stage clinical trials. All of our
product candidates are prone to the risks of failure inherent in
drug development and testing. Product candidates in later-stage
clinical trials may fail to show desired safety and efficacy
traits despite having progressed through initial clinical
testing. In addition, the data collected from clinical trials of
our product candidates may not be sufficient to support FDA
approval, or FDA officials could interpret the data differently
than we do. The FDA may require us or our partners to conduct
additional clinical testing, in which case we would have to
expend additional time and resources. The approval process may
also be delayed by changes in government regulation, future
legislation or administrative action or changes in FDA policy
that occur prior to or during our regulatory review.
Any failure or significant delay in completing
clinical trials for our product candidates, or in receiving
regulatory approval for the sale of our product candidates, may
severely harm our business and negatively affect our ability to
generate revenue from product sales, and our stock price will
likely decline.
The results of our clinical trials are
uncertain, which could substantially delay or prevent us from
bringing our product candidates to market.
Before we can obtain regulatory approval for a
product candidate, we must undertake extensive clinical testing
in humans to demonstrate safety and efficacy to the satisfaction
of the FDA or other regulatory agencies. Clinical trials are
very expensive and difficult to design and implement. The
clinical trial process is also time consuming. The commencement
and completion of our clinical trials could be delayed or
prevented by several factors, including:
•
delays in obtaining regulatory approvals to
    commence or continue a study;
•
delays in reaching agreement on acceptable
    clinical trial parameters;
•
slower than expected rates of patient recruitment
    and enrollment;
•
inability to demonstrate effectiveness or
    statistically significant results in our clinical trials;
•
unforeseen safety issues;
•
uncertain dosing issues;
•
inability to monitor patients adequately during
    or after treatment; and
•
inability or unwillingness of medical
    investigators to follow our clinical protocols.
6
We cannot assure you that our planned clinical
trials will begin or be completed on time or at all, or that
they will not need to be restructured prior to completion.
Significant delays in clinical testing will impede our ability
to commercialize our product candidates and generate revenue
from product sales and could materially affect our development
costs.
In some instances, we rely on third
parties, over which we have little or no control, to conduct
clinical trials for our products and their failure to perform
their obligations in a timely or competent manner may delay
development and commercialization of our product
candidates.
Pursuant to our license agreement with Adolor for
LidoPAIN SP, Adolor is responsible for conducting clinical
studies relating to LidoPAIN SP in North America. In addition,
Adolor has the exclusive control over, and authority and
responsibility for, the North American regulatory strategies
relating to LidoPAIN SP, including the preparation and filing of
all documents submitted to the FDA. We may enter into similar
agreements from time to time with additional third parties for
our other product candidates whereby these third parties
undertake significant responsibility for research, clinical
trials or other aspects of obtaining FDA approval. As a result,
we may face delays if Adolor or these additional third parties
do not conduct clinical studies and trials, or prepare or file
regulatory related documents, in a timely or competent fashion.
The conduct of the clinical studies by, and the regulatory
strategies of, Adolor or these additional third parties, over
which we have limited or no control, may delay or prevent
regulatory approval of our product candidates, which will have
an adverse effect on our ability to generate revenue from
product sales.
Clinical trial designs that were discussed
with regulatory authorities prior to their commencement may
subsequently be considered insufficient for approval at the time
of application for regulatory approval.
We or our partners discuss with and obtain
guidance from regulatory authorities on several of our clinical
trial protocols. Over the course of conducting our clinical
trials, circumstances may change, such as standards of safety,
efficacy or medical practice, which could affect regulatory
authorities' perception of the adequacy of any of our
clinical trial designs or the data we develop from our studies.
Changes in circumstances could affect our ability to conduct
clinical trials as planned. Even with successful clinical safety
and efficacy data, we may be required to conduct additional,
expensive trials to obtain regulatory approval.
If we receive regulatory approval, our
marketed products will also be subject to ongoing FDA
obligations and continued regulatory review and if we fail to
comply with these regulations, we could lose approvals to market
any products and our business would be seriously
harmed.
Following initial regulatory approval of any of
our product candidates, we will be subject to continuing
regulatory review, including review of adverse experiences and
clinical results that are reported after our products become
commercially available. This would include results from any
post-marketing tests or vigilance required as a condition of
approval. The manufacturer and manufacturing facilities we use
to make any of our product candidates will also be subject to
periodic review and inspection by the FDA or foreign regulatory
agencies. If a previously unknown problem or problems with a
product, manufacturing or laboratory facility used by us is
discovered, the FDA or foreign regulatory agency may impose
restrictions on that product or on the manufacturing facility,
including requiring us to withdraw the product from the market.
Any changes to an approved product, including the way it is
manufactured or promoted, often require FDA approval before the
product, as modified, can be marketed. We and our manufacturers
will be subject to ongoing FDA requirements for submission of
safety and other post-market information. If we and our
manufacturers fail to comply with applicable regulatory
requirements, a regulatory agency may:
•
issue warning letters;
•
impose civil or criminal penalties;
•
suspend or withdraw our regulatory approval;
•
suspend any of our ongoing clinical trials;
•
refuse to approve pending applications or
    supplements to approved applications filed by us;
7
•
impose restrictions on our operations;
•
close the facilities of our manufacturers; or
•
seize or detain products or require a product
    recall.
In addition, the FDA's policies may change
and additional government regulations may be enacted that could
prevent or delay regulatory approval of our product candidates.
We cannot predict the likelihood, nature, or extent of adverse
government regulation that may arise from future legislation or
administrative action, either in the United States or abroad.
Even if the FDA approves our product
    candidates, the approval will be limited to those indications
    and conditions for which we are able to show clinical safety and
    efficacy.
Any regulatory approval that we may receive for
our current or future product candidates will be limited to
those diseases and indications for which such product candidates
are clinically demonstrated to be safe and effective. In
addition to the FDA approval required for new formulations, any
new indication to an approved product also requires FDA
approval. If we are not able to obtain FDA approval for a broad
range of indications for our product candidates, our ability to
effectively market and sell our product candidates may be
greatly reduced and our business and ability to generate revenue
may be adversely affected.
While physicians may choose to prescribe drugs
for uses that are not described in the product's labeling
and for uses that differ from those tested in clinical studies
and approved by regulatory authorities, our regulatory approvals
will be limited to those indications that are specifically
submitted to the FDA for review. These "off-label"
uses are common across medical specialties and may constitute
the best treatment for many patients in varied circumstances.
Regulatory authorities in the United States generally do not
regulate the behavior of physicians in their choice of
treatments. Regulatory authorities do, however, restrict
communications by pharmaceutical companies on the subject of
off-label use. If our promotional activities fail to comply with
these regulations or guidelines, we may be subject to warnings
from, or enforcement action by, these authorities. In addition,
our failure to follow FDA rules and guidelines relating to
promotion and advertising may cause the FDA to delay its
approval or refuse to approve a product, the suspension or
withdrawal of an approved product from the market, recalls,
fines, disgorgement of money, operating restrictions,
injunctions or criminal prosecutions, any of which could harm
our business.
Risks Relating to Commercialization
If we fail to enter into and maintain
    successful strategic alliances for our product candidates, we
    may have to reduce or delay our product commercialization or
    increase our expenditures.
Our strategy for developing, manufacturing and
commercializing potential product candidates in multiple
therapeutic areas currently requires us to enter into and
successfully maintain strategic alliances with pharmaceutical
companies that have product development resources and expertise,
established distribution systems and direct sales forces to
advance our development programs and reduce our expenditures on
each development program and market any products that we may
develop. We have formed a strategic alliance with Adolor with
respect to our LidoPAIN SP product candidate and with Endo with
respect to our LidoPAIN BP product candidate. Although we have
ongoing discussions with other companies with respect to certain
of our product candidates, we may not be able to negotiate
additional strategic alliances on acceptable terms, or at all.
If we are unable to maintain our existing strategic alliances or
establish and maintain additional strategic alliances, we may
have to limit the size or scope of, or delay, one or more of our
product development or commercialization programs, or undertake
the various activities at our own expense. In addition, our
dependence on strategic alliances is subject to a number of
risks, including:
•
the inability to control the amount or timing of
    resources that our collaborators may devote to developing the
    product candidates;
8
•
the possibility that we may be required to
    relinquish important rights, including intellectual property,
    marketing and distribution rights;
•
the receipt of lower revenues than if we were to
    commercialize such products ourselves;
•
our failure to receive future milestone payments
    or royalties should a collaborator fail to commercialize one of
    our product candidates successfully;
•
the possibility that a collaborator could
    separately move forward with a competing product candidate
    developed either independently or in collaboration with others,
    including our competitors;
•
the possibility that our collaborators may
    experience financial difficulties;
•
business combinations or significant changes in a
    collaborator's business strategy that may adversely affect
    that collaborator's willingness or ability to complete its
    obligations under any arrangement; and
•
the chance that our collaborators may operate in
    countries where their operations could be adversely affected by
    changes in the local regulatory environment or by political
    unrest.
If the market does not accept and use our
    product candidates, we will not achieve sufficient product
    revenues and our business will suffer.
Even if we receive regulatory approval to market
our product candidates, physicians, patients, healthcare payors
and the medical community may not accept and use them. The
degree of market acceptance and use of any approved products
will depend on a number of factors, including:
•
perceptions by members of the healthcare
    community, including physicians, about the safety and
    effectiveness of our products;
•
cost effectiveness of our products relative to
    competing products;
•
relative convenience and ease of administration;
•
availability of reimbursement for our products
    from government or healthcare payors; and
•
effectiveness of marketing and distribution
    efforts by us and our licensees and distributors.
Because we expect to rely on sales and royalties
generated by our current lead product candidates for a
substantial portion of our product revenues for the foreseeable
future, the failure of any of these drugs to find market
acceptance would harm our business and could require us to seek
additional funding to continue our other development programs.
Our product candidates could be rendered
    obsolete by technological change and medical advances, which
    would adversely affect the performance of our
    business.
Our product candidates may be rendered obsolete
or uneconomical by the development of medical advances to treat
the conditions that our product candidates are designed to
address. Pain management therapeutics are the subject of active
research and development by many potential competitors,
including major pharmaceutical companies, specialized
biotechnology firms, universities and other research
institutions. While we will seek to expand our technological
capabilities to remain competitive, research and development by
others may render our technology or product candidates obsolete
or noncompetitive or result in treatments or cures superior to
any therapy we developed. Technological advances affecting costs
of production could also negatively affect our ability to sell
products.
We have no manufacturing capacity and
    anticipate continued reliance on third parties for the
    manufacture of our product candidates.
We do not currently operate manufacturing
facilities for our product candidates. We lack the resources and
the capabilities to manufacture any of our product candidates.
We currently rely on a single contract manufacturer for each
product candidate to supply, store and distribute drug supplies
for our
9
clinical trials. Any performance failure or delay
on the part of our existing manufacturers could delay clinical
development or regulatory approval of our product candidates and
commercialization of our drugs, producing additional losses and
depriving us of potential product revenues.
If the FDA or other regulatory agencies approve
any of our product candidates for commercial sale, the product
will need to be manufactured in larger quantities. Since to date
our product candidates have only been manufactured in small
quantities for preclinical and clinical trials, our third party
manufacturers may not be able to successfully increase their
manufacturing capacity in a timely or economical manner, or at
all. We may be forced to identify alternative or additional
third party manufacturers, which may prove difficult because the
number of potential manufacturers is limited and the FDA must
approve any replacement contractor prior to manufacturing our
products. Such approval would require new testing and compliance
inspections. In addition, a new manufacturer would have to be
educated in, or develop substantially equivalent processes for,
production of our product candidates. It may be difficult or
impossible for us to find a replacement manufacturer on
acceptable terms quickly, or at all. If we are unable to
successfully increase the manufacturing capacity for a drug
candidate in a timely and economical manner, the regulatory
approval or commercial launch of any related products may be
delayed or there may be a shortage in supply, both of which may
have an adverse effect on our business.
Our product candidates require precise, high
quality manufacturing. A failure to achieve and maintain high
manufacturing standards, including the incidence of
manufacturing errors, could result in patient injury or death,
product recalls or withdrawals, delays or failures in product
testing or delivery, cost overruns or other problems that could
seriously hurt our business. Manufacturers often encounter
difficulties involving production yields, quality control and
quality assurance, as well as shortages of qualified personnel.
These manufacturers are subject to ongoing periodic unannounced
inspection by the FDA, the U.S. Drug Enforcement Agency, or
DEA, and corresponding state agencies to ensure strict
compliance with current Good Manufacturing Practice and other
applicable government regulations and corresponding foreign
standards; however, we do not have control over third party
manufacturers' compliance with these regulations and
standards. If one of our manufacturers fails to maintain
compliance, the production of our product candidates could be
interrupted, resulting in delays, additional costs and
potentially lost revenues. Additionally, third-party
manufacturers must pass a preapproval inspection before we can
obtain marketing approval for any of our products in development.
Furthermore, our existing and future contract
manufacturers may not perform as agreed or may not remain in the
contract manufacturing business for the time required to
successfully produce, store and distribute our product
candidates. Even if any third party manufacturer or licensee
makes improvements in the manufacturing process for our product
candidates, we may not own, or may have to share, the
intellectual property rights to such innovation. In the event of
a natural disaster, equipment failure, power failure, strike or
other difficulty, we may be unable to replace our third party
manufacturers in a timely manner.
We may be the subject of costly product
    liability claims or product recalls, and we may be unable to
    obtain or maintain insurance adequate to cover potential
    liabilities.
The risk of product liability is inherent in the
development, manufacturing and marketing of human therapeutic
products. Regardless of merit or eventual outcome, product
liability claims may result in:
•
delays in, or failure to complete, our clinical
    trials;
•
withdrawal of clinical trial participants;
•
decreased demand for our product candidates;
•
injury to our reputation;
•
litigation costs;
10
•
substantial monetary awards against us; and
•
diversion of management or other resources from
    key aspects of our operations.
If we succeed in marketing our products, product
liability claims could result in an FDA investigation of the
safety or efficacy of our products or our marketing programs. An
FDA investigation could also potentially lead to a recall of our
products or more serious enforcement actions, or limitations on
the indications for which our products may be used, or
suspension or withdrawal of approval.
We have product liability insurance that covers
our clinical trials up to a $1,000,000 annual limit. We intend
to expand our insurance coverage to include the sale of
commercial products if marketing approval is obtained for our
product candidates. However, insurance coverage is increasingly
expensive. We may not be able to maintain insurance coverage at
a reasonable cost or at all, and the insurance coverage that we
obtain may not be adequate to cover potential claims or losses.
The coverage and reimbursement status of
    newly approved healthcare drugs is uncertain and failure to
    obtain adequate coverage and reimbursement could limit our
    ability to market our products.
Our ability to commercialize any products
successfully will depend in part on the extent to which
reimbursement will be available from governmental and other
third-party payors, both in the United States and in foreign
markets. Even if we succeed in bringing one or more products to
the market, the amount reimbursed for our products may be
insufficient to allow them to compete effectively with products
that are reimbursed at a higher level. If the price we are able
to charge for any products we develop is inadequate in light of
our development costs, our profitability could be adversely
affected.
Reimbursement by a governmental and other
third-party payor may depend upon a number of factors, including
the governmental and other third-party payor's
determination that the use of a product is:
•
a covered benefit under its health plan;
•
safe, effective and medically necessary;
•
appropriate for the specific patient;
•
cost-effective; and
•
neither experimental nor investigational.
Obtaining reimbursement approval for a product
from each third-party and governmental payor is a time consuming
and costly process that could require us to provide supporting
scientific, clinical and cost effectiveness data for the use of
our products to each payor. We may not be able to provide data
sufficient to obtain reimbursement.
Eligibility for coverage does not imply that any
drug product will be reimbursed in all cases or at a rate that
allows us to make a profit. Interim payments for new products,
if applicable, may also not be sufficient to cover our costs and
may not become permanent. Reimbursement rates may vary according
to the use of the drug and the clinical setting in which it is
used, may be based on payments allowed for lower-cost drugs that
are already reimbursed, may be incorporated into existing
payments for other products or services and may reflect
budgetary constraints and/or Medicare or Medicaid data used to
calculate these rates. Net prices for products also may be
reduced by mandatory discounts or rebates required by government
health care programs or by any future relaxation of laws that
restrict imports of certain medical products from countries
where they may be sold at lower prices than in the United States.
The health care industry is experiencing a trend
toward containing or reducing costs through various means,
including lowering reimbursement rates, limiting therapeutic
class coverage and negotiating reduced payment schedules with
service providers for drug products. There have been, and we
expect that there will continue to be, federal and state
proposals to constrain expenditures for medical products and
services, which may affect reimbursement levels for our future
products. In addition, the Centers for Medicare and Medicaid
Services frequently change product descriptors, coverage
policies, product and service codes,
11
payment methodologies and reimbursement values.
Third-party payors often follow Medicare coverage policies and
payment limitations in setting their own reimbursement rates and
may have sufficient market power to demand significant price
reductions.
Foreign governments tend to impose strict
    price controls, which may adversely affect our future
    profitability.
In some foreign countries, particularly in the
European Union, prescription drug pricing is subject to
governmental control. In these countries, pricing negotiations
with governmental authorities can take considerable time after
the receipt of marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be
required to conduct a clinical trial that compares the
cost-effectiveness of our product candidates to other available
therapies. If reimbursement of our products is unavailable or
limited in scope or amount, or if pricing is set at
unsatisfactory levels, our profitability will be negatively
affected.
Risks Relating to our Financial
Condition
Our independent registered public
accounting firm determined that a material weakness related to
our internal controls and procedures existed in certain periods
prior to December 31, 2003, which could adversely impact
our ability to report our consolidated financial results
accurately and on a timely basis.
As a result of numerous journal entry adjustments
and corrections recorded in the latter part of 2004 in
connection with the audit of our 2003 and 2002 consolidated
financial statements and the restatement of our 2001
consolidated financial statements, our independent registered
public accounting firm determined that a material weakness
related to our financial reporting internal controls and
procedures existed in those prior periods. Such journal entry
adjustments and corrections related to our accounting for
patents, redeemable preferred stock dividends, beneficial
conversion features of our debt and equity instruments, interest
and other individually insignificant items. Our auditors made
various recommendations to improve our financial reporting
internal controls, including establishing formal technical
accounting training for financial personnel, reviewing our
internal financial and accounting resources, performing periodic
detailed financial analysis of EpiCept's and its German
subsidiary's financial results, documenting our conclusions
on technical accounting issues and determinations on a timely
basis and ensuring the technical proficiency of our audit
committee to oversee our financial reporting function.
We are addressing these issues and have acted
upon many of these recommendations. We hired a Chief Financial
Officer in the second quarter of 2004. We have installed a new
general ledger system and have adopted stricter journal entry
authorization procedures. We have had only limited experience
with the improvements we have made to date. We cannot assure you
that the steps we have taken to date or any future measures will
remediate the material weakness reported by our independent
registered public accounting firm or that we will implement and
maintain adequate controls over our financial reporting in the
future. Our independent registered public accounting firm has
not evaluated the steps we have taken or intend to take to
address the material weakness described above. We cannot assure
you that additional material weaknesses or reportable conditions
in our financial reporting internal controls will not be
discovered in the future. Any failure to remediate any reported
material weaknesses or implement required new or improved
internal controls, or difficulties encountered in their
implementation, could cause us to fail to meet our reporting
obligations or result in material misstatements in our financial
statements. Inadequate internal controls could also cause
investors to lose confidence in our reported financial
statements, which could adversely affect the trading price of
our stock.
In addition, in 2005 we will be required to
comply with Section 404(a) of the Sarbanes-Oxley Act of
2002, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting
and an attestation to, and testing and assessment of, our
internal controls over financial
12
reporting by our independent registered public
accounting firm. While we have begun the development and
execution of a plan to ensure the effectiveness of our internal
controls over financial reporting, our failure to satisfy the
requirements of Section 404 on a timely basis could
adversely affect the price of our common stock.
We have had limited operating activities,
which may make it difficult for you to evaluate the success of
our business to date and to assess our future
viability.
Our activities to date have been limited to
organizing and staffing our operations, acquiring, developing
and securing our technology and undertaking preclinical and
clinical studies and clinical trials. We have not yet
demonstrated our ability to obtain regulatory approval,
manufacture products or conduct sales and marketing activities.
Consequently, it is difficult to make any predictions about our
future success, viability or profitability based on our
historical operations.
We have incurred significant losses since
our inception, may not generate revenue from product sales for
the foreseeable future.
Since our inception in 1993, we have incurred
significant net losses in each year. Our losses have resulted
principally from costs incurred in connection with our
development activities and from general and administrative costs
associated with our operations. Our net loss for the fiscal year
ended December 31, 2003 and the nine months ended
September 30, 2004 was $9.9 million and
$4.7 million, respectively. As of September 30, 2004,
we had an accumulated deficit of $56.0 million. Even if we
succeed in developing and commercializing one or more of our
products, we may never become profitable. We expect to continue
to incur increasing expenses over the next several years as we:
•
continue to conduct clinical trials for our
    product candidates;
•
seek regulatory approvals for our product
    candidates;
•
develop, formulate and commercialize our product
    candidates;
•
implement additional internal systems and develop
    new infrastructure;
•
acquire or in-license additional products or
    technologies or expand the use of our technologies;
•
maintain, defend and expand the scope of our
    intellectual property; and
•
hire additional personnel.
We will need to generate significant revenues to
achieve and maintain profitability. If we cannot successfully
develop and commercialize our products, we will not be able to
generate significant revenue from product sales or achieve
profitability in the future. Our failure to achieve or maintain
profitability could cause the market price of our common stock
and the value of your investment to decline.
We may need substantial additional funding,
may be unable to raise additional capital when needed and may
not continue as a going concern. This could force us to delay,
reduce or eliminate our product development and
commercialization activities.
Developing drugs, conducting clinical trials and
commercializing products is time-consuming and expensive. Our
future funding requirements will depend on many factors,
including:
•
the progress and cost of our clinical trials and
    other development activities;
•
the costs and timing of obtaining regulatory
    approval;
•
the costs of filing, prosecuting, defending and
    enforcing any patent applications, claims, patent and other
    intellectual property rights;
•
the cost and timing of securing manufacturing
    capabilities for our clinical product candidates and commercial
    products, if any;
•
the costs of establishing sales, marketing and
    distribution capabilities; and
•
the terms and timing of any collaborative,
    licensing and other arrangements that we may establish.
13
We believe that the net proceeds from this
offering, together with our cash on hand, will be sufficient to
fund our projected operating requirements for the next two
years. However, we may need to raise additional capital or incur
indebtedness to continue to fund our operations in the future.
The audit report from our independent registered public
accounting firm, included elsewhere in this prospectus, states
that our recurring losses from operations and our accumulated
deficit raise substantial doubt about our ability to continue as
a going concern. We cannot assure you that sufficient funds will
be available to us when required or on satisfactory terms. If
necessary funds are not available, we may have to delay, reduce
the scope of or eliminate some of our development programs,
which could delay the time to market for any of our product
candidates.
Our quarterly financial results are likely
to fluctuate significantly, which could have an adverse effect
on our stock price.
Our quarterly operating results are difficult to
predict and may fluctuate significantly from period to period,
particularly because we are a relatively small company with no
approved products. The level of our revenues, if any, and
results of operations at any given time could fluctuate as a
result of any of the following factors:
•
results of our clinical trials;
•
our ability to obtain regulatory approval for our
    product candidates;
•
our ability to achieve milestones under our
    strategic relationships on a timely basis or at all;
•
timing of new product offerings, acquisitions,
    licenses or other significant events by us or our competitors;
•
regulatory approvals and legislative changes
    affecting the products we may offer or those of our competitors;
•
our ability to establish and maintain a
    productive sales force;
•
demand and pricing of any products we may offer;
•
physician and patient acceptance of our products;
•
levels of third-party reimbursement for our
    products;
•
interruption in the manufacturing or distribution
    of our products;
•
the effect of competing technological and market
    developments;
•
litigation involving patents, licenses or other
    intellectual property rights; and
• product failures or product liability
lawsuits.
Until we obtain regulatory approval for any of
our product candidates, we cannot begin to market or sell them.
As a result, it will be difficult for us to forecast demand for
our products with any degree of certainty. It is also difficult
for us to predict the timing of the achievement of various
milestones under our strategic relationships. In addition, we
will be increasing our operating expenses as we develop our
product candidates and build our commercial capabilities.
Accordingly, we may experience significant, unanticipated
quarterly losses. Because of these factors, our operating
results in one or more future quarters may fail to meet the
expectations of securities analysts or investors, which could
cause our stock price to decline significantly.
Raising additional capital may cause
dilution to existing stockholders or require us to relinquish
valuable rights.
We may raise additional capital through public or
private equity offerings, debt financings or corporate
collaboration and licensing arrangements. Our ability to raise
additional capital will depend on financial, economic and market
conditions and other factors, many of which are beyond our
control. We cannot be certain that such additional funding will
be available upon acceptable terms, or at all. To the extent
that we raise additional capital by issuing equity securities,
our stockholders may experience further dilution. Debt
financing, if available, may subject us to restrictive covenants
that could limit our flexibility in
14
conducting future business activities. To the
extent that we raise additional capital through collaboration
and licensing arrangements, it may be necessary for us to
relinquish valuable rights to our product candidates that we
might otherwise seek to develop or commercialize independently.
Risks Relating to Intellectual
Property
If we are unable to protect our
intellectual property, our competitors could develop and market
products with features similar to our products and demand for
our products may decline.
Our commercial success will depend in part on
obtaining and maintaining patent protection and trade secret
protection of our technologies and product candidates as well as
successfully defending these patents and trade secrets against
third party challenges. We will only be able to protect our
intellectual property from unauthorized use by third parties to
the extent that valid and enforceable patents or trade secrets
cover them.
The patent positions of pharmaceutical and
biotechnology companies can be highly uncertain and involve
complex legal and factual questions for which important legal
principles remain unresolved. In addition, changes in either the
patent laws or in interpretations of patent laws in the United
States or other countries may diminish the value of our
intellectual property. Accordingly, we cannot predict the
breadth of claims that may be allowed or enforced in our patents
or in third party patents.
The degree of future protection for our
proprietary rights is uncertain because legal means afford only
limited protection and may not adequately protect our rights or
permit us to gain or keep our competitive advantage. For example:
•
we might not have been the first to make the
    inventions covered by each of our pending patent applications
    and issued patents, and we could lose our patent rights as a
    result;
•
we might not have been the first to file patent
    applications for these inventions or our patent applications may
    not have been timely filed, and we could lose our patent rights
    as a result;
•
others may independently develop similar or
    alternative technologies or duplicate any of our technologies;
•
it is possible that none of our pending patent
    applications will result in issued patents;
•
our issued patents may not provide a basis for
    commercially viable drugs or therapies, may not provide us with
    any protection from unauthorized use of our intellectual
    property by third parties, may not provide us with any
    competitive advantages;
•
our patent applications or patents may be subject
    to interference, opposition or similar administrative
    proceedings;
•
we may not develop additional proprietary
    technologies that are patentable; or
•
the patents of others may have an adverse effect
    on our business.
Moreover, the issuance of a patent is not
conclusive as to its validity or enforceability and it is
uncertain how much protection, if any, will be afforded by our
patents if we attempt to enforce them and they are challenged in
court or in other proceedings, such as oppositions, which may be
brought in U.S. or foreign jurisdictions to challenge the
validity of a patent. A third party may challenge the validity
or enforceability of a patent after its issuance by the
U.S. Patent and Trademark Office, or USPTO. It is possible
that a third party could attempt to challenge the validity or
enforceability of the two issued patents related to
LidoPAIN SP based upon a short videotape prepared by the
inventor more than one year prior to the filing of the initial
patent application related to LidoPAIN SP. It is possible
that a third party could attempt to challenge the validity and
enforceability of these patents based on the videotape and/or
its nondisclosure to the USPTO.
The defense and prosecution of intellectual
property suits, interferences, oppositions and related legal and
administrative proceedings in the United States are costly, time
consuming to pursue and result in diversion of resources. The
outcome of these proceedings is uncertain and could
significantly harm our business.
15
We also rely on trade secrets to protect our
technology, especially where we do not believe patent protection
is appropriate or obtainable. However, trade secrets are
difficult to protect. While we use reasonable efforts to protect
our trade secrets, our employees, consultants, contractors,
outside scientific partners and other advisors may
unintentionally or willfully disclose our confidential
information to competitors. Enforcing a claim that a third party
improperly obtained and is using our trade secrets is expensive
and time consuming, and the outcome is unpredictable. In
addition, courts outside the United States are sometimes less
willing to protect trade secrets. Moreover, our competitors may
independently develop equivalent knowledge, methods and know-how.
If we are not able to defend the patent
protection position of our technologies and product candidates,
then we will not be able to exclude competitors from marketing
product candidates that directly compete with our product
candidates, and we may not generate enough revenue from our
product candidates to justify the cost of their development and
to achieve or maintain profitability.
If we are sued for infringing intellectual
property rights of third parties, such litigation will be costly
and time consuming, and an unfavorable outcome would have a
material adverse effect on our business.
Our ability to commercialize our products depends
on our ability to sell our products without infringing the
proprietary rights of third parties. Numerous U.S. and foreign
issued patents and pending applications, which are owned by
third parties, exist in the same field of research we are
exploring. In addition, because patent applications can take
several years to issue, there may be currently pending
applications, unknown to us, which may later result in issued
patents that our product candidates may infringe. There could
also be existing patents of which we are not aware that our
product candidates may inadvertently infringe.
Although we are not aware that any of our product
candidates infringe the intellectual property of others, we
cannot assure you that this is the case. There is a substantial
amount of litigation involving patent and other intellectual
property rights in the biotechnology and biopharmaceutical
industries generally. If a third party claims that we infringe
on their technology, we could face a number of issues that could
adversely affect our business, including:
•
infringement and other intellectual property
    claims which, with or without merit, can be costly and time
    consuming to litigate and can delay the regulatory approval
    process and divert management's attention from our core
    business strategy;
•
substantial damages for past infringement, which
    we may have to pay if a court determines that our product
    infringes a competitor's patent;
•
an injunction prohibiting us from selling or
    licensing our product unless the patent holder licenses the
    patent to us, which it is not required to do; and
•
if a license is available from a patent holder,
    we may have to pay substantial royalties or grant cross licenses
    to our patents.
We may be subject to damages resulting from
claims that our employees or we have wrongfully used or
disclosed alleged trade secrets of their former
employers.
Many of our employees were previously employed at
other biotechnology or pharmaceutical companies, including our
competitors or potential competitors. Although no claims against
us are currently pending, we may be subject to claims that these
employees or we have inadvertently or otherwise used or
disclosed trade secrets or other proprietary information of
their former employers. Litigation may be necessary to defend
against these claims. If we fail in defending such claims, in
addition to paying monetary claims, we may lose valuable
intellectual property rights or personnel. A loss of key
research personnel or their work product could hamper or prevent
our ability to commercialize certain product candidates, which
could severely harm our business. Even if we are successful in
defending against these claims, litigation could result in
substantial costs and be a distraction to management.
16
Risks Relating to our Business and
Industry
Our failure to attract and retain skilled
    personnel could impair our product development and
    commercialization efforts.
Our success is substantially dependent on our
continued ability to attract, retain and motivate highly
qualified management, scientific and technical personnel and our
ability to develop and maintain important relationships with
leading institutions, clinicians and scientists. We are highly
dependent upon our senior management, particularly John V.
Talley, our President and Chief Executive Officer, and key
scientific and technical personnel. The loss of the services of
any member of our senior management, key scientific or technical
staff may significantly delay or prevent the achievement of
product development, commercialization and other business
objectives. We also rely on consultants and advisors to assist
us in formulating our research and development strategy. All of
our consultants and advisors are either self-employed or
employed by other organizations, and they may have conflicts of
interest or other commitments such as consulting or advisory
contracts with other organizations that may affect their ability
to contribute to us.
As of September 30, 2004, we had 13
employees. We believe that we will need to recruit additional
management and technical personnel. There is currently a
shortage of, and intense competition for, skilled executives and
employees with relevant scientific and technical expertise, and
this shortage is likely to continue. The inability to attract
and retain sufficient scientific, technical and managerial
personnel could limit or delay our product development efforts,
which would adversely affect the commercialization of our
product candidates and growth of our business.
We expect to expand our operations, and as
a result, we may encounter difficulties in managing our growth,
which could disrupt our operations.
We expect to have significant growth in the scope
of our operations as our product candidates are commercialized.
To manage our anticipated future growth, we must continue to
implement and improve our managerial, operational and financial
systems, expand our facilities and continue to recruit and train
additional qualified personnel. Due to our limited resources, we
may not be able to effectively manage the expansion of our
operations or recruit and train additional qualified personnel.
The physical expansion of our operations may lead to significant
costs and may divert our management and business development
resources. Any inability to manage growth could delay the
execution of our business strategy or disrupt our operations.
Our competitors may develop and market
drugs that are less expensive, safer, or more effective, which
may diminish or eliminate the commercial success of any of our
product candidates.
The biotechnology and pharmaceutical industries
are highly competitive and characterized by rapid technological
change. Because our research approach integrates many
technologies, it may be difficult for us to stay abreast of the
rapid changes in technology. If we fail to stay at the forefront
of technological change, we will be unable to compete
effectively. Our competitors may render our technologies
obsolete by advances in existing technological approaches or the
development of different approaches by one or more of our
current or future competitors.
We will compete with Pfizer Inc. and Endo in the
treatment of neuropathic pain; Purdue Pharmaceuticals, L.P.,
Abbott Laboratories, and Endo in the treatment of post-operative
pain; Johnson & Johnson and others in the treatment of
back pain. Our competitors may:
•
develop and market product candidates that are
    less expensive and more effective than our future product
    candidates;
•
adapt more quickly to new technologies and
    scientific advances;
•
commercialize competing product candidates before
    we or our partners can launch any product candidates developed
    from our product candidates;
•
initiate or withstand substantial price
    competition more successfully than we can;
•
have greater success in recruiting skilled
    scientific workers from the limited pool of available talent;
17
•
more effectively negotiate third party licenses
    and strategic alliances; and
•
take advantage of acquisition or other
    opportunities more readily than we can.
We will compete for market share against
fully-integrated pharmaceutical companies and smaller companies
that are collaborating with larger pharmaceutical companies, new
companies, academic institutions, government agencies and other
public and private research organizations. Many of these
competitors, either alone or together with their partners, may
develop new product candidates that will compete with ours, as
these competitors may operate larger research and development
programs or have substantially greater financial resources than
we do. Our competitors may also have significantly greater
experience in:
•
developing drugs;
•
undertaking preclinical testing and human
    clinical trials;
•
building relationships with key customers and
    opinion-leading physicians;
•
obtaining and maintaining FDA and other
    regulatory approvals of drugs;
•
formulating and manufacturing drugs; and
•
launching, marketing and selling drugs.
These and other competitive factors may adversely
affect our financial performance.
Risks Relating to our Common Stock and this
Offering
We expect that our stock price will
    fluctuate significantly, and you may not be able to resell your
    shares at or above the initial public offering
    price.
Prior to this offering, there has been no public
market for our common stock. An active and liquid trading market
for our common stock may not develop or be sustained following
this offering. We will negotiate and determine the initial
public offering price with the representatives of the
underwriters based on several factors. This price may vary from
the market price of our common stock after this offering. The
volatility of biopharmaceutical stocks often does not relate to
the operating performance of the companies represented by the
stock. Factors that could cause this volatility in the market
price of our common stock include:
•
results from and any delays in our clinical trial
    programs;
•
announcements concerning our collaborations with
    Adolor and Endo or future strategic alliances;
•
delays in the development and commercialization
    of our product candidates due to inadequate allocation of
    resources by our strategic collaborators or otherwise;
•
market conditions in the broader stock market in
    general, or in the pharmaceutical and biotechnology sectors in
    particular;
•
issuance of new or changed securities
    analysts' reports or recommendations;
•
actual and anticipated fluctuations in our
    quarterly financial and operating results;
•
developments or disputes concerning our
    intellectual property or proprietary rights;
•
introduction of technological innovations or new
    commercial products by us or our competitors;
•
additions or departures of key personnel;
•
FDA or international regulatory actions affecting
    us or our industry;
•
issues in manufacturing our product candidates;
•
market acceptance of our product candidates;
•
third party healthcare reimbursement
    policies; and
•
litigation or public concern about the safety of
    our product candidates.
18
These and other factors may cause the market
price and demand for our common stock to fluctuate
substantially, which may limit or prevent investors from readily
selling their shares of common stock and may otherwise
negatively affect the liquidity of our common stock. In
addition, in the past, when the market price of a stock has been
volatile, holders of that stock have instituted securities class
action litigation against the company that issued the stock. If
any of our stockholders brought a lawsuit against us, we could
incur substantial costs defending the lawsuit. Such a lawsuit
could also divert the time and attention of our management.
If the ownership of our common stock
continues to be highly concentrated, it may prevent you and
other stockholders from influencing significant corporate
decisions and may result in conflicts of interest that could
cause our stock price to decline.
Our executive officers, directors and their
affiliates will beneficially own or control
approximately                     percent
of the outstanding shares of our common stock (after giving
effect to the conversion of all outstanding convertible
preferred stock and the exercise of all outstanding vested and
unvested options and warrants) following the completion of this
offering. Accordingly, these executive officers, directors and
their affiliates, acting as a group, will have substantial
influence over the outcome of corporate actions requiring
stockholder approval, including the election of directors, any
merger, consolidation or sale of all or substantially all of our
assets or any other significant corporate transactions. These
stockholders may also delay or prevent a change of control of
us, even if such a change of control would benefit our other
stockholders. The significant concentration of stock ownership
may adversely affect the trading price of our common stock due
to investors' perception that conflicts of interest may
exist or arise.
If securities or industry analysts do not
    publish research or reports about our business, if they change
    their recommendations regarding our stock adversely or if our
    operating results do not meet their expectations, our stock
    price and trading volume could decline.
The trading market for our common stock will be
influenced by the research and reports that industry or
securities analysts publish about us or our business. If one or
more of these analysts cease coverage of our company or fail to
publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or
trading volume to decline. Moreover, if one or more of the
analysts who cover us downgrade our stock or if our operating
results do not meet their expectations, our stock price could
decline.
Future sales of common stock by our
    existing stockholders may cause our stock price to
    fall.
The market price of our common stock could
decline as a result of sales by our existing stockholders in the
market after this offering, or the perception that these sales
could occur. These sales might also make it more difficult for
us to sell equity securities at a time and price that we deem
appropriate. The lock-up agreements to be entered into by our
executive officers and directors and substantially all of our
stockholders and optionholders provide that Wachovia Capital
Markets, LLC, in its sole discretion, may release those parties,
at any time or from time to time and without notice, from their
obligation not to dispose of shares of common stock for a period
of 180 days after the date of this prospectus. Wachovia
Capital Markets, LLC has no pre-established conditions to
waiving the terms of the lock-up agreements, and any decision by
it to waive those conditions would depend on a number of
factors, which may include market conditions, the performance of
the common stock in the market and our financial condition at
that time. See "Shares Eligible for Future Sale."
19
We will have broad discretion in how we use
    the proceeds of this offering, and we may not use these proceeds
    effectively, which could affect our results of operations and
    cause our stock price to decline.
We will have considerable discretion in the
application of the net proceeds of this offering. We currently
intend to use the net proceeds for working capital and general
corporate purposes, including:
•
clinical trials;
•
research and development expenses;
•
general and administrative expenses; and
•
potential acquisitions of companies, products and
    technologies that complement our business.
The amounts and timing of our actual expenditures
depend on several factors, including the progress of our
research and development efforts and the amount of cash used by
our operations. We have not yet determined the amount or timing
of the expenditures listed above. We also intend to use
approximately $5.8 million of the net proceeds to repay
existing indebtedness. We may use the net proceeds in ways in
which stockholders do not agree, or for corporate purposes that
do not yield a significant return or any return at all for our
stockholders.
Provisions of our charter documents or
    Delaware law could delay or prevent an acquisition of our
    company, even if the acquisition would be beneficial to our
    stockholders, and could make it more difficult for you to change
    management.
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 stockholders
might otherwise receive a premium for their shares. This is
because these provisions may prevent or frustrate attempts by
stockholders to replace or remove our current management. These
provisions include:
•
a classified board of directors;
•
a prohibition on stockholder action through
    written consent;
•
a requirement that special meetings of
    stockholders be called only by the board of directors or a
    committee duly designated by the board of directors whose powers
    and authorities include the power to call such special meetings;
•
advance notice requirements for stockholder
    proposals and nominations; and
•
the authority of the board of directors to issue
    preferred stock with such terms as the board of directors may
    determine.
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 that 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.
As a result of these provisions in our charter
and Delaware law, the price investors may be willing to pay in
the future for shares of our common stock may be limited.
The requirements of being a public company
    may strain our resources and distract management.
As a public company, we will be subject to the
reporting requirements of the Securities Exchange Act of 1934,
as amended, the Sarbanes-Oxley Act and the listing requirements
of The Nasdaq National Market, Inc. We expect that the
obligations of being a public company will require significant
additional expenditures and will place additional demands on our
management as we comply with the reporting
20
requirements of a public company. We will need to
hire additional accounting and financial staff with appropriate
public company experience and technical accounting knowledge.
We have never paid dividends on our capital
    stock, and we do not anticipate paying any cash dividends in the
    foreseeable future.
We have not paid cash dividends on any of our
classes of capital stock to date, and we currently intend to
retain our future earnings, if any, to fund the development and
growth of our businesses. In addition, the terms of existing or
any future debt may preclude us from paying these dividends. As
a result, capital appreciation, if any, of our common stock will
be your sole source of gain for the foreseeable future.
Investors in this offering will pay a much
    higher price than the book value of our common
    stock.
If you purchase common stock in this offering,
you will pay more for your shares than the amounts paid by
existing stockholders for their shares. You will incur immediate
and substantial dilution of
$           per
share, representing the difference between our pro forma net
tangible book value per share after giving effect to this
offering and an assumed initial public offering price of
$          .
In the past, we issued options and warrants to acquire common
stock at prices significantly below the initial public offering
price. To the extent these outstanding options or warrants are
ultimately exercised, you will sustain further dilution.
21
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus, including the sections entitled
"Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and
"Business," contains forward-looking statements.
Forward-looking statements include, but are not
limited to, statements about:
•
the progress of preclinical development and
    laboratory testing and clinical trials;
•
the time and costs involved in obtaining
    regulatory approvals;
•
delays that may be caused by evolving
    requirements of regulatory agencies;
•
the number of drug candidates we pursue;
•
the costs involved in filing and prosecuting
    patent applications and enforcing or defending patent claims;
•
the establishment of sales, marketing and/or
    manufacturing capabilities;
•
our ability to establish, enforce and maintain
    selected strategic alliances and activities required for product
    commercialization;
•
the acquisition of technologies, products and
    other business opportunities that require financial
    commitments; and
•
our revenues, if any, from successful development
    and commercialization of our drug candidates.
These statements relate to future events or our
future financial performance and involve known and unknown
risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be
materially different from any future results, levels of
activity, performance or achievements expressed or implied by
these forward-looking statements. These risks and other factors
include those listed under "Risk Factors" and
elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as
"may," "will," "should,"
"expects," "intends," "plans,"
"anticipates," "believes,"
"estimates," "predicts,"
"potential," "continue" or the negative of
these terms or other comparable terminology. Although we believe
that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We do not
intend to update any of the forward-looking statements after the
date of this prospectus or to conform these statements to actual
results. Neither the Private Securities Litigation Reform Act of
1995 nor Section 27A of the Securities Act provides any
protection to us for statements made in this prospectus.
Neither we nor any of the underwriters have
authorized anyone to provide information different from that
contained in this prospectus. When you make a decision about
whether to invest in our common stock, you should not rely upon
any information other than the information in this prospectus.
Neither the delivery of this prospectus nor sale of common stock
means that information contained in this prospectus is correct
after the date of this prospectus.
22
USE OF PROCEEDS
Our net proceeds from the sale
of                      shares
of common stock in this offering are estimated to be
approximately
$           million,
based on an assumed offering price of
$           per
share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, which are payable
by us.
We intend to use the proceeds of this offering
for working capital and general corporate purposes, including to:
•
continue clinical trials and research and
    development efforts;
•
continue preparation for the manufacturing and
    commercialization of our product candidates; and
•
repay approximately $5.8 million of our
    outstanding indebtedness (including accrued interest), which
    includes our convertible bridge loan and our loan from IKB.
The convertible bridge loan matures on
October 30, 2005 and bears interest at a rate of
8% per annum. The term loan with IKB matures on
December 31, 2006 and currently bears interest at a rate of
20% per annum, payable quarterly. For more detail on the
convertible bridge loan and our term loan from IKB, see
"Management's Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources."
The amounts and timing of our actual expenditures
depend on several factors, including the progress of our
research and development efforts and the amount of cash used by
our operations. We have not determined the amount or timing of
the expenditures in the areas listed above. Pending their use,
we intend to invest the net proceeds in short-term,
investment-grade, interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid cash dividends on
our capital stock. We do not anticipate paying any cash
dividends on our capital stock in the foreseeable future. We
currently intend to retain all available funds and any future
earnings to fund the development and growth of our business.
23
CAPITALIZATION
The following table sets forth our cash and cash
equivalents and our capitalization as of September 30, 2004
on an actual basis and on a pro forma as adjusted basis, to give
effect to:
•
the filing of an amended and restated certificate
    of incorporation to
    authorize                      shares
    of common stock
    and                      shares
    of undesignated preferred stock,
•
the conversion of all of our preferred stock into
    an aggregate
    of                      shares
    of common stock immediately prior to the closing of this
    offering;
•
the exercise of the bridge warrants into an
    aggregate
    of                      shares
    of common stock immediately prior to the closing of this
    offering;
•
the conversion of the tbg convertible term loan
    into an aggregate
    of                      shares
    of common stock immediately prior to the closing of this
    offering;
•
the sale
    of                      shares
    of common stock in this offering at an assumed initial public
    offering price of
    $          per
    share, after deducting the estimated underwriting discounts and
    commissions and estimated offering expenses payable by
    us; and
•
the repayment of certain of our outstanding
    indebtedness as described under "Use of Proceeds."
You should read this table in conjunction with
the sections of this prospectus entitled "Selected
Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and with our consolidated financial statements
and the notes thereto.
As of September 30, 2004
Pro Forma
Actual
As Adjusted
(Dollars in thousands)
Cash and cash equivalents
$
3,026
$
Long-term debt, less current portion
$
10,692
Series B Redeemable Convertible Preferred
    Stock, $0.0001 par value, 3,440,069 shares authorized,
    3,106,736 shares issued and outstanding, actual;
    0 shares issued and outstanding, as adjusted
6,667
Series C Redeemable Convertible Preferred
    Stock, $0.0001 par value, 12,769,573 shares authorized,
    8,839,573 shares issued and outstanding, actual;
    0 shares, issued and outstanding, as adjusted
18,374
Warrants
4,584
Stockholders' (deficit) equity:
Series A Convertible Preferred Stock,
    $0.0001 par value, 3,422,620 shares authorized,
    3,368,485 shares issued and outstanding, actual;
    0 shares issued and outstanding, as adjusted
8,226
Common stock, $0.0001 par value,
    31,000,000 shares authorized, 6,798,485 shares issued
    and outstanding,
    actual;            shares
    outstanding pro forma
1
Additional paid-in capital
150
Deferred stock compensation
(90
)
Accumulated deficit
(55,993
)
Accumulated other comprehensive loss
(953
)
Treasury stock, 50,000 shares
(75
)
Total stockholders' (deficit) equity
(48,734
)
Total capitalization
$
(8,417
)
$
The number of shares of common stock to be
outstanding after this offering is based on the number of shares
outstanding as
of                     .
This number excludes:
•
shares
    of our common stock issuable upon exercise of options
    outstanding, at weighted average exercise price of
    $           per
    share; and
•
shares
    of our common stock reserved for issuance under our 1995 Stock
    Option Plan, our 2005 Equity Incentive Plan and our 2005
    Employee Stock Purchase Plan.
24
DILUTION
If you invest in our common stock in this
offering, your ownership interest will be diluted to the extent
of the difference between the initial public offering price per
share and the historical adjusted net tangible book value per
share of common stock upon the completion of this offering. The
historical adjusted net tangible book value as
of                     was
approximately
$           million,
or approximately
$           per
share. Historical adjusted net tangible book value per share
represents our total tangible assets less total liabilities
divided by the pro forma total number of shares of common stock
outstanding after giving effect to the automatic conversion of
all shares of our outstanding preferred stock. Dilution in
historical adjusted net tangible book value per share represents
the difference between the amount per share paid by purchasers
of common stock in this offering and the net tangible book value
per share of common stock immediately after the closing of this
offering.
After giving effect to the sale of the shares of
common stock at an assumed initial public offering price of
$           per
share and after deducting underwriting discounts and commissions
and estimated offering expenses payable by us, our pro forma net
tangible book value as
of                     would
have been approximately
$           million,
or
$           per
share of common stock. This represents an immediate increase in
net tangible book value of
$           per
share to existing stockholders and an immediate dilution of
$           per
share to new investors purchasing shares of common stock in this
offering at the initial offering price.
The following table illustrates this dilution on
a per share basis:
Assumed initial public offering price per share
$
Historical adjusted net tangible book value per
    share as of
$
Increase per share attributable to new investors
Pro forma net tangible book value per share after
    this offering
Dilution per share to new investors
$
The following table summarizes as
of                     the
number of shares of our common stock purchased from us, the
total consideration paid to us, and the average price per share
paid to us by existing stockholders and to be paid by new
investors purchasing shares of our common stock in this
offering. The table assumes an initial public offering price of
$           per
share, and deducts underwriting discounts and commissions and
estimated offering expenses payable by us:
Shares Purchased
Total Consideration
Average
Price Per
Number
Percent
Amount
Percent
Share
Existing stockholders
%
$
%
$
New investors
Total
100
%
$
100
%
The above discussion and tables are based
on                      shares
of common stock issued and outstanding as of September 30,
2004 and excludes:
•
shares
    of our common stock issuable upon exercise of options
    outstanding; and
•
shares
    of our common stock reserved for issuance under our 1995 Stock
    Option Plan, our 2005 Equity Incentive Plan and our 2005
    Employee Stock Purchase Plan.
To the extent the outstanding options are
exercised, you will experience further dilution. In addition, we
may choose to raise additional capital due to market conditions
or strategic considerations even if we believe we have
sufficient funds for our current or future operating plans. To
the extent that additional capital is raised through the sale of
equity or convertible debt securities, the issuance of these
securities could result in further dilution to our stockholders.
25
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following financial
information together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
following this section and our consolidated financial statements
and the notes thereto included elsewhere in this
prospectus.
The following tables present our selected
consolidated balance sheet and statement of operations data as
of and for the fiscal years ended December 31, 1999, 2000,
2001, 2002 and 2003 and the nine months ended September 30,
2003 and 2004. Our consolidated balance sheet data as of
December 31, 2002 and 2003 and September 30, 2004 and
our consolidated statement of operations data for the fiscal
years ended December 31, 2001, 2002 and 2003 and the nine
months ended September 30, 2004 have been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. Our consolidated balance sheet data as of
December 31, 1999, 2000 and 2001 and our consolidated
statement of operations data for the fiscal years ended
December 31, 1999 and 2000 have been derived from our
unaudited consolidated financial statements not included in this
prospectus. Our selected consolidated financial data for and as
of the nine months ended September 30, 2003 were derived
from our unaudited consolidated financial statements included
elsewhere in this prospectus. Operating results for the nine
months ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the full
fiscal year ending December 31, 2004.
Nine Months
Year Ended December 31,
Ended September 30,
1999(1)
2000(1)
2001(1)
2002
2003
2003
2004
(Dollars in thousands, except per share data)
Consolidated Statements of Operations
    Data:
Revenue
$
16
$
—
$
—
$
—
$
434
$
160
$
1,875
Operating expenses:
General and administrative
3,529
1,904
3,394
3,493
3,407
2,131
3,148
Research and development
2,209
2,784
4,085
4,874
1,641
1,183
1,272
Total operating expenses
5,738
4,688
7,479
8,367
5,048
3,314
4,420
Loss from operations
(5,722
)
(4,688
)
(7,479
)
(8,367
)
(4,614
)
(3,154
)
(2,545
)
Other income (expense), net
843
(2,070
)
186
(1,509
)
(5,364
)
(3,613
)
(2,123
)
Loss before benefit for income taxes
(4,879
)
(6,758
)
(7,293
)
(9,876
)
(9,978
)
(6,767
)
(4,668
)
Benefit for income taxes
—
235
278
225
75
—
—
Net loss
(4,879
)
(6,523
)
(7,015
)
(9,651
)
(9,903
)
(6,767
)
(4,668
)
Warrant deemed dividend and redeemable
    convertible preferred stock dividends
—
(301
)
(1,254
)
(1,288
)
(1,254
)
(941
)
(1,091
)
Loss attributable to common stockholders
$
(4,879
)
$
(6,824
)
$
(8,269
)
$
(10,939
)
$
(11,157
)
$
(7,708
)
$
(5,759
)
Basic and diluted loss per common share
$
(0.75
)
$
(1.05
)
$
(1.26
)
$
(1.66
)
$
(1.69
)
$
(1.17
)
$
(0.86
)
Weighted average shares outstanding
6,507,323
6,507,323
6,551,622
6,597,638
6,602,871
6,602,707
6,710,741
Unaudited pro forma basic and diluted loss per
    common share(2)
$
(0.24
)
$
(0.12
)
Shares used in computing unaudited pro forma
    basic and diluted loss per common share(2)
41,486,162
41,666,628
26
As of December 31,
As of
September 30,
1999(1)
2000(1)
2001(1)
2002
2003
2004
(Dollars in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents
$
895
$
10,791
$
5,356
$
620
$
8,007
$
3,026
Working capital (deficit)
462
9,896
4,590
(933
)
3,133
(3,068
)
Total assets
1,839
11,232
5,654
951
8,196
3,939
Long-term debt, net of current portion
9,032
5,709
5,407
7,085
10,272
10,692
Redeemable convertible preferred stock
—
17,147
19,201
20,456
24,099
25,040
Accumulated deficit
(16,376
)
(22,998
)
(30,013
)
(39,664
)
(50,354
)
(55,993
)
Total stockholders' deficit
(8,332
)
(13,931
)
(21,174
)
(31,430
)
(43,595
)
(48,734
)
(1)
As discussed in Note 11 to our consolidated
    financial statements, our 2001 consolidated financial statements
    were restated. We made certain adjustments to our previously
    audited 1999 and 2000 consolidated financial statements in this
    summary to reflect our results on a basis consistent with our
    restated 2001 consolidated financial statements. Those
    adjustments have not been audited.
(2)
For a discussion of the calculation of unaudited
    pro forma loss per common share, see Note 2 to our
    consolidated financial statements.
27
MANAGEMENT'S DISCUSSION AND
ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion of
our financial condition and results of operations in conjunction
with our consolidated financial statements and the related notes
included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties.
As a result of many factors, including those set forth under the
section entitled "Risk Factors" and elsewhere in this
prospectus, our actual results may differ materially from those
anticipated in these forward-looking statements.
Overview
We are a specialty pharmaceutical company focused
on the development and commercialization of topically-delivered
prescription pain management therapeutics. We have six product
candidates in clinical development; three in late-stage
development that are ready to enter, or have entered,
Phase IIb or Phase III clinical trials, and three that
have completed initial Phase II clinical trials. All of our
product candidates target moderate-to-severe pain that is
influenced, or mediated, by nerve receptors located just beneath
the skin's surface. Our product candidates utilize
proprietary formulations and several topical delivery
technologies to administer FDA-approved pain management
therapeutics, or analgesics.
Our late stage product candidates are:
EpiCept NP-1, a prescription topical analgesic
cream designed to provide effective, long-term relief from the
pain of peripheral neuropathies;
LidoPAIN SP, a sterile prescription
analgesic patch designed to provide sustained topical delivery
of lidocaine to a post-surgical or post-traumatic sutured wound
while also providing a sterile protective covering for the
wound; and
LidoPAIN BP, a prescription analgesic
non-sterile patch designed to provide sustained topical delivery
of lidocaine for the treatment of acute or recurrent lower back
pain.
Our objective is to address unmet medical needs
in pain management by developing a broad portfolio of
topically-delivered prescription analgesics for the treatment of
moderate-to-severe pain where existing treatments are
ineffective or cause significant adverse side effects. To
achieve our objective, the three key elements of our strategy
are to:
•
focus our development efforts on
    topically-delivered analgesics targeting peripheral nerve
    receptors;
•
focus our development efforts on FDA-approved
    drugs; and
•
opportunistically enter into development and
    commercialization alliances for our products.
None of our product candidates has been approved
by the FDA or any comparable foreign agencies. We have yet to
generate revenues from product sales. Until 2003, we had not
generated any significant revenues. During 2003, we entered into
two agreements, the first in July with Adolor for the
development and commercialization of certain products, including
LidoPAIN SP in North America, and the second in December
with Endo for the worldwide commercialization of certain
products, including LidoPAIN BP. We received a total of
$10.0 million in upfront license fees upon the closing of
these license agreements. Under these relationships, we are
eligible to receive an additional $102.5 million in
milestone payments and, upon receipt of appropriate regulatory
approvals, royalties based on net sales of products. There is no
assurance that any of these milestones will be earned or any
royalties paid. Our ability to generate additional revenue in
the future will depend on our ability to meet development or
regulatory milestones under our existing license agreements that
trigger additional payments to us, to enter into new license
agreements for other products or territories and to receive
regulatory approvals for, and successfully commercialize, our
product candidates either directly or through commercial
partners.
Since our inception we have incurred significant
net losses each year. Our net loss for the year ended
December 31, 2003 and the nine months ended
September 30, 2004 was $9.9 million and
$4.7 million,
28
respectively. As of September 30, 2004, we
had an accumulated deficit of $56.0 million. Our losses
have resulted principally from costs incurred in connection with
our development activities and from general and administrative
expenses. Even if we succeed in developing and commercializing
one or more of our product candidates, we may never become
profitable. We expect to continue to incur increasing expenses
over the next several years as we:
•
continue to conduct clinical trials for our
    product candidates;
•
seek regulatory approvals for our product
    candidates;
•
develop, formulate, and commercialize our product
    candidates;
•
implement additional internal systems and develop
    new infrastructure;
•
acquire or in-license additional products or
    technologies or expand the use of our technologies;
•
maintain, defend and expand the scope of our
    intellectual property; and
•
hire additional personnel.
Our operations to date have been funded
principally through the proceeds from the sales of common and
preferred securities, debt, revenue from collaborative
relationships, investment income earned on cash balances and
short-term investments and the sales of a portion of its New
Jersey net operating loss carry forwards.
As disclosed in Note 11 to our consolidated
financial statements, our 2001 consolidated financial statements
were restated to correct errors.
We have a 100%-owned subsidiary, EpiCept GmbH,
based in Munich, Germany, which is engaged in research and
development activities on our behalf. Historically, a
significant amount of our debt was denominated in euros.
Following this offering, more than half of our euro-denominated
debt will either be repaid or converted into common stock.
Financial Operations Review
Revenues
Our revenues are limited to amounts earned under
licenses and related development agreements. We have not
generated any significant revenue from product sales or
royalties, nor do we expect to generate such revenues in the
near term. We are currently recognizing the payment of upfront
license fees from our licensees as revenues on a straight-line
basis over the anticipated development period for the respective
product candidates. Licensing fees of $2.5 and $7.5 million
were received in 2003 from Adolor and Endo, respectively, of
which $2.3 million in the aggregate was recognized as
revenue through September 30, 2004. We expect that any
additional revenue we generate as a result of the timing and
amount of milestone payments we may receive from our strategic
relationships, as well as those we may receive upon the sale of
our product candidates, to the extent any are successfully
commercialized, will vary from quarter-to-quarter and from
year-to-year.
Royalty Expense
Upon receipt of marketing approval and
commencement of commercial sales, which may not occur for
several years, we will owe royalties to licensors of certain
patents. Under a royalty agreement with Dr. R. Douglas
Cassel, we are obligated to pay a royalty based on net sales of
any of our products for the treatment of pain associated with
surgically closed wounds. Under a sublicense agreement with
Epitome Pharmaceuticals Limited that relates to EpiCept NP-1, we
are obligated to pay royalties based on annual net sales derived
from the products incorporating the licensed technology. In each
case, our royalty obligation expires upon the expiration of the
last to expire related patent.
29
Research and Development
    Expense
Research and development expense consists of
development work associated with product candidates, including
employee compensation, costs of preclinical studies, clinical
trials and clinical supplies, consultant fees and payments to
our research partners. We are responsible for all of the
research and development costs related to EpiCept NP-1 and
LidoPAIN BP and for continuing and completing our European
Phase III clinical trial for LidoPAIN SP that we
anticipate will be used to support an application for marketing
approval in Europe. As we commence more extensive development
activities, including Phase III clinical trials and
commercial scale-up, we expect research and development expense
to increase substantially.
For the years ended December 31, 2003, 2002,
and 2001, and the nine-month periods ended September 30,
2004 and 2003, we incurred the following research and
development expense:
Nine Months
Ended
Year Ended December 31,
September 30,
2003
2002
2001
2004
2003
(Dollars in thousands)
Direct Expenses
EpiCept NP-1
$
447
$
2,069
$
1,144
$
260
$
200
LidoPAIN SP
186
842
513
139
196
LidoPAIN BP
22
527
501
31
22
Other Projects
43
345
902
30
76
Total Direct Expenses
698
3,783
3,060
460
494
Indirect Expenses
Staffing
637
681
654
629
489
Other Indirect
306
410
371
183
200
Total Indirect Expenses
943
1,091
1,025
812
689
Total Research &
    Development
$
1,641
$
4,874
$
4,085
$
1,272
$
1,183
Direct expenses consist primarily of fees paid to
vendors and consultants for services related to preclinical
product development, clinical trials, and manufacturing of the
respective products. We generally maintain few fixed
commitments; therefore, we have flexibility with respect to the
timing and magnitude of a significant portion of our direct
expenses. Indirect expenses are those expenses we incur that are
not allocated by project, which consist primarily of the
salaries and benefits of our research and development staff.
Development timelines and costs are difficult to
estimate and may vary significantly for each product and from
quarter-to-quarter. The process of seeking regulatory approvals,
and the subsequent compliance with applicable regulations,
require the expenditure of substantial resources. We intend to
advance our three late-stage product candidates into
Phase IIb or Phase III clinical trials by the first
half of 2005. You should read the risk factors contained
elsewhere in this prospectus that relate to the risks inherent
in our research and development programs.
General and Administrative
    Expense
General and administrative expense consists
primarily of compensation for employees in executive and
operational functions, including finance and accounting,
business development and corporate development. Other
significant costs include facilities costs and professional fees
for accounting and legal services. After completion of this
offering, we anticipate our general and administrative expenses
to increase due to increased costs for insurance, professional
fees, external reporting requirements, Sarbanes-Oxley compliance
and investor relations associated with operating as a
publicly-traded company. These increases will also likely
include the hiring of additional personnel.
30
Stock-Based Compensation
In connection with the grant of stock options to
employees, we recorded deferred stock-based compensation as a
component of stockholders' deficit. Deferred stock
compensation for options granted to employees is the difference
between the fair value of our common stock on the date such
options were granted and their exercise price. We amortize this
stock-based compensation as charges to operations over the
vesting periods of the options, generally 36 months.
We recorded $0.6 million in amortization of
deferred stock-based compensation related to options granted to
employees during the year ended December 31, 2003. There
was a balance of $0.4 million of deferred stock-based
compensation at December 31, 2003 which we expect to be
substantially amortized in 2004 with the balance amortized in
2005. We also recorded $0.2 million of stock-based
compensation expense related to options granted to non-employees
during the year ended December 31, 2003. Stock-based
compensation expense for non-employees is recorded based on the
fair value method utilizing the Black-Scholes option pricing
model. The value of the underlying option is periodically
re-measured at each reporting date and income or expense is
recognized during the vesting period. Stock-based compensation
expense is classified as either research and development expense
or general and administrative expense depending on the nature of
the compensated services.
The amount of stock-based compensation expense we
expect to incur in future periods may decrease if unvested
options for which deferred compensation expense has been
recorded are subsequently cancelled, or may increase if we make
future option grants with exercise prices below the estimated
fair market value of our common stock on the date of grant.
Other Income (Expense)
Other income (expense) consists of
non-operating items, including interest income, interest expense
and foreign exchange transaction gains or losses. Interest
income is earned from funds on deposit. Interest expense is
incurred from our various financing arrangements. A portion of
our interest expense derives from non-cash charges for debt
discount and beneficial conversion feature present in certain of
our debt obligations. Foreign exchange transaction gains and
losses are principally related to the payment of intercompany
debt obligations denominated in foreign currencies.
Results of Operations
Nine Months Ended September 30, 2004
    and 2003
Revenues.
We
recorded $1.9 million in revenue during the nine months
ended September 30, 2004, representing the recognized
portion of the deferred revenue from upfront licensing fees
received from Adolor and Endo in 2003. In July 2003, we entered
into a license agreement with Adolor relating to certain
products, including LidoPAIN SP, which resulted in our
receipt of a $2.5 million payment upon signing. This amount
has been deferred and is being recognized as revenue on a
straight-line basis over the three-year estimated development
period of LidoPAIN SP. In December 2003, we signed a
license agreement with Endo, which resulted in our receipt of a
$7.5 million payment upon signing. This payment has also
been deferred and is being recognized as revenue on a
straight-line basis over the estimated 4.5 year development
period of LidoPAIN BP.
Revenue in the first nine months of 2003 amounted
to $0.2 million representing the recognized portion of the
deferred revenue from the upfront licensing fee received from
Adolor in July 2003.
Research and development
expense.
Research and development
expense increased approximately 8% in the nine-month period
ended September 30, 2004 to $1.3 million compared to
$1.2 million during the nine-month period ended
September 30, 2003. Primary research and development
activity during the 2004 period included preparing for the
commencement of the Phase III clinical trial of LidoPAIN SP in
Germany, an End of Phase II meeting with the FDA for EpiCept
NP-1, ongoing work with respect to the design of pivotal
clinical trials for EpiCept NP-1 and LidoPAIN BP, and the
selection of manufacturers for the commercial scale-up of our
product candidates. Included in 2004 research and development
expense was a $0.1 million maintenance fee payment relating
to our license agreement for Epicept NP-1. We commenced
enrollment of our Phase III trial in Germany of LidoPAIN SP in
November 2004.
31
Research and development expenses in the first
nine months of 2003 consisted primarily of salaries and
benefits, payments to consultants and clinical trial expenses
related to EpiCept NP-1 and LidoPAIN SP. We completed
two Phase II clinical trials for EpiCept NP-1 and one
Phase II clinical trial for LidoPAIN SP during the
first quarter of 2003.
General and administrative
expense.
General and
administrative expense increased $1.0 million to
$3.1 million from $2.1 million for the nine months
ended September 30, 2004 and 2003, respectively, primarily
as a result of higher audit and legal expenses, additional
staffing, higher employee compensation and increased consulting
expenses in connection with business development activities.
Other income
(expense).
Other expense, net,
decreased $1.5 million, to $2.1 million from
$3.6 million for the nine months ended September 30,
2004 and 2003, respectively. Loan discount and beneficial
conversion feature related to the convertible bridge loan taken
in 2002 and early 2003 was fully accreted during the first half
of 2004; as a result, interest expense for the nine-month period
ended September 30, 2004 decreased to $2.3 million from
$3.2 million for the nine-month period ended
September 30, 2003, a decline of $0.9 million.
Components of interest expense for the 2004 period were non-cash
charges of $1.3 million related to the accretion of the
discount on the convertible bridge loan, $0.8 million in
coupon interest payable on loans, and $0.1 million each for
increases in additional and contingent interest on certain debt
obligations. Other expense, net, was also affected by net
foreign exchange transaction gains related to intercompany debt
recognized in 2004 of $0.1 million compared with net
foreign exchange transaction losses recognized in 2003 of
$0.4 million, a net improvement of $0.5 million. Since
a portion of our transactions is denominated in euros, foreign
exchange transaction gains and losses result from changes in the
exchange rate between the U.S. dollar and the euro during the
relevant period.
Warrant Deemed Dividend and Redeemable
Convertible Preferred Stock
Dividends.
In addition to accrued
redeemable convertible preferred stock dividends of
$0.9 million relating to our Series B and C redeemable
convertible preferred stock, we recorded a beneficial conversion
charge of $0.2 million related to the exercise of warrants
into Series A convertible preferred stock. A total of
74,259 warrants were exercised via a net share issuance of
53,225 shares of Series A convertible preferred stock.
Years Ended December 31, 2003, 2002
    and 2001
Revenues.
We
recorded $0.4 million in revenue during the year ended
December 31, 2003, representing the recognized portion of
the deferred revenue from upfront licensing fees received from
Adolor and Endo. In July 2003, we entered into a license
agreement with Adolor relating to certain products, including
LidoPAIN SP, which resulted in our receipt of a
$2.5 million non-refundable payment upon signing. This
amount has been deferred and is being recognized as revenue on a
straight-line basis over the three-year estimated development
period of LidoPAIN SP. In December 2003, we signed a
license agreement with Endo, which resulted in our receipt of a
non-refundable $7.5 million payment upon signing. This
payment has also been deferred and is being recognized as
revenue on a straight-line basis over the estimated four and
one-half-year development period of LidoPAIN BP. We did not
recognize any revenues in 2002 or 2001.
Research and development
expense.
Our research and
development expenses were $1.6, $4.9 and $4.1 million for
the years ended December 31, 2003, 2002 and 2001,
respectively. In early 2003, we completed three clinical trials
for two of our late-stage product candidates: one Phase II
trial for LidoPAIN SP in Germany and two Phase II
trials for EpiCept NP-1. We undertook no new significant
clinical activity during the balance of the year, resulting in
the reduction of expense from 2002 and 2001 as compared to 2003.
In 2002, we were conducting three clinical trials
for two of our late stage product candidates, including two
Phase II trials for EpiCept NP-1 that involved more
than 25 centers in the United States and Canada. Direct expenses
related to the EpiCept NP-1 clinical trial totaled
$2.1 million, or 42%, of our total research and development
expenses in 2002. A Phase II clinical trial for
LidoPAIN SP at nine centers in Germany commenced in
December 2001 and continued throughout 2002. Direct
expenses for the LidoPAIN SP clinical trial totaled
$0.8 million, or 17%, of total research and development
expenses in 2002.
32
Research and development expenses for 2001
consisted primarily of the costs of non-clinical testing and
clinical trial activity for our product candidates, payments to
consultants and salaries and benefits.
General and administrative
expense.
General and
administrative expenses were $3.4, $3.5 and $3.4 million
for the years ended December 31, 2003, 2002, and 2001,
respectively. In 2003, general and administrative expenses were
affected by higher legal, audit and insurance expenses and
increased business development efforts in connection with the
negotiation and conclusion of our license agreements with Adolor
and with Endo. This increase was offset by lower consulting and
directors' expenses. Increased staffing costs of
$0.1 million primarily accounted for the increase in
general and administrative expenses in 2002 from 2001.
General and administrative expense in 2001
consisted primarily of compensation for employees in executive
and operational functions, facilities costs and professional
fees for accounting and legal services, including patent
maintenance.
Other income
(expense).
Other income (expense),
net, consisted of net other expense of $5.4, $1.5 and net other
income of $0.2 million for the years ended
December 31, 2003, 2002 and 2001, respectively. The
increase in net expense in 2003 of $3.9 million was
primarily attributable to an increase of $3.8 million in
interest expense, principally due to the amortization of the
debt discount and the beneficial conversion feature in
connection with our convertible bridge loan that closed in
tranches beginning November 2002. The discount is being accreted
over the original scheduled term of the convertible bridge loan
and totaled $2.6 million for the year ended
December 31, 2003. The beneficial conversion feature of
approximately $1.2 million was recorded in April 2003,
of which $0.8 million was recognized in 2003.
The increase in other expense of
$1.7 million in 2002 over 2001 was principally due to
$0.7 million in net foreign exchange transaction losses
recognized in 2002 compared with $0.3 million in net
foreign exchange transaction gains recognized in 2001, as well
as reduced interest income and increased interest expense as
cash on hand declined while notes and loans payable increased.
Benefit for income
taxes.
Federal income tax expense
for the year ended December 31, 2003 was approximately
$31,000. State income benefit for the year ended
December 31, 2003 was $(105,000). The state income tax
benefit is comprised of current state income tax expense of
$0.1 million offset by a state income tax benefit resulting
from the sale of some state NOLs of $0.2 million.
During the years ended December 31, 2003 and
2002, we sold a portion of our state NOLs resulting in a state
tax benefit of approximately $0.3 million in each of those
years. The sales of cumulative net operating losses are a result
of a New Jersey state law enacted January 1, 1999
allowing emerging technology and biotechnology companies to
transfer or "sell" their unused New Jersey net
operating loss carryforwards and New Jersey research and
development tax credits to any profitable New Jersey
company qualified to purchase them for cash. We received
approval from the State of New Jersey to sell NOLs in
November 2003 and November 2002 and entered into a
contract with a third party to sell the NOLs at a discount for
approximately $0.2 million in each December of the year.
License Agreements
In December 2003, we entered into a license
agreement with Endo under which we granted Endo (and its
affiliates) the exclusive (including as to us and our
affiliates) worldwide right to commercialize LidoPAIN BP.
We also granted Endo worldwide rights to certain of our other
patents used by Endo in the development of certain Endo
products, including Lidoderm, Endo's topical
lidocaine-containing patch, for the treatment of chronic lower
back pain. We remain responsible for continuing and completing
the development of LidoPAIN BP, including the conduct of
all clinical trials and the supply of the clinical products
necessary for those trials and the preparation and submission of
the NDA in order to obtain regulatory approval for
LidoPAIN BP. Upon the execution of the Endo agreement, we
received a payment of $7.5 million, which has been deferred
and is being recognized as revenue ratably over the estimated
development period of LidoPAIN BP, and we may receive
payments of up to $52.5 million upon the achievement of
various milestones relating to product development, regulatory
approval and commercial success for both our LidoPAIN BP
product candidate and Endo's own back pain product
candidate, so long as, in the case of Endo's product
candidate, our patents provide protection thereof. We will also
33
receive royalties from Endo based on the net
sales of LidoPAIN BP. These royalties are payable until
generic equivalents of the LidoPAIN BP product candidate
are available or until expiration of the patents covering
LidoPAIN BP, whichever is sooner. We are also eligible to
receive milestone payments from Endo of up to approximately
$30.0 million upon the achievement of specified net sales
milestones of covered Endo products, including Lidoderm,
Endo's chronic lower back pain product candidate, so long
as our patents provide protection thereof. The total amount of
upfront and milestone payments we are eligible to receive under
the Endo agreement is $90.0 million. There is no certainty
that any of these milestones will be achieved or any royalty
earned.
In July 2003, we entered into a license
agreement with Adolor under which we granted Adolor the
exclusive right to commercialize, among other products,
LidoPAIN SP throughout North America. Upon the execution of
the Adolor agreement, we received a payment of
$2.5 million, which has been deferred and will be
recognized as revenue over the estimated development period of
LidoPAIN SP. The agreement also requires Adolor to pay us
up to $20.0 million upon reaching certain development,
regulatory and commercial milestones and a royalty on sales of
licensed products, including LidoPAIN SP. There is no
certainty that any of these milestones will be achieved or any
royalty earned.
Liquidity and Capital Resources
We have devoted substantially all of our cash
resources to research and development programs and general and
administrative expenses. To date, we have not generated any
meaningful revenues from the sale of products and we do not
expect to generate any such revenues for a number of years, if
at all. As a result, we have incurred an accumulated deficit of
$50.4 and $56.0 million as of December 31, 2003 and
September 30, 2004, respectively, and we expect to incur
operating losses, potentially greater than losses in prior
years, for a number of years in the future. The audit report
from our independent registered public accounting firm states
that our recurring losses from operations and our accumulated
deficit raise substantial doubt about our ability to continue as
a going concern. Our working capital deficit as of
September 30, 2004 amounted to $3.1 million. Cash and
cash equivalents were $3.0 million as of September 30,
2004. Since our inception through September 30, 2004, we
have financed our operations through the proceeds from the sales
of common and preferred securities, debt, revenue from
collaborative relationships, investment income earned on cash
balances and short-term investments and the sales of a portion
of our New Jersey net operating loss carry forwards.
During the nine months ended September 30,
2004, cash used in operating activities totaled
$3.6 million, primarily due to our net loss of
$4.7 million and a $1.9 million reduction in deferred
revenue representing the amount we recorded as revenue during
the period. Cash use was partially offset by a $1.1 million
increase in accounts payable and $1.3 million for the
accretion of loan discount on our convertible bridge loan. For
the year ended December 31, 2003, net cash of
$4.8 million was provided by operating activities primarily
as a result of $10.0 million in deferred revenue that will
be recognized in future periods, $3.4 million in accretion
of discount on our convertible bridge loan, $0.8 million
foreign exchange loss due to an unfavorable change in the
exchange rate between the U.S. dollar and euro pertaining
primarily to our loan interest payments and $0.8 million in
stock-based compensation charges, which were partially offset by
our $9.9 million net loss. Deferred revenue of
$10.0 million represents the $10.0 million in
non-refundable license fee payments we received from Adolor and
Endo in 2003.
Cash used in investing activities totaled
approximately $25,000 and $17,000 during the nine months ended
September 30, 2004 and the year ended December 31,
2003, respectively, primarily for the purchase of office
equipment. Future cash used in investing activities for property
and equipment are not expected to be significant.
Cash used in financing activities totaled
approximately $1.4 million during the nine months ended
September 30, 2004 and consisted of $0.7 million of
scheduled loan repayments and $0.7 million of costs related
to our proposed initial public offering of common stock. Cash
provided by financing activities totaled approximately
$2.7 million for the year ended December 31, 2003,
primarily related to the receipt of a portion of the proceeds
from our convertible bridge loan.
34
We believe that our existing cash resources, the
net proceeds of this offering, future payments from our
strategic partners, future sales of our New Jersey net
operating loss carry forwards and interest earned on cash
balances and investments will be sufficient to meet our
projected operating requirements for at least the next
24 months. However, we may need to raise additional capital
or incur indebtedness to continue to fund our operations in the
future.
Our future capital uses and requirements depend
on numerous forward-looking factors. These factors include, but
are not limited to, the following:
•
progress in our research and development
    programs, as well as the magnitude of these programs;
•
the timing, receipt and amount of milestone and
    other payments, if any, from present and future collaborators,
    if any;
•
our ability to establish and maintain additional
    collaborative arrangements;
•
the resources, time and costs required to
    successfully initiate and complete our preclinical and clinical
    trials, obtain regulatory approvals, protect our intellectual
    property and obtain and maintain licenses to third-party
    intellectual property;
•
the cost of preparing, filing, prosecuting,
    maintaining and enforcing patent claims; and
•
the timing, receipt and amount of sales and
    royalties, if any, from our potential products.
If, at any time, our prospects for financing our
clinical development programs decline, we may decide to reduce
research and development expenses by delaying, discontinuing or
reducing our funding of development of one or more product
candidates. Alternatively, we might raise funds through public
or private financings, strategic relationships or other
arrangements. We cannot assure you that the funding, if needed,
will be available on attractive terms, or at all. Furthermore,
any additional equity financing may be dilutive to stockholders
and debt financing, if available, may involve restrictive
covenants and increased interest expense. Similarly, financing
obtained through future co-development arrangements may require
us to forego certain commercial rights to future drug
candidates. Our failure to raise capital as and when needed
could have a negative impact on our financial condition and our
ability to pursue our business strategy.
Contractual Obligations
As of December 31, 2003, the annual amounts
of future minimum payments under debt obligations, interest,
lease obligations and other long term liabilities consisting of
research, development, and license agreements are as follows (in
thousands of U.S. dollars, using exchange rates where
applicable in effect as of December 31, 2003):
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
Thereafter
Total
Long-term debt
$
1,010
$
5,861
$
1,208
$
4,520
—
—
$
12,599
Interest
690
484
272
1,279
—
—
2,725
Operating leases
267
222
68
40
—
—
597
Other long-term liabilities
439
406
524
1,225
525
950
4,069
Total
$
2,406
$
6,973
$
2,072
$
7,064
$
525
$
950
$
19,990
Our long-term debt commitments consist of the
following:
€
1.5 Million
Due 2007.
In August 1997, our
subsidiary, EpiCept GmbH entered into a 10-year
non-amortizing loan in the amount of
€
1.5 million
with Technologie-Beteiligungs Gesellschaft mbH der Deutschen
Ausgleichsbank, or "tbg." Proceeds must be directed
toward research, development, production and distribution of
pharmaceutical products. The loan bears interest at 6% per
annum. Tbg is also entitled to receive additional compensation
equal to 9% of the annual surplus (income before taxes, as
defined in the debt agreement) of EpiCept GmbH, reduced by
any other compensation received from EpiCept GmbH by virtue
of other loans to or investments in EpiCept GmbH provided
that tbg is an equity investor in EpiCept GmbH during that
time period. To date, EpiCept GmbH has had no annual
surplus. We consider the additional compensation element based
on the surplus of the EpiCept GmbH to
35
be a derivative. We have assigned no value to the
derivative at each reporting period as no surplus of
EpiCept GmbH is anticipated over the term of the agreement.
At the demand of tbg, additional amounts may be
due at the end of the loan term up to 30% of the loan amount,
plus 6% of the principal balance of the loan for each year after
the expiration of the fifth complete year of the loan period,
such payments to be offset by the cumulative amount of all
payments made to tbg from the annual surplus of
EpiCept GmbH. We are accruing these additional amounts as
additional interest up to the maximum amount due over the term
of the loan. Accrued interest attributable to these additional
amounts totaled $0.3, $0.3 and $0.4 million at
December 31, 2003 and 2002, and September 30, 2004,
respectively. The effective rate of interest of this loan is
9.7%.
€
2.0 Million
Due 2007.
In February 1998,
EpiCept GmbH entered into a 10-year non-amortizing
convertible term loan in the amount of
€
2.0 million
with tbg. The loan is non-interest bearing; however, the loan
agreement provides for potential future annual payments from
surplus of EpiCept GmbH up to 6% of the outstanding loan
principal balance, not to exceed 9% of all payments made from
surplus of EpiCept GmbH and limited to 7% of the total
financing from tbg. To date, EpiCept GmbH has had no annual
surplus. We consider the additional compensation element based
on the surplus of the EpiCept GmbH to be a derivative. We
have assigned no value to the derivative at each reporting
period as no surplus of EpiCept GmbH is anticipated over
the term of the agreement.
The loan is convertible into shares of our common
stock at any time by tbg at a conversion price of $7.07 per
share. We can require conversion upon a defined triggering event
(such as a sale of substantially all our assets, a public
offering of our securities, a sale of more than 50% of the
voting power of our outstanding equity securities, a merger,
etc.) at a calculated conversion price ranging between $2.02 and
$7.07 based on the applicable triggering event's proceed.
We intend to require tbg to convert this loan upon consummation
of this offering.
€
2.6 Million
Due 2006.
In March 1998,
EpiCept GmbH entered into a term loan in the amount of
€
2.6 million
with IKB Private Equity GmbH, or "IKB," which we
guaranteed. The interest rate on the loan varies and was
10.5% per annum from August 1, 2000 through
March 31, 2001, 15% per annum through June 30,
2003 and 20% per annum thereafter. The loan was amended in
December 2002 to extend the maturity to December 31,
2006 and incorporate a principal repayment schedule, which
commenced April 30, 2004. The first 11 quarterly principal
payments are
€
0.2 million
(approximately $0.2 million as of September 30, 2004),
and the final quarterly principal payment will be approximately
€
0.4 million
(approximately $0.4 million as of September 30, 2004).
The loan agreement provides for contingent interest of
4% per annum of the principal balance, becoming due only
upon our realization of a profit and payable up to two years
thereafter, as defined in the agreement. We have not realized a
profit through September 30, 2004. We value the contingent
interest as a derivative using the fair value method in
accordance with SFAS 133. Changes in the fair value of the
contingent interest are recorded as an adjustment to interest
expense. The fair value of the contingent interest was
approximately $0.5, $0.3 and $0.6 million as of
December 31, 2003 and 2002, and September 30, 2004,
respectively. We intend to repay this term loan with a portion
of the proceeds of this offering.
Convertible Bridge Loan Due 2005.
In November 2002, we entered into
a convertible bridge loan with several of our shareholders in an
aggregate amount of up to $5.0 million. At
December 31, 2003, we had outstanding borrowings of
$4.8 million. The convertible bridge loan bears interest at
8% per annum. The convertible bridge loan is convertible
into the next round of preferred stock financing and also has
provisions for optional conversion into preferred stock or
common stock. The conversion rate is equal to the lowest price
per share paid by any purchaser in a financing of the next round
of preferred stock or at anti-dilutive conversion rates for
optional conversion into preferred stock or common stock based
upon the results of certain milestones. In addition, warrants to
purchase preferred stock were issued to the lenders in
connection with the convertible bridge loan. Such warrants were
valued utilizing the Black-Scholes options pricing model and
resulted in recording warrants at $3.6 million and a
discount of $3.6 million to the convertible bridge loan.
The discount was accreted over the original scheduled term of
the loans. During the years ended December 31, 2003 and
2002 and the nine months ended September 30, 2004 and 2003,
we recognized approximately $2.5, $0.2, $0.9 and
$1.9 million, respectively, of non-cash interest expense
36
related to the accretion of the debt discount.
The term of the convertible bridge loan has been extended from
April 30, 2004 until October 30, 2005. We intend to
repay all amounts outstanding under the convertible bridge loan
with a portion of the proceeds of this offering.
Our long-term commitments under operating leases
shown above consist of payments relating to our facility leases
in Englewood Cliffs, New Jersey, which expires in September
2005, and Munich, Germany, which expires in July 2009, but is
cancelable at our option in July 2007
.
We have a number of research, consulting and
license agreements that require us to make payments to the other
party to the agreement upon us attaining certain milestones as
defined in the agreements. In 2003, we made payments of
approximately $1.5 million under these agreements, the
majority of which were in connection with milestones relating to
preclinical and clinical trials and manufacturing. As of
December 31, 2003, we may be required to make future
milestone payments, totaling approximately $4.1 million,
under these agreements, depending upon the success and timing of
future clinical trials and the attainment of other milestones as
defined in the respective agreement. In 2004, we entered into an
additional clinical research agreement totaling approximately
$1.2 million in payments beginning in September 2004
through 2006. Under our agreement with Epitome, we are obligated
to pay an annual maintenance fee that is equal to twice the fee
paid in the previous year as long as no commercial product sales
have occurred. We recorded a maintenance expense of $100,000
during the third quarter 2004. Our current estimate as to the
timing of other research, development and license payments,
assuming all related research and development work is
successful, is listed in the table above in "Other
long-term liabilities."
We are also obligated to make future royalty
payments to two of our collaborators under existing license
agreements, one based on net sales of EpiCept NP-1 and the other
based on net sales of LidoPAIN SP, to the extent revenues on
such products are realized. We have not estimated the amount or
timing of such royalty payments.
Market Risks
The financial currency of our German subsidiary
is the euro. As a result, we are exposed to various foreign
currency risks. First, our consolidated financial statements are
in U.S. dollars, but a portion of our consolidated assets and
liabilities is denominated in euros. Accordingly, changes in the
exchange rate between the euro and the U.S. dollar will affect
the translation of our German subsidiary's financial
results into U.S. dollars for purposes of reporting our
consolidated financial results. We also bear the risk that
interest on our euro-denominated debt, when translated from
euros to U.S. dollars, will exceed our current estimates
and that principal payments we make on those loans may be
greater than those amounts currently reflected on our balance
sheet. Historically, fluctuations in exchange rates resulting in
transaction gains or losses have had a material effect on our
consolidated financial results. We have not engaged in any
hedging activities to minimize this exposure, although we may do
so in the future.
Our exposure to interest rate risk is limited to
interest income sensitivity, which is affected by changes in the
general level of U.S. dollar interest rates, particularly
as the majority of our investments are in short-term debt
securities and bank deposits. The primary objective of our
investment activities is to preserve principal while at the same
time maximizing the income we receive without significantly
increasing risk. To minimize risk, we maintain our portfolio of
cash and cash equivalents in a variety of interest-bearing
instruments, including U.S. government and agency
securities, high-grade U.S. corporate bonds, commercial
paper and money market funds. Due to the nature of our
short-term and restricted investments, we believe that we are
not exposed to any material market risk.
We do not have any relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
engage in trading activities involving non-exchange traded
contracts. Therefore, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in these relationships. We do not have
relationships or transactions with persons or entities that
derive benefits from their non-independent relationship with our
related parties or us.
37
Critical Accounting Policies and
Estimates
Our discussion and analysis of our financial
condition and results of operations are based on our financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses and related disclosure of
contingent assets and liabilities. We review our estimates on an
ongoing basis. We base our estimates on historical experience
and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more
detail in the notes to our financial statements included in this
prospectus, we believe the following accounting policies to be
critical to the judgments and estimates used in the preparation
of our financial statements.
Revenue Recognition
We recognize revenue relating to our
collaboration agreements in accordance with the Securities and
Exchange Commission's Staff Accounting Bulletin
("SAB") No. 101,
Revenue Recognition in
Financial Statements
, SAB No. 104,
Revenue
Recognition
, and Emerging Issues Task Force
("EITF") Issue No. 00-21,
Revenue Arrangements
with Multiple Deliverables
. Revenue under collaborative
arrangements may include the receipt of non-refundable license
fees, milestone payments and research and development payments.
We evaluate our collaboration agreements to
determine units of accounting for revenue recognition purposes.
Revenue is deemed earned when all of the following have
occurred: all of our obligations relating to the revenue have
been met and the earnings process is complete; the monies
received or receivable are not refundable irrespective of
research results; and there are neither future obligations nor
milestones that we must meet with respect to such revenue. We
recognize revenue from non-refundable, upfront licenses and
related payments, not specifically tied to a separate earnings
process, ratably over the development period in which we are
obligated to participate on a continuing and substantial basis
in the research and development activities outlined in each
contract. We periodically review the estimated development
period and, to the extent such estimates change, the impact of
such change is recorded at the time. When payments are
specifically tied to a separate earnings process, revenue will
be recognized when the specific performance obligation
associated with the payment has been satisfied. Performance
obligations typically consist of contracted services or
development milestones. Revenue from significant milestones in
the development lifecycle of the related technology, including
filing for and obtaining approvals with regulatory agencies,
will be considered earned when the payer acknowledges the
milestone achievement, generally by payment of amounts due.
Stock-Based Compensation
As permitted by Statement No. 123,
Accounting for Stock-Based Compensation
("SFAS 123"), we account for employee stock-based
compensation in accordance with Accounting Principles Board
("APB") Opinion No. 25,
Accounting for Stock
Issued to Employees
("APB 25"), using
intrinsic values with appropriate disclosures using the fair
value based method. Accordingly, we have recorded stock-based
compensation expense for stock options issued to employees in
fixed amounts with exercise prices that are, for financial
reporting purposes, deemed to be below fair market value on the
measurement date — generally being the date of grant.
In the notes to our consolidated financial statements, we
provide pro forma disclosures required by SFAS No. 123
and related pronouncements. We account for stock-based
transactions with non-employees in which services are received
in exchange for the equity instruments based upon the fair value
of the equity instruments issued, in accordance with
SFAS No. 123 and EITF Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
The two factors that most
affect charges or credits to operations related to stock-based
compensation are the estimated fair market value of the common
stock underlying stock options for which stock-based
compensation is recorded and the estimated volatility of such
fair market value.
Accounting for equity instruments granted by us
requires fair value estimates of the equity instrument granted
or sold. If our estimates of fair value of these equity
instruments are too high or too low, it would
38
have the effect of overstating or understating
expenses. When equity instruments are granted in exchange for
the receipt of goods or services, we estimate the value of the
equity instruments based upon consideration of factors that we
deem to be relevant at the time using cost, market and/or income
approaches to such valuations. Because shares of our common
stock have not been publicly traded, market factors historically
considered in valuing stock and stock option grants include
comparative values of public companies discounted for the risk
and limited liquidity provided for in the shares we are issuing,
pricing of private sales of our convertible preferred stock,
prior valuations of stock grants and the effect of events that
have occurred between the time of such grants, economic trends,
perspective provided by investment banks and the comparative
rights and preferences of the security being granted compared to
the rights and preferences of our other outstanding equity. As a
result of these factors, some of which are subjective, changes
in our estimates of fair market value and volatility could have
a significant effect on the determination of stock-based
compensation.
The fair value of our common stock for options
granted during 2003, 2002 and 2001 and for the nine month period
ending September 30, 2004 was determined contemporaneously
at the time of the grant by our board of directors, with input
from management. Prior to our entering into the Adolor license
agreement in July 2003, we utilized the value paid for each of
our series of preferred stock as an estimate of the fair value
of our common stock. During the period October 1, 2003
through September 30, 2004, we did not grant any options to
employees. During the nine month period ended September 30,
2003 and for the years ended December 31, 2002 and 2001, we
granted options to employees at prices, which, for financial
reporting purposes, were deemed to be below fair market value on
the dates of grant. As a result, we recorded deferred
compensation related to these grants for the difference between
the deemed fair market value and the exercise price. We are
amortizing this deferred compensation as a charge to operations
over the vesting period of the options. In 2002 and 2001, we
also granted options to non-employees for which we recorded
stock-based compensation in the statements of operations based
upon the fair market value of these options, as determined using
the Black-Scholes model, over the service period, which is
usually the vesting period. We did not grant any options to
non-employees in 2003. Stock-based compensation for third
parties is re-measured through the vesting period at fair value.
The following weighted average assumptions were used for grants
in 2003 and 2002: dividend yield of 0% percent, risk free
interest rate from 2.79% to 4.74%, volatility of 101% and
expected life of four to five years. As discussed above, these
stock-based compensation charges will fluctuate based primarily
on the volatility and fair value of our common stock.
Derivatives
We comply with SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities
("SFAS 149").
SFAS 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristics of a
derivative as discussed in Statement No. 133. It also
specifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. As a
result of certain financings, derivative instruments were
created that we measured at fair value and mark to market at
each reporting period.
Foreign Exchange Gains and
Losses
We have a 100%-owned subsidiary in Germany,
EpiCept GmbH, that performs certain research and development
activities on our behalf pursuant to a research collaboration
agreement. EpiCept GmbH has been unprofitable since its
inception. Its functional currency is the euro. The process by
which EpiCept GmbH's financial results are translated into
U.S. dollars is as follows: income statement accounts are
translated at average exchange rates for the period and balance
sheet asset and liability accounts are translated at end of
period exchange rates. Translation of the balance sheet in this
manner affects the stockholders' equity account, referred
to as the cumulative translation adjustment account. This
account exists only in EpiCept GmbH's U.S. dollar
balance sheet and is necessary to keep the foreign balance sheet
stated in U.S. dollars in balance.
Several of our debt instruments, originally
expressed in German deutsche marks, are now denominated in
euros. Changes in the value of the euro relative to the value of
the U.S. dollar could affect
39
the U.S. dollar value of our indebtedness at
each reporting date as substantially all of our assets are held
in U.S. dollars. These changes are recognized by us as a
foreign currency transaction gain or loss, as applicable, and
are reported in other expense or income in our consolidated
statements of operations.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 153,
Exchanges of Nonmonetary Assets
("SFAS 153").
SFAS 153 amends Accounting Policy Board ("APB")
Opinion No. 29 ("APB 29"),
Accounting for
Nonmonetary Transactions,
which requires that exchanges of
nonmonetary assets be measured based on the fair value of the
assets exchanged, but which includes certain exceptions to that
principle. SFAS 153 eliminates the exception from
APB 29 for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have a commercial substance.
SFAS 153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005.
The adoption of SFAS 153 is not expected to have a material
impact on our consolidated financial position or results of
operations.
In December 2004, the FASB issued a revision to
SFAS No. 123,
Accounting for Stock-Based Compensation
("SFAS 123R"). SFAS 123R replaces
SFAS 123 and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees,
and establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services.
SFAS 123R focuses primarily on accounting for transactions
in which an entity obtains employee services in share-based
payment transactions and is effective as of the beginning of the
first reporting period that begins after June 15, 2005 for
public entities that do not file as small business issuers. We
have illustrated the effect on our earnings as if we had adopted
the fair value method of accounting for stock-based compensation
under SFAS 123 in Note 2 to our Consolidated Financial
Statements for the years ended December 31, 2001, 2002, and
2003 and for the nine months ended September 30, 2004. The
fair value-based method of SFAS 123 is similar in most
respects to the fair value-based method under SFAS 123R,
although the election of certain methods within the applicable
transition rules of SFAS 123R may affect the impact on our
consolidated financial position or results of operations. Such
impact, if any, on our consolidated financial position or
results of operations has not been determined.
In December 2003, the FASB issued Interpretation
No. 46(R),
Consolidation of Variable Interest Entities
("FIN 46R"), which is an interpretation of
Accounting Research Bulletin No. 51,
Consolidated
Financial Statements
. FIN 46R requires that if an
entity has a controlling interest in a variable interest entity,
the assets, liabilities and results of activities of the
variable interest entity should be included in the consolidated
financial statements of the entity. FIN 46R is effective
immediately for all new variable interest entities created or
acquired after December 31, 2003. The adoption of
FIN 46R is not expected to have a significant impact on our
consolidated financial position or results of operations.
In May 2003, SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
("SFAS 150") was issued. This statement
establishes how a company classifies and measures certain
financial instruments with characteristics of both liabilities
and equity, including redeemable convertible preferred stock.
This statement is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise effective
at the beginning of the interim period commencing July 1,
2003, except for mandatorily redeemable financial instruments of
nonpublic companies. The FASB has indefinitely deferred
implementation of certain provisions of SFAS 150. The
adoption of SFAS 150 did not have a significant impact on
our consolidated financial position or results of operations.
In April 2003, the FASB issued
SFAS No. 149,
Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
("SFAS 149"). SFAS 149 clarifies under
what circumstances a contract with an initial net investment
meets the characteristics of a derivative as discussed in
Statement No. 133. It also specifies when a derivative
contains a financing component that warrants special reporting
in the statement of cash flows. SFAS 149 amends certain
other existing pronouncements in order to improve consistency in
reporting these types of transactions. The new guidance is
effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated
after June 30, 2003.
40
The adoption of this standard did not have a
significant impact on our consolidated financial position or
results of operations.
In November 2002, the FASB issued Interpretation
No. 45,
Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
("FIN 45").
FIN 45 requires a guarantor to recognize, at the inception
of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The accounting
provisions and new disclosure requirements of FIN 45 are
required to be adopted for all guarantees issued or modified on
or after January 1, 2003. The adoption of FIN 45 had
no impact on our consolidated financial position or results of
operations, as we do not enter into guarantees with third
parties.
In July 2002, the FASB issued
SFAS No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities
("SFAS 146").
SFAS 146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability
is incurred, as opposed to when the entity commits to an exit
plan under previous guidance. This statement is effective for
exit or disposal activities initiated after December 31,
2002. The adoption of SFAS 146 did not have a significant
impact on our consolidated financial position or results of
operations.
In June 2001, the FASB issued
SFAS No. 143,
Accounting for Asset Retirement
Obligations
("SFAS 143"). SFAS 143
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement requires
that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. It applies
to legal obligations associated with the retirement of
long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees.
This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The adoption of
SFAS 143 did not have a significant impact on our
consolidated financial position or results of operations.
41
BUSINESS
We are a specialty pharmaceutical company focused
on the development and commercialization of topically-delivered
prescription pain management therapeutics. We have six product
candidates in clinical development; three in late-stage clinical
development that are ready to enter, or have entered, pivotal
Phase IIb or Phase III clinical trials, and three that
have completed initial Phase II clinical trials. All of our
product candidates target moderate-to-severe pain that is
influenced, or mediated, by nerve receptors located just beneath
the skin's surface. Our product candidates utilize
proprietary formulations and several topical delivery
technologies to administer FDA-approved pain management
therapeutics, or analgesics. We believe using FDA-approved
analgesics reduces the risks associated with new drug
development, lowers our development costs and speeds
time-to-market. Our product candidates are designed to provide
effective pain relief with fewer adverse side effects than
systemically-delivered drugs, which are absorbed into the
bloodstream. None of our products has been approved by the FDA
or its counterparts in other countries.
Our lead late-stage product candidate,
EpiCept NP-1, is a prescription topical analgesic cream
containing a patented formulation, the contents of which include
two FDA-approved drugs, amitriptyline and ketamine.
Amitriptyline is a widely-used antidepressant, and ketamine is
an NMDA antagonist that is used as an anesthetic.
EpiCept NP-1 is designed to provide effective, long-term
relief from the pain of peripheral neuropathies. Peripheral
neuropathies are medical conditions caused by damage to the
nerves in the nervous system. The initial indication for this
product candidate is post-herpetic neuralgia, a specific type of
peripheral neuropathy associated with shingles, a condition
caused by the herpes zoster virus. We have completed
Phase II clinical trials in the United States and Canada
that included 343 subjects and plan to commence a Phase III
clinical trial in the United States by the second half of 2005
that will include at least 800 subjects.
LidoPAIN SP, our second late-stage product
candidate, is a sterile prescription analgesic patch designed to
provide sustained topical delivery of lidocaine to a
post-surgical or post-traumatic sutured wound while also
providing a sterile protective covering for the wound. If
approved, we believe that LidoPAIN SP would be the first sterile
prescription analgesic patch on the market. We have completed a
Phase II clinical trial in Germany that included 221 hernia
repair subjects and commenced a Phase III clinical trial in
Europe during the fourth quarter of 2004 that will include at
least 400 hernia repair subjects. In July 2003, we entered into
an agreement with Adolor for the development and
commercialization of LidoPAIN SP in North America.
Our third late-stage product candidate is
LidoPAIN BP, a prescription analgesic non-sterile patch
designed to provide sustained topical delivery of lidocaine for
the treatment of acute or recurrent lower back pain. We have
completed Phase IIa and Phase IIb clinical trials in
the United States that included 242 subjects and plan to
commence a pivotal Phase IIb clinical trial in the United
States during the second half of 2005 that will include at least
400 subjects. In December 2003, we entered into an agreement
with Endo for the commercialization of LidoPAIN BP
worldwide.
We have three earlier-stage product candidates in
clinical development: (1) EpiCept MP/DP, a topical
spray gel matrix containing morphine and lidocaine for the
treatment of oral mucositis, an inflammation of the mucosa of
the mouth typically resulting from chemotherapy and radiation
therapy, and dental pain; (2) LidoPAIN TV, a topical
lidocaine patch for the treatment of tinnitus, a constant or
intermittent buzzing or ringing noise in the ear; and
(3) LidoPAIN HM, a topical anesthetic patch for the
treatment of headache pain. We have completed initial
Phase II clinical trials and expect to conduct additional
Phase II clinical trials for each of these product
candidates.
Pain and Pain Management
Pain occurs as a result of surgery, trauma or
disease. It is generally provoked by a harmful stimulus to a
pain receptor in the skin or muscle. Pain can range in severity
(mild, moderate or severe) and duration (acute or chronic).
Acute pain, such as pain resulting from an injury or surgery, is
of short duration, generally less than a month, but may last up
to three months. Chronic pain is more persistent, extending long
after an injury has healed, and typically results from a chronic
illness or appears spontaneously and
42
persists for undefined reasons. Examples of
chronic pain include chronic lower back pain and pain resulting
from bone cancer or advanced arthritis. If treated inadequately,
unrelieved acute and chronic pain can slow recovery and healing
and adversely affect a person's quality of life.
IMS Health has estimated that the total
U.S. market for prescription analgesics has increased from
$5.3 billion in 1998 to $14.7 billion in 2003,
representing an approximate 23% compounded annual growth rate.
In 2003, analgesics were the third most prescribed class of
medications in the United States with approximately
313 million prescriptions written. We believe that growth
in this market has been primarily attributable to:
•
increased physician recognition of the need for
    effective pain management;
•
patient demand for more effective pain treatments;
•
an aging population, with an increased prevalence
    of chronic pain conditions, such as cancer, arthritis,
    neuropathies and lower back pain;
•
increased number of surgeries;
•
introduction of new and reformulated branded
    products; and
•
increased active and healthy lifestyles,
    resulting in additional sports and fitness related injuries.
Analgesics typically fall into one of three
categories:
•
opioid analgesics or narcotics, such as morphine,
    codeine, oxycodone (OxyContin) and tramadol (Ultram);
•
non-narcotic analgesics, primarily non-steroidal
    anti-inflammatory drugs (NSAIDs), including prostaglandin
    inhibitors (such as aspirin, acetaminophen and ibuprofen) and
    inhibitors of the enzyme cycloxygenase-2 (COX-2), so-called
    COX-2 inhibitors (such as Celebrex); and
•
adjuvant therapeutics, such as anesthetics
    (lidocaine), antidepressants (amitriptyline), anti-convulsives
    and corticosteriods.
Limitations of Current
Therapies
Until recently, analgesics primarily have been
delivered systemically and absorbed into the bloodstream where
they can then alleviate the pain. Systemic delivery is achieved
either orally, via injection or through a transdermal patch.
Systemic delivery of analgesics can have significant adverse
side effects because the concentration of analgesics in the
bloodstream can impact other organs and systems throughout the
body.
Adverse side effects of systemically-delivered
analgesics are well documented. Systemically-delivered opioid
analgesics can cause respiratory distress, nausea, vomiting,
dizziness, sedation, constipation, urinary retention and severe
itching. In addition, chronic use of opioid analgesics can lead
to the need for increased dosing and potential addiction.
Concerns about addiction and abuse often influence physicians to
prescribe less than adequate doses of opioids or to prescribe
opioids less frequently. Systemically-delivered NSAIDs and
adjuvant therapeutics can also have significant adverse side
effects, including kidney failure, liver dysfunction, gastric
ulcers and nausea. In the United States, there are approximately
16,500 NSAID-related deaths each year, and over
103,000 patients are hospitalized annually due to NSAID
complications. These adverse side effects may lead doctors to
prescribe analgesics less often and at lower doses than may be
necessary to alleviate pain. Further, patients may take lower
doses for shorter periods of time and opt to suffer with the
pain rather than risk the adverse side effects. Systemic
delivery of these drugs may also result in significant
interactions with other drugs, which is of particular concern
when treating elderly patients who typically take multiple
pharmaceutical therapies.
Recent Scientific
Developments
Almost every disease and every trauma is
associated with pain. Injury or inflammation stimulates the pain
receptors, causing electrical pain signals to be transmitted
from the pain receptors through nerve fibers into the spinal
cord and eventually to the brain. Pain receptors include central
pain receptors, such as those found in the brain and spinal
cord, and peripheral nerve receptors, also called
"nociceptors," such
43
as those located directly beneath the skin and in
joints, eyes and visceral organs. Within the spinal cord, the
electrical pain signals are received by a second set of nerve
fibers that continue the transmission of the signal up the
spinal cord and through the central nervous system into the
brain. Within the brain, additional nerve fibers transmit the
electrical signals to the "pain center" of the brain.
The brain decodes the messages being sent to the central nervous
system from the peripheral nervous system, and the signals are
perceived as "pain" and pain is "felt."
These messages can be disrupted with pharmaceutical intervention
either at the source of the pain, such as the pain receptor, or
at the point of receipt of the pain message, in the brain.
Topical delivery of analgesics blocks the transmission of pain
at the source of the pain message, whereas systemic delivery of
analgesics primarily blocks the perception of pain within the
brain.
Not until recently has the contribution of
peripheral nerve receptors to the perception of pain been well
understood. Recent studies have indicated that peripheral nerve
receptors can play an important role in both the sensory
perception of pain and the transmission of pain impulses.
Specifically, certain types of acute and chronic pain depend to
some degree on the activation of peripheral pain receptors
located beneath the skin's surface. The topical
administration of well-known analgesics can localize drug
concentrations at the point where the pain signals originate,
resulting in dramatically lower systemic blood levels. We
believe this results in a new treatment strategy that provides
significant pain relief, with fewer adverse side effects, fewer
drug to drug interactions and lower potential for abuse.
Our Solution
We are targeting peripheral nerve receptors using
topical analgesics as a novel mechanism to effectively treat
both acute and chronic pain, without the liabilities of
traditional systemically-delivered analgesics. We are developing
innovative topically-delivered analgesics using a combination of
our internally-developed and in-licensed proprietary
technologies and know-how to address the unmet medical needs and
adverse side effects associated with systemically-delivered
analgesics. Our topical delivery technologies and formulations
are designed to deliver FDA-approved analgesics safely,
effectively and conveniently to the appropriate peripheral
nerves while preventing or limiting the amount of drug that
enters the bloodstream. We utilize patch, cream and spray gel
matrix delivery methods to topically deliver the active
ingredients to the pain site. In some instances, we combine
existing FDA-approved analgesics to create a new product having
a therapeutic profile superior to either one of the standalone
analgesics.
44
Our Products
We have six product candidates in clinical
development; three in late-stage clinical development that ready
to enter, or have entered, pivotal Phase IIb or
Phase III clinical trials, and three that have completed
initial Phase II clinical trials. The following table
summarizes the current status of our principal development
programs and product candidates:
Topical
Product
Dosage Form
Initial Indication
Clinical Status
Next Steps
Marketing Rights
EpiCept NP-1
Cream
Post-herpetic neuralgia
Phase II completed
Initiate Phase III during second half of 2005
EpiCept
LidoPAIN SP
Sterile patch
Surgical incision pain
Phase III initiated in Germany
Adolor has announced plans for Phase IIb and
    Phase III clinical trials in United States
Adolor in North America; EpiCept outside of North
    America EpiCept retains right to negotiate future co-promotion
    agreement
LidoPAIN BP
Patch
(non-sterile)
Acute or recurrent lower back pain
Phase IIa completed
Initiate pivotal Phase IIb clinical trial
    during second half of 2005
Endo worldwide; EpiCept
retains right to negotiate future co-promotion agreement
EpiCept MP/DP
Spray gel matrix
Oral mucositis; Dental pain
Phase II
Continue Phase II development
EpiCept
LidoPAIN TV
Patch
(non-sterile)
Tinnitus
Phase II in Europe
Continue Phase II development
EpiCept
LidoPAIN HM
Patch
(non-sterile)
Headache
Phase II
Continue Phase II development
EpiCept
We conduct our clinical trials in pain centers
throughout North America and in Europe. There are various ways
in which to assess a subject's severity of pain. Pain is a
subjective phenomenon, and each person has a different pain
threshold. We utilize various types of validated pain assessment
scales in our clinical trials that are self-administered by each
subject in the form of questionnaires. The first is the
numerical pain scale, or "11-point numerical pain
scale," which is generally a number line from 0 (no pain)
to 10 (worst possible pain). The subject is asked how much pain
he or she feels at a given moment or over a period of time and
is asked to rank it based on the 11-point numerical pain scale.
A second pain assessment tool we often utilize is the McGill
Pain Questionnaire, which is a two part questionnaire that asks
the subject to rate both type and intensity of pain experienced.
We analyze the data from these studies in a number of ways,
including a responder analysis. In this type of analysis,
subjects serve as their own control and are required to
demonstrate a clinically-significant level of response depending
upon the structure of the particular clinical trial.
We utilize various statistical analyses to
evaluate the data from our clinical trials. We commonly utilize
the "area under the curve" analysis as a measure of
efficacy. The term "area under the curve" is a
recognized statistical analytical tool that refers to the
measurement of the total sum of pain that a patient experiences
over a particular period of time. We also use statistical
analyses to estimate the probability that a positive effect is
actually produced by the product candidate. This probability is
expressed as a "P-value," which refers to the
likelihood that the difference measured between the drug group
and the placebo group occurred just "by chance." For
example, when a P-value is reported as "P<0.05,"
the probability that the drug produced an effect just by chance
is less than 5%. A P-value of 0.05 or less is generally
considered to be statistically significant.
45
Peripheral Neuropathy and Post-Herpetic
Neuralgia
Peripheral neuropathy is a medical condition
caused by damage to the nerves in the peripheral nervous system.
The peripheral nervous system includes nerves that run from the
brain and spinal cord to the rest of the body. According to
Datamonitor's study
"Stakeholder Insight:
Neuropathic Pain,"
published in February 2004,
peripheral neuropathy affects over 15 million people in the
United States and is associated with conditions that injure
peripheral nerves, including herpes zoster, or shingles,
diabetes, HIV and AIDS and other diseases. It can also be caused
by trauma or may result from surgical procedures. Peripheral
neuropathy is usually first felt as tingling and numbness in the
hands and feet. Symptoms can be experienced in many ways,
including burning, shooting pain, throbbing or aching.
Peripheral neuropathy can cause intense chronic pain that, in
many instances, is debilitating.
Post-herpetic neuralgia (PHN) is one type of
peripheral neuropathic pain associated with herpes zoster, or
shingles, that exists after the rash has healed. According to
Datamonitor, PHN affects over 100,000 people in the United
States each year. PHN causes pain on and around the area of skin
that was affected by the shingles rash. Most people with PHN
describe their pain as "mild" or "moderate."
However, the pain can be severe in some cases. PHN pain is
usually a constant, burning or gnawing pain but can be an
intermittent sharp or stabbing pain. Current treatments for PHN
have limited effectiveness, particularly in severe cases and can
cause significant adverse side effects. The initial indication
for our EpiCept NP-1 product candidate is for the treatment of
peripheral neuropathy in PHN patients.
There are currently three FDA-approved treatments
for post-herpetic neuralgia: Neurontin (gabapentin), Lidoderm
(lidocaine patch 5%) and Lyrica (pregabalin). Market estimates
indicate that Neurontin is expected to generate sales of
approximately $3 billion in the United States in 2004.
According to the Scott-Levin Physician Drug and Diagnosis Audit,
approximately 55% of the 5.1 million prescriptions for
Neurontin relate to some form of neuropathic pain. Some patients
also receive Tegretol (carbamazepine) to manage the
symptoms of peripheral neuropathy. However, these drugs only
work in some patients, and Neurontin may have significant side
adverse effects, such as drowsiness. Often the use of these
medications is combined with topical analgesics such as the
Lidoderm patch and over-the-counter topical analgesic creams
that provide minimal relief with a short duration of action.
Lidoderm is expected to generate sales of approximately
$300 million in the United States in 2004, much of which we
believe will be attributable to patients with PHN. Lyrica was
approved for the treatment of neuralgia in December 2004.
EpiCept NP-1.
EpiCept NP-1 is a prescription
topical analgesic cream containing a patented formulation, the
contents of which include two FDA-approved drugs, amitriptyline
(a widely-used antidepressant) and ketamine (an NMDA antagonist
that is used as an anesthetic). EpiCept NP-1 is designed to
provide effective, long-term relief from the pain caused by
peripheral neuropathies. We believe that EpiCept NP-1 can be
used in conjunction with systemically-delivered analgesics, such
as Neurontin. The cream contains a 4% concentration of
amitriptyline and a 2% concentration of ketamine. Since each of
these ingredients has been shown to have significant analgesic
effects and because NMDA antagonists, such as ketamine, have
demonstrated the ability to enhance the analgesic effects of
amitriptyline, we believe the combination is a good candidate
for the development of a new class of analgesics. We intend to
selectively seek a partner or strategic alliance to enable us to
maintain financial and operational flexibility while retaining
significant economic and commercial rights to this product
candidate.
EpiCept NP-1 is a white vanishing cream that is
applied twice daily and is quickly absorbed into the applied
area. We believe the topical delivery of our patented
combination represents a fundamentally new approach for the
treatment of pain associated with peripheral neuropathy. In
addition, we believe that the topical delivery of our product
candidate will significantly reduce the risk of adverse side
effects and drug to drug interactions associated with the
systemic delivery of the active ingredients. The results of our
clinical trials to date have demonstrated the safety of the
cream for use for up to one year and a potent analgesic effect
in subjects with both post-herpetic neuralgia and other types of
peripheral neuropathy, such as those with diabetic, traumatic
and surgical causes.
We believe EpiCept NP-1, if approved, would offer
the following favorable attributes:
•
analgesic effect comparable to levels provided
    when using systemically-delivered analgesics;
•
additive therapy to systemically-delivered
    analgesics, such as Neurontin;
46
•
minimal adverse side effects, including reduced
    drowsiness;
•
ease of application and suitability for
    self-administration;
•
low potential for abuse;
•
good patient compliance;
•
no drug to drug interactions; and
•
potential to treat a broad range of peripheral
    neuropathic conditions.
Clinical
Development.
We have completed two
Phase II clinical trials, one initiated in Canada in
October 2001 and one initiated in the United States in February
2002.
Placebo-controlled Factorial
Trial.
This four center Canadian
Phase II clinical trial in Ontario and Nova Scotia
(Dalhousie University) was a placebo-controlled factorial trial
designed to demonstrate that the use of the combination of
amitriptyline and ketamine was more effective than either drug
alone. A factorial trial is a clinical trial in which the active
ingredients in combination are compared with each drug used on
its own accompanied by a placebo control. The trial included 92
subjects with a history of diabetic, post surgical or traumatic
neuropathy or PHN. The trial tested a low-dose formulation of
EpiCept NP-1, consisting of a 2% concentration of amitriptyline
and a 1% concentration of ketamine, applied three times daily
for three weeks. Subjects were allowed to continue their current
pain medications (other than Lidoderm) as long as they did not
alter their dosage level or frequency. Subjects who entered the
trial had to have a score of at least 4 on the 11-point
numerical pain scale. We completed the analysis of data from
this clinical trial in February 2004.
We assessed several end points in this clinical
trial, including mean daily pain severity as measured on the
11-point numerical pain scale, pain relief, a responder analysis
and changes in the McGill Pain Questionnaire. While none of the
results was statistically significant, the results of the
responder analysis were the most compelling. In the responder
analysis, subjects were required to show at least a 30%
reduction in their pain as compared to placebo for the duration
of the study. The results indicated a desirable rank order of
the combination being more effective than either amitriptyline
or ketamine alone or placebo. The cream was well-tolerated by a
majority of the subjects, and no significant adverse reactions
were observed. Based on a review of our Phase II clinical
trial results, the FDA concurred in our End of Phase II
meeting that we design our Phase III clinical trial as a
responder analysis.
The following chart shows the number of subjects
that completed the clinical trial with a reduction in pain of
two points or more on the 11-point numerical pain scale. The
number of subjects in each group were as follows: placebo: 25;
ketamine only: 22; amitriptyline only: 22; and combination of
amitriptyline and ketamine: 23:
NP-1
Factorial Trial Results
Percentage
of Subjects with Reduction in Neuropathic Pain>2
Note:
p=0.10; (ami + ket vs. placebo)
47
Dose-Response Clinical
Trial.
In the United States, we
conducted a Phase II placebo-controlled dose-response
clinical trial in subjects recruited from 21 pain centers
to determine an effective clinical dose of EpiCept NP-1. The
trial included 251 subjects with post-herpetic neuralgia
who had been suffering significant pain for at least three
months. We tested two dosage formulations, one containing a
4% concentration of amitriptyline and a 2% concentration of
ketamine, which we refer to as "high-dose" and one
containing a 2% concentration of amitriptyline and a 1%
concentration of ketamine, which we refer to as
"low-dose," as compared to placebo. Subjects were
allowed to continue on their current pain medications as long as
they did not alter their dosage level or frequency. Subjects who
entered the trial had to have a score of at least 4 on the
11-point numerical pain scale. All subjects initially received
the high-dose formulation twice daily for seven days.
Responders, which were defined in the initial phase of this
clinical trial as those experiencing a one point or greater drop
on the 11-point numerical pain scale for three or more days,
were then randomized into one of three study arms (high-dose,
low-dose or placebo). Each study arm applied the applicable
formulation of EpiCept NP-1 or placebo twice daily for an
additional 14 days. We completed the analysis of the data
from this clinical trial in August 2003.
The primary endpoint was the baseline average
daily pain score compared to the average daily pain score at
day 21, measured on the 11-point numerical pain scale. We
measured the score for a 14 day period beginning on the day
the subjects were randomized. The clinical trial's primary
objective was to determine if the subjects in either the
high-dose or low-dose groups experienced better analgesia as
reflected by lower pain intensity scores over the length of the
trial. Secondary endpoints included pain relief, sleep quality
and patient global satisfaction, all measured on the 11-point
numerical scale.
The following chart shows the outcome following
randomization of the responding subjects in either the
high-dose, low-dose or placebo group:
NP-1
Dose-Response Clinical Trial Results
Note:
*p=0.026 (NP-1 high-dose group versus placebo
    group — baseline to day 21)
The clinical trial results indicated that the
high-dose formulation of EpiCept NP-1 met the primary endpoint
for the trial and resulted in a statistically significant
reduction in pain intensity and increase in pain relief as
compared to placebo. We also observed a dose-related effect,
i.e.
the subjects receiving the high-dose formulation had
more favorable results than the subjects receiving the low-dose
formulation. In addition, the subjects receiving the high-dose
formulation reported better sleep quality and greater overall
satisfaction than subjects receiving placebo. In addition, we
observed a greater number of "responders," which for
purposes of the responder analysis conducted during the 14-day
period were defined as subjects with a two or more point drop in
average daily pain scores on the 11-point numerical pain scale.
No significant adverse reactions were observed other than skin
irritation and rash, which were equivalent to placebo.
48
After the completion of the two Phase II
trials, we conducted open label trials in which participants in
the clinical trials could continue to use the low-dose
formulation for a period of up to one year. The low-dose
formulation was well-tolerated and detectable blood
concentration levels of the active ingredients were
insignificant, which is indicative of the safety and potential
long term efficacy of the product.
The results of our Phase II clinical trials
helped us decide to use the high-dose formulation of EpiCept
NP-1 in our Phase III clinical trials.
Current Clinical
Initiatives.
We held an End of
Phase II meeting with the FDA in April 2004 to discuss the
Phase II clinical trial results and the protocols for our
planned Phase III clinical trials. In that meeting, the FDA
accepted our stability data and manufacturing plans for the
combination product, as well as toxicology data on ketamine from
studies conducted by others and published literature. The FDA
also confirmed that the proposed New Drug Application, or NDA
would qualify for a Section 505(b)(2) submission (for
details on this submission process, see
"Business — Government Regulation —
Section 505(b)(2) Drug Applications" below). In
addition, the FDA approved our Phase III clinical trial
protocol and indicated that a second factorial Phase III
clinical trial would be required. The FDA also requested that we
conduct an additional pharmacokinetic trial to assess dermal
absorption of ketamine and outlined the parameters for long-term
safety studies for the high-dose formulation. The
pharmacokinetic clinical trial will involve applying the cream
twice daily and measuring blood concentration levels of
amitriptyline and ketamine over 48 hours.
We will work with the FDA to develop an
appropriate toxicology program for amitriptyline and ketamine
where existing data is not available. We initiated a
supplemental toxicology study in the third quarter of 2004
related to the application of EpiCept NP-1 on the skin. The
duration of the study and the number and types of animals to be
tested will be determined during further discussions with the
FDA.
In addition, we plan to commence our
Phase III clinical trial in the United States during the
second half of 2005 with at least 800 subjects with PHN. The
enrollment of these subjects could take up to one year to
complete. This Phase III clinical trial will test the
high-dose formulation against each component used on its own
accompanied by a placebo control. We expect to utilize primarily
the same endpoints that we used in our Phase II clinical
trial conducted in the United States. A responder analysis based
on pain intensity and pain relief, as well as sleep and patient
global satisfaction, will be assessed over the eight-week
duration of the clinical trial.
Surgical Pain
According to Datamonitor's study
"
Postoperative Pain
," published in April 2004,
there are over 53 million surgical procedures conducted
annually in the United States. Traditional post-surgical pain
treatment usually begins with the application of a local
anesthetic at the surgical incision site during the surgery. The
pain relief provided by the anesthetic applied during surgery
typically wears off within the first two hours. Pain relief is
then provided by a combination of oral or injectible narcotic
analgesics and NSAIDs, with accompanying adverse side effects
and drug to drug interactions.
LidoPAIN SP.
LidoPAIN SP is a sterile prescription analgesic patch designed
to provide sustained topical delivery of lidocaine to a
post-surgical or post-traumatic sutured wound while also
providing a sterile protective covering for the wound. The
LidoPAIN SP patch contains a 10% concentration of lidocaine and
is intended to be applied once daily for as many days as needed,
typically two to three days. LidoPAIN SP can be targeted for use
following both inpatient and ambulatory surgical procedures,
including among others: hernia repair, plastic surgery, puncture
wounds, biopsy, cardiac catheterization and tumor removal.
49
Currently, there is no marketed product similar
to LidoPAIN SP, and we believe that it would be the first
sterile prescription analgesic patch on the market. If approved,
we believe LidoPAIN SP would offer the following favorable
attributes:
•
safety and ease of use;
•
sterility on a sutured wound;
•
reduced need for systemically-delivered narcotic
    analgesics and NSAIDs;
•
once daily administration;
•
minimal adverse side effects, including no
    observed nausea or vomiting;
•
additive therapy to systemically-delivered
    analgesics;
•
no drug to drug interactions; and
•
no wound healing interference.
Clinical
Development.
In December 2001, we
initiated a randomized, double-blind, placebo-controlled
Phase II clinical trial in 221 subjects who underwent
hernia repair. We conducted the clinical trial in nine surgical
centers in Germany. Subjects were randomized to receive two
different doses of lidocaine, 9.5% and 3.5%, or placebo, in a
patch applied once each day for two days. Subjects were not
allowed to take any supplemental analgesics. We completed the
analysis of this clinical trial in January 2003.
The primary endpoint was subject pain
self-assessment at various intervals during the 48-hour period
following the subject's surgery and the secondary endpoint
was the number of "rescues," i.e. subjects receiving
systemically-delivered analgesics to alleviate pain. The results
of this trial indicate that the 9.5% formulation of LidoPAIN SP
provided a statistically significant analgesic effect in the
subjects. A dose-related response was also observed, with
subjects receiving the higher dose reporting a greater reduction
in pain and fewer rescues. No significant adverse reactions were
observed.
The following chart shows the pain scores over
time for LidoPAIN SP relative to placebo in a two-day trial
following hernia repair surgery:
LidoPAIN SP Placebo-Controlled Clinical
Trial
Results
Current Clinical
Initiatives.
Our clinical protocol
for a Phase III clinical trial in Europe was approved by
Germany's Federal Institute for Drugs and Medical Devices,
commonly known as the BfArM. We initiated dosing for this trial
during the fourth quarter of 2004. The clinical trial is a
randomized, double-blind, placebo-controlled trial in which at
least 400 subjects who underwent hernia repair will receive a
LidoPAIN SP patch or a placebo patch, for 48 hours. The
primary endpoint is
50
self-assessed pain intensity at various times
from 4 to 24 hours. The secondary endpoints include pain
intensity over the 48-hour duration of the study, global
satisfaction and the use of rescue medications. We believe that
this clinical trial will be adequate for European registration,
but we anticipate that we will need to conduct additional
clinical trials in Europe in order to broaden the product
labeling. We remain responsible for continuing and completing
our ongoing dermal sensitivity study for LidoPAIN SP, but Adolor
is responsible for further clinical trials and managing the
approval process in North America under our strategic alliance
with them. Adolor has announced that it plans to conduct
Phase IIb and Phase III clinical trials in the United
States.
Back Pain
In the United States, 80% of the U.S. population
will experience significant back pain at some point. Back pain
ranks second only to headaches as the most frequent pain people
experience. It is the leading reason for visits to neurologists
and orthopedists and the second most frequent reason for
physician visits overall. Both acute and chronic back pain are
typically treated with NSAIDs, muscle relaxants or opioid
analgesics. All of these drugs can subject the patient to
systemic toxicity, significant adverse side effects and drug to
drug interactions.
LidoPAIN BP.
LidoPAIN BP is a prescription analgesic non-sterile patch
designed to provide sustained topical delivery of lidocaine for
the treatment of acute or recurrent lower back pain of moderate
severity of less than three months duration. The LidoPAIN BP
patch contains 140 mg of lidocaine in a 19.5%
concentration, is intended to be applied once daily and can be
worn for a continuous 24-hour period. The patch's adhesive
is strong enough to permit a patient to move and conduct normal
daily activities but can be removed easily.
If approved, we believe LidoPAIN BP would offer
the following favorable attributes:
•
safety and ease of use;
•
reduced need for treatment with NSAIDs, muscle
    relaxants and narcotic analgesics;
•
once daily administration;
•
minimal adverse side effects; and
•
no drug to drug interactions.
LidoPAIN BP is designed to treat acute or
recurrent lower back pain. As part of our strategic alliance
with Endo, we licensed to Endo certain of our patents to enable
Endo to develop a patch for the treatment of chronic lower back
pain. The significant differences between LidoPAIN BP and
Endo's product, Lidoderm, are as follows:
•
LidoPAIN BP is designed for 24-hour use whereas
    Lidoderm is approved for 12-hour use;
•
LidoPAIN BP is made with a stronger adhesive;
•
LidoPAIN BP contains a higher concentration of
    lidocaine; and
•
LidoPAIN BP is designed to provide earlier onset
    of action.
Clinical
Development.
In May 2001, we
initiated a placebo-controlled dose-response trial
Phase IIa clinical trial in the United States. In this
clinical trial, we tested two dosage formulations of LidoPAIN
BP — one patch measuring 150 sq. cm. with a 19.5%
concentration of lidocaine and one patch measuring 75 sq.
cm. with a 19.5% concentration of lidocaine — compared
to placebo. Each patch was applied once daily for three days to
43 subjects with acute lower back pain of at least moderate
intensity. Subjects abstained from other analgesics and other
therapeutic regimens.
We completed the analysis of this clinical trial
in August 2003. The primary endpoint was pain intensity measured
by a 5-point numerical pain scale where 0 indicated no pain and
5 indicated severe pain. Pain measurements were made at various
times over the three-day duration of the trial. We assessed
51
a number of secondary endpoints, including pain
relief, muscle stiffness and global satisfaction. The trial
demonstrated a dose-related statistically significant reduction
in back pain intensity and muscle stiffness as well as increase
in pain relief from the initiation of the trial.
The following chart demonstrates the significant
improvement in pain intensity relative to the baseline over the
three-day duration of the study:
LidoPAIN BP Placebo-Controlled
Dose-Response Clinical Trial Results
In January 2002, we initiated a double-blind,
placebo-controlled Phase IIb clinical trial in three
centers in the United States. In this clinical trial, we tested
a LidoPAIN BP patch measuring 150 sq. cm. with a 19.5%
concentration of lidocaine. Each patch was applied once daily
for three days to 198 subjects with acute lower back pain
of at least moderate intensity. Subjects abstained from other
analgesics and other therapeutic regimens.
Although the results at two of the three centers
in this study did indicate that LidoPAIN BP had a greater
analgesic effect as compared to the placebo control, the results
at a third center were contradictory. At that center, the trial
subjects who received placebo reported an analgesic effect that
exceeded the analgesic effect reported by the subjects receiving
LidoPAIN BP. After the trial, our consultant concluded that the
unusually large placebo effect reported at this center most
likely resulted because many of the subjects may have been
concerned that a failure to report an analgesic effect would
result in a loss of the stipend offered as compensation for
participation in the trial. Due to the results reported at this
center, this clinical trial did not demonstrate a statistically
significant analgesic effect.
Current Clinical
Initiatives.
Based on the results
from our Phase I and Phase II clinical trials, we are
designing a new pivotal Phase IIb clinical trial, which we
expect to commence by the second half of 2005. Our new trial
will be designed to address the issues raised in our previous
Phase IIb clinical trial. The trial will be longer and will
have more stringent enrollment criteria. Under our strategic
alliance with Endo, we remain responsible for the development of
LidoPAIN BP, including all clinical trials and regulatory
submissions. We intend to request an End of Phase II
meeting with the FDA during the first half of 2005.
Other Product Candidates
EpiCept MP/DP
EpiCept MP/DP is a spray gel matrix of morphine
and lidocaine for the treatment of oral mucositis and dental
pain. A spray gel matrix is a liquid spray that solidifies upon
contact with a warm surface. Oral mucositis is an inflammation
of the mucosa of the mouth that ranges from redness to severe
ulceration and typically results from chemotherapy and radiation
therapy. It is anticipated that other clinical uses will be
52
considered to expand upon the initial indications
being studied. The FDA cleared our IND for EpiCept MP/DP in July
2001, and we completed a Phase IIa clinical trial on dental
pain subjects in Europe in April 2002. Preliminary results have
indicated that the product is well tolerated and provided a
longer duration of pain relief compared to lidocaine by itself.
We intend to continue dose ranging and dose optimization trials.
LidoPAIN TV
LidoPAIN TV is a topical lidocaine patch applied
to the periauricular skin region (behind the ear) for the
treatment of tinnitus. This product releases doses of lidocaine
into nerve endings located behind the ear. Tinnitus is
characterized by a constant or intermittent hissing, buzzing or
ringing noise in the ear that affects over 50 million
Americans. There are many causes of tinnitus, including defects
in nerve conduction, however, there are no currently approved
treatments. We completed a European Phase II clinical trial
in subjects with tinnitus in May 2002. Subjects utilizing the
LidoPAIN TV patch perceived a beneficial effect as compared to
subjects given the placebo patch.
LidoPAIN HM
LidoPAIN HM is a topical lidocaine patch applied
to the forehead for the treatment of headaches. LidoPAIN HM
releases analgesic doses of lidocaine directly into the
trigeminal nerve, a nerve located in the face and forehead,
stimulating the coverings (meninges) of the brain, which is
believed to be a cause of migraine pain. The FDA cleared our IND
for LidoPAIN HM in January 2001, and we completed a
Phase II clinical trial for LidoPAIN HM in headache
subjects. Our initial pilot study indicated that the patch was
well tolerated and demonstrated statistically significant
efficacy of the lidocaine patch over the placebo patch. A second
larger study was unable to replicate those results. We intend to
continue our clinical trials to establish efficacy of this
product candidate in various types of headache pain.
Our Strategy
Our objective is to address unmet medical needs
in pain management by developing a broad portfolio of
topically-delivered prescription analgesics for the treatment of
moderate-to-severe pain where existing treatments are
ineffective or cause significant adverse side effects. To
achieve our objective, the key elements of our strategy are to:
•
Focus our development efforts on
    topically-delivered analgesics targeting peripheral nerve
    receptors.
We intend to leverage
    our pain management expertise by developing proprietary products
    that target peripheral nerve receptors as a novel mechanism to
    effectively treat both acute and chronic pain, with fewer
    adverse side effects than conventional oral, injectable or
    transdermal pain therapeutics. We are developing new
    patent-protected products for conditions that can be treated by
    blocking the ability of peripheral nerve receptors to transmit
    pain messages to the brain.
•
Focus our development efforts on
    FDA-approved drugs.
All of our
    product candidates utilize several proprietary formulations and
    topical delivery technologies to administer FDA-approved
    analgesics. We believe using FDA-approved analgesics reduces the
    risks associated with new drug development, lowers our
    development costs and speeds time-to-market
.
•
Opportunistically enter into development
    and commercialization alliances for our
    products.
We plan to market
    products for which we obtain regulatory approval through
    co-marketing, co-promotion, licensing and distribution
    arrangements with third-party collaborators. We may also
    consider contracting with a third party professional
    pharmaceutical sales organization to perform the marketing
    function for our products. Where appropriate, we plan to retain
    certain rights to the development and commercialization of our
    product candidates and build our own internal sales and
    marketing capabilities in order to retain a greater share of any
    potential revenues. We believe that our current approach allows
    us maximum flexibility of selecting the marketing method that
    will optimize market penetration and commercial acceptance of
    our products and enable us to avoid developing a large internal
    sales and marketing organization.
53
Our Strategic Alliances
We have established strategic alliances with
Adolor with respect to our LidoPAIN SP product candidate
for the treatment of pain associated with surgical incisions and
with Endo with respect to our LidoPAIN BP product candidate
for the treatment of lower back pain. These strategic alliances
are designed to provide us with operating capital and supplement
our development and marketing capabilities. We intend to
selectively pursue additional strategic alliances as appropriate.
Adolor
In July 2003, we entered into a license agreement
with Adolor under which we granted Adolor the exclusive right to
commercialize a sterile topical patch containing an analgesic
alone or in combination, including without limitation,
LidoPAIN SP, throughout North America. Upon the execution
of the Adolor agreement, we received a non-refundable payment of
$2.5 million, and we may receive additional non-refundable
payments of up to $15.0 million that become due upon the
achievement of various milestones relating to product
development and regulatory approval. Under the agreement, we
will also receive royalties from Adolor based on the net sales
of licensed products in North America. These royalties are
payable on a country-by-country basis until our last patent
covering the licensed product expires or the tenth anniversary
of the first commercial sale of licensed product, whichever is
later. Under the agreement, Adolor is obligated to pay us a one
time bonus payment of up to $5.0 million upon the
achievement of specified net sales milestones of licensed
product. The total amount of upfront and milestone payments we
are eligible to receive from Adolor is $22.5 million.
Under the terms of the agreement, Adolor is
responsible for conducting further clinical trials and
completing the approval process in North America. At
Adolor's option, we may be required to supply or to obtain
supply of the clinical products necessary to complete clinical
trials. Alternatively, Adolor can choose to subcontract these
responsibilities to a third party. In North America, Adolor is
responsible for the supply and manufacture of LidoPAIN SP for
commercial use or, at its option, may subcontract these
responsibilities to third parties. In October 2004, we and
Adolor entered into an amendment to the license agreement to
facilitate our respective clinical development activities. The
amendment provided that the we and Adolor would coordinate our
independent pre-clinical and clinical activities with respect to
the LidoPAIN SP product. In addition, we agreed to provide
Adolor with clinical trial data generated from our recent
clinical trial conducted in Europe and to permit Adolor to use
such data for development, regulatory and commercialization of
licensed products. Adolor, in turn, agreed to provide us with
certain data generated by Adolor relating to the lidocaine
patches manufactured by Corium International, Inc. and to permit
us to use such data for the development, regulatory and
commercialization of sterile lidocaine patches. Lastly, the
amendment permits us to enter into an agreement with Corium
pursuant to which Corium will manufacture and supply our
clinical and commercial supplies of sterile lidocaine patches
for use outside North America. We have not yet entered into any
manufacturing or supply agreement with Corium.
At our option, within 30 days after
Adolor's first filing of an NDA (or foreign equivalent) for
LidoPAIN SP or similar product, we have the right to negotiate
with Adolor regarding a co-promotion arrangement in any country
in North America in which such filing has been made. However,
neither we nor Adolor is under any obligation to enter into any
such arrangement.
The Adolor license terminates on a
country-by-country and licensed product-by-licensed product
basis upon the expiration of the royalty obligations in the
particular country. Adolor may also terminate the agreement upon
120 days advance written notice to us, and either Adolor or
EpiCept may terminate the agreement upon an uncured material
breach by the other or, subject to the relevant bankruptcy laws,
upon a bankruptcy event of the other.
Endo
In December 2003, we entered into a license
agreement with Endo under which we granted Endo (and its
affiliates) the exclusive (including as to us and our
affiliates) worldwide right to commercialize LidoPAIN BP. We
also granted Endo worldwide rights to use certain of our patents
for the development
54
of certain other non-sterile, topical lidocaine
patches, including Lidoderm, Endo's non-sterile topical
lidocaine-containing patch for the treatment of chronic lower
back pain. Upon the execution of the Endo agreement, we received
a non-refundable payment of $7.5 million, and we may
receive payments of up to $52.5 million upon the
achievement of various milestones relating to product
development, regulatory approval and commercial success for both
our LidoPAIN BP product and Endo's own back pain product,
so long as, in the case of Endo's product candidate, our
patents provide protection thereof. We will also receive
royalties from Endo based on the net sales of LidoPAIN BP. These
royalties are payable until generic equivalents to the LidoPAIN
BP product are available or until expiration of the patents
covering LidoPAIN BP, whichever is sooner. We are also eligible
to receive milestone payments from Endo of up to approximately
$30.0 million upon the achievement of specified regulatory
and net sales milestones of Lidoderm, Endo's chronic lower
back pain product candidate, so long as our patents provide
protection thereof. The total amount of upfront and milestone
payments we are eligible to receive under this agreement is
$90.0 million.
We remain responsible for continuing and
completing the development of LidoPAIN BP, including conducting
all clinical trials (and supplying the clinical products
necessary for those trials) and the preparation and submission
of the NDA in order to obtain regulatory approval for LidoPAIN
BP. We may subcontract with third parties for the manufacture
and supply of LidoPAIN BP. Endo is conducting Phase II
clinical trials for its Lidoderm patch and remains responsible
for continuing and completing the development, including
conducting all clinical trials (and supplying the clinical
products necessary for those trials) in connection with that
product candidate.
In the event that we have obtained regulatory
approval of LidoPAIN BP in a particular country and Endo fails
to commercialize LidoPAIN BP in that country within three years
from the date on which we receive final regulatory approval in
the United States, then the license granted to Endo relating to
the commercialization of LidoPAIN BP in that country terminates,
and we will have the right to commercialize or license the
product in that country. In that event, we will be required to
pay Endo a royalty on the net sales of LidoPAIN BP in any such
country.
At our option, within 30 days after our
first filing of an NDA (or foreign equivalent) for LidoPAIN BP,
we have the right to negotiate a co-promotion arrangement with
Endo in any country in which such filing has been made. However,
neither we nor Endo is under any obligation to enter into any
such arrangement.
The license terminates upon the later of the
conclusion of the royalty term, on a country-by-country basis,
and the expiration of the last applicable EpiCept patent
covering licensed Endo product candidates on a
country-by-country basis. Either Endo or EpiCept may terminate
the agreement upon an uncured material breach by the other or,
subject to the relevant bankruptcy laws, upon a bankruptcy event
of the other.
Manufacturing
We have no in-house manufacturing capabilities.
We intend to outsource all of our manufacturing activities for
the foreseeable future. We believe that this strategy will
enable us to direct operational and financial resources to the
development of our product candidates rather than diverting
resources to establishing a manufacturing infrastructure.
We have entered into arrangements with qualified
third parties for the formulation and manufacture of our
clinical supplies. We intend to enter into additional written
supply agreements in the future and are currently in
negotiations with several potential suppliers. We generally
purchase our supplies from our current suppliers pursuant to
purchase orders. We plan to use a single, separate third party
manufacturer for each of our product candidates that we are
responsible for manufacturing. In some cases, the responsibility
to manufacture product, or to identify suitable third party
manufacturers, may be assumed by our licensees. For example,
under the Adolor agreement, Adolor is responsible for the
manufacture of the commercial supply of LidoPAIN SP in North
America. We may source LidoPAIN SP for marketing outside of
North America from Adolor or Adolor's third party supplier.
Alternatively, we can separately arrange for other third party
suppliers to manufacture the commercial supply of LidoPAIN SP
outside
55
North America. Pursuant to the October 2004
amendment to the Adolor agreement, Adolor has agreed to permit
us to enter into an agreement with Corium pursuant to which
Corium would manufacture and supply our clinical and commercial
supplies of sterile lidocaine patches for our use outside North
America. We have not yet entered into any manufacturing or
supply agreement with Corium.
We cannot assure you that our current
manufacturers can successfully increase their production to meet
full commercial demand. We believe that there are several
manufacturing sources available to us, including our current
manufacturers, which can meet our commercial supply requirements
on commercially reasonable terms. We will continue to look for
and secure the appropriate manufacturing capabilities and
capacity to ensure commercial supply at the appropriate time.
Sales and Marketing
We do not currently have internal sales or
marketing capabilities. In order to commercially market our
product candidates if we obtain regulatory approval, we must
either develop an internal sales and marketing infrastructure or
collaborate with third parties with sales and marketing
expertise. We have retained full rights to commercialize EpiCept
NP-1 worldwide. We have granted Adolor exclusive
commercialization rights for LidoPAIN SP in North America but
have also retained the right to negotiate with Adolor a
co-promotion agreement for LidoPAIN SP in North America. In
addition, we have granted Endo exclusive worldwide marketing and
commercialization rights for LidoPAIN BP but have also retained
the right to negotiate with Endo co-promotion rights for
LidoPAIN BP worldwide. We will likely market our products in
international markets outside of North America through
collaborations with third parties. We intend to make decisions
regarding internal sales and marketing of our product candidates
on a product-by-product and country-by-country basis.
Intellectual Property
Our commercial success will depend in part on
obtaining and maintaining patent protection and trade secret
protection of our technologies and drug candidates as well as
successfully defending these patents against third-party
challenges. We have various composition of matter and use
patents, which have claims directed to our product candidates or
methods of their use. Our patent policy is to retain and secure
patents for the technology, inventions and improvements related
to our core portfolio of product candidates. We currently own 17
issued U.S. patents, five issued foreign patents, one
allowed U.S. patent application and seven pending U.S. and
foreign patent applications. We also rely on trade secrets,
technical know-how and continuing innovation to develop and
maintain our competitive position.
The following is a summary of the patent position
relating to our three late-stage product candidates:
EpiCept
    NP-1
— We own a U.S.
    patent with claims directed to a formulation containing a
    combination of amitriptyline and ketamine, which can be used as
    a treatment for the topical relief of pain, including
    neuropathic pain, that expires in August 2021. We also have a
    license to additional patents, which expire in September 2015
    and May 2018, and which have claims directed to topical uses of
    tricyclic antidepressants, such as amitriptyline, and NMDA
    antagonists, such as ketamine, as treatments for relieving pain,
    including neuropathic pain. Additional foreign patent
    applications are pending related to EpiCept NP-1 in many major
    pharmaceutical markets outside the United States.
LidoPAIN
    SP
— We own two U.S.
    patents that have claims directed to the topical use of a local
    anesthetic or salt thereof, such as lidocaine, for the
    prevention or relief of pain from surgically closed wounds, in a
    hydrogel patch, which expire in October 2019. Additionally, we
    own a pending U.S. patent application that is directed to a
    breathable, sterile patch that can be used to treat pain caused
    by various types of wounds, including surgically closed wounds.
    We have foreign patent applications pending relating to LidoPAIN
    SP in many major pharmaceutical markets outside the United
    States.
LidoPAIN
    BP
— We own a U.S.
    patent that has claims directed to the use and composition of a
    patch containing a local anesthetic, such as lidocaine, to
    topically treat back pain, myofascial pain and
56
muscular tensions, which expires in July 2016.
    Equivalent foreign patents have been granted in many major
    European pharmaceutical markets.
We also seek to protect our proprietary
information by requiring our employees, consultants,
contractors, outside partners and other advisers to execute, as
appropriate, nondisclosure and assignment of invention
agreements upon commencement of their employment or engagement.
We also require confidentiality or material transfer agreements
from third parties that receive our confidential data or
materials.
We also rely on trade secrets to protect our
technology, especially where we do not believe patent protection
is appropriate or obtainable. However, trade secrets are
difficult to protect. While we use reasonable efforts to protect
our trade secrets, our employees, consultants, contractors,
partners and other advisors may unintentionally or willfully
disclose our information to competitors. Enforcing a claim that
a third party illegally obtained and is using our trade secrets
is expensive and time consuming, and the outcome is
unpredictable. In addition, courts outside the United States are
sometimes less willing to protect trade secrets. Moreover, our
competitors may independently develop equivalent knowledge,
methods and know-how.
The pharmaceutical, biotechnology and other life
sciences industries are characterized by the existence of a
large number of patents and frequent litigation based upon
allegations of patent infringement. While our drug candidates
are in clinical trials, and prior to commercialization, we
believe our current activities fall within the scope of the
exemptions provided by 35 U.S.C. Section 271(e) in the
United States and Section 55.2(1) of the Canadian Patent
Act, each of which covers activities related to developing
information for submission to the FDA and its counterpart agency
in Canada. As our drug candidates progress toward
commercialization, the possibility of an infringement claim
against us increases. While we attempt to ensure that our drug
candidates and the methods we employ to manufacture them do not
infringe other parties' patents and other proprietary
rights, competitors or other parties may assert that we infringe
on their proprietary rights.
For a discussion of the risks associated with our
intellectual property, see "Risk Factors — Risks
Relating to Intellectual Property."
License Agreements
We have in the past licensed and will continue to
license patents from collaborating research groups and
individual inventors.
Hyson
In March 2001, we entered into a license
agreement with Dr. Morton Hyson under which Dr. Hyson
licensed to us various patents relating to LidoPAIN HM. We are
required to pay Dr. Hyson a royalty based on both the
composition and the net sales of the product ultimately
developed. Commencing with the first commercial sale of a
product incorporating the licensed patents, the royalties to
Dr. Hyson will not be less than $50,000 per year. The
term of the license extends until the last to expire of the
licensed patents, at which time the royalties also terminate.
Dr. Hyson may also terminate the agreement if we fail to
pay royalties when due or, subject to the relevant bankruptcy
laws, if we become subject to a bankruptcy event. We may
terminate the agreement if we determine that commercialization
of the products incorporating the licensed patents is not in our
best commercial interests.
Memorial Sloan Kettering
In January 2001, we entered into a license
agreement with Memorial Sloan Kettering Institute for Cancer
Research, or MSK, under which MSK granted us an exclusive
license to certain patent applications related to topical
anesthetics involving opioids for the treatment of pain
associated with the skin and mucosal surfaces. We are required
to pay MSK royalties based on the net sales generated from
products utilizing the licensed patents. The agreement provides
for minimum royalties of $25,000 per year starting from the
first sale of product and increases by $25,000 per year, up
to a maximum of $125,000 per
57
year. The royalty obligations terminate upon the
last to expire of the licensed patents. MSK may terminate the
agreement if we become insolvent or if we fail to make royalty
payments when due after a specified period. We may terminate the
agreement if we determine that the commercialization of products
incorporating the licensed patent is not in our best interests.
Either of us may terminate the agreement upon a material uncured
breach of the other.
Cassel
In October 1999, we acquired from Dr. R.
Douglas Cassel certain patent applications relating to
technology for the treatment of surgical incision pain. On
July 16, 2003, this royalty agreement was amended. Pursuant
to this agreement, we have agreed to pay Dr. Cassel a fee
of $4,000 per month until July 2006. We will also pay
Dr. Cassel royalties based on the net sales of any of our
products for the treatment of pain associated with surgically
closed wounds. The $4,000 per month fee will be credited
towards these royalty payments. The royalty obligations will
terminate upon the expiration of the last to expire acquired
patent. As part of the royalty arrangement, we have engaged
Dr. Cassel as a consultant, for which he is paid on a per
diem basis. Dr. Cassel provides us with general scientific
consulting services, particularly with respect to the
development and commercialization of LidoPAIN SP.
Dr. Cassel has also granted us an option to obtain, on
mutually agreeable terms, an exclusive, worldwide license to any
technology discovered by Dr. Cassel outside of his
performance of services for us.
Epitome
In August 1999, we entered into a sublicense
agreement with Epitome Pharmaceuticals Limited under which we
have an exclusive license to certain patents for the topical use
of tricyclic anti-depressants and NMDA antagonists as topical
analgesics for neuralgia. This technology has been incorporated
into EpiCept NP-1. We have been granted worldwide rights to
make, use, develop, sell and market products utilizing the
licensed technology in connection with passive dermal
applications. We are obligated to make payments to Epitome upon
achievement of specified milestones and to pay royalties based
on annual net sales derived from the products incorporating the
licensed technology. At the end of each year in which there has
been no commercially sold products, we will be obligated to pay
to Epitome a maintenance fee that is equal to twice the fee paid
in the previous year, or Epitome will have the option to
terminate the contract. The sublicense terminates upon the
expiration of the last to expire licensed patents. The
sublicense may be terminated earlier under specified
circumstances, such as breaches, lack of commercial feasibility
and regulatory issues.
Government Regulation
United States
The U.S. Food and Drug Administration and
comparable state and local regulatory agencies impose
substantial requirements upon the clinical development,
manufacture, marketing and distribution of drugs. These agencies
and other federal, state and local entities regulate research
and development activities and the testing, manufacture, quality
control, safety, effectiveness, labeling, storage, record
keeping, approval, advertising and promotion of our product
candidates. In the United States, the FDA regulates drugs under
the Federal Food, Drug, and Cosmetic Act, or FFDCA, and
implementing regulations. The process required by the FDA before
our product candidates may be marketed in the United States
generally involves the following:
•
completion of extensive pre-clinical laboratory
    tests, pre-clinical animal studies and formulation studies all
    performed in accordance with the FDA's good laboratory
    practice, or GLP, regulations;
•
submission to the FDA of an IND application that
    must become effective before clinical trials may begin;
•
performance of adequate and well-controlled
    clinical trials to establish the safety and efficacy of the
    product candidate for each proposed indication;
58
•
submission of an NDA to the FDA;
•
satisfactory completion of an FDA pre-approval
    inspection of the manufacturing facilities at which the product
    is produced to assess compliance with current GMP, or cGMP,
    regulations; and
•
FDA review and approval of the NDA prior to any
    commercial marketing, sale or shipment of the drug.
The testing and approval process requires
substantial time, effort and financial resources, and we cannot
be certain that any approvals for our product candidates will be
granted on a timely basis, if at all.
Pre-clinical
Activities.
Pre-clinical
activities include laboratory evaluation of product chemistry,
formulation and stability, as well as studies to evaluate
toxicity in animals. The results of pre-clinical tests, together
with manufacturing information and analytical data, are
submitted as part of an IND application to the FDA. The IND
automatically becomes effective 30 days after receipt by
the FDA, unless the FDA, within the 30-day time period, raises
concerns or questions about the conduct of the clinical trial,
including concerns that human research subjects will be exposed
to unreasonable health risks. In such a case, the IND sponsor
and the FDA must resolve any outstanding concerns before the
clinical trial can begin. Our submission of an IND, or those of
our collaborators, may not result in FDA authorization to
commence a clinical trial. A separate submission to an existing
IND must also be made for each successive clinical trial
conducted during product development, and the FDA must grant
permission before each clinical trial can begin. Further, an
independent institutional review board, or IRB, for each medical
center proposing to conduct the clinical trial must review and
approve the plan for any clinical trial before it commences at
that center, and it must monitor the study until completed. The
FDA, the IRB or the sponsor may suspend a clinical trial at any
time on various grounds, including a finding that the subjects
or patients are being exposed to an unacceptable health risk.
Clinical testing also must satisfy extensive Good Clinical
Practice, or GCP, regulations and regulations for informed
consent of subjects.
Clinical
Trials.
For purposes of NDA
submission and approval, clinical trials are typically conducted
in the following three sequential phases, which may overlap:
•
Phase I:
Studies are initially conducted in a limited population to test
    the drug candidate for safety, dose tolerance, absorption,
    metabolism, distribution and excretion in healthy humans or, on
    occasion, in subjects. In some cases, a sponsor may decide to
    run what is referred to as a "Phase Ib"
    evaluation, which is a second safety-focused Phase I
    clinical trial typically designed to evaluate the impact of the
    drug candidate in combination with currently approved drugs.
•
Phase II:
Studies are generally conducted in a limited patient population
    to identify possible adverse effects and safety risks, to
    determine the efficacy of the drug candidate for specific
    targeted indications and to determine dose tolerance and optimal
    dosage. Multiple Phase II clinical trials may be conducted
    by the sponsor to obtain information prior to beginning larger
    and more expensive Phase III clinical trials. In some
    instances, a sponsor may decide to run what is referred to as a
    "Phase IIa" clinical trial, which is designed to
    provide dose-ranging and additional safety and pharmaceutical
    data. In other cases, a sponsor may decide to run what is
    referred to as a "Phase IIb" evaluation, which is
    a second, confirmatory Phase II clinical trial that could,
    if positive and accepted by the FDA, serve as a pivotal clinical
    trial in the approval of a drug candidate.
•
Phase III:
These are commonly referred to as pivotal studies. When
    Phase II clinical trials demonstrate that a dose range of
    the drug candidate is effective and has an acceptable safety
    profile, Phase III clinical trials are undertaken in large
    patient populations to further evaluate dosage, to provide
    substantial evidence of clinical efficacy and to further test
    for safety in an expanded and diverse patient population at
    multiple, geographically dispersed clinical trial sites.
In some cases, the FDA may condition approval of
an NDA for a drug candidate on the sponsor's agreement to
conduct additional clinical trials to further assess the
drug's safety and effectiveness after NDA approval. Such
post-approval trials are typically referred to as Phase IV
clinical trials.
59
New Drug
Application.
The results of drug
candidate development, pre-clinical testing, chemistry and
manufacturing controls and clinical trials are submitted to the
FDA as part of an NDA. The NDA also must contain extensive
manufacturing information. Once the submission has been accepted
for filing, by law the FDA has 180 days to review the
application and respond to the applicant. The review process is
often significantly extended by FDA requests for additional
information or clarification. The FDA may refer the NDA to an
advisory committee for review, evaluation and recommendation as
to whether the application should be approved. The FDA is not
bound by the recommendation of an advisory committee, but it
generally follows such recommendations. The FDA may deny
approval of an NDA if the applicable regulatory criteria are not
satisfied, or it may require additional clinical data or an
additional pivotal Phase III clinical trial. Even if such
data is submitted, the FDA may ultimately decide that the NDA
does not satisfy the criteria for approval. Data from clinical
trials are not always conclusive and the FDA may interpret data
differently than we interpret data. Once issued, the FDA may
withdraw drug approval if ongoing regulatory requirements are
not met or if safety problems occur after the drug reaches the
market. In addition, the FDA may require testing, including
Phase IV clinical trials, and surveillance programs to
monitor the effect of approved products that have been
commercialized, and the FDA has the power to prevent or limit
further marketing of a drug based on the results of these
post-marketing programs. Drugs may be marketed only for the
approved indications and in accordance with the provisions of
the approved label. Further, if there are any modifications to
the drug, including changes in indications, labeling or
manufacturing processes or facilities, we may be required to
submit and obtain FDA approval of a new NDA or NDA supplement,
which may require us to develop additional data or conduct
additional pre-clinical studies and clinical trials.
Satisfaction of FDA regulations and requirements
or similar requirements of state, local and foreign regulatory
agencies typically takes several years, and the actual time
required may vary substantially based upon the type, complexity
and novelty of the product or disease. Government regulation may
delay or prevent marketing of drug candidates for a considerable
period of time and impose costly procedures upon our activities.
The FDA or any other regulatory agency may not grant approvals
for new indications for our drug candidates on a timely basis,
if at all. Even if a drug candidate receives regulatory
approval, the approval may be significantly limited to specific
usages, patient populations and dosages. Further, even after
regulatory approval is obtained, later discovery of previously
unknown problems with a drug may result in restrictions on the
drug or even complete withdrawal of the drug from the market.
Delays in obtaining, or failures to obtain, regulatory approvals
for any of our drug candidates would harm our business. In
addition, we cannot predict what additional governmental
regulations may arise from future U.S. governmental action.
Any drugs manufactured or distributed by us or
our collaborators pursuant to FDA approvals are subject to
continuing regulation by the FDA, including record keeping
requirements and reporting of adverse experiences associated
with the drug. Drug manufacturers and their subcontractors are
required to register their establishments with the FDA and
certain state agencies and are subject to periodic unannounced
inspections by the FDA and certain state agencies for compliance
with ongoing regulatory requirements, including cGMPs, which
impose certain procedural and documentation requirements upon us
and our third-party manufacturers. Failure to comply with the
statutory and regulatory requirements can subject a manufacturer
to potential legal or regulatory action, such as warning
letters, suspension of manufacturing, seizure of product,
injunctive action or civil penalties. We cannot be certain that
we or our present or future third-party manufacturers or
suppliers, will be able to comply with the cGMP regulations and
other ongoing FDA regulatory requirements. If our present or
future third-party manufacturers or suppliers are not able to
comply with these requirements, the FDA may halt our clinical
trials, require us to recall a drug from distribution, or
withdraw approval of the NDA for that drug.
The FDA closely regulates the post-approval
marketing and promotion of drugs, including standards and
regulations for direct-to-consumer advertising, off-label
promotion, industry-sponsored scientific and educational
activities and promotional activities involving the Internet. A
company can make only those claims relating to safety and
efficacy that are approved by the FDA. Failure to comply with
these requirements can result in adverse publicity, warning
letters, corrective advertising and potential civil and
60
criminal penalties. Physicians may prescribe
legally available drugs for uses that are not described in the
drug's labeling and that differ from those tested by us and
approved by the FDA. Such off-label uses are common across
medical specialties. Physicians may believe that such off-label
uses are the best treatment for many patients in varied
circumstances. The FDA does not regulate the behavior of
physicians in their choice of treatments. The FDA does, however,
impose stringent restrictions on manufacturers'
communications regarding off-label use.
Section 505(b)(2) Drug
Applications.
As an alternate path
to FDA approval for new or improved formulations of previously
approved products, a company may file a Section 505(b)(2)
NDA. Section 505(b)(2) permits the filing of an NDA where
at least some of the information required for approval comes
from studies not conducted by or for the applicant and for which
the applicant has not obtained a right of reference. The rule
permits the applicant to rely upon certain pre-clinical or
clinical studies conducted for an approved product. The FDA may
also require companies to perform additional studies or
measurements to support the change from the approved product.
The FDA may then approve the new product candidate for all or
some of the label indications for which the referenced product
has been approved, as well as for any new indication sought by
the Section 505(b)(2) applicant.
To the extent that the Section 505(b)(2)
applicant is relying on studies conducted for an already
approved product, the applicant is required to certify to the
FDA concerning any patents listed for the approved product in
the FDA's Orange Book publication. Specifically, the
applicant must certify that: (i) the required patent
information has not been filed; (ii) the listed patent has
expired; (iii) the listed patent has not expired, but will
expire on a particular date and approval is sought after patent
expiration; or (iv) the listed patent is invalid or will
not be infringed by the new product. If the applicant does not
challenge the listed patents, the Section 505(b)(2)
application will not be approved until all the listed patents
claiming the referenced product have expired. The
Section 505(b)(2) application also will not be approved
until any non-patent exclusivity, such as exclusivity for
obtaining approval of a new chemical entity, listed in the
Orange Book for the referenced product has expired.
Foreign Regulation
Whether or not we obtain FDA approval for a
product, we must obtain approval of a product by the comparable
regulatory authorities of foreign countries before we can
commence clinical trials or marketing of the product in those
countries. The approval process varies from country to country,
and the time may be longer or shorter than that required for
FDA approval. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement
also vary greatly from country to country. Although governed by
the applicable country, clinical trials conducted outside of the
United States typically are administered with the three-phase
sequential process that is discussed above under
"Government Regulation — United States."
However, the foreign equivalent of an IND is not a prerequisite
to performing pilot studies or Phase I clinical trials.
Under European Union regulatory systems, we may
submit marketing authorization applications either under a
centralized or decentralized procedure. The centralized
procedure, which is available for medicines produced by
biotechnology or which are highly innovative, provides for the
grant of a single marketing authorization that is valid for all
EU member states. This authorization is a marketing
authorization approval, or MAA. The decentralized procedure
provides for mutual recognition of national approval decisions.
Under this procedure, the holder of a national marketing
authorization may submit an application to the remaining member
states. Within 90 days of receiving the applications and
assessment report, each member state must decide whether to
recognize approval. This procedure is referred to as the mutual
recognition procedure, or MRP.
In addition, regulatory approval of prices is
required in most countries other than the United States. We face
the risk that the resulting prices would be insufficient to
generate an acceptable return to us or our collaborators.
61
Competition
The pharmaceutical industry, and the pain
management sector specifically, is highly competitive and
includes a number of established, large and mid-sized
pharmaceutical and specialty pharmaceutical companies, as well
as smaller emerging companies, whose activities are directly
focused on our target markets and areas of expertise. These
organizations also compete with us to attract qualified
personnel and potential parties for acquisitions, joint ventures
or other strategic alliances. Many of our competitors have
significantly greater financial, manufacturing, marketing and
drug development resources than we do. Large pharmaceutical
companies in particular have extensive experience in clinical
testing, obtaining regulatory approvals and drug
commercialization. If approved, our product candidates will
compete with a large number of products that include
over-the-counter treatments, prescription drugs specifically
indicated for pain management and prescription drugs that are
prescribed off-label. In addition, new developments occur in the
pharmaceutical industry at a rapid pace.
If approved, each of our product candidates will
compete for a share of the existing market with products that
have become standard treatments recommended or prescribed by
physicians.
We believe that the primary competition for our
lead product candidates are as follows:
EpiCept NP-1.
The primary competition for EpiCept NP-1 in the area of
    post-herpetic neuralgia is Neurontin (gabapentin), which is
    currently marketed by Pfizer. Gabapentin, the generic equivalent
    of Neurontin, is now available at a cost substantially below the
    price of Neurontin. Pfizer has developed a successor product
    candidate to Neurontin called Lyrica or pregabalin, which has
    been shown in Phase III clinical trials to effectively
    treat subjects with neuropathic pain. We also face competition
    from Endo's Lidoderm patch, which is currently indicated
    for post-herpetic neuralgia.
LidoPAIN SP.
The primary competition in the market for acute post-operative
    pain are narcotic analgesics. Several competitors are seeking
    product candidates that would be used in combination with
    opioids to mitigate one or more of the adverse side effects
    associated with their use. For example, Endo recently announced
    that the FDA has approved Skyepharma's NDA for DepoDur for
    the treatment of pain following major surgery, to which product
    Endo has licensed the commercial rights. Previously referred to
    as DepoMorphine, DepoDur is a single dose sustained-release
    injectable formulation of morphine. Other competitors include
    Purdue Pharmaceuticals and Ortho-McNeil Pharmaceutical, Inc.
LidoPAIN BP.
There are a number of competitive products that are used to
    treat acute lower back pain. We compete with fully-integrated
    pharmaceutical companies, smaller companies that are
    collaborating with larger pharmaceutical companies, academic
    institutions, government agencies and other public and private
    research organizations. Many of these competitors have drugs
    already approved by the FDA or in development and operate larger
    research and development programs in these fields than we do.
Although we believe that, if approved, our
product candidates will have favorable features for the
treatment of their intended indications, existing treatments or
treatments currently under clinical development that also
receive regulatory approval may possess advantages in competing
for market share.
Legal Proceedings
We are not currently involved in any material
legal proceedings.
Facilities
Our facilities consist of approximately
12,700 square feet of research and office space. We lease
9600 square feet located at 270 Sylvan Avenue in
Englewood Cliffs, New Jersey until September 2005 with an option
to renew until September 2010. We also lease 2,766 square
feet in Munich, Germany until August 2007, with an automatic
year-long extension for an additional three years.
62
Employees
Our workforce consists of 13 full-time
employees, three of whom hold a Ph.D. or M.D., and one of whom
holds other advanced degrees. Of our total workforce, six are
engaged in research and development, and seven are engaged in
business development, finance and administration. We have no
collective bargaining agreements with our employees, and we have
not experienced any work stoppages. We believe that our
relations with our employees are good.
63
MANAGEMENT
Management and Board of Directors
EpiCept has a strong team of experienced business
executives, scientific professionals and medical specialists.
Our executive officers and directors, their ages and positions,
as of January 6, 2005, are as follows:
Name
Age
Position/Affiliation
John V. Talley
48
President, Chief Executive Officer and Director
Robert W. Cook
49
Chief Financial Officer — Senior Vice
    President, Finance and Administration
Dov Elefant
37
Controller — Vice President, Finance
    and Administration
Earle Lockhart, M.D.
63
Vice President, Clinical and Regulatory Affairs
Scott B. Kozak
39
Vice President, Business Development
Oliver Wiedemann, M.D.
45
Managing Director — Medical Affairs,
    EpiCept GmbH
Dileep Bhagwat, Ph.D., M.B.A.
54
Senior Vice President, Pharmaceutical Development
Robert G. Savage
51
Chairman of the Board
Ernst-Gunter Afting, M.D., Ph.D.
62
Director
Gert Caspritz, Ph.D.
55
Director
Mark Docherty
40
Director
Guy C. Jackson
62
Director
Reiner Ponschab, Ph.D.
61
Director
Thorlef Spickschen, Ph.D.
63
Director
Executive Officers and Key Employees
John V. Talley
has been our President, Chief
Executive Officer and a Director since October 2001.
Mr. Talley has more than 23 years of experience in the
pharmaceutical industry. Prior to joining us, Mr. Talley
was the Chief Executive Officer of Consensus Pharmaceuticals, a
biotechnology drug discovery start-up company that developed a
proprietary peptide-based combinatorial library screening
process. Prior to joining Consensus, Mr. Talley led Penwest
Ltd.'s efforts in its spin-off of its subsidiary Penwest
Pharmaceuticals Co. in 1998 and served as President and Chief
Operating Officer of Penwest Pharmaceuticals. Mr. Talley
started his career at Sterling Drug Inc., where he was
responsible for all U.S. marketing activities for
prescription drugs, helped launch various new pharmaceutical
products and participated in the 1988 acquisition of Sterling
Drug by Eastman Kodak Co. Mr. Talley received his B.S. in
Chemistry from the University of Connecticut and completed
coursework towards an M.B.A. in Marketing from New York
University, Graduate School of Business.
Robert W. Cook
has been our Chief Financial
Officer and Senior Vice President, Finance and Administration
since April 2004. Prior to joining us, Mr. Cook was Vice
President, Finance and Chief Financial Officer of Pharmos
Corporation since January 1998 and became Executive Vice
President of Pharmos in February 2001. From May 1995 until his
appointment as Pharmos's Chief Financial Officer, he was a
vice president in GE Capital's commercial finance
subsidiary, based in New York. From 1977 until 1995,
Mr. Cook held a variety of corporate finance and capital
markets positions at The Chase Manhattan Bank, both in the
United States and in several overseas locations. He was named a
managing director of Chase and several of its affiliates in
January 1986. Mr. Cook received his B.S. in International
Finance from The American University, Washington, D.C.
64
Dov S. Elefant
has been our Controller and Vice
President of Finance and Administration since April 2004. Prior
to being named our Controller and Vice President of Finance and
Administration, Mr. Elefant was our Controller from
December 1999 through September 2000, our Chief Financial
Officer from October 2000 through January 2001 and our Chief
Financial Officer and Vice President of Finance and
Administration from January 2001 until April 2004. From October
1998 until December 1999, Mr. Elefant was Assistant
Controller of Alteon Inc., a publicly traded biotechnology
company. Prior to that, he served as Director of Accounting and
Finance of Innapharma, Inc., a pharmaceutical contract research
organization. Mr. Elefant received his B.S. in Accounting
from the Sy Syms School of Business of Yeshiva University
in New York.
Earle A. Lockhart, M.D.,
has been our Vice President of
Clinical and Regulatory Affairs since 2000, and prior to that
served as our Director of Clinical Research and Medical Affairs
since 1998. From 1996 until joining us, Dr. Lockhart was
Medical Director supporting the launch and marketing of a
controlled release oxycodone (OxyContin) for The Purdue
Frederick Company. From 1991 until 1996, Dr. Lockhart
served as Senior Medical Director in the OTC Division of
American Home Products Corporation. From 1986 to 1991,
Dr. Lockhart served as Senior Medical Director of Medical
Affairs at Sterling Drug. From 1981 until 1986,
Dr. Lockhart held various positions in clinical research at
Bristol-Myers Squibb Company and Janssen Pharmaceutica Products,
L.P. Dr. Lockhart received his M.D. from the University of
Toronto and is Board Certified in both Pediatrics and
Nephrology. He has been Associate Professor of Pediatrics at New
York Medical College in Valhalla, N.Y. and is currently Clinical
Assistant Professor at Albert Einstein College of Medicine in
New York.
Scott B. Kozak
has been our Vice President of
Business Development since April 2002 and has more than
14 years of experience in the pharmaceutical industry.
Prior to joining us, Mr. Kozak was the Director of
Licensing at Forest Laboratories, Inc. Before joining Forest in
September 1999, Mr. Kozak was Assistant Director, Global
Licensing and Corporate Development at Hoffmann-La Roche
Inc., where he was responsible for the licensing efforts in the
Metabolic and Drug Delivery areas and was a member of the
Metabolic Therapeutic Area Strategy Team responsible for global
planning. From 1989 to 1997, Mr. Kozak held various sales,
marketing, and licensing and acquisition positions at Solvay
Pharmaceuticals. Mr. Kozak received his B.S. in Marketing
from the University of Connecticut and his M.B.A. in Marketing
from Kennesaw State University's Michael J. Coles College
of Business.
Oliver Wiedemann, M.D.,
joined our subsidiary EpiCept GmbH
in October 1998 as Director of Medical Affairs. Since July 1999,
he has been the Managing Director at EpiCept GmbH. From January
1992 until joining us, he was the Department Head CNS/ Muscle of
the Medical Department of Sanofi Winthrop, Munich. Prior to
that, Dr. Widemann worked as a surgeon at the
Olympiapark-Klinik, Munich. He is the author of several
scientific publications in the pain area. Dr. Wiedemann
received his Medical Doctorate Degree from the University of
Munich.
Dileep Bhagwat, Ph.D., M.B.A.,
has been our Senior Vice President
of Pharmaceutical Development since February 2004 and has more
than 20 years of pharmaceutical experience developing and
commercializing various dosage forms. Prior to joining EpiCept
in 2004, Dr. Bhagwat worked at Bradley Pharmaceuticals, as
Vice President, Research and Development and Chief Scientific
Officer. From November 1994 through September 1999,
Dr. Bhagwat was employed at Penwest Pharmaceuticals in
various capacities, including Vice President, Scientific
Development and Regulatory Affairs and at Purdue Frederick
Research Center as Assistant Director of Pharmaceutical
Development. Dr. Bhagwat holds many U.S. and foreign
patents and has presented and published on dosage form
development and drug delivery. Dr. Bhagwat holds a B.S. in
Pharmacy from Bombay University, an M.S. and Ph.D. in Industrial
Pharmacy from St. John's University in New York and an
M.B.A. in International Business from Pace University in New
York.
Board of Directors
Robert G. Savage
has been a member of our Board
since December 2004 and serves as the Chairman. Mr. Savage
has been a pharmaceutical executive for almost 20 years. He
held the position of Worldwide
65
Chairman of the Pharmaceuticals Group at
Johnson & Johnson and was both a company officer and a
member of the Executive Committee. He also served
Johnson & Johnson in the capacity of a Company Group
Chairman and President of Ortho-McNeil Pharmaceuticals. Most
recently, Mr. Savage was President for the General
Therapeutics and Inflammation Business for Pharmacia Corporation
where he was President of the Worldwide Inflammation Group. He
has held multiple positions leading marketing, business
development and strategic planning at Hoffmann-La Roche and
Sterling Drug. Mr. Savage is a director of The Medicines
Company, a specialty pharmaceutical company, Noven
Pharmaceuticals, a drug delivery company, and NovaDel Pharma,
Inc., a privately-held drug delivery company. Mr. Savage
received a B.S. in Biology from Upsala College and an M.B.A.
from Rutgers University.
Ernst-Günter
Afting, M.D., Ph.D.,
has
been a member of our board since 1998. Since 1995, Professor
Afting has been President and Chief Executive Officer of
Munich-based GSF-National Research Center for Environment and
Health, a large medical research organization. From 1993 until
1995, he was President and Chief Executive Officer of Roussel
Uclaf, a French pharmaceutical company, which was majority owned
by Hoechst AG. Professor Afting had previously held various
positions with Hoechst AG since 1984, including Chief Executive
Officer of the Pharmaceutical Division of the Hoechst Group and
Chairman of the Divisional Pharmaceutical Board. He was a member
of the Advisory Committee on Science and Technology to the
German Chancellor and serves on several boards of
entrepreneurial biotechnology companies in Europe and the United
States. Professor Afting has been a member of the faculty at the
University Göttingen since 1985. Professor Afting received
his M.D. and Ph.D. from the University of Freiburg, Germany.
Gert Caspritz, Ph.D.,
has been a member of our board
since 1999 and served as our Chairman from July 2002 until
December 2004. Dr. Caspritz joined Techno Venture
Management, or "TVM," in 1999 as an Investment Manager
in the healthcare and life sciences group and has been a General
Partner since 2000. Prior to that, Dr. Caspritz held
various positions with Hoechst AG. Most recently he was
Vice President, New Technologies Licensing at Hoechst Marion
Roussel, the pharmaceutical subsidiary of Hoechst, where he had
primary global responsibility for identifying business
opportunities in the areas of biotechnology, enabling
technologies and early-stage products in both the biotech
industry and academia. Additionally, he supervised HMR's
various venture capital investments and was a member of their
strategy teams for oncology and bone diseases and the oncology
opportunity review team. Dr. Caspritz was previously
Assistant to the Head of Hoechst's worldwide pharmaceutical
research and established or led a number of immuno and
neuropharmacology laboratories as well as a drug discovery
group. Dr. Caspritz received degrees in Biology and
Microbiology from the University of Mainz, Germany where he
wrote his doctoral thesis.
Mark Docherty
has been a member of our board
since July 2003. Mr. Docherty is a founding director of
Merlin Biosciences Limited and serves as an Investment Director.
He has worked on a large number of initial investments and
refinancings of biotechnology companies. He was previously
associated with Arthur Andersen (UK) in the Corporate
Finance Group based in the United Kingdom. Mr. Docherty is
a Chartered Accountant and holds a B.Eng. in Mechanical
Engineering from Sheffield University in the United Kingdom.
Mr. Docherty also holds a number of non-executive
directorships on the boards of directors of various private
biotechnology companies.
Guy C.
Jackson
has been a member of our
Board since December 2004. In June 2003, Mr. Jackson
retired from the Minneapolis office of the accounting firm of
Ernst & Young LLP, after 35 years with the firm
and one of its predecessors, Arthur Young & Company.
During his career, he served as audit partner for numerous
public companies in Ernst & Young's New York and
Minneapolis offices. Mr. Jackson also serves as a director
and member of the audit committee of Cyberonics, Inc, Digi
International Inc., Life Time Fitness, Inc. and Urologix, Inc.
Mr. Jackson received a B.S. in Business Administration from
Pennsylvania State University and a M.B.A. from the Harvard
Business School.
Reiner
Ponschab, Ph.D.,
has been a
member of our board since June 1999. Dr. Ponschab is an of
counsel with Heussen Rechtsanwaltsgesellschaft mbH in Munich,
working as a lawyer in the field of commercial law with the main
emphasis in the areas of corporate law, merger and acquisitions,
venture
66
capital and structuring of companies since 1976,
and prior to that working in the tax department of Peat Marwick
Mitchell & Co. since 1974. Dr. Ponschab is the
Chairman of the Committee for Alternative Dispute Resolution of
the German Bar Association and President of the Society of
Business Mediation and Conflict Management, and since 1996 he
has been conducting a teaching assignment with the University of
Passau.
Thorlef
Spickschen, Ph.D.,
has been a
member of our board since November 2001. He has worked as a
senior executive in the pharmaceutical industry for over
30 years. From 1994 until 2001, he served as Chairman and
Chief Executive Officer of BASF Pharma-Knoll AS. From 1991 until
1993, he was Chairman and CEO of Boehringer Mannheim GmbH.
Earlier in his career, he held business positions at Eli Lilly
and Company and McKinsey & Company. Dr. Spickschen
serves on the boards of BioVisioN AG (Vice Chairman), Heidelberg
Innovation GmbH (Chairman), Pharmion Corporation, Weston Medical
CYTOS Biotechnology AG and GfK AG, as well as several
academic and social institutions. Dr. Spickschen received a
Doctorate in Business Management from the University of Cologne.
Scientific and Medical Advisory
Board
Our Scientific and Medical Advisory Board is
composed of individuals with expertise in clinical pharmacology,
clinical medicine and regulatory matters. Advisory board members
assist us in identifying scientific and product development
opportunities and in reviewing with management progress of the
our projects.
Dr. Gavril Pasternak,
Chief Advisor
, is a
recognized authority on opioid receptor mechanisms. He has
published a substantial body of literature on the subject, and
he is on the editorial boards of numerous journals related to
the subjects of neuropharmacology and pain. Dr. Pasternak
is a Member and attending Neurologist at Memorial
Sloan-Kettering Cancer Center and is Professor of Neurology and
Neuroscience, Pharmacology and Psychiatry at Cornell University
Medical College and Graduate School of Medical Sciences.
Prof. Dr. Christoph Stein
is a recognized authority in
experimental and clinical pain research. He has studied
mechanisms of peripherally mediated opioid analgesia for over
16 years and has published an extensive body of literature
on this topic. He is on editorial boards of several journals
related to pain, anesthesia and analgesia. Dr. Stein is
Professor and Chairman of the Department of Anesthesiology at
Charité — Campus Benjamin Franklin, Freie
Universität Berlin, Germany, and Adjunct Professor at Johns
Hopkins University.
Bruce F. Mackler, Ph.D., J.D.,
M.S.,
received his J.D. from the
South Texas College of Law of the Texas A&M University, his
Ph.D. from the University of Oregon Medical School, his M.S.
from Pennsylvania State University and his B.A. from Temple
University. He is a member of the District of Columbia Bar and
admitted to practice before the Federal District and Appeals
Court and before the Supreme Court. He has published some 100
scientific articles, abstracts and books during his tenure as a
scientist and has been an attorney in the food and drug area for
25 years.
Dr. Howard Maibach
is a dermatologist whose research
area is dermatology, dermatopharmacology and dermatotoxicology.
Dr. Maibach has published over 1900 articles on various
dermatology-related subjects and is a frequent lecturer on
various subjects related to dermatology. Dr. Maibach is
currently professor in the Department of Dermatology, School of
Medicine, at the University of California in San Francisco.
Board Composition
Prior to the closing of this offering, our board
of directors will be divided into three classes, with each
director serving a three-year term and one class being elected
at each year's annual meeting of stockholders. A majority
of the members of our board of directors are
"independent" of us and our
67
management. Directors Savage and Caspritz will be
in the class of directors whose initial term expires at the 2005
annual meeting of stockholders. Directors Spickschen, Ponschab
and Jackson will be in the class of directors whose initial term
expires at the 2006 annual meeting of the stockholders.
Directors Talley and Afting will be in the class of directors
whose initial term expires at the 2007 annual meeting of
stockholders. This classification of our board of directors will
make it more difficult for a third party to acquire control of
our company. Director Docherty intends to resign upon
consummation of this offering.
A majority of our directors are non-U.S.
residents and a substantial portion of the assets of those
directors are located outside the United States. As a result,
you may not be able to effect service of process within the
United States upon these persons or to enforce, in
U.S. courts, against these persons judgments of
U.S. courts predicated upon any civil liability provisions
of the U.S. federal or state securities laws against those
directors.
Committees of the Board
Our board of directors has established three
standing committees: the audit committee, the compensation
committee and the corporate governance and nominating committee.
Audit
Committee.
Our audit committee is
responsible for preparing such reports, statements or charters
as may be required by The Nasdaq Stock Market or federal
securities laws, as well as, among other things:
•
overseeing and monitoring the integrity of our
    financial statements, our compliance with legal and regulatory
    requirements as they relate to financial statements or
    accounting matters and our internal accounting and financial
    controls;
•
preparing the report that SEC rules require be
    included in our annual proxy statement;
•
overseeing and monitoring our independent
    auditor's qualifications, independence and performance;
•
providing the board with the results of its
    monitoring and recommendations; and
•
providing to the board additional information and
    materials as it deems necessary to make the board aware of
    significant financial matters that require the attention of the
    board.
Directors Jackson, Savage and Afting are
currently members of the audit committee, each of whom is a
non-employee member of our board of directors. Mr. Jackson
serves as Chairman of the audit committee and also qualifies as
a financial expert, as that term is defined under the SEC rules
implementing Section 407 of the Sarbanes-Oxley Act. Our
board has determined that each member of our audit committee
meets the current independence and financial literacy
requirements under the Sarbanes-Oxley Act, The Nasdaq Stock
Market, Inc. and SEC rules and regulations. We intend to comply
with future requirements to the extent they become applicable to
us.
Compensation
Committee.
Our compensation
committee is composed of Directors Savage, Spickschen and
Jackson, each of whom is a non-employee member of our board of
directors. Mr. Savage serves as Chairman of our
compensation committee. Each member of our compensation
committee is an "outside director" as that term is
defined in Section 162(m) of the Internal Revenue Code of
1986 and a "non-employee" director within the meaning
of Rule 16b-3 of the rules promulgated under the Securities
Exchange Act of 1934 and the rules of the Nasdaq Stock Market,
Inc.. The compensation committee is responsible for, among other
things:
•
reviewing and approving for our chief executive
    officer and other executive officers (a) the annual base
    salary, (b) the annual incentive bonus, including the
    specific goals and amount, (c) equity compensation,
    (d) employment agreements, severance arrangements and
    change in control arrangements, and (e) any other benefits,
    compensations, compensation policies or arrangements;
•
reviewing and making recommendations to our board
    regarding the compensation policy for such other officers as
    directed by the board;
68
•
preparing a report to be included in our annual
    proxy statement that describes: (a) the criteria on which
    compensation paid to our chief executive officer for the last
    completed fiscal year is based; (b) the relationship of
    such compensation to our performance; and (c) the
    committee's executive compensation policies applicable to
    executive officers; and
•
acting as administrator of our current benefit
    plans and making recommendations to the board with respect to
    amendments to the plans, changes in the number of shares
    reserved for issuance thereunder and regarding other benefit
    plans proposed for adoption.
Corporate Governance and Nominating
Committee.
Our corporate
governance and nominating committee is composed of Directors
Savage, Ponschab and Spickschen, each of whom is a non-employee
member of our board of directors and independent in accordance
with the applicable rules of the Sarbanes-Oxley Act and The
Nasdaq Stock Market, Inc. Mr. Savage serves as Chairman of
our Corporate Governance and Nominating Committee. The corporate
governance and nominating committee is responsible for, among
other things:
•
reviewing board structure, composition and
    practices, and making recommendations on these matters to the
    board;
•
reviewing, soliciting and making recommendations
    to the board and stockholders with respect to candidates for
    election to the board;
•
overseeing compliance by our chief executive
    officer and senior financial officers with our Code of Ethics
    for the Chief Executive Officer and Senior Financial
    Officers; and
•
overseeing compliance by employees with our Code
    of Business Conduct and Ethics.
Director Compensation
We reimburse our non-employee directors for their
expenses incurred in connection with attending board and
committee meetings and for their services as board or committee
members. We have in the past granted non-employee directors
options to purchase our common stock pursuant to the terms of
our 1995 Stock Option Plan, and our board continues to have the
discretion to grant options to new and continuing non-employee
directors.
In                     2005,
our stockholders approved our 2005 Equity Incentive Plan, the
terms of which also include the grant of stock options to
directors who are not our officers or employees.
69
Executive Compensation
The following table sets forth the compensation
earned for services rendered to us in all capacities by our
chief executive officer and our executive officers whose total
cash compensation exceeded $100,000 for the year ended
December 31, 2003, collectively referred to in this
prospectus as the "named executive officers."
Securities
Other Annual
Restricted
Underlying
All Other
Salary
Bonus
Compensation
Stock Awards
Options/SARs
LTIP Payouts
Compensation
Name and Principal Position
($)
($)
($)
($)
(#)(1)
($)
($)(2)
John V. Talley
250,000
200,000
29,815
(3)
—
—
—
6,000
President and Chief Executive Officer
Robert W. Cook(4)
—
—
—
—
—
—
—
Chief Financial Officer, Senior Vice President,
    Finance and Administration
Dileep Bhagwat(5)
—
—
—
—
—
—
—
Senior Vice President, Pharmaceutical Development
Dov Elefant
160,000
—
15,981
(6)
—
—
—
4,800
Controller and Vice President, Finance and
    Administration
Earle Lockhart
195,000
—
22,686
(7)
—
—
—
5,850
Vice President, Clinical and Regulatory Affairs
Scott Kozak
165,000
—
16,126
(8)
—
—
—
3,237
Vice President, Business Development
Oliver Wiedemann(9)
162,287
—
10,630
(10)
—
—
—
7,628
Managing Director — Medical Affairs,
    EpiCept GmbH
(1)
Represents the number of shares of common stock
    on an as converted basis.
(2)
Includes the contributions made by us to the
    account of the executive officer under our 401(k) plan.
(3)
Includes $17,354 for premiums for health benefits
    and for life and disability insurance paid on behalf of
    Mr. Talley and $12,461 for an automobile allowance.
(4)
Mr. Cook joined us in April 2004.
(5)
Dr. Bhagwat joined us in February 2004.
(6)
Includes premiums for health benefits and for
    life and disability insurance paid on behalf of Mr. Elefant.
(7)
Includes premiums for health benefits and for
    life and disability insurance paid on behalf of
    Dr. Lockhart.
(8)
Includes premiums for health benefits and for
    life and disability insurance paid on behalf of Mr. Kozak.
(9)
Mr. Wiedemann's compensation was
    translated from euros to the U.S. dollar using the exchange rate
    as of December 31, 2003.
(10)
Includes premiums for health benefits and for
    life and disability insurance paid on behalf of
    Mr. Wiedemann.
70
Option Grants in 2003
We did not grant any stock options to any of the
named executive officers during 2003.
Aggregate Option Exercises in 2003 and Values
at December 31, 2003
The following table sets forth information
concerning exercisable and unexercisable stock options held by
the named executive officers at December 31, 2003. The
value of unexercised in-the-money options is based on an assumed
initial offering price of
$          share
less the actual exercise prices. All options were granted under
our 1995 Stock Option Plan, as amended. Except as otherwise
noted, these options vest over three years and otherwise
generally conform to the terms of our 1995 Stock Option Plan, as
amended.
Number of Securities
Underlying Unexercised
Value of Unexercised
Shares
Options at
In-the-Money Options at
Acquired
Value
December 31, 2003 (#)
December 31, 2003 ($)(2)
on
Realized
Name
Exercise
($)(1)
Exercisable
Unexercisable
Exercisable
Unexercisable
John V. Talley
—
—
$
—
$
—
Robert Cook
—
—
—
—
—
—
Dileep Bhagwat
—
—
—
—
—
—
Earle Lockhart
—
—
—
—
—
Dov Elefant
—
—
—
—
—
Scott Kozak
—
—
—
—
Oliver Wiedemann
—
—
—
—
—
—
(1)
Based upon the assumed initial public offering
    price of
    $          per
    share less the exercise price per share.
(2)
Value is determined by subtracting the exercise
    price of an option from an assumed
    $           per
    share fair market value of our common stock.
Employment Agreements
We have entered into employment agreements with
Messrs. John V. Talley and Robert W. Cook, each dated as of
October 28, 2004. Pursuant to their employment contracts,
Messrs. Talley and Cook currently receive base salaries of
$275,000 and $225,000, respectively. Upon the completion of this
initial public offering of our common stock,
Mr. Talley's base salary will be $350,000 and
Mr. Cook's base salary will be $250,000. Each
employment agreement also provides for discretionary bonuses and
stock option awards and reimbursement of reasonable expenses
incurred in connection with services performed under each
officer's respective employment agreement. In addition,
Mr. Talley's employment agreement provides for
automobile benefits and term life and long-term disability
insurance coverage. Both employment agreements expire on
December 31, 2006 but are automatically extended for
unlimited additional one-year periods. Upon termination for any
reason and in addition to any other payments disbursed in
connection with termination, Mr. Talley and Mr. Cook
will receive payment of his applicable base salary through the
termination date, the balance of any annual, long-term or
incentive award earned in any period prior to the termination
date and a lump-sum payment for any accrued but unused vacation
days.
If Mr. Talley dies or becomes disabled, he
is entitled to (i) receive a lump-sum payment equal to
(a) one-third of his base salary times (b) a fraction,
the numerator being the number of days he was employed in the
calendar year of termination and the denominator being the
number of days in that year and (ii) have (a) 50% of
outstanding stock options that are not then vested or
exercisable become vested and exercisable as of the termination
date; (b) the remaining outstanding stock options that are
not then vested or exercisable become vested and exercisable
ratably and quarterly for two years following the termination
date; and (c) each outstanding stock option remain
exercisable for all securities for the later of (x) the
90th day following the date that the option becomes fully vested
and exercisable and (y) the first anniversary of the
termination date. If Mr. Cook dies or becomes disabled, he
is entitled to the same
71
benefits as Mr. Talley, except the equation
for his lump-sum payment is based on one-fourth of his base
salary.
If Mr. Talley is terminated without cause or
the term of his agreement is not extended pursuant to the
employment agreement, he is entitled to the same benefits as if
he were terminated due to death or disability and to receive a
lump-sum payment equal to (a) one and one-third times
(b) his base salary times (c) the number of whole and
partial months remaining in the term of the agreement (but no
more than 12 and no less than 6) divided by (d) 12. If
Mr. Cook is terminated without cause or the term of his
agreement is not extended pursuant to the employment agreement,
he is entitled to the same benefits as Mr. Talley, but the
equation for his lump-sum payment is based on one and one-fourth
times his base salary.
If Mr. Talley is terminated after an initial
public offering or in anticipation of, or within one year
following, a change of control, he is entitled to:
(i) receive a lump-sum payment equal to (a) one and
one third times (b) his base salary times (c) the
number of whole and partial months remaining in the term of the
agreement (but not less than 24) divided by (d) 12 and
(ii) have (a) 50% of outstanding stock options that
are not then vested or exercisable become vested and exercisable
as of the termination date; (b) the remaining outstanding
stock options that are not then vested or exercisable become
vested and exercisable ratably and monthly for the first year
following the termination date; and (c) each outstanding
stock option remain exercisable for all securities for the later
of (x) the 90th day following the date that the option
becomes fully vested and exercisable and (y) the first
anniversary of the termination date. If Mr. Cook is
terminated after an initial public offering or in anticipation
of, or within one year following, a change of control, he is
entitled to the same benefits as Mr. Talley, except his
lump sum is equal to (a) one and one-fourth times
(b) his base salary times (c) the number of whole and
partial months remaining in the term of the agreement (but no
more than 18 and no less than 12) divided by (d) 12.
Stock Plans
1995 Stock Option Plan
Our 1995 Stock Option Plan, as amended, was
approved by our board of directors in December 1995, and
subsequently amended in April 1997, March 1999, February 2002
and June 2002. As of November 10, 2004, 947,770 shares
were available for issuance under the 1995 Stock Option Plan.
The purpose of the 1995 Stock Option Plan is to
provide us and our shareholders the benefits arising out of
capital stock ownership by our employees, officers, directors,
consultants and advisors and any of our subsidiaries, who are
expected to contribute to our future growth and success. Our
1995 Stock Option Plan provides for the grant of non-statutory
stock options to our (and our majority-owned subsidiaries')
employees, officers, directors, consultants or advisors, and for
the grant of incentive stock options meeting the requirements of
Section 422 of the Internal Revenue Code to our employees
and employees of our majority-controlled subsidiaries.
A total of 3,188,320 shares of our common
stock are authorized for issuance under the 1995 Stock Option
Plan.
A committee duly appointed by our board of
directors administers the 1995 Stock Option Plan. The committee
has the authority to (a) construe the respective option
agreements and the terms of the plan; (b) prescribe, amend
and rescind rules and regulations relating to the plan;
(c) determine the terms and provisions of the respective
option agreements, which need not be identical; (d) make
all other determinations in the judgment of the committee
necessary or desirable for the administration of the plan. From
and after the registration of our common stock under the
Securities Exchange Act of 1934, the selection of a director or
an officer who is a "reporting person" under
Section 16(a) of the Exchange Act as a recipient of an
option, the timing of the option grant, the exercise price of
the option and the number of shares subject to the option shall
be determined by (a) the committee of the Board, each of
which members shall be an outside director or (b) by a
committee consisting of two or more directors having full
authority to act in the matter, each of whom shall be an outside
director.
72
The committee shall determine the exercise price
of stock options granted under the 1995 Stock Option Plan, but
with respect to all incentive stock options, the exercise price
must be at least equal to the fair market value of our common
stock on the date of the grant or, in the case of grants of
incentive stock options to holders of more than 10% of the total
combined voting power of all classes of our stock ("10%
owners"), at least equal to 110% of the fair market value
of our common stock on the date of the grant.
The committee shall determine the term of stock
options granted under the 1995 Stock Option Plan, but such date
shall not be later than 10 years after the date of the
grant, except in the case of incentive stock options granted to
10% owners in which case such date shall not be later than five
years after the date of the grant.
Each option granted under the 1995 Stock Option
Plan is exercisable in full or in installments at such time or
times and during such period as is set forth in the option
agreement evidencing such option, but no option granted to a
"reporting person" shall be exercisable during the
first six months after the grant.
No optionee may be granted an option to purchase
more than 350,000 shares in any fiscal year. In addition,
no incentive stock option may be exercisable for the first time
in any one calendar year for shares of common stock with an
aggregate fair market value (as of the date of the grant) of
more than $100,000.
Our 1995 Stock Option Plan generally does not
allow for the transfer of options and only the optionee may
exercise an option during his or her lifetime.
An optionee may exercise an option at any time
within three months following the termination of the
optionee's employment or other relationship with us or
within one year if such termination was due to the death or
disability of the optionee, but except in the case of the
optionee's death, in no event later than the expiration
date of the option. If the termination of the optionee's
employment is for cause, the option expires immediately upon
termination.
Our 1995 Stock Option Plan will automatically
terminate upon the earlier of, 2005 or the date on which all
shares available for issuance under the plan shall have been
issued.
2005 Equity Incentive Plan
Our board of directors adopted our 2005 Equity
Incentive Plan on July 13, 2004, subject to stockholder
approval. Our Equity Incentive Plan provides for the grant of
incentive stock options, within the meaning of Section 422
of the Internal Revenue Code, to our employees and our parent
and subsidiary corporations' employees, and for the grant
of nonstatutory stock options, stock purchase rights, restricted
stock, stock appreciation rights, stock units and performance
shares and cash awards to our employees, directors and
consultants and our parent and subsidiary corporations'
employees and consultants.
As
of                     ,
2005, a total
of            shares
of our common stock were reserved for issuance pursuant to the
Equity Incentive Plan, of which no options were issued and
outstanding as of that date. The Equity Incentive Plan will
become effective on the day prior to the completion of this
offering. No optionee may be granted an option to purchase more
than                      shares
in any fiscal year.
Our board of directors or a committee of our
board administers our Equity Incentive Plan. In the case of
options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of
the Internal Revenue Code, the committee will consist of two or
more "outside directors" within the meaning of
Section 162(m) of the Code. The administrator has the power
to determine the terms of the awards, including the exercise
price, the number of shares subject to each such award, the
exercisability of the awards and the form of consideration, if
any, payable upon exercise. The administrator also has the
authority to institute an exchange program by which outstanding
awards may be surrendered in exchange for awards with a lower
exercise price.
The administrator will determine the exercise
price of options granted under our Equity Incentive Plan, but
with respect to nonstatutory stock options intended to qualify
as "performance-based compensation" within the meaning
of Section 162(m) of the Code and all incentive stock
options, the exercise price must at least be equal to the fair
market value of our common stock on the date of grant.
73
The term of an incentive stock option may not
exceed ten years, except that with respect to any participant
who owns 10% of the voting power of all classes of our
outstanding stock, the term must not exceed five years and the
exercise price must equal at least 110% of the fair market value
on the grant date. The administrator determines the term of all
other options.
Stock appreciation rights may be granted under
our Equity Incentive Plan. Stock appreciation rights allow the
recipient to receive the appreciation in the fair market value
of our common stock between the exercise date and the date of
grant. The administrator will determine the terms of stock
appreciation rights, including when such rights become
exercisable and whether to pay the increased appreciation in
cash or with shares of our common stock, or a combination
thereof.
Restricted stock may be granted under our Equity
Incentive Plan. Restricted stock awards are shares of our common
stock that vest in accordance with terms and conditions
established by the administrator. The administrator will
determine the number of shares of restricted stock granted to
any employee. The administrator may impose whatever conditions
to vesting it determines to be appropriate. For example, the
administrator may set restrictions based on the achievement of
specific performance goals. Shares of restricted stock that do
not vest are subject to our right of repurchase or forfeiture.
Stock units and performance shares may be granted
under our Equity Incentive Plan. Stock units and performance
shares are awards that will result in a payment to a participant
only if performance goals established by the administrator are
achieved or the awards otherwise vest. The administrator will
establish organizational or individual performance goals in its
discretion, which, depending on the extent to which they are
met, will determine the number and/or the value of performance
units and performance shares to be paid out to participants.
Our Equity Incentive Plan generally does not
allow for the transfer of awards and only the recipient of an
award may exercise an award during his or her lifetime.
Our Equity Incentive Plan will provide that if we
experience a Change of Control (as defined), the administrator
may provide at anytime prior to the Change of Control that all
then outstanding stock options, stock appreciation rights and
stock units and unvested cash awards shall immediately vest and
become exercisable and any restrictions on restricted stock
awards or stock units shall immediately lapse. In addition, the
administrator may provide that all awards held by participants
who are at the time of the Change of Control in our service or
the service of a subsidiary or an affiliate of ours shall remain
exercisable for the remainder of their terms notwithstanding any
subsequent termination of a participant's service. All
awards will be subject to the terms of any agreement effecting
the Change of Control, which agreement may provide, without
limitation, that in lieu of continuing the awards, each
outstanding stock option and stock appreciation right shall
terminate within a specified number of days after notice to the
holder, and that such holder shall receive, with respect to each
share of common stock subject to such stock option or stock
appreciation right, an amount equal to the excess of the fair
market value of such shares of common stock immediately prior to
the occurrence of such Change of Control over the exercise price
(or base price) per share underlying such stock option or stock
appreciation right with such amount payable in cash, in one or
more kinds of property (including the property, if any, payable
in the transaction) or in a combination thereof, as the
administrator, in its discretion, shall determine. A provision
like the one contained in the preceding sentence shall be
inapplicable to a stock option or stock appreciation right
granted within 6 months before the occurrence of a Change of
Control if the holder of such stock option or stock appreciation
right is subject to the reporting requirements of Section 16(a)
of the Exchange Act and no exception from liability under
Section 16(b) of the Exchange Act is otherwise available to such
holder.
Our Equity Incentive Plan will automatically
terminate
in                     2015,
unless we terminate it sooner. In addition, our board of
directors has the authority to amend, suspend or terminate the
Equity Incentive Plan provided such action does not impair the
rights of any participant.
74
2005 Employee Stock Purchase
Plan
Our board of directors adopted our 2005 Employee
Stock Purchase Plan on July 13, 2004, subject to
stockholder approval. The Employee Stock Purchase Plan will
become effective on the day prior to the completion of this
offering and a total
of                      shares
of our common stock will be made available for sale.
Our board of directors or a committee of our
board will administer our Employee Stock Purchase Plan. Our
board of directors or the committee will have full and exclusive
authority to interpret the terms of our Employee Stock Purchase
Plan and determine eligibility.
All of our employees are eligible to participate
if they are customarily employed by us or any participating
subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not
be granted an option to purchase stock if such employee:
•
immediately after the grant owns stock possessing
    5% or more of the total combined voting power or value of all
    classes of our capital stock, or
•
whose rights to purchase stock under all of our
    employee stock purchase plans accrues at a rate that exceeds
    $25,000 worth of stock for each calendar year.
Our Employee Stock Purchase Plan is intended to
qualify under Section 423 of the Internal Revenue Code and
provides for consecutive, overlapping 24-month offering periods.
Each offering period includes four six-month purchase periods
beginning on January 1 and July 1 of each calendar
year, commencing
on                     .
Our Employee Stock Purchase Plan permits
participants to purchase common stock through payroll deductions
from their eligible compensation which includes a
participant's base salary, wages, overtime pay, shift
premium and recurring commissions, but does not include payments
for incentive compensation or bonuses. A participant may
purchase a maximum
of                      shares
during a six-month purchase period.
Amounts deducted and accumulated by the
participant are used to purchase shares of our common stock at
the end of each six-month purchase period. The price is 85% of
the lower of the fair market value of our common stock at the
beginning of an offering period or after a purchase period end.
If the fair market value at the end of a purchase period is less
than the fair market value at the beginning of the offering
period, participants will be withdrawn from the current offering
period following their purchase of shares on the purchase date
and will be automatically re-enrolled in a new offering period.
Participants may end their participation at any time during an
offering period, and will be paid their payroll deductions to
date. Participation ends automatically upon termination of
employment with us.
A participant may not transfer rights granted
under the Employee Stock Purchase Plan other than by will, the
laws of descent and distribution or as otherwise provided under
the Employee Stock Purchase Plan.
Our board of directors has the authority to amend
or terminate our Employee Stock Purchase Plan, except that,
subject to certain exceptions described in the Employee Stock
Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our Employee Stock
Purchase Plan.
401(k) Plan
In 1998, we adopted a Retirement Savings and
Investment Plan, the 401(k) Plan, covering our full-time
employees located in the United States. The 401(k) Plan is
intended to qualify under Section 401(k) of the Internal
Revenues Code, so that contributions to the 401(k) Plan by
employees or by us, and the investment earnings thereon, are not
taxable to the employees until withdrawn. If our 401(k) Plan
qualifies under Section 401(k) of the Internal Revenues
Code, our contributions will be tax deductible by us when made.
Our employees may elect to reduce their current compensation by
up to the statutorily prescribed annual limit of $14,000 if
under 50 years old and $18,000 if over 50 years old in
2004 and to have those
75
funds contributed to the 401(k) Plan. The 401(k)
Plan permits us, but does not require us, to make additional
matching contributions on behalf of all participants.
Compensation Committee Interlocks and Insider
Participation
None of the members of our compensation committee
has at any time been one of our officers or employees. None of
our executive officers currently serves, or in the past fiscal
year has served, as a member of the Board of Directors or
compensation committee of any entity that has one or more
executive officers serving on our Board of Directors or
compensation committee.
76
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
We have a policy requiring that any material
transaction that we enter into with our officers, directors or
principal stockholders and their affiliates be on terms no less
favorable to us than reasonably could have been obtained in an
arms' length transaction with independent third parties.
Any other matters involving potential conflicts of interests are
to be resolved on a case-by-case basis.
Preferred Stock
In April 1997, we sold a total of
2,330,218 shares of our Series A convertible preferred
stock at a price of $2.02 per share to TVM III Limited
Partnership ("TVM III") and Alpinvest
International B.V. ("Alpinvest"). Dr. Gert
Caspritz, a member of our Board of Directors, is a general
partner of Techno Venture Management ("TVM"), an
affiliate of TVM III. In January 2000, we sold a total of
1,240,333 shares of our Series B redeemable
convertible preferred stock at a price of $1.50 per share
to TVM III, Alpinvest and KB Lux Venture Capital Fund
("KB Lux"). In December 2000 and January 2001, we sold
a total of 8,939,573 shares of our Series C redeemable
convertible preferred stock at a price of $1.50 per share
to TVM IV GmbH & Co. KG ("TVM IV"),
Alpinvest, KB Lux, The Merlin Biosciences Fund L.P.
("Merlin L.P.") and The Merlin Biosciences Fund GbR
("Merlin"), Private Equity US Direct Finance and
Gold-Zack. Dr. Gert Caspritz, a member of our Board of
Directors, is a general partner of TVM, an affiliate of TVM IV.
Mr. Mark Docherty, a member of our Board of Directors, is a
director of Merlin Biosciences Limited ("Merlin"),
investment advisor to the general partner of Merlin L.P. and the
managing partner of Merlin GbR. Each of these investors is a
greater than 5% stockholder of EpiCept.
Amended and Restated Registration Rights
Agreement
We have entered into an agreement pursuant to
which holders of our convertible preferred stock and certain
other individuals have registration rights with respect to their
shares of common stock following this offering. For a
description of these registration rights, see "Description
of Capital Stock." Concurrently with the completion of this
offering, all shares of our outstanding preferred stock will be
automatically converted into an equal number of shares of common
stock.
Convertible Bridge Loan Due 2005
In November 2002, we entered into a convertible
bridge loan in an aggregate amount of up to $5,000,000. The
lenders under that facility included Mr. John V. Talley,
our President and Chief Executive Officer, and certain holders
of our preferred stock, including TVM IV, Private Equity
U.S. Direct Finance, Merlin L.P., Merlin GbR and Gold-Zack
Partners I B.V. The convertible bridge loan bears interest at
8% per annum and matures on October 30, 2005. Each of
the lenders received a convertible bridge note which is, under
certain circumstances, convertible into our convertible
preferred stock, which in turn is convertible into our common
stock. We plan to use a portion of the proceeds from this
offering to repay this convertible bridge loan in full. See
"Use of Proceeds." In connection with the purchase of
a convertible note, each investor also received a preferred
stock purchase warrant, which we refer to in this prospectus as
the "bridge warrants," entitling that investor to
purchase a specified amount of our preferred stock or common
stock under certain specified circumstances. The bridge warrants
expire upon consummation of our initial public offering. Upon a
prepayment of the convertible term notes, the bridge warrants
are exercisable
into            shares
of our common stock at an exercise price of $0.157 per
share.
tbg Loans
In August 1997 and February 1998, our German
subsidiary entered into two 10-year non-amortizing loans with
tbg, one of our greater than 5% stockholders. For a description
of these loans, please see "Management's Discussion
and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital Resources."
Employment Agreements
As described under "Executive
Compensation — Employment Agreements," we have
employment agreements with Mr. John V. Talley, our
President and Chief Executive Officer and Mr. Robert Cook,
our Chief Financial Officer.
77
PRINCIPAL STOCKHOLDERS
The following table sets forth information known
to us with respect to the beneficial ownership of our common
stock as
of                     ,
2005 as adjusted to reflect the sale of common stock offered
hereby by:
•
each stockholder known by us to own beneficially
    more than five percent of our common stock;
•
each of the named executive officers;
•
each of our directors; and
•
all of our directors and the named executive
    officers as a group.
Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them.
Unless otherwise indicated, the principal address of each of the
stockholders below is in care of EpiCept Corporation, 270 Sylvan
Avenue, Englewood Cliffs, New Jersey 07632.
Percent of Shares
Number of Shares
Beneficially Owned(2)
Beneficially Owned
Prior to the
Before
After
Name and Address of Beneficial Owner
Offering
Offering(1)
Offering
5% Stockholders
TVM Techno Venture Management(3)
Merlin General Partner II Limited(4)
Private Equity US Direct Finance(5)
GZ Paul Partners B.V.(6)
IKB Private Equity GmbH(7)
Dr. Rainer Liedtke(8)
Technologie-Beteiligungs Gesellschaft mbH(9)
Executive Officers and Directors
John V. Talley(10)
Dr. Gert Caspritz(3)
Mark Docherty(4)
Dr. Thorlef Spickschen(11)
Prof. Ernst-Gunter Afting(12)
Dr. Reiner Ponschab(13)
All directors and named executive officers as a
    group
(  persons)(14)
*
Represents beneficial ownership of less than one
    percent (1%) of the outstanding shares of our common stock.
(1)
Beneficial ownership is determined with the rules
    of the Securities and Exchange Commission and generally includes
    voting or investment power with respect to securities. Shares of
    common stock subject to stock options and warrants currently
    exercisable or exercisable within 60 days are deemed to be
    outstanding for computing the percentage ownership of the person
    holding such options and the percentage ownership of any group
    of which the holder is a member, but are not deemed outstanding
    for computing the percentage of any other person. Except as
    indicated by footnote, the persons named in the table have sole
    voting and investment power with respect to all shares of common
    stock shown beneficially owned by them.
78
(2)
Percentage ownership is based on
    the            shares
    of common stock outstanding
    on                     ,
    after giving effect to the conversion of all of our preferred
    stock into shares of our common stock, the exercise of the
    bridge warrants and the conversion of the tbg convertible loan.
(3)
Includes                      shares
    of common stock held by
    TVM III                      shares
    issuable upon the conversion of 2,666,667 shares of
    Series C redeemable convertible preferred stock
    and                      shares
    issuable upon the exercise of the bridge warrants held by TVM
    IV,
    and                      shares
    issuable upon the conversion of 1,485,164 shares of
    Series A convertible preferred stock, 333,333 shares
    of Series B redeemable convertible preferred stock and
    490,731 shares of Series C redeemable convertible
    preferred stock held by TVM III. Also
    includes                      shares
    of common stock issuable upon the exercise of warrants that are
    exercisable within 60 days held by TVM IV. For a
    description of these warrants, see "Description of Capital
    Stock — Warrants."
    Includes                      shares
    of common stock issuable upon the exercise of stock options that
    are exercisable within 60 days held by Mr. Gert
    Caspritz, one of our directors, who is a general partner of TVM,
    which is the general partner of each of TVM III and TVM IV
    and                      shares
    of common stock issuable upon the exercise of stock options that
    are exercisable within 60 days held by other partners of
    TVM (the "TVM Partners"). Mr. Caspritz disclaims
    beneficial ownership of the shares held by TVM III, TVM IV
    and the TVM Partners except to the extent of his pecuniary
    interest therein. The address of Mr. Caspritz, TVM,
    TVM III and TVM IV is c/o TVM Techno Venture
    Management, 101 Arch Street, Boston, Massachusetts, 02110.
(4)
Includes 33,135 shares of common
    stock,                      shares
    issuable upon the conversion of 1,257,744 shares of
    Series C redeemable convertible preferred stock
    and                      shares
    issuable upon the exercise of the bridge warrants beneficially
    owned by Merlin L.P. and held by Merlin. Also includes
    1,991 shares of common
    stock,                      shares
    issuable upon the conversion of 75,589 shares of
    Series C convertible preferred stock
    and                      shares
    issuable upon the exercise of the bridge warrants beneficially
    owned by Merlin GbR and held by Merlin.
    Includes                      shares
    of common stock issuable upon the exercise of stock options that
    are exercisable within 60 days held by Mr. Mark
    Docherty, one of our directors, who is a director of Merlin,
    which is investment advisor to the general partner of each of
    Merlin L.P. and Merlin GbR. Mr. Docherty disclaims
    beneficial ownership of the shares held by Merlin, Merlin L.P.
    and Merlin GbR except to the extent of his pecuniary interest
    therein. The address of Mr. Docherty, Merlin, Merlin L.P.
    and Merlin GbR is c/o Merlin Biosciences Limited, 33 King
    Street, St. James's, London, SW1Y 6RJ, United Kingdom.
(5)
Includes                      shares
    of common stock issuable upon conversion of
    1,338,155 shares of our Series C redeemable
    convertible preferred
    stock,                      shares
    issuable upon the exercise of the bridge warrants
    and                      shares
    of common stock issuable upon the exercise of warrants that are
    exercisable within 60 days. For a description of these
    warrants, see "Description of Capital Stock —
    Warrants." The address of this fund is
    c/o Mr. Guy Myint-Maung, ALPHA Associates AG,
    Talstrasse 66, P.O. Box 1081, CH-8039, Zurich, Switzerland.
(6)
Includes                      shares
    of common stock issuable upon conversion of
    1,666,667 shares of our Series C redeemable
    convertible preferred stock
    and                      shares
    issuable upon the exercise of the bridge warrants. The address
    of GZ Paul Partners is c/o GZ Paul Management Services
    GmbH, Lindenstrasse 43, D-60325 Frankfurt, Germany.
(7)
Includes                      shares
    issuable upon the conversion of 1,866,403 shares of
    Series B redeemable convertible preferred stock. The
    address of IKB is Wilhelm-Bötzkes-Strasse 1, 40002
    Düsseldorf, Germany.
(8)
Includes                      shares
    of common stock held by
    Dr. Liedtke,                      shares
    of common stock held by Ms. Hanne Liedtke, his spouse,
    and                      shares
    of common stock held by Dr. Liedtke's children. Also
    includes                      shares
    of common stock issuable upon conversion of our Series A
    convertible preferred stock
    and                      shares
    of common stock issuable upon conversion of our Series C
    redeemable convertible preferred stock, each held by pharmed
    Holding GmbH, which is an entity controlled by Dr. Liedtke.
    Dr. Liedtke disclaims beneficial ownership of
79
the shares held by his wife, his children and
    pharmed Holding GmbH except to the extent of his pecuniary
    interest therein. The address of Dr. Liedtke, his wife, his
    children and pharmed Holding GmbH is c/o pharmed Holding
    GmbH, P.O. Box 1306, 82027 Grünwald/ München,
    Germany.
(9)
Includes                      shares
    of common stock issuable upon conversion of 829,901 shares
    of Series A convertible stock. Pursuant to the terms of the
    convertible loan described under "Certain Relationships and
    Related Party Transactions," tbg will receive an
    additional                               shares
    of common stock. The address of tbg is
    c/o Technologie-Beteiligungs-Gesellschaft mbH, Ludwig-
    Erhard-Platz 1, 5319 Bonn, Germany.
(10)
Includes 1,000 shares of common
    stock,                      shares
    issuable upon exercise of the bridge warrants
    and                      shares
    exercisable upon the exercise of options that are exercisable
    within 60 days.
(11)
Includes                      shares
    of common stock
    and                      shares
    issuable upon exercise of stock options that are exercisable
    within 60 days.
(12)
Includes                      shares
    of common
    stock,                      shares
    of common stock issuable upon the conversion of
    27,000 shares of Series B convertible stock
    and                      shares
    of common stock issuable upon the exercise of options that are
    exercisable within 60 days.
(13)
Includes                      shares
    of common stock held by
    Dr. Ponschab,                      shares
    of common stock held by Dr. Ponschab's wife
    and                      shares
    of common stock issuable upon the exercise of options that are
    exercisable within 60 days. Dr. Ponschab disclaims
    beneficial ownership of the shares of stock held by his wife
    except to the extent of his pecuniary interest therein.
(14)
Includes an aggregate
    of                      shares
    issuable upon exercise of options
    and            shares
    issuable upon the exercise of warrants.
80
DESCRIPTION OF CAPITAL STOCK
General
After the completion of this offering, our
restated certificate of incorporation will
authorize                 shares
of common stock, $0.0001 par value,
and                 shares
of undesignated preferred stock, $0.0001 par value. The
foregoing and the following description of capital stock give
effect to the restated certificate of incorporation and is
subject to and qualified by our restated certificate of
incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part,
and by the provisions of the applicable Delaware law.
Common Stock
Assuming the conversion of all of our preferred
stock and the exercise of the bridge warrants
into                 shares
of common stock at the closing of this offering, as
of                   ,
2005 we
had                 shares
of common stock outstanding that were held of record by
approximately            stockholders.
The holders of common stock are entitled to one
vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to
any outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends that may be declared
from time to time by the board of directors out of funds legally
available for that purpose. In the event of our liquidation,
dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior distribution rights of
preferred stock then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are
fully paid and nonassessable, and the shares of common stock to
be issued upon the closing of this offering will be fully paid
and nonassessable.
Preferred Stock
Upon the closing of this offering, our board of
directors will have the authority, without action by our
stockholders, to designate and issue up
to                 shares
of preferred stock in one or more series. The board of directors
may also designate the rights, preferences and privileges of
each series of preferred stock; any or all of which may be
greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of
preferred stock upon the rights of holders of the common stock
until the board of directors determines the specific rights of
the holders of the preferred stock. However, these effects might
include:
•
restricting dividends on the common stock;
•
diluting the voting power of the common stock;
•
impairing the liquidation rights of the common
    stock; and
•
delaying or preventing a change in control of our
    company without further action by the stockholders.
We have no present plans to issue any shares of
preferred stock.
Warrants
As
of                          ,
2005, the following warrants were outstanding:
•
In August 2000, in connection with the issuance
    of convertible term notes, we issued two warrants to purchase an
    aggregate of 333,333 shares of our Series B redeemable
    convertible preferred stock at an exercise price of
    $1.50 per share to Alpinvest International B.V. and
    TVM Techno Ventures Enterprises No. III Limited
    Partnership (now known as TVM III Limited Partnership). The
    expiration date of these warrants is August 15, 2010. Upon
    automatic conversion of our Series B
81
redeemable convertible preferred stock in
    connection with our initial public offering, these warrants will
    represent the right to
    purchase                      shares
    of common stock at an exercise price of
    $                    .
    The exercise price and the number of shares of common stock
    issuable upon exercise of the warrant are subject to adjustment
    upon the occurrence of certain anti-dilution events.
•
In November 2000, in connection with the issuance
    of a convertible term note, we issued a warrants to purchase an
    aggregate of 750,000 shares of our Series C redeemable
    convertible preferred stock at an exercise price of
    $1.50 per share to Private Equity US Direct Finance.
    The expiration date of these warrants is November 30, 2010.
    Upon automatic conversion of our Series C redeemable
    convertible preferred stock in connection with our initial
    public offering, these warrants will represent the right to
    purchase                      shares
    of common stock at an exercise price of
    $                    .
    The exercise price and the number of shares of common stock
    issuable upon exercise of the warrants are subject to adjustment
    upon the occurrence of certain anti-dilution events.
•
In November 2002, in connection with the bridge
    financing, we issued stock purchase warrants to the lenders
    thereunder entitling them to purchase a number of shares of
    common stock equal to 50% of the greatest principal amount
    outstanding under the convertible bridge loan, divided by the
    applicable exercise price as defined in the warrant. The
    warrants are exercisable into preferred stock or common stock at
    any time through November 2012 and possess certain anti-dilutive
    rights. Upon consummation of our initial public offering, the
    warrants will be exercisable into 15,445,858 shares of
    common stock at an exercise price of $0.157 per share.
Registration Rights
Upon completion of this offering, under our
amended and restated registration rights agreement, the holders
of                 shares
of our common stock will be entitled to rights with respect to
the registration of their shares under the Securities Act of
1933, as amended. These rights include demand, piggyback and
Form S-3 registration rights.
Demand Registration
Rights.
Demand registration rights
are rights that entitle holders to require us to register some
or all of their shares of our common stock under the Securities
Act at such holder's election. Generally, the following
groups of holders may require us to register their shares
pursuant to these demand registration rights, subject to
applicable minimum thresholds to be included in the requested
registration:
•
holders of at least 25% of the then outstanding
    common stock issued upon conversion of our Series C
    Preferred Stock;
•
holders of at least 25% of the then outstanding
    common stock issued upon conversion of our Series B
    Preferred Stock; and
•
holders of at least 50% of the then outstanding
    common stock issued upon conversion of our Series A
    Preferred Stock.
Collectively, there are a total
of                 shares
of common stock that are subject to these demand registration
rights. We are not obligated to effect more than two
registrations on behalf of any of the aforementioned groups
pursuant to their demand registration rights. We have the right,
under various circumstances, to delay the registration of the
requesting holders' shares for a limited time period. We
generally must pay all expenses, except for underwriters'
discounts and commissions, incurred in connection with the
exercise of these demand registration rights.
Piggyback Registration
Rights.
Piggyback registration
rights are rights that entitle holders to require us to register
some or all of their shares of our common stock under the
Securities Act if we register any securities for public sale,
subject to specified exceptions. The underwriters of any
underwritten offering may have the right to limit the number of
shares registered by these holders due to marketing conditions.
There are a total
of                 shares
of common stock that are subject to these piggyback registration
rights. We generally must pay all expenses, except for
underwriters' discounts and commissions, incurred in
82
connection with the exercise of these piggyback
registration rights. All of the holders of registration rights
in connection with this offering have waived their piggyback
rights with respect to this offering.
Form S-3 Registration
Rights.
If we are eligible to file
a registration statement on Form S-3, holders of at least
25% of the shares of our common stock issued upon conversion of
our series A convertible preferred stock, series B
convertible preferred stock or series C convertible
preferred stock, as applicable, can request that we register
their shares under the Securities Act on Form S-3, provided
that the total proceeds of the shares of common stock offered to
the public is at least $250,000. We generally must pay all
expenses, except for underwriters' discounts and
commissions, incurred in connection with the exercise of these
Form S-3 registration rights.
Anti-Takeover Provisions
Provisions of Delaware law and our amended and
restated certificate of incorporation and amended bylaws to be
in effect upon the closing of this offering could make the
acquisition of our company through a tender offer, a proxy
contest or other means more difficult and could make the removal
of incumbent officers and directors more difficult. We expect
these provisions to discourage coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to
acquire control of our company to first negotiate with our board
of directors. We believe that the benefits provided by our
ability to negotiate with the proponent of an unfriendly or
unsolicited proposal outweigh the disadvantages of discouraging
these proposals. We believe the negotiation of an unfriendly or
unsolicited proposal could result in an improvement of its terms.
Effects of Some Provisions of Delaware
Law.
Upon the closing of this
offering, we will be subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general,
Section 203 prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an
"interested stockholder" for a period of three years
following the date the person became an interested stockholder,
unless:
•
prior to the date of the transaction, the board
    of directors of the corporation approved either the business
    combination or the transaction which resulted in the stockholder
    becoming an interested stockholder;
•
the stockholder owned at least 85% of the voting
    stock of the corporation outstanding at the time the transaction
    commenced, excluding for purposes of determining the number of
    shares outstanding (a) shares owned by persons who are
    directors and also officers, and (b) shares owned by
    employee stock plans in which employee participants do not have
    the right to determine confidentially whether shares held
    subject to the plan will be tendered in a tender or exchange
    offer; or
•
on or subsequent to the date of the transaction,
    the business combination is approved by the board and authorized
    at an annual or special meeting of stockholders, and not by
    written consent, by the affirmative vote of at least 66% of the
    outstanding voting stock which is not owned by the interested
    stockholder.
Generally, a "business combination" for
these purposes includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested
stockholder. An "interested stockholder" for these
purposes 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 outstanding voting securities. We
expect the existence of this provision to have an anti-takeover
effect with respect to transactions our board of directors does
not approve in advance. We also anticipate that Section 203
may also discourage attempts that might result in a premium over
the market price for the shares of common stock held by
stockholders.
Anti-Takeover Effects of Provisions of Our
Charter Documents.
Our amended and
restated certificate of incorporation to be in effect upon the
closing of this offering provides for our board of directors to
be divided into three classes serving staggered terms.
Approximately one-third of the board of directors will be
elected each year. The provision for a classified board could
prevent a party who acquires control of a
83
majority of the outstanding voting stock from
obtaining control of the board of directors until the second
annual stockholders meeting following the date the acquiring
party obtains the controlling stock interest. The classified
board provision could discourage a potential acquiror from
making a tender offer or otherwise attempting to obtain control
of our company and could increase the likelihood that incumbent
directors will retain their positions. Our amended and restated
certificate of incorporation to be in effect upon the closing of
this offering also provides that directors may be removed with
cause by the affirmative vote of the holders of the outstanding
shares of common stock.
Our amended and restated bylaws to be in effect
upon the closing of this offering establish an advance notice
procedure for stockholder proposals to be brought before an
annual meeting of our stockholders, including proposed
nominations of persons for election to the board of directors.
At an annual meeting, stockholders may only consider proposals
or nominations specified in the notice of meeting or brought
before the meeting by or at the direction of the board of
directors. Stockholders may also consider a proposal or
nomination by a person who was a stockholder of record on the
record date for the meeting, who is entitled to vote at the
meeting and who has given to our Secretary timely written
notice, in proper form, of his or her intention to bring that
business before the meeting. The amended bylaws do not give the
board of directors the power to approve or disapprove
stockholder nominations of candidates or proposals regarding
other business to be conducted at a special or annual meeting of
the stockholders. However, our bylaws may have the effect of
precluding the conduct of business at a meeting if the proper
procedures are not followed. These provisions may also
discourage or deter a potential acquiror from conducting a
solicitation of proxies to elect the acquiror's own slate
of directors or otherwise attempting to obtain control of our
company.
Under Delaware law, a special meeting of
stockholders may be called by the board of directors or by any
other person authorized to do so in the amended and restated
certificate of incorporation or the amended and restated bylaws.
Our amended and restated bylaws authorize a majority of our
board of directors, the chairman of the board or the chief
executive officer to call a special meeting of stockholders.
Because our stockholders do not have the right to call a special
meeting, a stockholder could not force stockholder consideration
of a proposal over the opposition of the board of directors by
calling a special meeting of stockholders prior to such time as
a majority of the board of directors believed or the chief
executive officer believed the matter should be considered or
until the next annual meeting provided that the requestor met
the notice requirements. The restriction on the ability of
stockholders to call a special meeting means that a proposal to
replace the board also could be delayed until the next annual
meeting.
Delaware law provides that stockholders may
execute an action by written consent in lieu of a stockholder
meeting. However, Delaware law also allows us to eliminate
stockholder actions by written consent. Elimination of written
consents of stockholders may lengthen the amount of time
required to take stockholder actions since actions by written
consent are not subject to the minimum notice requirement of a
stockholder's meeting. However, we believe that the
elimination of stockholders' written consents may deter
hostile takeover attempts. Without the availability of
stockholders' actions by written consent, a holder
controlling a majority of our capital stock would not be able to
amend our bylaws or remove directors without holding a
stockholders meeting. The holder would have to obtain the
consent of a majority of the board of directors, the chairman of
the board or the chief executive officer to call a stockholders
meeting and satisfy the notice periods determined by the board
of directors. Our amended and restated certificate of
incorporation to be in effect upon the closing of this offering
provides for the elimination of actions by written consent of
stockholders upon the closing of this offering.
Transfer Agent and Registrar
The transfer agent and registrar for our common
stock
is                     ,
located
at                               .
Nasdaq Stock Market Listing
We intend to apply to have our common stock
listed on the Nasdaq National Market for quotation under the
symbol "EPCT."
84
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public
market for our stock. Future sales of substantial amounts of our
common stock in the public market following this offering or the
possibility of these sales occurring could adversely affect
prevailing market prices for our common stock or could impair
our ability to raise capital through an offering of equity
securities.
Upon the closing of this
offering,              shares
of our common stock will be outstanding, based on the number of
shares outstanding on September 30, 2004. All of the shares
sold in this offering will be freely tradable without
restriction under the Securities Act except for any shares
purchased by our affiliates as that term is defined in
Rule 144 under the Securities Act. The
remaining                 shares
of common stock held by existing stockholders as of
September 30, 2004 are restricted shares as that term is
defined in Rule 144 under the Securities Act or if they
qualify for an exemption from registration, such as the
exemptions provided under Rule 144 or 701 under the
Securities Act, which are summarized below.
Rule 144
Sales by
Affiliates.
After the expiration
of the lock-up agreements, described below under "Lock-up
Agreements," the holders
of                 shares
of our common stock will be eligible to sell their shares under
Rule 144. All shares of our common stock held by our
affiliates, other than shares eligible for resale under
Rule 701, have Rule 144 holding periods that exceed
one year. As a result, under Rule 144, our affiliates will
be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
•
One percent of the number of shares of common
    stock then outstanding, which will equal
    approximately                 shares
    immediately after the offering; or
•
The average weekly trading volume of our common
    stock during the four calendar weeks preceding the date on which
    notice of the sale is filed.
Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to
the availability of current public information about us.
Sales by
Non-affiliates.
Subject to the
lock-up agreements described below, Rule 144(k) is
available immediately upon effectiveness of the offering for any
person, other than a person deemed to have been an affiliate of
our company at any time during the three months preceding a
sale, who is selling shares that have a Rule 144 holding
period that exceeds two years. As of September 30, 2004,
all of the outstanding shares held by non–affiliates have a
Rule 144 holding period that exceeds two years, other than
shares that are eligible for resale under Rule 701. As a
result, our non-affiliates may sell these shares under
Rule 144(k) without complying with the manner of sale,
public information, volume limitation or notice provisions of
Rule 144.
Rule 701
Subject to the lock-up agreements described
below, all sales of our common stock effected under
Rule 701 may be made beginning 90 days after the
effectiveness of this offering. Rule 701 applies to shares
of our common stock outstanding before the effectiveness of this
offering that were acquired pursuant to our stock plans. These
shares may be resold without compliance with
Rule 144's one-year holding period:
•
By persons other than affiliates, subject only to
    the manner-of-sale provisions of Rule 144; and
•
By affiliates, subject to the manner-of-sale,
    current public information and filing requirements of
    Rule 144.
85
Form S-8 Registration
Statements
Shortly after the effectiveness of the offering,
we intend to file a registration statement on Form S-8
under the Securities Act to register an aggregate
of                 shares
of common stock reserved for issuance under our 1995 Stock
Option Plan, 2004 Equity Incentive Plan and our
2004 Employee Stock Purchase Plan. Shares of common stock
issued upon exercise of options under the Form S-8 will be
available for sale in the public market, subject to
Rule 144 volume limitations applicable to affiliates and
subject to the lock-up agreements described below.
Lock-up Agreements
Our directors, executive officers and certain of
our stockholders, who will, after the offering, collectively
hold an aggregate
of                 shares
have agreed to enter into lock-up agreements with us or the
underwriters in connection with this offering. These lock-up
agreements will provide that, with limited exceptions, these
persons and entities will not offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of any of our
shares for a period of 180 days after the effective date of
this offering. Wachovia Capital Markets, LLC may, in its sole
discretion and at any time without prior notice, release all or
any portion of the shares subject to these lock-up agreements.
We have also entered into an agreement with Wachovia Capital
Markets, LLC that, with certain exceptions, we will not offer,
sell or otherwise dispose of our common stock until
180 days after the date of this prospectus.
86
MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES
General
The following is a general discussion of the
material U.S. federal income and estate tax consequences of
the ownership and disposition of common stock that may be
relevant to you if you are a non-U.S. Holder. For purposes
of this discussion, a "non-U.S. Holder" is any
person or entity that is, for U.S. federal income tax
purposes, a foreign corporation, a nonresident alien individual,
a foreign estate or a foreign trust. This discussion is based on
current law, which is subject to change, possibly with
retroactive effect, or different interpretations. This
discussion is limited to non-U.S. Holders who hold shares
of common stock as capital assets. Moreover, this discussion is
for general information only and does not address all the tax
consequences that may be relevant to you in light of your
personal circumstances. In particular, this discussion does not
address the U.S. federal income tax consequences to certain
holders that are subject to special treatment (such as holders
who are broker dealers, insurance companies, tax-exempt
organizations, banks, financial institutions, or "financial
services entities"); holders of our common stock held as
part of a "straddle," "hedge,"
"constructive sale" or "conversion
transaction" with other investments; holders who received
our common stock as compensation; holders who have elected
mark-to-market accounting; and certain expatriates or former
long-term residents of the United States. Additionally, the
discussion does not consider the tax treatment of holders who
are partnerships or pass-through entities for U.S. federal
income tax purposes, or persons who hold our common stock
through a partnership or other pass-through entity. If a
partnership holds shares of the common stock, the
U.S. federal income tax treatment of a partner in the
partnership will generally depend on the status of the partner
and the activities of the partnership. In addition, this
discussion does not consider any aspect of state, local or
non-U.S. tax laws.
If you are an individual, you may, in many cases,
be deemed to be a resident alien, as opposed to a nonresident
alien, by virtue of being present in the United States for at
least 31 days in the calendar year and for an aggregate of
at least 183 days during a three-year period ending in the
current calendar year. For these purposes all the days present
in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in
the second preceding year are counted. Resident aliens are
subject to U.S. federal income tax as if they were
U.S. citizens. Because U.S. federal tax law uses
different tests to determine whether an individual is a
non-resident alien for income tax purposes, some individuals may
be "non-U.S. Holders" for purposes of the
U.S. federal income tax discussion, but not for the purpose
of the U.S. federal estate tax discussion and vice versa.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS
ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND
POSSIBLE FUTURE TAX CONSEQUENCES OF PURCHASING, OWNING AND
DISPOSING OF OUR COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES
THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE,
MUNICIPALITY OR OTHER TAXING JURISDICTION.
Dividends
In the event that distributions are paid by us,
such 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). If the amount of
a distribution exceeds our current and accumulated earnings and
profits, such excess first will be treated as a tax-free return
of capital to the extent of your tax basis in the common stock,
and thereafter will be treated as capital gain, as discussed
below under "Dispositions of Common Stock." If
dividends for U.S. federal income tax purposes are paid, as
a non-U.S. Holder, you will be subject to U.S. federal
withholding tax at a 30% rate or a lower rate as may be
specified by an applicable income tax treaty. To claim the
benefit of a lower rate under an income tax treaty, you must
properly file with the payor an Internal Revenue Service
Form W-8BEN, or successor form, claiming an exemption from
or reduction in withholding under the applicable tax treaty. If
dividends are considered effectively connected with the conduct
of a trade or business by you within the United States and,
where a tax treaty applies, are attributable to a
87
U.S. permanent establishment those dividends
will be subject to U.S. federal income tax on a net basis
at regular U.S. federal income tax rates in the same manner
as a U.S. person but will not be subject to
U.S. federal withholding tax, provided an Internal Revenue
Service Form W-8ECI, or successor form, is filed with the
payor. If you are a foreign corporation, any effectively
connected dividends may, under certain circumstances, be subject
to an additional "branch profits tax" at a rate of 30%
or a lower rate as may be specified by an applicable income tax
treaty.
You must comply with the certification procedures
described above, or, in the case of payments made outside the
United States with respect to an offshore account, certain
documentary evidence procedures, directly or under certain
circumstances through an intermediary, to obtain the benefits of
a reduced rate under an income tax treaty with respect to
dividends paid with respect to your common stock. In addition,
if you are required to provide an Internal Revenue Service
Form W-8ECI or successor form, as discussed above, you must
also provide your tax identification number.
If you are eligible for a reduced rate of
U.S. federal withholding tax pursuant to an income tax
treaty, you may obtain a refund or credit of any excess amounts
withheld by timely filing an appropriate claim for refund with
the Internal Revenue Service.
Dispositions of Common Stock
As a non-U.S. Holder, you generally will not
be subject to U.S. federal income or withholding tax on any
gain recognized on the sale or other disposition of common stock
unless:
•
the gain is considered effectively connected with
    the conduct of a trade or business by you within the United
    States and, where a tax treaty applies, is attributable to a
    U.S. permanent establishment (and, in which case, if you
    are a foreign corporation, you may be subject to an additional
    branch profits tax equal to 30% or a lower rate as may be
    specified by an applicable income tax treaty);
•
you are an individual who holds the common stock
    as a capital asset and are present in the United States for 183
    or more days in the taxable year of the sale or other
    disposition and other conditions are met; or
•
we are or become a U.S. Real Property
    Holding Corporation (USRPHC). In general, a corporation is a
    USRPHC if the fair market value of its "U.S. real
    property interests" equals or exceeds 50% of the sum of the
    fair market value of its worldwide real property interests and
    its other assets used or held for use in a trade or business. We
    believe that we are not currently, and are not likely not to
    become, a USRPHC. If we were to become a USRPHC, then gain on
    the sale or other disposition of common stock by you generally
    would not be subject to U.S. federal income tax provided:
•
the common stock was "regularly traded on an
    established securities market"; and
•
you do not actually or constructively own more
    than 5% of the common stock during the shorter of (i) the
    five-year period preceding the disposition or (ii) your
    holding period.
No assurance can be given that we will not be a
USRPHC, or that our common stock will be considered regularly
traded, when you sell your shares of common stock.
Federal Estate Tax
If you are an individual, common stock held at
the time of your death will be included in your 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.
Information Reporting and Backup Withholding
Tax
We must report annually to the Internal Revenue
Service and to each of you the amount of dividends paid to you
and the tax withheld with respect to those dividends, regardless
of whether withholding was
88
required. Copies of the information returns
reporting those dividends and withholding amounts may also be
made available to the tax authorities in the country in which
you reside under the provisions of an applicable income tax
treaty or other applicable agreements.
Backup withholding is generally imposed at a
current rate of 28% on certain payments to persons that fail to
furnish the necessary identifying information to the payor. You
generally will be subject to backup withholding tax (currently
28%) with respect to dividends paid on your common stock unless
you certify your non-U.S. status on Internal Revenue
Service Form W-8BEN (or successor form) or otherwise
establish an exemption.
The payment of proceeds of a sale of common stock
effected by or through a U.S. office of a broker is subject
to both backup withholding and information reporting unless you
provide the payor with your name and address and you certify
your non-U.S. status or you otherwise establish an
exemption. In general, backup withholding and information
reporting will not apply to the payment of the proceeds of a
sale of common stock by or through a foreign office of a broker.
If, however, such broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation,
a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in
the United States or a foreign partnership that at any time
during its tax year either is engaged in the conduct of a trade
or business in the United States or has as partners one or more
U.S. persons that, in the aggregate, hold more than 50% of
the income or capital interest in the partnership, backup
withholding will not apply, but such payments will be subject to
information reporting, unless such broker has documentary
evidence in its records that you are a non-U.S. Holder and
certain other conditions are met or you otherwise establish an
exemption.
Backup withholding is not an additional tax. Any
amounts withheld under the backup withholding rules generally
will be allowed as a refund or a credit against your
U.S. federal income tax liability provided the required
information is furnished in a timely manner to the Internal
Revenue Service.
89
UNDERWRITING
Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell to the
underwriters named below and the underwriters have severally
agreed to purchase from us, the number of shares of common stock
appearing opposite their names below.
Underwriter
Number of Shares
Wachovia Capital Markets, LLC
C.E. Unterberg, Towbin, LLC
Total
The underwriters have agreed to purchase all of
the shares shown in the above table if any of those shares are
purchased. If an underwriter defaults, the underwriting
agreement provides that the purchase commitments of the
non-defaulting underwriter may be increased or the underwriting
agreement may be terminated.
The shares of common stock are offered by the
underwriters, subject to prior sale, when, as and if issued to
and accepted by them, subject to approval of legal matters by
counsel for the underwriters and other conditions contained in
the underwriting agreement, such as the receipt by the
underwriters of officers' certificates and legal opinions.
The underwriters have advised us that they do not
intend to confirm sales to any account over which they exercise
discretionary authority.
Commissions and Discounts
The underwriters have advised us that they
propose to offer the shares of our common stock to the public at
the public offering price falling within the range listed on the
cover page of this prospectus and to certain dealers at that
price less a concession of not more than
$          per
share, of which
$          may
be reallowed to other dealers. After completion of this initial
public offering, the public offering price, concession and
reallowance to dealers may be changed.
The following table shows the public offering
price, underwriting discount and proceeds, before expenses, to
us on a per share basis and in total, assuming either no
exercise or full exercise by the underwriters of their
over-allotment option.
Total
Per Share
Without Option
With Option
Public offering price
$
$
$
Underwriting discount
$
$
$
Proceeds to us (before expenses)
$
$
$
We estimate that the expenses of this offering,
not including the underwriting discount, will be approximately
$          and
are payable by us.
Over-allotment Option
We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this
prospectus, to purchase up to a total
of                additional
shares of common stock at the public offering price per share
less the underwriting discounts and commissions per share shown
on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each of the underwriters will
have a firm commitment, subject to conditions, to purchase
approximately the same percentage of the additional shares that
the number of shares of common stock to be purchased by that
underwriter as shown in the above table represents as a
percentage of the total number of shares shown in that table.
90
Indemnity
We have agreed to indemnify the underwriters
against specified liabilities, including liabilities under the
Securities Act, or to contribute to payments that the
underwriters may be required to make in respect of those
liabilities.
Lock-up Agreements
Our directors and officers and the holders of
approximately  of the shares of our common stock
outstanding as
of                     ,
2005 will agree, with limited exceptions, for a period of 180
days after the date of this prospectus, they will not, without
the prior written consent of Wachovia Capital Markets, LLC,
offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or other
capital stock or any securities convertible into, or exercisable
or exchangeable for, shares of our common or our other capital
stock, except that such directors, officers and stockholders
will be permitted to transfer any of these securities by gift,
will or intestate succession (so long as any recipient of those
securities enters into a similar lock-up agreement), the selling
stockholders will be permitted to distribute securities to their
partners (so long as any recipient of those securities enters
into a similar lock-up agreement).
In addition, we have agreed that, for a period of
180 days after the date of this prospectus, we will not, without
the prior written consent of Wachovia Capital Markets, LLC,
offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or other
capital stock or any securities convertible into, or exercisable
or exchangeable for, shares of our common stock or other capital
stock, except for:
•
the shares of common stock being sold by us in
    this offering;
•
the issuance of shares of common stock and stock
    options pursuant to our stock option plans as in effect on the
    date of this prospectus; and
•
the issuance of shares of common stock upon the
    exercise of stock options.
Wachovia Capital Markets, LLC may, in its sole
discretion and at any time or from time to time, without notice,
release all or any portion of the shares or other securities
subject to the lock-up agreements listed above.
Stabilization
The representatives have advised us that,
pursuant to Regulation M under the Securities Exchange Act
of 1934, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which
may have the effect of stabilizing or maintaining the market
price of our common stock at a level above that which might
otherwise prevail in the open market.
•
A "stabilizing bid" is a bid for or the
    purchase of the common stock on behalf of the underwriters for
    the purpose of fixing or maintaining the price of the common
    stock.
•
A "syndicate covering transaction" is a
    bid for or the purchase of the common stock on behalf of the
    underwriters to reduce a short position incurred by the
    underwriters in connection with this offering.
•
A "penalty bid" is an arrangement
    permitting the underwriters to reclaim the selling concession
    otherwise accruing to an underwriter or selling group member in
    connection with this offering if the common stock originally
    sold by that underwriter or selling group member is purchased by
    the underwriters in a syndicate covering transaction and has
    therefore not been effectively placed by that underwriter or
    selling group member.
91
The underwriters have advised us that these
transactions may be effected on the Nasdaq National Market or
otherwise. Neither we nor any of the underwriters makes any
representation that the underwriters will engage in any of the
transactions described above, and these transactions, if
commenced, may be discontinued without notice. Neither we nor
any of the underwriters makes any representation or prediction
as to the direction or magnitude of the effect that the
transactions described above, if commenced, may have on the
market price of our common stock.
Other Relationships
C.E. Unterberg, Towbin, LLC has performed
investment banking and advisory services for us from time to
time for which they received customary fees and expenses. The
underwriters may, from time to time, engage in transactions with
and perform services for us in the ordinary course of business.
Pricing of this Offering
Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public
offering price for the shares of our common stock will be
determined by negotiations between us and the underwriters. The
factors to be considered in determining the initial public
offering price include:
•
prevailing market conditions;
•
our results of operations and financial condition;
•
financial and operating information and market
    valuations with respect to other companies that we and the
    representatives of the underwriters believe to be comparable to
    us;
•
the present state of our business; and
•
our future prospects.
An active trading market for our common stock may
not develop. It is possible that the market price of our common
stock after this offering may be less than the initial public
offering price. In addition, the estimated initial public
offering price range appearing on the cover of this preliminary
prospectus is subject to change as a result of market conditions
or other factors.
Quotation on the Nasdaq National
Market
We intend to file an application for our common
stock to be quoted on the Nasdaq National Market under the
symbol "EPCT."
Electronic Prospectus
In connection with this offering, certain of the
underwriters or securities dealers may distribute this
prospectus electronically.
VALIDITY OF SECURITIES
Weil, Gotshal & Manges LLP, New York,
New York has passed upon the validity of the common stock
offered hereby on behalf of us. Shearman & Sterling
LLP, New York, New York has passed upon the validity of the
common stock offered hereby on behalf of the underwriters.
EXPERTS
The consolidated financial statements as of
December 31, 2003 and 2002 and September 30, 2004, and
for each of the three years in the period ended
December 31, 2003 and for the nine months ended
September 30, 2004, included in this prospectus have been
audited by Deloitte & Touche LLP, an
92
independent registered public accounting firm, as
stated in their report appearing herein (which report expresses
an unqualified opinion and includes explanatory paragraphs
relating to the Company's ability to continue as a going
concern as discussed in Note 1 and the restatement
discussed in Note 11), and have been so included in
reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
CHANGE IN INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Our consolidated balance sheets as of
December 31, 2001 and 2000 and the related consolidated
statements of operations, stockholders' (deficiency) equity
and cash flows for the years then ended and the period from
March 9, 1993 (inception) through December 31, 2001
were previously audited by Ernst & Young LLP, an independent
registered public accounting firm. In May 2004, Ernst &
Young LLP resigned.
On July 13, 2004, our board of directors
approved the appointment of Deloitte & Touche LLP to
serve as our independent registered public accounting firm. We
engaged Deloitte & Touche LLP to audit our consolidated
financial statements as of December 31, 2003 and 2002, and
for the years then ended, and to re-audit our consolidated
financial statements for the year ended December 31, 2001.
In connection with the audits of our financial
statements for the years ended December 31, 2000 and 2001 and in
the subsequent period through the date of Ernst & Young
LLP's resignation, there were no disagreements with
Ernst & Young LLP on any matters of accounting
principles or practices, financial statement disclosure or
auditing scope and procedures, which if not resolved to the
satisfaction of Ernst & Young LLP would have caused Ernst
& Young LLP to make reference to the matter in their report.
Except for a paragraph relating to a going concern uncertainty,
the audit report of Ernst & Young LLP on our consolidated
financial statements described above did not contain any adverse
opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles.
As a result of the reaudit of our financial
statement for the year ended December 31, 2001, we determined
that a restatement of this financial statement was required for
certain items as disclosed in Note 11 to the financial
statements, and we informed Ernst & Young LLP about these
matters.
We have requested Ernst & Young LLP to
furnish a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the above statements.
A copy of that letter confirming its agreement, dated November
11, 2004, is filed as Exhibit 16.1.
WHERE YOU CAN FIND ADDITIONAL
INFORMATION
We have filed with the Securities and Exchange
Commission a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered hereby.
This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to
EpiCept Corporation and the common stock offered hereby, you
should refer to the registration statement and to the exhibits
and schedules filed therewith. Statements contained in this
prospectus regarding the contents of any contract or any other
document that is filed as an exhibit to the registration
statement are not necessarily complete, and each such statement
is qualified in all respects by reference to the full text of
such contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and
the exhibits and schedules therewith may be inspected without
charge at the public reference room maintained by the SEC
located at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of all or any portion of the registration
statement may be obtained from such offices upon payment of
prescribed fees. The public may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC maintains a website at www.sec.gov that
contains reports, proxy and information statements and other
information regarding registrants that file electronically with
the SEC.
93
EPICEPT CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public
    Accounting Firm
F-2
Consolidated Balance Sheets as of
    December 31, 2003 and 2002 and September 30, 2004
F-3
Consolidated Statements of Operations for the
    Years Ended December 31, 2003, 2002, and 2001 and for the
    Nine Months Ended September 30, 2004 and 2003 (Unaudited)
F-4
Consolidated Statements of Preferred Stock and
    Stockholders' Deficit for the Years Ended December 31,
    2001, 2002 and 2003 and the Nine Months Ended September 30,
    2004
F-5
Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002, and 2001 and for the
    Nine Months Ended September 30, 2004 and 2003 (Unaudited)
F-7
Notes to Consolidated Financial Statements
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders of
EpiCept Corporation and subsidiary:
We have audited the accompanying consolidated
balance sheets of EpiCept Corporation and subsidiary (the
"Company") as of December 31, 2003, 2002 and
September 30, 2004, and the related consolidated statements
of operations, preferred stock and stockholders' deficit,
and cash flows for each of the three years in the period ended
December 31, 2003 and for the nine months ended
September 30, 2004. These financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with
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 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, such consolidated financial
statements present fairly, in all material respects, the
financial position of EpiCept Corporation and subsidiary as of
December 31, 2003 and 2002 and September 30, 2004, and
the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003 and
for the nine months ended September 30, 2004 in conformity
with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring
losses from operations and the stockholders' deficit raise
substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are
also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
As discussed in Note 11, the accompanying
2001 consolidated financial statements have been restated.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
January 10, 2005
F-2
EPICEPT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Pro Forma
Liabilities and
Stockholders'
December 31,
Deficit
September 30,
September 30,
2003
2002
2004
2004 (Note 2)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
8,007,187
$
619,552
$
3,026,176
Prepaid expenses and other current assets
36,285
36,738
66,815
Total current assets
8,043,472
656,290
3,092,991
Property and equipment, net
110,135
169,390
97,816
Deferred financing and initial public offering
    costs
28,552
114,209
712,743
Other assets
13,345
10,832
35,735
Total assets
$
8,195,504
$
950,721
$
3,939,285
LIABILITIES AND STOCKHOLDERS'
    DEFICIT
Current liabilities:
Accounts payable
$
387,230
$
542,955
$
1,446,108
Accrued research contract costs
114,537
584,343
105,333
Accrued interest
419,597
42,329
681,535
Other accrued liabilities
478,490
419,896
440,457
Notes and loans payable, current portion
1,010,400
—
986,960
Deferred revenue, current portion
2,500,508
—
2,500,508
Total current liabilities
4,910,762
1,589,523
6,160,901
Notes and loans payable
10,272,177
7,085,258
10,692,170
$
8,169,047
Deferred revenue
7,065,682
—
5,190,302
Accrued interest
343,654
279,561
395,060
Contingent interest
483,173
299,927
592,557
Deferred rent and other noncurrent liabilities
31,578
43,215
18,045
Total long term liabilities
18,196,264
7,707,961
16,888,134
14,365,011
Total liabilities
23,107,026
9,297,484
23,049,035
20,525,912
Commitments (Note 7)
Series B Redeemable Convertible Preferred
    Stock, $0.0001 par value; authorized 3,440,069 shares;
    issued and outstanding 3,106,736 shares ($9,320,208
    liquidation preference at December 31, 2003 and 2002 and
    September 30, 2004)
6,421,845
5,474,291
6,666,500
—
Series C Redeemable Convertible Preferred
    Stock, $0.0001 par value; authorized
    12,769,573 shares; issued and outstanding
    8,839,573 shares ($26,518,719 liquidation preference at
    December 31, 2003 and 2002 and September 30, 2004)
17,677,607
14,981,538
18,373,807
—
Warrants
4,583,974
2,627,337
4,583,974
—
Stockholders' Deficit:
Series A Convertible Preferred Stock,
    $0.0001 par value; authorized 3,422,620 shares, issued
    and outstanding 3,315,160 shares at December 31, 2003
    and 2002; 3,368,385 shares at September 30, 2004;
    (liquidation preference of $6,696,623 at December 31, 2003
    and 2002 and $6,804,138 at September 30, 2004)
8,191,840
7,274,762
8,225,806
—
Common stock, $0.0001 par value; authorized
    31,000,000 shares; issued and outstanding 6,603,359,
    6,601,359 and 6,798,485 shares at December 31, 2003
    and 2002 and September 30, 2004, and 26,220,770 shares
    pro forma at September 30, 2004
660
660
680
2,622
Additional paid-in capital
33,966
2,493,932
150,000
40,521,268
Deferred stock compensation
(394,972
)
(1,065,806
)
(89,722
)
(89,722
)
Accumulated deficit
(50,353,727
)
(39,664,321
)
(55,992,782
)
(55,992,782
)
Accumulated other comprehensive loss
(997,715
)
(394,156
)
(953,013
)
(953,013
)
Treasury stock, at cost (50,000 shares)
(75,000
)
(75,000
)
(75,000
)
(75,000
)
Total stockholders' deficit
(43,594,948
)
(31,429,929
)
(48,734,031
)
(16,586,627
)
Total liabilities and stockholders' deficit
$
8,195,504
$
950,721
$
3,939,285
See accompanying notes.
F-3
EPICEPT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
OPERATIONS
Nine Months Ended
Year Ended December 31,
September 30,
2003
2002
2001
2004
2003
(As Restated,
(Unaudited)
See Note 11)
Revenue
$
433,810
$
—
$
—
$
1,875,380
$
160,274
Operating expenses:
General and administrative
3,406,648
3,492,928
3,393,797
3,148,206
2,131,355
Research and development
1,640,955
4,873,999
4,085,258
1,271,782
1,182,547
5,047,603
8,366,927
7,479,055
4,419,988
3,313,902
Loss from operations
(4,613,793
)
(8,366,927
)
(7,479,055
)
(2,544,608
)
(3,153,628
)
Other income (expense):
Interest income
—
41,978
400,129
36,153
—
Minority interest
—
—
(9,357
)
—
—
Foreign exchange gain (loss)
(770,777
)
(728,167
)
283,968
125,203
(405,104
)
Interest expense
(4,593,180
)
(823,389
)
(488,930
)
(2,284,270
)
(3,208,479
)
Other income (expense), net
(5,363,957
)
(1,509,578
)
185,810
(2,122,914
)
(3,613,583
)
Loss before benefit for income taxes
(9,977,750
)
(9,876,505
)
(7,293,245
)
(4,667,522
)
(6,767,211
)
Benefit for income taxes
74,454
225,343
277,993
—
—
Net loss
(9,903,296
)
(9,651,162
)
(7,015,252
)
(4,667,522
)
(6,767,211
)
Warrant deemed dividend and redeemable
    convertible preferred stock dividends
(1,254,362
)
(1,288,328
)
(1,254,362
)
(1,090,855
)
(940,770
)
Loss attributable to common stockholders
$
(11,157,658
)
$
(10,939,490
)
$
(8,269,614
)
$
(5,758,377
)
$
(7,707,981
)
Basic and diluted loss per common share
$
(1.69
)
$
(1.66
)
$
(1.26
)
$
(0.86
)
$
(1.17
)
Weighted average shares outstanding
6,602,871
6,597,638
6,551,622
6,710,741
6,602,707
Unaudited pro forma basic and diluted loss per
    common share (Note 2)
$
(0.24
)
$
(0.12
)
Shares used in computing unaudited pro forma
    basic and diluted loss per common share (Note 2)
41,486,162
41,666,628
See accompanying notes.
F-4
EPICEPT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2001,
2002, and 2003
and the Nine Months Ended September 30,
2004
Series B Redeemable
Series C Redeemable
Convertible Preferred
Convertible Preferred
Series A Convertible
Accumulated
Stock
Stock
Preferred Stock
Common Stock
Additional
Deferred
Other
Total
Paid-In
Stock
Accumulated
Comprehensive
Treasury
Stockholders'
Comprehensive
Shares
Amount
Shares
Amount
Warrants
Shares
Amount
Shares
Amount
Capital
Compensation
Deficit
(Loss)
Stock
Deficit
Loss
Balance at December 31, 2000 — As
    previously reported
3,106,736
$
4,520,625
8,306,239
$
12,315,056
$
—
2,493,707
$
4,938,627
6,507,323
$
651
$
5,796,977
$
(1,734,667
)
$
(21,229,977
)
$
(123,169
)
$
(75,000
)
$
(12,426,558
)
—
Prior period adjustments (Note 11)
—
301,252
—
10,172
949,957
—
890,483
—
—
(627,381
)
—
(1,767,930
)
—
—
(1,504,828
)
—
Balance at December 31, 2000 — as
    restated, see Note 11
3,106,736
4,821,877
8,306,239
12,325,228
949,957
2,493,707
5,829,110
6,507,323
651
5,169,596
(1,734,667
)
(22,997,907
)
(123,169
)
(75,000
)
(13,931,386
)
—
Issuance of common stock in connection with
    conversion of Series A Convertible Preferred Stock
—
—
—
—
—
(8,448
)
(17,065
)
9,945
1
17,064
—
—
—
—
—
—
Exercise of stock options
—
—
—
—
—
—
—
55,500
5
17,994
—
—
—
—
17,999
—
Issuance of Series A Convertible Preferred
    Stock for minority interest equity conversion
—
—
—
—
—
829,901
1,462,717
—
—
(1,431,852
)
—
—
—
—
30,865
—
Issuance of Series C Redeemable Convertible
    Preferred Stock for cash
—
—
633,334
950,000
—
—
—
—
—
—
—
—
—
—
—
—
Accretion of preferred stock
    dividends — as restated, see Note 11
—
326,207
—
928,155
—
—
—
—
—
(1,254,362
)
—
—
—
—
(1,254,362
)
—
Acquisition of Series C Redeemable
    Convertible Preferred Stock
—
—
(100,000
)
(150,000
)
—
—
—
—
—
—
—
—
—
—
—
—
Deferred stock compensation related to employee
    stock options — as restated, see Note 11
—
—
—
—
—
—
—
—
—
379,963
(379,963
)
—
—
—
—
—
Amortization of deferred stock compensation
—
—
—
—
—
—
—
—
—
—
763,686
—
—
—
763,686
—
Stock-based compensation to third
    parties — as restated, see Note 11
—
—
—
—
—
—
—
—
—
220,434
—
—
—
—
220,434
—
Foreign currency translation adjustment
—
—
—
—
—
—
—
—
—
—
—
—
(5,648
)
—
(5,648
)
$
(5,648
)
Net loss — as restated, see Note 11
—
—
—
—
—
—
—
—
—
—
—
(7,015,252
)
—
—
(7,015,252
)
(7,015,252
)
Balance at December 31, 2001 — as
    restated, see Note 11
3,106,736
5,148,084
8,839,573
14,053,383
949,957
3,315,160
7,274,762
6,572,768
657
3,118,837
(1,350,944
)
(30,013,159
)
(128,817
)
(75,000
)
(21,173,664
)
$
(7,020,900
)
Exercise of stock options
—
—
—
—
—
—
—
28,591
3
8,575
—
—
—
—
8,578
—
Accretion of preferred stock dividends
—
326,207
—
928,155
—
—
—
—
—
(1,254,362
)
—
—
—
—
(1,254,362
)
—
Issuance of Series A Convertible Preferred
    Stock warrants to investor
—
—
—
—
—
—
—
—
—
33,966
—
—
—
—
33,966
—
Series A Convertible Preferred Stock warrant
    deemed dividend
—
—
—
—
—
—
—
—
—
(33,966
)
—
—
—
—
(33,966
)
—
Deferred stock compensation related to employee
    stock options
—
—
—
—
—
—
—
—
—
573,770
(573,770
)
—
—
—
—
—
F-5
EPICEPT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND
STOCKHOLDERS'
DEFICIT — (Continued)
Series B Redeemable
Series C Redeemable
Convertible Preferred
Convertible Preferred
Series A Convertible
Accumulated
Stock
Stock
Preferred Stock
Common Stock
Additional
Deferred
Other
Total
Paid-In
Stock
Accumulated
Comprehensive
Treasury
Stockholders'
Comprehensive
Shares
Amount
Shares
Amount
Warrants
Shares
Amount
Shares
Amount
Capital
Compensation
Deficit
(Loss)
Stock
Deficit
Loss
Amortization of deferred stock compensation
—
—
—
—
—
—
—
—
—
—
858,908
—
—
—
858,908
—
Stock-based compensation to third parties
—
—
—
—
—
—
—
—
—
47,112
—
—
—
—
47,112
—
Sale of warrants
—
—
—
—
1,677,380
—
—
—
—
—
—
—
—
—
—
—
Foreign currency translation adjustment
—
—
—
—
—
—
—
—
—
—
—
—
(265,339
)
—
(265,339
)
$
(265,339
)
Net loss
—
—
—
—
—
—
—
—
—
—
—
(9,651,162
)
—
—
(9,651,162
)
(9,651,162
)
Balance at December 31, 2002
3,106,736
5,474,291
8,839,573
14,981,538
2,627,337
3,315,160
7,274,762
6,601,359
660
2,493,932
(1,065,806
)
(39,664,321
)
(394,156
)
(75,000
)
(31,429,929
)
$
(9,916,501
)
Exercise of stock options
—
—
—
—
—
—
—
2,000
—
600
—
—
—
—
600
—
Accretion of preferred stock dividends
—
326,207
—
928,155
—
—
—
—
—
(771,960
)
—
(482,402
)
—
—
(1,254,362
)
—
Beneficial conversion feature related to
    preferred stock
—
621,347
—
1,767,914
—
—
917,078
—
—
(3,081,595
)
—
(224,744
)
—
—
(2,389,261
)
—
Deferred stock compensation related to employee
    stock options
—
—
—
—
—
—
—
—
—
(1,552
)
80,516
(78,964
)
—
—
—
—
Amortization of deferred stock compensation
—
—
—
—
—
—
—
—
—
—
590,318
—
—
—
590,318
—
Stock-based compensation to third parties
—
—
—
—
—
—
—
—
—
178,558
—
—
—
—
178,558
—
Sale of warrants
—
—
—
—
1,956,637
—
—
—
—
—
—
—
—
—
—
—
Beneficial conversion feature related to
    convertible term notes
—
—
—
—
—
—
—
—
—
1,215,983
—
—
—
—
1,215,983
—
Foreign currency translation adjustment
—
—
—
—
—
—
—
—
—
—
—
—
(603,559
)
—
(603,559
)
$
(603,559
)
Net loss
—
—
—
—
—
—
—
—
—
—
—
(9,903,296
)
—
—
(9,903,296
)
(9,903,296
)
Balance at December 31, 2003
3,106,736
6,421,845
8,839,573
17,677,607
4,583,974
3,315,160
8,191,840
6,603,359
660
33,966
(394,972
)
(50,353,727
)
(997,715
)
(75,000
)
(43,594,948
)
$
(10,506,855
)
Exercise of stock options
—
—
—
—
—
—
—
195,126
20
69,018
—
—
—
—
69,038
—
Exercise of Series A Convertible Preferred
    Stock warrants
—
—
—
—
—
53,225
33,966
—
—
(33,966
)
—
—
—
—
—
—
Beneficial conversion feature related to
    Series A Convertible Preferred Stock warrant exercise
—
—
—
—
—
—
—
—
—
150,000
—
(150,000
)
—
—
—
—
Accretion of preferred stock dividends
—
244,655
—
696,200
—
—
—
—
—
(119,322
)
—
(821,533
)
—
—
(940,855
)
—
Amortization of deferred stock compensation
—
—
—
—
—
—
—
—
—
—
305,250
—
—
—
305,250
—
Stock-based compensation to third parties
—
—
—
—
—
—
—
—
—
50,304
—
—
—
—
50,304
—
Foreign currency translation adjustment
—
—
—
—
—
—
—
—
—
—
—
—
44,702
—
44,702
$
44,702
Net loss
—
—
—
—
—
—
—
—
—
—
—
(4,667,522
)
—
—
(4,667,522
)
(4,667,522
)
Balance at September 30, 2004
3,106,736
$
6,666,500
8,839,573
$
18,373,807
$
4,583,974
3,368,385
$
8,225,806
6,798,485
$
680
$
150,000
$
(89,722
)
$
(55,992,782
)
$
(953,013
)
$
(75,000
)
$
(48,734,031
)
$
(4,622,820
)
See accompanying notes.
F-6
EPICEPT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Nine Months Ended
Year Ended December 31,
September 30,
2003
2002
2001
2004
2003
(Unaudited)
(As Restated
See Note 11)
Cash flows from operating
    activities:
Net loss
$
(9,903,296
)
$
(9,651,162
)
$
(7,015,252
)
$
(4,667,522
)
$
(6,767,211
)
Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
Depreciation and amortization
78,424
97,143
91,439
40,769
60,303
Loss (gain) on disposal of assets
—
—
6,810
(1,895
)
—
Foreign exchange loss (gain)
770,777
728,167
(283,968
)
(125,203
)
405,104
Stock-based compensation expense
768,876
906,020
984,120
355,554
488,688
Amortization of deferred financing costs
85,657
14,276
—
28,552
57,105
Minority interest
—
—
9,357
—
—
Accretion of discount on loans
3,356,400
177,057
—
1,316,543
2,375,972
Change in operating assets and
    liabilities —
Decrease (increase) in prepaid expenses and other
    current assets
453
(1,324
)
14,771
(30,530
)
(16,069
)
(Increase) decrease in other assets
(2,513
)
(2,041
)
82,874
(22,390
)
(1,322
)
(Decrease) increase in accounts payable
(155,725
)
377,733
(30,588
)
1,058,878
8,530
(Decrease) increase in accrued research contract
    costs
(469,806
)
277,887
(8,130
)
(9,204
)
(433,208
)
Increase in accrued interest — current
377,268
22,051
20,278
261,938
363,608
Increase (decrease) in other accrued liabilities
58,594
109,624
(125,127
)
(38,033
)
(345,838
)
Increase in deferred revenue
10,000,000
—
—
—
2,500,000
Amortization of deferred revenue
(433,810
)
—
—
(1,875,380
)
(160,274
)
Increase in accrued interest
64,093
53,425
50,626
51,406
47,221
Increase in contingent interest
183,246
111,442
39,462
109,384
114,445
(Decrease) in other liabilities
(11,637
)
(8,433
)
(13,546
)
(13,533
)
(7,126
)
Net cash provided by (used in) operating
    activities
4,767,001
(6,788,135
)
(6,176,874
)
(3,560,666
)
(1,310,072
)
Cash flows from investing
    activities:
Purchase of property and equipment
(17,357
)
(9,933
)
(56,769
)
(26,198
)
(1,817
)
Proceeds from sale of property and equipment
—
—
4,092
999
—
Net cash used in investing activities
(17,357
)
(9,933
)
(52,677
)
(25,199
)
(1,817
)
Cash flows from financing
    activities:
Issuance of common stock
600
8,578
17,999
69,038
—
Proceeds from bridge loans and warrants
2,654,546
2,195,454
—
—
2,654,546
Net proceeds from sale of convertible preferred
    stock
—
—
950,000
—
—
Acquisition of Series C Redeemable
    Convertible Preferred Stock
—
—
(150,000
)
—
—
Repayment of loan
—
—
—
(729,340
)
—
Deferred financing and initial public offering
    costs
—
(128,485
)
—
(712,743
)
—
Net cash provided by (used in) financing
    activities
2,655,146
2,075,547
817,999
(1,373,045
)
2,654,546
Net increase (decrease) in cash and cash
    equivalents
7,404,790
(4,722,521
)
(5,411,552
)
(4,958,910
)
1,342,657
Effect of exchange rate changes on cash
(17,155
)
(14,371
)
(23,264
)
(22,101
)
(8,627
)
Cash and cash equivalents at beginning of period
619,552
5,356,444
10,791,260
8,007,187
619,552
Cash and cash equivalents at end of period
$
8,007,187
$
619,552
$
5,356,444
$
3,026,176
$
1,953,582
Supplemental disclosure of cash flow
    information
Cash paid for interest
$
493,579
$
453,333
$
391,374
$
654,230
$
300,402
Supplemental disclosure of non-cash investing
    and financing activities
Warrant deemed dividend and redeemable
    convertible preferred stock dividends
$
1,254,362
$
1,288,328
$
1,254,362
$
1,090,855
$
940,770
Beneficial conversion feature related to
    preferred stock or warrant exercise
$
3,306,339
$
—
$
—
$
150,000
$
3,306,339
Beneficial conversion feature related to
    convertible term notes
$
1,215,983
$
—
$
—
$
—
$
1,215,983
Minority interest conversion into Series A
    Convertible Preferred Stock
$
—
$
—
$
1,462,717
$
—
$
—
See accompanying notes.
F-7
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Years Ended December 31, 2003, 2002 and
2001 and Nine Months Ended
September 30, 2004 and 2003
(Unaudited)
1.
Organization and Description of
    Business
EpiCept Corporation ("EpiCept" or the
"Company") is a specialty pharmaceutical company
focused on the development and commercialization of topically
delivered prescription pain management therapeutics. The Company
has six product candidates in clinical development, three of
which are in late-stage clinical development and ready to enter,
or which have entered, Phase IIb or Phase III clinical
trials. EpiCept's product candidates target
moderate-to-severe pain that is influenced, or mediated, by
nerve receptors located just beneath the skin's surface.
The Company's product candidates utilize several
proprietary formulations and topical delivery technologies to
administer established, FDA-approved pain management
therapeutics, or analgesics.
The Company's late stage product candidates
are EpiCept NP-1, a prescription topical analgesic cream
designed to provide effective long-term relief of peripheral
neuropathies; LidoPAIN SP, a sterile prescription analgesic
patch designed to provide sustained topical delivery of
lidocaine to a post-surgical or post-traumatic sutured wound
while also providing a sterile protective covering for the
wound; and LidoPAIN BP, a prescription analgesic non-sterile
patch designed to provide sustained topical delivery of
lidocaine for the treatment of acute or recurrent lower back
pain.
The Company has yet to generate product revenues
from any of its product candidates in development. During 2003,
the Company entered into two strategic alliances, the first in
July 2003 with Adolor Corporation ("Adolor") for the
development and commercialization of certain products, including
LidoPAIN SP in North America, and the second in December 2003
with Endo Pharmaceuticals, Inc. ("Endo") for the
worldwide commercialization of LidoPAIN BP. The Company received
a total of $10.0 million in upfront non-refundable license
fees upon the closing of these license agreements. Under these
relationships, the Company is eligible to receive an additional
$102.5 million in milestone payments and, upon receipt of
appropriate regulatory approvals, the Company will earn
royalties based on net sales of products. There is no assurance
that any of these milestones will be earned or any royalties
paid. The Company's ability to generate additional revenue
in the future will depend on its ability to meet development or
regulatory milestones under its existing license agreements that
trigger additional payments, to enter into new license
agreements for other products or territories, and to receive
regulatory approvals for, and successfully commercialize, its
product candidates either directly or through commercial
partners.
The Company is subject to a number of risks
associated with companies in the specialty pharmaceutical
industry. Principal among these are risks associated with the
Company's dependence on collaborative arrangements,
development by the Company or its competitors of new
technological innovations, dependence on key personnel,
protection of proprietary technology, compliance with the
U.S. Food and Drug Administration and other governmental
regulations and approval requirements, as well as the ability to
grow the Company's business and the need to obtain adequate
financing to fund this growth.
The Company has prepared its financial statements
under the assumption that it is a going concern. The Company has
devoted substantially all of its cash resources to research and
development programs and general and administrative expenses,
and to date it has not generated any meaningful revenues from
the sale of products and does not expect to generate any such
revenues for a number of years, if at all. As a result, the
Company has incurred an accumulated deficit of $50.4 and
$56.0 million as of December 31, 2003 and
September 30, 2004, respectively, and expects to incur
operating losses, potentially greater than losses in prior
years, for a number of years. The Company's recurring
losses from operations and the accumulated deficit raise
substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The
Company has financed its operations through the proceeds from
the sales of common and preferred equity
F-8
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
securities, debt, revenue from collaborative
relationships, investment income earned on cash balances and
short-term investments and the sales of a portion of its New
Jersey net operating loss carryforwards.
The Company expects to utilize its cash and cash
equivalents to fund its operations, including research and
development of its product candidates, primarily for clinical
trials. Based upon the projected spending levels for the
Company, the Company does not currently have adequate cash and
cash equivalents to complete the trials and therefore will
require additional funding. The Company believes that its
existing cash and cash equivalents plus anticipated milestone
payments will be adequate to satisfy its working capital
requirements for its current operations until the fourth quarter
of 2005. As a result, the Company intends to monitor its
liquidity position and the status of its clinical trials and to
continue to actively pursue fund-raising possibilities through
the sale of its equity securities. If the Company is
unsuccessful in its efforts to raise additional funds through
the sale of its equity securities or achievement of development
milestones, it may be required to significantly reduce or
curtail its research and development activities and other
operations if its level of cash and cash equivalents falls below
pre-determined levels.
The Company will require, over the long-term,
substantial new funding to pursue development and
commercialization of its product candidates and continue its
operations. The Company believes that satisfying these capital
requirements over the long-term will require successful
commercialization of its product candidates. However, it is
uncertain whether any products will be approved or will be
commercially successful. The amount of the Company's future
capital requirements will depend on numerous factors, including
the progress of its research and development programs, the
conduct of pre-clinical tests and clinical trials, the
development of regulatory submissions, the costs associated with
protecting patents and other proprietary rights, the development
of marketing and sales capabilities and the availability of
third-party funding.
There can be no assurance that such funding will
be available at all or on terms acceptable to the Company. If
the Company obtains funds through arrangements with
collaborative partners or others, the Company may be required to
relinquish rights to certain of its technologies or product
candidates.
The Company was incorporated in Delaware in March
1993. A 100%-owned subsidiary, EpiCept GmbH, organized in
Munich, Germany, is engaged in research and development
activities on behalf of the Company. Prior to 2003, the Company
was a development stage company.
2.
Summary of Significant Accounting
    Policies
Consolidation
The accompanying consolidated financial
statements include the accounts of EpiCept Corporation and the
Company's 100%-owned subsidiary, EpiCept GmbH. All
significant intercompany transactions and balances have been
eliminated. In April 2001, in accordance with the original terms
of the agreement, the minority interest in EpiCept GmbH was
converted into 829,901 shares of Series A convertible
preferred stock of the Company.
Interim Financial Statements
The consolidated statements of operations and
consolidated statements of cash flows for the nine months ended
September 30, 2003 and related disclosures contained in the
accompanying notes are unaudited. In the opinion of management,
all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of
operations and cash flows for the nine months ended
September 30, 2003 have been made. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or
eliminated. The results for the nine months ended
F-9
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
September 30, 2004 are not necessarily
indicative of the results to be expected for the year-ending
December 31, 2004 or for any other year.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. Estimates also affect
the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue relating to its
collaboration agreements in accordance with the Securities and
Exchange Commission's Staff Accounting
Bulletin No. 104,
Revenue Recognition
, and
Emerging Issues Task Force ("EITF") Issue
No. 00-21,
Revenue Arrangements with Multiple
Deliverables
. Revenue under collaborative arrangements may
include the receipt of non-refundable license fees, milestone
payments, and research and development payments.
The Company evaluates its collaboration
agreements to determine units of accounting for revenue
recognition purposes. Revenue is deemed earned when all of the
following have occurred: all obligations of the Company relating
to the revenue have been met and the earnings process is
complete; the monies received or receivable are not refundable
irrespective of research results; and there are neither future
obligations nor milestones to be met by the Company with respect
to such revenue. The Company recognizes revenue from
non-refundable, up-front licenses and related payments, not
specifically tied to a separate earnings process, ratably over
the development period in which the Company is obligated to
participate on a continuing and substantial basis in the
research and development activities outlined in each contract.
The Company periodically reviews the estimated development
period and, to the extent such estimates change, the impact of
such change is recorded at the time. When payments are
specifically tied to a separate earnings process, revenue will
be recognized when the specific performance obligation
associated with the payment has been satisfied. Performance
obligations typically consist of contracted services or
development milestones. Revenue from significant milestones in
the development lifecycle of the related technology, including
filing for and obtaining approvals with regulatory agencies,
will be considered earned when the payer acknowledges the
milestone achievement, generally by payment of amounts due.
Deferred revenue represents the excess of cash
received compared to revenue recognized to date under licensing
agreements.
Foreign Currency Translation
The financial statements of the Company's
foreign subsidiary are translated into U.S. dollars using
the year-end exchange rate for all balance sheet accounts and
the average exchange rates for expenses. Adjustments resulting
from translation have been reported in other comprehensive loss.
Gains or losses from foreign currency
transactions relating to intercompany debt are recorded in the
consolidated statements of operations in other income (expense).
Stock-Based Compensation
As permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123,
Accounting for
Stock-Based Compensation
("SFAS 123"), the
Company accounts for employee stock-based compensation in
accordance with Accounting Principles Board ("APB")
Opinion No. 25,
Accounting for Stock
F-10
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Issued to Employees
("APB 25"), using
intrinsic values with appropriate disclosures using the fair
value based method.
Pro forma information regarding net loss is
required by SFAS 123, as amended by SFAS No. 148
Accounting for Stock-Based Compensation, Transition and
Disclosure
("SFAS 148"), and has been
determined as if the Company had accounted for its employee
stock options under the fair value method. As allowed by
SFAS 123 and SFAS 148, the Company has elected to
continue to apply the intrinsic-value-based method of accounting
for employee stock options described above, and has adopted only
the disclosure requirements of SFAS 123. The following
table illustrates the effect on earnings as if the Company
applied the fair value method of accounting for stock-based
employee compensation under SFAS 123:
Nine Months Ended
Year Ended December 31,
September 30,
2003
2002
2001
2004
2003
(Unaudited)
Net loss
$
(9,903,296
)
$
(9,651,162
)
$
(7,015,252
)
$
(4,667,522
)
$
(6,767,211
)
Add back: Total stock-based employee compensation
    expense under the APB 25 intrinsic value method
590,318
858,908
763,686
305,250
462,068
Deduct: Total stock-based employee compensation
    expense determined under fair value based method
(634,148
)
(869,844
)
(772,434
)
(312,111
)
(514,530
)
Net loss — pro forma
(9,947,126
)
(9,662,098
)
(7,024,000
)
(4,674,383
)
(6,819,673
)
Warrant deemed dividend and redeemable
    convertible preferred stock dividends
(1,254,362
)
(1,288,328
)
(1,254,362
)
(1,090,855
)
(940,770
)
Pro forma loss attributable to common stockholders
$
(11,201,488
)
$
(10,950,426
)
$
(8,278,362
)
$
(5,765,238
)
$
(7,760,443
)
Basic and diluted loss per common share
As reported
$
(1.69
)
$
(1.66
)
$
(1.26
)
$
(0.86
)
$
(1.17
)
Pro forma
$
(1.70
)
$
(1.66
)
$
(1.26
)
$
(0.86
)
$
(1.18
)
The pro forma net loss may not be representative
of pro forma net loss in future years because the pro forma
results include the impact of previous grants and related
vesting, while subsequent years will include additional grants
and vesting.
The fair value of each option grant is estimated
on the date of the grant using the Black-Scholes option-pricing
model. The following weighted average assumptions were used for
grants in 2003, 2002 and 2001: dividend yield of 0%, risk free
interest rate of 2.87%, 3.81%-4.65% and 3.97%-4.89%, volatility
of 0% and expected life of 4 years. No options were granted
during the nine months ended September 30, 2004. The
weighted-average fair value of options granted was $1.05, $1.17
and $1.25 for the years ended December 31, 2003, 2002 and
2001, respectively.
Options issued to non-employees are valued using
the fair value method (Black-Scholes option pricing model) under
SFAS 123 and EITF Issue 96-18,
Accounting for
Equity Investments that are Issued to Other than Employees for
Acquiring or in Conjunction with Selling Goods or Services
("EITF 96-18").
F-11
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The value of such options is periodically
remeasured and income or expense is recognized during the
vesting terms.
Income Taxes
The Company accounts for its income taxes under
the asset and liability method. Under the asset and liability
method, deferred tax assets and liabilities are recognized based
upon the differences arising from carrying amounts of the
Company's assets and liabilities for tax and financial
reporting purposes using enacted tax rates in effect for the
year in which the differences are expected to reverse. The
effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in the period when the change in tax
rates is enacted. A valuation allowance is established when it
is determined that it is more likely than not that some portion
or all of the deferred tax assets will not be realized. As of
September 30, 2004, December 31, 2003 and 2002, a full
valuation allowance has been applied against the Company's
deferred tax assets (See Note 10).
Loss Per Share
Basic and diluted loss per share is computed by
dividing loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding
during the period. Diluted weighted average shares outstanding
excludes shares underlying the Series A convertible
preferred stock, the Series B redeemable convertible
preferred stock and the Series C redeemable convertible
preferred stock (collectively the "Preferred Stock"),
stock options and warrants, since the effects would be
anti-dilutive. Accordingly, basic and diluted loss per share is
the same. Such excluded shares are summarized as follows:
For the Nine Months Ended
For the Year Ended December 31,
September 30,
2003
2002
2001
2004
2003
(Unaudited)
Common stock options
2,061,626
2,574,641
2,318,391
1,866,500
2,061,626
Warrants
25,601,284
25,601,284
1,199,886
25,499,999
25,601,284
Series A Convertible Preferred Stock
4,521,690
4,521,690
3,902,461
4,594,286
4,521,690
Redeemable convertible preferred stock
Series B
3,584,695
3,584,695
3,106,736
3,584,695
3,584,695
Series C
10,199,507
10,199,507
8,839,573
10,199,507
10,199,507
Total shares excluded from calculation
45,968,802
46,481,817
19,367,047
45,744,987
45,968,802
Unaudited Pro Forma Loss Per
    Share
Unaudited pro forma loss per share is computed
using the weighted average number of shares of common stock
outstanding, including the pro forma effects of the conversion
of the Company's Preferred Stock, conversion of the
Company's ten-year non-amortizing convertible loan and the
exercise of the bridge warrants (Note 9) into shares of the
Company's common stock effective upon the assumed closing
of the Company's proposed initial public offering, as if
such conversion had occurred at January 1, 2003.
F-12
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The following table reconciles the loss
attributable to common stockholders used in the computation of
basic and diluted loss per share to the unaudited pro forma loss
attributable to common stockholders:
Year Ended
Nine Months Ended
December 31, 2003
September 30, 2004
Loss attributable to common stockholders, as
    reported
$
(11,157,658
)
$
(5,758,377
)
Reversal of preferred dividends
1,254,362
940,855
Unaudited pro forma loss attributable to common
    stockholders
$
(9,903,296
)
$
(4,817,522
)
The following table reconciles the weighted
average number of common shares used in the computation of basic
and diluted weighted average common shares outstanding to the
unaudited pro forma basic and diluted weighted average number of
common shares outstanding:
Nine Months
Year Ended
Ended
December 31,
September 30,
2003
2004
Basic and diluted weighted average number of
    common shares outstanding
6,602,871
6,710,741
Weighted average number of common shares assuming
    the conversion of the Preferred Stock, conversion of the
    Company's ten-year non-amortizing convertible loan and
    exercise of bridge warrants at January 1, 2003
34,883,291
34,955,887
Unaudited pro forma basic and diluted weighted
    average common shares outstanding
41,486,162
41,666,628
Pro Forma Liabilities and
    Stockholders' Deficit
The pro forma liabilities and stockholders'
deficit as of September 30, 2004 assumes the automatic
conversion of the Preferred Stock effective upon the assumed
close of the Company's proposed initial public offering of
common stock and the conversion of the Company's ten-year
non-amortizing convertible loan, as if such conversion had
occurred as of September 30, 2004 and the reclassification
of the warrant value into additional paid-in capital. At the
time of the proposed initial public offering of common stock,
the warrants are only exercisable into common stock of the
Company (see Note 9).
Cash Equivalents
Cash equivalents consist of money market mutual
funds, which invest in U.S. government securities and bank
deposits. The Company considers all highly liquid instruments
which have maturity of three months or less when acquired to be
cash equivalents.
Deferred Financing and Initial Public
    Offering Costs
At December 31, 2003 and 2002, deferred
financing costs represent legal and other costs and fees
incurred to negotiate and obtain financing. These costs are
capitalized and amortized on a straight-line basis (which
approximates the effective interest method) over the life of the
applicable financing (18 months). As of September 30,
2004, deferred financing and initial public offering costs
includes approximately $0.7 million of costs incurred
relating to the Company's proposed initial public offering
of common stock. Such amount will be reclassified against the
proceeds received from the proposed initial public offering at
closing.
F-13
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Property and Equipment
Property and equipment consists of office
furniture and equipment, laboratory equipment and leasehold
improvements stated at cost. Furniture and equipment are
depreciated on a straight-line basis over their estimated useful
lives ranging from five to seven years. Leasehold
improvements are amortized on a straight-line basis over the
shorter of the lease term or the estimated useful life of the
asset. Maintenance and repairs are charged to expense as
incurred.
Impairment of Long-Lived
    Assets
Effective January 1, 2002 the Company
adopted SFAS No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets.
In accordance with this
standard, the Company performs impairment tests on its
long-lived assets when circumstances indicate that their
carrying amounts may not be recoverable. If required,
recoverability is tested by comparing the estimated future
undiscounted cash flows of the asset or asset group to its
carrying value. If the carrying value is not recoverable, the
asset or asset group is written down to fair value. No such
impairments have been identified with respect to the
Company's long-lived assets, which consist primarily of
property and equipment.
Derivatives
The Company accounts for its derivative
instruments in accordance with SFAS No. 133
"Accounting for Derivative Instruments and Hedging
Activities,"
as amended ("SFAS 133").
SFAS 133 establishes accounting and reporting standards
requiring that derivative instruments, including derivative
instruments embedded in other contracts, be recorded on the
balance sheet as either an asset or liability measured at its
fair value. SFAS 133 also requires that changes in the fair
value of derivative instruments be recognized currently in
results of operations unless specific hedge accounting criteria
are met. The Company does not enter into hedging activities. As
a result of certain financings (see Note 6), derivative
instruments were created that are measured at fair value and
marked to market at each reporting period. Changes in the
derivative value are recorded as interest expense.
Comprehensive Loss
The Company's only element of comprehensive
loss other than net loss is foreign currency translation
adjustments.
Fair Value of Financial
    Instruments
The following methods and assumptions were used
to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and Cash
Equivalents.
The estimated fair
value of cash and cash equivalents approximates its carrying
value due to the short-term nature of these instruments.
Non-Convertible
Loans.
The estimated fair value of
non-convertible loans is based on the present value of their
cash flows discounted at a rate that approximates current market
returns for issues of similar risk.
Convertible Loans and Redeemable
Convertible Preferred Stock.
The
fair value of the convertible loan, the convertible bridge
loans, and the two series of redeemable convertible preferred
stock is estimated based on the Company's estimated fair
value of its common stock that such instruments are convertible
into.
F-14
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The estimated fair values of the Company's
financial instruments are as follows:
At December 31,
2003
2002
Carrying
Carrying
Amount
Fair Value
Amount
Fair Value
(In millions)
Cash and cash equivalents
$
8.0
$
8.0
$
0.6
$
0.6
Non-convertible loans
5.2
5.4
4.3
4.4
Convertible bridge loans
7.4
31.1
4.3
6.1
Redeemable Convertible Preferred Stock
24.1
55.1
20.4
20.7
At September 30,
2004
Carrying
Amount
Fair Value
(In millions)
Cash and cash equivalents
$
3.0
$
3.0
Non-convertible loans
4.3
4.7
Convertible bridge loans
7.4
31.1
Redeemable Convertible Preferred Stock
25.0
55.1
Recent Accounting
    Pronouncements
In December 2004, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 153,
Exchanges of Nonmonetary Assets
("SFAS 153").
SFAS 153 amends Accounting Policy Board ("APB")
Opinion No. 29 ("APB 29"),
Accounting for
Nonmonetary Transactions,
which requires that exchanges of
nonmonetary assets be measured based on the fair value of the
assets exchanged, but which includes certain exceptions to that
principle. SFAS 153 eliminates the exception from
APB 29 for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have a commercial substance.
SFAS 153 is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005.
The adoption of SFAS 153 is not expected to have a material
impact on the Company's consolidated financial position or
results of operations.
In December 2004, the FASB issued a revision to
SFAS No. 123,
Accounting for Stock-Based
Compensation
("SFAS 123R"). SFAS 123R
replaces SFAS 123 and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees,
and establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services.
SFAS 123R focuses primarily on accounting for transactions
in which an entity obtains employee services in share-based
payment transactions and is effective as of the beginning of the
first reporting period that begins after June 15, 2005 for
public entities that do not file as small business issuers. The
Company has illustrated the impact on its earnings as if it had
adopted the fair value method of accounting for stock-based
compensation under SFAS 123 in Note 2 to the
Consolidated Financial Statements for the years ended
December 31, 2001, 2002, and 2003 and for the nine months
ended September 30, 2004. The fair value-based method of
SFAS 123 is similar in most respects to the fair
value-based method under SFAS 123R, although the election
of certain methods within the applicable transition rules of
SFAS 123R may affect the impact on the Company's
consolidated financial position or results of operations. Such
impact, if any, on the Company's consolidated financial
position or results of operations has not been determined.
In December 2003, the FASB issued Interpretation
No. 46R,
Consolidation of Variable Interest Entities
("FIN 46R"), which is an interpretation of
Accounting Research Bulletin No. 51,
Consolidated
F-15
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Financial
Statements.
FIN 46R requires that
if an entity has a controlling interest in a variable interest
entity, the assets, liabilities and results of activities of the
variable interest entity should be included in the consolidated
financial statements of the entity. FIN 46R is effective
for all new variable interest entities created or acquired after
December 31, 2003. The adoption of FIN 46R did not
have a significant impact on the Company's consolidated
financial position or results of operations.
In May 2003, SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
("SFAS 150") was issued. This statement
establishes how a company classifies and measures certain
financial instruments with characteristics of both liabilities
and equity, including redeemable convertible preferred stock.
This statement is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise
effective at the beginning of the interim period commencing
July 1, 2003, except for mandatorily redeemable financial
instruments of nonpublic companies. The Financial Accounting
Standards Board ("FASB") has indefinitely deferred
implementation of certain provisions of SFAS 150. The
adoption of SFAS 150 did not have a significant impact on
the Company's consolidated financial position or results of
operations.
In April 2003, the FASB issued
SFAS No. 149,
Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
("SFAS 149"). SFAS 149 clarifies under
what circumstances a contract with an initial net investment
meets the characteristics of a derivative as discussed in
Statement No. 133. It also specifies when a derivative
contains a financing component that warrants special reporting
in the statement of cash flows. SFAS 149 amends certain
other existing pronouncements in order to improve consistency in
reporting these types of transactions. The new guidance is
effective for contracts entered into or modified after
June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of this standard did not
have a significant impact on the Company's consolidated
financial position or results of operations.
In November 2002, the FASB issued Interpretation
No. 45,
Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
("FIN 45").
FIN 45 requires a guarantor to recognize, at the inception
of certain guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The accounting
provisions and new disclosure requirements of FIN 45 are
required to be adopted for all guarantees issued or modified on
or after January 1, 2003. The adoption of FIN 45 had
no impact on the Company's consolidated financial position
or results of operations, as it does not enter into guarantees
with third parties.
In July 2002, the FASB issued
SFAS No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities
("SFAS 146").
SFAS 146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability
is incurred, as opposed to when the entity commits to an exit
plan under previous guidance. This statement is effective for
exit or disposal activities initiated after December 31,
2002. The adoption of SFAS 146 did not have a significant
impact on the Company's consolidated financial position or
results of operations.
In June 2001, the FASB issued
SFAS No. 143,
Accounting for Asset Retirement
Obligations
("SFAS 143"). SFAS 143
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. This statement requires
that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made. It applies
to legal obligations associated with the retirement of
long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees.
This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The adoption of
SFAS 143 did not have a significant impact on the
Company's consolidated financial position or results of
operations.
F-16
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Reclassifications
Certain reclassifications have been made to
amounts reported in 2001 to conform to the current year's
presentation.
3.
License Agreements
Adolor Corporation
In July 2003, the Company entered into a license
agreement with Adolor under which it granted Adolor the
exclusive right to commercialize a sterile topical patch
containing an analgesic alone or, in combination, including
without limitation, LidoPAIN SP throughout North America. Upon
the execution of the Adolor agreement, the Company received a
non-refundable payment of $2.5 million, which has been
deferred and is being recognized as revenue ratably over the
estimated product development period of three years. Under the
Adolor agreement, Adolor is obligated to pay the Company
additional non-refundable amounts of up to $15.0 million
upon the achievement of various milestones relating to product
development and regulatory approval, and is also obligated to
pay royalties to the Company based on the net sales of licensed
products in North America on a country-by-country basis until
the last patent covering the licensed product expires or the
tenth anniversary of the first commercial sale of licensed
product, whichever is later. Adolor is also obligated to pay the
Company a one-time bonus payment of up to $5.0 million upon
the achievement of specified net sales milestones of licensed
product. The total amount of upfront and milestone payments the
Company is eligible to receive from Adolor is $22.5 million.
Under the terms of the agreement, Adolor is
responsible for conducting further clinical trials and
completing the approval process in North America. At
Adolor's option, the Company may be required to supply or
to obtain supply of the clinical products necessary to complete
clinical trials. Alternatively, Adolor may choose to subcontract
these responsibilities to a third party. In North America,
Adolor is responsible for the supply and manufacture of LidoPAIN
SP for commercial use or, at its option, may subcontract these
responsibilities to third parties.
The Company has the option to negotiate a
co-promotion arrangement with Adolor for LidoPAIN SP or similar
product in any country in which a New Drug Application
("NDA") (or foreign equivalent) filing has been made
within thirty days of such filing. However, neither EpiCept nor
Adolor is under any obligation to enter into any such agreement.
Endo Pharmaceuticals Inc.
In December 2003, the Company entered into a
license agreement with Endo under which it granted Endo (and its
affiliates) the exclusive (including as to the Company and its
affiliates) worldwide right to commercialize LidoPAIN BP. The
Company also granted Endo worldwide rights to use certain of its
patents for the development of certain other non-sterile,
topical lidocaine containing patches, including Lidoderm,
Endo's topical lidocaine-containing patch for the treatment
of chronic lower back pain. Upon the execution of the Endo
agreement, the Company received a non-refundable payment of
$7.5 million, which has been deferred and is being
recognized as revenue ratably over the estimated product
development period of 54 months, and the Company may
receive payments of up to $52.5 million upon the
achievement of various milestones relating to product
development, regulatory approval and commercial success for both
the Company's LidoPAIN BP product and licensed Endo
products, including Lidoderm, Endo's own back pain product
candidate, so long as, in the case of Endo's product
candidate, the Company's patents provide protection
thereof. The Company will also receive royalties from Endo based
on the net sales of LidoPAIN BP. These royalties are payable
until generic equivalents to the LidoPAIN BP product are
available or until expiration of the patents covering LidoPAIN
BP, whichever
F-17
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
is sooner. The Company is also eligible to
receive milestone payments from Endo of up to approximately
$30.0 million upon the achievement of specified regulatory
and net sales milestones for licensed Endo products, including
Lidoderm, Endo's chronic lower back pain product candidate,
so long as our patents provide protection thereof. The total
amount of upfront and milestone payments the Company is eligible
to receive under the Endo agreement is $90.0 million.
The Company is responsible for continuing and
completing the development of LidoPAIN BP, including the conduct
of all clinical trials and the supply of the clinical products
necessary for those trials and the preparation and submission of
the NDA in order to obtain regulatory approval for LidoPAIN BP.
It may subcontract with third parties for the manufacture and
supply of LidoPAIN BP. Endo remains responsible for continuing
and completing the development of Lidoderm for the treatment of
chronic lower back pain, including the conduct of all clinical
trials and the supply of the clinical products necessary for
those trials.
The Company has the option to negotiate a
co-promotion arrangement with Endo for LidoPAIN BP or similar
product in any country in which an NDA (or foreign equivalent)
filing has been made within thirty days of such filing. The
Company also has the right to terminate its license to Endo with
respect to any territory in which Endo has failed to
commercialize LidoPAIN BP within three years of the receipt of
regulatory approval permitting such commercialization.
4.
Property and Equipment
Property and equipment consist of the following:
December 31,
September 30,
2003
2002
2004
Furniture, office and laboratory equipment
$
500,125
$
469,462
$
477,132
Leasehold improvements
125,834
125,280
122,676
625,959
594,742
599,808
Less accumulated depreciation
(515,824
)
(425,352
)
(501,992
)
$
110,135
$
169,390
$
97,816
Depreciation expense was approximately $78,000,
$97,000, $91,000, $41,000 and $60,000 for the years ended
December 31, 2003, 2002 and 2001, and the nine months ended
September 30, 2004 and 2003, respectively.
5.
Other Accrued Liabilities
Other accrued liabilities consist of the
following:
December 31,
September 30,
2003
2002
2004
Accrued professional fees
$
242,865
$
322,748
$
193,165
Income taxes
145,417
—
121,743
Other
90,208
97,148
125,549
$
478,490
$
419,896
$
440,457
F-18
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
6.     Notes, Loans
and Financings
The Company is a party to several loan
agreements, the amounts, terms and descriptions of which are as
follows:
December 31,
September 30,
2003
2002
2004
Ten-year, non-amortizing loan due
    December 31, 2007(A)
$
1,937,285
$
1,597,532
$
1,892,343
Ten-year, non-amortizing convertible loan due
    December 31, 2007(B)
2,583,047
2,130,042
2,523,123
Term loan due December 31, 2006(C)
3,228,808
2,662,553
2,413,664
Convertible bridge loans due October 30,
    2005(D)
4,850,000
2,195,454
4,850,000
Total notes and loans payable, before debt
    discount
12,599,140
8,585,581
11,679,130
Less: debt discount(D)
1,316,563
1,500,323
—
Total notes and loans payable
11,282,577
7,085,258
11,679,130
Less: Notes and loans payable, current portion
1,010,400
—
986,960
Notes and loans payable, long-term
$
10,272,177
$
7,085,258
$
10,692,170
(A)
In August 1997, EpiCept GmbH entered into a
    ten-year non-amortizing loan in the amount of
€
1.5 million
    with Technologie-Beteiligungs Gesellschaft mbH der Deutschen
    Ausgleichsbank ("tbg"). Proceeds must be directed
    toward research, development, production and distribution of
    pharmaceutical products. The loan bears interest at 6% per
    annum. The lender also receives additional compensation equal to
    9% of the annual surplus (income before taxes, as defined in the
    agreement) of EpiCept GmbH, reduced by any other compensation
    received from EpiCept GmbH by virtue of other loans to or
    investments in EpiCept GmbH provided that tbg is an equity
    investor in EpiCept GmbH during that time period. To date,
    EpiCept GmbH has had no annual surplus. The Company considers
    the additional compensation element based on the surplus of
    EpiCept GmbH to be a derivative. The Company has assigned no
    value to the derivative at each reporting period as no surplus
    of EpiCept GmbH is anticipated over the term of the agreement.
At the demand of tbg, additional amounts may be
    due at the end of the loan term up to 30% of the loan amount,
    plus 6% of the principal balance of the note for each year after
    the expiration of the fifth complete year of the loan period,
    such payments to be offset by the cumulative amount of all
    payments made to the lender from the annual surplus of EpiCept
    GmbH. The Company is accruing these additional amounts as
    additional interest up to the maximum amount due over the term
    of the loan. Accrued interest attributable to these additional
    amounts totaled $0.3, $0.3 and $0.4 million at
    December 31, 2003 and 2002 and September 30, 2004,
    respectively. The effective rate of interest of this loan is
    9.7%.
(B)
In February 1998, EpiCept GmbH entered into a
    ten-year non-amortizing convertible term loan in the amount of
€
2.0 million
    with tbg. The loan is non-interest bearing; however, the loan
    agreement provides for potential future annual payments from
    surplus of EpiCept GmbH up to 6% of the outstanding loan
    principal balance, not to exceed 9% of all payments made from
    surplus of EpiCept GmbH and limited to 7% of the total financing
    from tbg. To date, EpiCept GmbH has had no annual surplus. The
    Company considers the additional compensation element based on
    the surplus of EpiCept GmbH to be a derivative. The Company has
    assigned no value to the derivative at each reporting period as
    no surplus of EpiCept GmbH is anticipated over the term of the
    agreement.
F-19
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The loan is convertible into shares of the
    Company's common stock at any time by the holder at a
    conversion price of $7.07 per share. The Company can
    require conversion upon a defined triggering event (such as a
    sale of substantially all assets of the Company, a public
    offering of the Company's securities, a sale of more than
    50% in voting power of outstanding equity securities of the
    Company, a merger, etc.) at a calculated conversion price
    ranging between $2.02 and $7.07 determined based on the
    applicable triggering event's proceeds.
(C)
In March 1998, EpiCept GmbH entered into a term
    loan in the amount of
€
2.6 million
    with IKB Private Equity GmbH ("IKB"), guaranteed by
    the Company. The interest rate on the loan varies and was
    10.5% per annum from August 1, 2000 through
    March 31, 2001, 15% per annum through June 30,
    2003 and 20% per annum thereafter. The loan was amended in
    November 2002 by extending the maturity to December 31,
    2006 and incorporating a principal repayment schedule, which
    commenced April 30, 2004. The first 11 quarterly principal
    payments are
€
0.2 million
    (approximately $0.2 million as of September 30, 2004)
    and the final quarterly principal payment will be approximately
€
0.4 million
    (approximately $0.4 million as of September 30, 2004).
    The loan agreement provides for contingent interest of
    4% per annum of the principal balance, becoming due only
    upon the Company's realization of a profit, as defined in
    the agreement. The Company has not realized a profit through
    September 30, 2004. The Company values the contingent
    interest as a derivative using the fair value method in
    accordance with SFAS 133. Changes in the fair value of the
    contingent interest are recorded as an adjustment to interest
    expense. The fair value of the contingent interest was
    approximately $0.5, $0.3 and $0.6 million as of
    December 31, 2003 and 2002 and September 30, 2004,
    respectively.
(D)
In November 2002, the Company entered into
    convertible bridge loans with several of its stockholders, in an
    aggregate amount of up to $5.0 million. At
    December 31, 2003 and 2002, the Company had borrowings
    outstanding of $4.8 and $2.2 million, respectively. The
    convertible bridge loans bear interest at 8% per annum. The
    convertible bridge loans are convertible into the next round of
    preferred stock financing, and also have provisions for optional
    conversion into preferred stock or common stock. The conversion
    rate is equal to the lowest price per share paid by any
    purchaser in a financing of the next round of preferred stock,
    or at anti- dilutive conversion rates for optional conversion
    into preferred stock or common stock based upon the achievement
    of certain milestones. In addition, warrants to purchase
    preferred stock were issued to the lenders in connection with
    the convertible bridge loans (see Note 9). Such warrants
    were valued utilizing the Black-Scholes options pricing model
    and resulted in recording warrants at $3.6 million and a
    discount of $3.6 million to the convertible bridge loans.
    The discount is being accreted over the term of the loan. During
    the years ended December 31, 2003 and 2002 and the nine
    months ended September 30, 2004 and 2003, the Company
    recognized approximately $2.5, $0.2, $0.9 and $1.9 million,
    respectively, of non-cash interest expense related to the
    accretion of the debt discount. The term of the convertible
    bridge loans have been extended from April 30, 2004 until
    October 30, 2005.
Emerging Issues Task Force Issue
    No. 98-5
, Accounting for Convertible Securities with
    Beneficial Conversion Features or Contingently Adjustable
    Conversion Ratios,
as supplemented by EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible
    Instruments,
requires the Company to compute the beneficial
    conversion feature ("BCF"). The Company computed the
    BCF of the convertible bridge loan as of the commitment date and
    accounted for it when certain clinical trial results became
    available in 2003 that determined the appropriate conversion
    rate. The BCF is being amortized as additional interest expense
    through the debt's redemption date. For these convertible
    bridge loans, the BCF was recorded in April 2003 at
    approximately $1.2 million. For the year ended
    December 31, 2003 and the nine months ended
    September 30, 2004 and 2003, approximately $0.8, $0.4 and
    $0.5 million of the BCF was amortized and included as
    interest expense, respectively.
F-20
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Investors in the Company's common stock and
Preferred Stock hold all of the Company's notes, loans and
financings. For the years ended December 31, 2003, 2002 and
2001 and the nine months ended September 30, 2004 and 2003,
the interest expense related to these notes, loans and
financings was $1.2, $0.6, $0.5, $1.0 and $0.8 million,
respectively. The above loans are unsecured. Accretion of the
discount of the loans approximated $3.4, $0.2, $0.0, $1.3 and
$2.4 million for the years ended December 31, 2003,
2002 and 2001 and the nine months ended September 30, 2004
and 2003, respectively. Such amounts are included in interest
expense in the accompanying consolidated statements of
operations.
At December 31, 2003 and September 30,
2004, principal payments due on long-term debt are as follows:
As of
As of
December 31,
September 30,
Year Ending
2003
2004
2004
$
1,010,400
$
246,740
2005
5,860,400
5,836,960
2006
1,208,008
1,179,964
2007
4,520,332
4,415,466
Total
$
12,599,140
$
11,679,130
7.
Commitments
The Company leases facilities and certain
equipment under agreements through 2007 accounted for as
operating leases. The leases generally contain renewal options
and require the Company to pay all executory costs such as
maintenance and insurance. Rent expense was $0.3 million
for each of the years ended December 31, 2003, 2002 and
2001, and $0.2 and $0.2 million for the nine months ended
September 30, 2004 and 2003, respectively.
Future minimum rental payments under
non-cancelable operating leases as of December 31, 2003 and
September 30, 2004 are as follows:
As of
As of
December 31,
September 30,
Year Ending
2003
2004
2004
$
267,000
$
68,000
2005
222,000
222,000
2006
68,000
69,000
2007
40,000
41,000
$
597,000
$
400,000
The Company maintains a 401(k) plan covering
substantially all employees. The Company is not obligated to
make matching contributions to the plan. In 2003, the Company
made a contribution of approximately $35,000 to employees
participating in the 401(k) plan for plan year 2002 in order to
comply with the top-heavy provisions of Section 416 of the
Internal Revenue Code.
The Company is a party to a number of research,
consulting, and license agreements, which require the Company to
make payments to the other party to the agreement upon the other
party attaining certain milestones as defined in the agreements.
The Company paid approximately $1.5 million in 2003, the
majority of which was in connection with milestones relating to
preclinical and clinical trials and manufacturing. As of
December 31, 2003 the Company may be required to make
future milestone payments, totaling approximately
$4.1 million, under these agreements, of which
approximately $0.5 million is payable during 2004 and
approximately $0.4, $0.5, $1.2, and $0.5 million from 2005
through
F-21
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
2008, and $1.0 million thereafter. In 2004,
the Company entered into an additional clinical research
agreement totaling approximately $1.2 million payable from
2004 to 2006. The Company is also obligated to make future
royalty payments to two of its collaborators under existing
license agreements, one based on net sales of EpiCept NP-1 and
the other based on net sales of LidoPAIN SP, to the extent
revenues on such products are realized. Under its agreement with
Epitome Pharmaceuticals, the Company is obligated to pay a
maintenance fee annually that is equal to twice the fee paid in
the previous year so long as no commercial product sales have
occurred and the Company desires to maintain its rights under
the license agreement. A maintenance fee payment of $100,000 was
paid in October 2004.
8.
Preferred Stock and Stockholders'
    Deficit
The Company is currently authorized to issue two
classes of stock: common stock and preferred stock. Pursuant to
the Company's Amended Restated Certificate of Incorporation
(the "Certificate"), preferred stockholders and common
stockholders vote together as a class on all matters presented
to the stockholders. Preferred stockholders have the right to
the number of votes equal to the number of shares of common
stock into which each such share of preferred stock held by such
holder could be converted on the date for determination of
stockholders entitled to vote. Pursuant to the terms of a voting
agreement, the preferred stockholders also have the right,
separately from the common stockholders, to elect three
directors to the Company's Board of Directors. The voting
agreement also fixes the number of directors to be at least
seven but no more than eight directors.
Preferred Stock
The Company has issued Preferred Stock, as of
December 31, 2003, as follows:
Common
Shares
Shares
Liquidation
Shares as if
Preferred Stock Series
Authorized
Outstanding
Preference
Converted
A
3,422,620
3,315,160
$
6,696,623
4,521,690
B
3,440,069
3,106,736
9,320,208
3,584,695
C
12,769,573
8,839,573
26,518,719
10,199,507
19,632,262
15,261,469
$
42,535,550
18,305,892
As of September 30, 2004, the number of Series A
Preferred Shares Outstanding increased by 53,225 (as a result of
a warrant exercise in April 2004 — Note 9) to
3,368,385, the Liquidation Preference increased to $6,804,138
and the Common Shares as if Converted increased to 4,594,286.
There were no changes in the Preferred Stock Series B or C since
December 31, 2003.
A summary of the rights, preferences, and
privileges of the Preferred Stock is as follows:
Liquidation Preference
In the event of any liquidation, dissolution or
winding up of the affairs of the Company, whether voluntary or
involuntary, the holders of Series C redeemable convertible
preferred stock ("Series C Preferred") are
entitled to be ratably paid first out of the assets of the
Company available for distribution an amount equal to
$3.00 per share, plus all dividends accrued or declared
thereon but unpaid. The holders of Series B redeemable
convertible preferred stock ("Series B
Preferred") are entitled to be ratably paid next in an
amount equal to $3.00 per share, plus all dividends accrued
or declared thereon but unpaid. The holders of Series A
convertible preferred stock ("Series A
Preferred") are entitled then to be ratably paid in an
amount equal to $2.02 per share, plus all dividends accrued
or declared thereon but unpaid. No payment shall be made with
respect to any series of preferred stock unless and until full
payment has been made to the holders of the series of
convertible preferred stock with preferential rights of the
amounts that they are entitled to receive. After the payment in
full of the Series A Preferred, the
F-22
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
remaining assets and funds of the Company legally
available for distribution, if any, are distributable ratably
among the holders of common stock and the Preferred Stock in
proportion to the number of shares of common stock then held by
them or issuable to them upon conversion of the Preferred Stock
then held by them.
Conversion Rights
Each share of Preferred Stock is convertible,
without the payment of any additional consideration by the
holder thereof, at the option of the holder, subject to future
adjustments for stock splits, stock dividends, recapitalizations
or other similar events, as well as future dilutive issuances of
common stock. Future dilutive issuances of common stock or
Preferred Stock may result in additional beneficial conversion
features.
Each share of Preferred Stock will automatically
be converted into shares of common stock upon the closing of a
firm commitment for an underwritten public offering pursuant to
an effective registration statement covering the offer and the
sale of the common stock at an offering price per share of not
less than $1.00 and with gross proceeds to the Company of not
less than $15 million. The holders of Preferred Stock have
registration rights, under an amended and restated registration
rights agreement, which requires the Company, upon request, to
register 25% of the "Registrable Securities" as
defined in the registration rights agreement at any time after
the earlier of April 28, 2002 or the date that is six
months after the closing of the Company's first public
offering of securities. In addition, the holders of the
Preferred Stock are entitled to "piggy back"
registration rights in conjunction with a public offering of the
Company's common stock.
Dividends
The holders of Series B Preferred and
Series C Preferred are entitled to receive, when and as
declared by the Board of Directors, preferential cumulative
dividends in cash at the rate of 7% per annum of the
preferred stock's stated value of $1.50 per share,
subject to adjustment as defined in the Certificate. Such
dividends accrue from the original issue date, as defined, of
each of the Series B Preferred and Series C Preferred.
Dividends are payable to the holders of Series B Preferred
only to the extent that holders of Series C Preferred first
receive the dividend payment to which they are entitled. The
Company's Board of Directors has not declared any dividend
payment on any class of preferred stock or common stock.
Dividends are being recorded as an addition to the preferred
stock carrying value through the earliest redemption date (see
"Redemption" below). The total amount of accreted
dividends was approximately $4.1, $2.8 and $5.0 million as
of December 31, 2003 and 2002 and September 30, 2004,
respectively.
Redemption
Each holder of Series B Preferred and
Series C Preferred may request the Company to redeem for
cash such holder's preferred stock, ratably on each of
December 31, 2005 and 2006, or in any amount thereafter at
$1.50 per share plus all dividends accrued but unpaid, and
any and all other amounts owing with respect to the
holder's shares of such preferred stock. The redemption
price for each share of Series B Preferred or Series C
Preferred is subject to adjustment to take account of any stock
splits, stock dividend, combination of shares, or other similar
event.
Other
In 1997, the Company sold 2,330,218 and 163,489
Series A Preferred at $2.02 per share, respectively.
In April 2001, 8,448 of the Series A Preferred were
converted into 9,945 shares of common stock.
F-23
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
In December 2000, the Company received net
proceeds of approximately $12.3 million from a private
placement of 8,306,239 shares of Series C Preferred at
a price of $1.50 per share. Additionally, in January 2001,
the Company received additional proceeds of approximately
$1.0 million from a private placement of
633,334 shares of Series C Preferred at a price of
$1.50 per share. In August 2001, the Company purchased
100,000 shares of Series C Preferred at its cost of
approximately $0.2 million, which has been recorded as a
reduction in the carrying value of the Series C Preferred
for accounting purposes.
In connection with the convertible bridge loans
(see Note 6), the Company recorded BCF's related to
adjustments made to the conversion ratios of the Preferred
Stock. The adjustments to the conversion ratios entitled the
Preferred Stockholders to additional shares of common stock upon
conversion. The BCF approximated $3.3 million, increasing
the carrying value of the Preferred Stock with a related charge
to additional paid-in capital, to the extent available, and to
accumulated deficit in 2003.
Common Stock
In 1999, the Company repurchased
50,000 shares of its common stock at a cost of $75,000,
which has been recorded as treasury stock for accounting
purposes.
9.
Stock Options and Warrants
Stock Options
The EpiCept Corporation 1995 Stock Option Plan as
amended in 1997 and 1999 (the "Plan") provides for the
granting of incentive stock options and non-qualified stock
options to purchase the Company's stock through the year
2005. A total of 3.2 million shares of the Company's
common stock are authorized under the Plan. As of
December 31, 2003 and September 30, 2004, the number
of shares of common stock available for grant under the Plan is
947,770 shares. Options are to be granted and vest as
determined by the Board of Directors, generally over a 3-year
period.
F-24
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Stock option activity under the Plan is as
follows:
Weighted
Under
Average
Option
Exercise Price
Options outstanding at December 31, 2000
2,062,500
$
0.41
Options granted
883,333
$
0.30
Options canceled/expired
(572,442
)
$
0.34
Options exercised
(55,000
)
$
0.30
Options outstanding at December 31, 2001
2,318,391
$
0.39
Options granted
646,667
$
0.39
Options canceled/expired
(361,826
)
$
0.30
Options exercised
(28,591
)
$
0.30
Options outstanding at December 31, 2002
2,574,641
$
0.38
Options granted
45,000
$
0.50
Options canceled/expired
(556,015
)
$
0.46
Options exercised
(2,000
)
$
0.30
Options outstanding at December 31, 2003
2,061,626
$
0.36
Options exercised
(195,126
)
$
0.35
Options outstanding at September 30, 2004
1,866,500
$
0.37
Options exercisable at December 31, 2001
1,178,633
$
0.47
Options exercisable at December 31, 2002
1,550,805
$
0.41
Options exercisable at December 31, 2003
1,665,851
$
0.36
Options exercisable at September 30, 2004
1,775,287
$
0.36
The following table summarizes information about
stock options outstanding at December 31, 2003:
Options Outstanding
Options Exercisable
Options
Weighted-
Weighted-
Shares
Weighted-
Outstanding at
Average
Average
Exercisable at
Average
Range of
December 31,
Remaining
Exercise
December 31,
Exercise
Exercise Price
2003
Contractual Life
Price
2003
Price
$
0.30
1,576,626
7.2 years
$
0.30
1,317,430
$
0.30
0.50
340,000
8.5 years
0.50
203,421
0.50
0.75
145,000
5.5 years
0.75
145,000
0.75
2,061,626
0.36
1,665,851
0.36
F-25
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The following table summarizes information about
stock options outstanding at September 30, 2004:
Options Outstanding
Options Exercisable
Options
Weighted-
Weighted-
Shares
Weighted-
Outstanding at
Average
Average
Exercisable at
Average
Range of
September 30,
Remaining
Exercise
September 30,
Exercise
Exercise Price
2004
Contractual Life
Price
2004
Price
$
0.30
1,434,000
6.5 years
$
0.30
1,390,638
$
0.30
0.50
287,500
7.7 years
0.50
239,649
0.50
0.75
145,000
4.8 years
0.75
145,000
0.75
1,866,500
0.37
1,775,287
0.36
During 2003, the Company granted options to
employees to purchase an aggregate of 45,000 shares of
common stock at exercise prices that were considered to be below
the deemed fair value at the date of grant for financial
reporting purposes resulting in deferred stock compensation of
$45,000. Such amount is being amortized over the option vesting
period. The Company adjusted the deferred stock compensation by
$0.1 million for stock option forfeitures during the year.
During 2002, the Company granted options to
employees to purchase an aggregate of 646,667 shares of
common stock at exercise prices, which were considered to be
below the deemed fair value at the date of grant for financial
reporting purposes resulting in deferred stock compensation of
approximately $0.7 million. Such amount is being amortized
over the option vesting period. The Company adjusted the
deferred stock compensation by $0.1 million for stock
option forfeitures during the year.
During 2001, the Company granted options to
employees to purchase an aggregate of 883,333 shares of
common stock at exercise prices that were considered to be below
the deemed fair value at the date of grant for financial
reporting purposes resulting in deferred stock compensation of
$0.9 million. Such amount is being amortized to expense
over the option vesting periods. The Company adjusted the
deferred stock compensation by $0.5 million for stock
option forfeitures during the year.
Amortization of deferred stock compensation
approximated $0.6, $0.9, $0.8, $0.3 and $0.5 million for
the years ended December 31, 2003, 2002, and 2001 and for
the nine months ended September 30, 2004 and 2003.
The fair value of the Company's common stock
for options granted during 2003, 2002, and 2001 and for the
nine month period ended September 30, 2004, was
determined contemporaneously at the time of the grant by the
board of directors, with input from management. Prior to the
completion of the Adolor license agreement in July 2003, the
Company utilized the value paid for each of its series of
preferred stock as an estimate of the fair value of its common
stock. During the period October 1, 2003 through
September 30, 2004, the Company granted no options to
employees.
Warrants
In connection with the issuance of the
convertible bridge loans discussed in Note 6, the Company
issued warrants in 2003 and 2002 entitling the lenders, subject
to adjustments as defined, to purchase a number of shares equal
to 50% of the greatest principal amount outstanding under the
loan divided by the applicable exercise price as described in
the warrant. The warrants are exercisable into preferred stock
or common stock, at any time through November 2012 and possess
certain anti-dilutive rights, as defined in the warrant. In the
event of an initial public offering of the Company's common
stock, the warrants are exercisable into 15,445,858 shares
of common stock at an exercise price of $0.157 per share,
however, such warrants will expire on the first business day
following the date of the consummation of an initial public
offering. The fair value ascribed to the warrants was
$1.9 million in 2003 and $1.7 million in 2002 and was
determined utilizing the Black-Scholes option pricing model. The
following assumptions were used:
F-26
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
dividend yield of zero (0%) percent; risk free
interest rate of 4.53%; volatility of 101%; and expected life of
4 years.
The value of these warrants of $3.6 million
has been recorded as temporary equity as the warrants are
potentially exercisable into redeemable preferred stock.
The following table summarizes shares issuable
upon exercise of warrants outstanding at December 31, 2003:
Common
Issuance Date
Expiration Date
Shares Issuable Upon Exercise
Exercise Price
Shares Issuable
April 1997
April 2004
74,259 Series A Preferred
$
1.48
101,285
August 2000
August 2010
333,333 Series B Preferred
$
1.30
384,615
November 2000
November 2012
750,000 Series C Preferred
$
1.30
865,384
November 2002
November 2012
24,250,000 Common
$
0.10
24,250,000
Total
25,601,284
As of September 30, 2004, there were no
Series A Preferred warrants outstanding, and the
Series B Preferred, Series C Preferred and Common
warrants remained the same.
The number of shares issuable upon the exercise
of the warrants is subject to adjustment to take account of any
stock splits, stock dividend, combination of shares, or other
similar event. In April 2002, warrants to
purchase 24,753 shares of Series A Preferred
expired unexercised. In April 2004, 74,259 warrants issued in
April 1997 were exercised via a net share issuance of
53,225 shares of Series A Preferred. A BCF charge of
$0.2 million was recorded to reflect a dividend deemed to
be paid at the exercise date.
Third Party Stock-Based
    Compensation
During 2002 and 2001, the Company granted options
to purchase the Company's common stock to third party
consultants in connection with service agreements. Compensation
expense relating to third party stock-based compensation was
approximately $0.2 million, $47,000, $0.2 million
$50,000 and $27,000 for the years ended December 31, 2003,
2002 and 2001 and the nine months ended September 30, 2004
and 2003, respectively. The Company values these options
utilizing the Black-Scholes option pricing model and remeasures
them during the vesting period.
10.
Income Taxes
The Company has deferred tax assets of $16.9,
$13.6 and $18.5 million as of December 31, 2003 and
2002 and September 30, 2004, respectively, for items
including: net operating losses, stock-based compensation,
deferred revenue, patent costs and accrued liabilities. As of
December 31, 2003 and 2002, the Company has federal, state,
and foreign net operating loss carryforwards of approximately
$44.7 and $48.0 million, respectively, available to reduce
future taxable income. The Company's federal and state net
operating losses expire in various intervals through 2023. In
the event of certain ownership changes, the Company's
ability to utilize the tax benefits from net operating loss
carryforwards could be substantially limited. The Company has
provided a valuation allowance for the full amount of its net
deferred tax assets since the realization of any future benefits
from deductible temporary differences and net operating loss
carryforwards cannot be sufficiently assured at
December 31, 2003 and 2002 and September 30, 2004.
The valuation allowance at December 31, 2003
and 2002 and September 30, 2004 was approximately $16.9,
$13.6 and $18.5 million, respectively. For the years ended
December 31, 2003, 2002 and 2001 and the nine months ended
September 30, 2004, the valuation allowance increased by
$3.3, $3.6, $2.2 and $1.6 million, respectively.
F-27
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
A reconciliation of the federal statutory tax
rate and the effective tax rates for the years ended
December 31, 2003, 2002, and 2001 and the nine months ended
September 30, 2004 is as follows:
For the Year Ended
Nine Months
December 31,
Ended
September 30,
2003
2002
2001
2004
Statutory tax rate
(34.0
)%
(34.0
)%
(34.0
)%
(34.0
)%
State income taxes, net of federal benefit
(0.7
)
(1.5
)
(2.5
)
—
Nondeductible expenses
2.9
—
—
3.0
Change in valuation allowance
31.1
33.2
32.7
31.0
Effective tax rate
(0.7
)%
(2.3
)%
(3.8
)%
0.0
%
The principal differences between the
U.S. statutory tax benefit rate of 34% and the
Company's effective tax benefit rates of 0.7%, 2.3%, 3.8%
and 0.0% for the years ended December 31, 2003, 2002 and
2001 and for the nine month period ended September 30, 2004
are primarily due to the state income tax benefit from the sale
of state net operating loss carryforwards and the Company not
recognizing the benefit of its net operating loss carryforwards
incurred during the year.
Federal income tax expense for the year ended
December 31, 2003 is approximately $31,000. Federal income
tax expense is comprised of current alternative minimum tax.
State income benefit for the year ended December 31, 2003
is $(105,000). The state income tax benefit is comprised of
current state income tax expense of $0.1 million offset by
a state income tax benefit resulting from the sale of some state
NOLs of $0.2 million.
During the years ended December 31, 2003 and
2002, the Company sold a portion of its state NOLs resulting in
a state tax benefit of approximately $0.3 million in each
of those years. The sales of cumulative net operating losses are
a result of New Jersey state law enacted January 1, 1999
allowing emerging technology and biotechnology companies to
transfer or "sell" their unused New Jersey net
operating loss carryforwards and New Jersey research and
development tax credits to any profitable New Jersey company
qualified to purchase them for cash. The Company received
approval from the state of New Jersey to sell NOLs in November
2003 and November 2002 and entered into a contract with a third
party to sell the NOLs at a discount for approximately
$0.2 million in each December of the year. Accordingly, the
valuation allowance was reduced by the gross amount of
$0.3 million each as of December 31, 2003 and
December 31, 2002.
F-28
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The principal components of deferred tax assets,
liabilities and the valuation allowance are as follows:
December 31
September 30,
2003
2002
2004
Deferred tax assets:
Patent costs
$
623,000
$
703,000
$
543,000
Stock-based compensation
1,321,000
1,014,000
1,464,000
Accrued liabilities
818,000
649,000
564,000
Amortization of discount
167,000
(35,000
)
—
Deferred revenue
3,103,000
—
2,528,000
Other assets
64,000
28,000
58,000
Net operating loss carryforwards
10,833,000
11,257,000
13,391,000
Total deferred tax assets
16,929,000
13,616,000
18,548,000
Valuation allowance
(16,929,000
)
(13,616,000
)
(18,548,000
)
Net deferred tax asset
$
—
$
—
$
—
11.
Restatement of 2001 Financial
    Statements
Subsequent to the issuance of the Company's
2001 consolidated financial statements, the Company determined
such statements contained errors relating to the accounting
treatment that had been applied to patents, redeemable preferred
stock, dividends, beneficial conversion features (BCF),
contingent interest and other individually insignificant items.
The Company had previously capitalized costs of
acquiring patent and trademark rights for drug candidates and
technology that had not received marketing approval from the
United States Food and Drug Administration or similar foreign
governmental authority. Such costs were being amortized to
general and administrative expense. The Company has subsequently
determined that such costs should have been expensed as research
and development as incurred, as the purchases were made for
research and development efforts and there is no assurance that
a product based on the acquired rights will ever be developed.
The Company did not record and accrete the
dividends on the Series B Preferred and Series C
Preferred in 2000 or 2001 of $0.3 and $1.3 million,
respectively. The Company did not record a BCF of
$1.0 million on the Series A convertible preferred
stock, which resulted from an adjustment to the conversion price
in connection with the issuance of the Series B Preferred
and Series C Preferred stock. The Company did not record a
BCF of $0.9 million related to the bridge financing in 2000
and incorrectly calculated the value of its warrants issued with
such financing at fair value of $0.9 million. Such warrants
were initially valued at $0.4 million. In addition, the
Company incorrectly stated certain accrued items including
$146,467 of interest. As a result, the accompanying 2001
consolidated financial statements have been restated from the
amounts previously reported to correct the accounting for these
items. The following is a summary of the significant effects of
the restatement:
As Previously
Reported
As Restated
Research and development expense
$
3,950,215
$
4,085,258
General and administrative expense
3,486,415
3,393,797
Interest expense
538,842
488,930
Net loss
(7,022,739
)
(7,015,252
)
F-29
EPICEPT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The following summarizes the effects of the
restatement by major items affecting the net loss for 2001:
Net loss, as reported
$
(7,022,739
)
Adjustments —
Expensing of patents and reversal of amortization
(49,220
)
Interest expense
49,912
Other
6,795
Net loss, as revised
$
(7,015,252
)
12.
Subsequent events
On November 10, 2004, the Company's
Board of Directors approved the following actions:
Employment Agreements
The Company's Board of Directors ratified
the employment agreements between the Company and its chief
executive officer and chief financial officer dated as of
October 28, 2004. The employment agreements cover an
initial term through December 31, 2006, but may be extended
for unlimited additional one-year periods, and provide for base
salary, discretionary compensation, stock option awards, and
reimbursement of reasonable expenses in connection with services
performed under the employment agreements. The agreements also
compensate such officers in the event of their death or
disability, termination without cause, or termination within one
year of an initial public offering or a change of control, as
defined in the respective employment agreements.
Stock Options
The Company's Board of Directors approved
the establishment of a stock option pool under the
Company's 2004 Stock Option Plan (which will be implemented
upon consummation of the proposed initial public offering),
initially equal to 2% of the fully-diluted outstanding common
stock of the Company immediately following the consummation of
the Company's proposed initial public offering. The options
in the pool vest within four years of the date of the applicable
grant and their exercise price is equal to the initial offering
price. Options to employees under the pool were approved for
issuance upon successful completion of the initial public
offering.
The Company's Board of Directors approved
the grant of stock options under the 1995 Stock Option Plan to
two of the Company's employees in exchange for such
employees joining the Company. The options enable such employees
to purchase 525,000 shares of the Company's
Common Stock in the aggregate and will be granted at the time of
the Company's initial public offering. The exercise price
of the grants is equal to the initial public offering price. One
half of the options will vest on the grant date and the
remainder will vest ratably on a monthly basis over a two-year
period.
Compensation Plan for Board of
    Directors
A compensation plan for directors was approved by
the Board of Directors. This plan contemplates the payment of
annual retainers, meeting fees and the granting of stock options
and will be effective upon the consummation of the initial
public offering.
F-30
Shares
Common Stock
PROSPECTUS
,
2005
Wachovia Securities
C.E. Unterberg,
Towbin
Until                     ,
2005 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This delivery is in addition to the dealer's
obligation to deliver a prospectus when acting as an underwriter
and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN
PROSPECTUS
Item 13.
Other Expenses of Issuance and
    Distribution.
The following table sets forth the costs and
expenses, other than the underwriting discounts, payable by the
Registrant in connection with the sale of the securities being
registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and The Nasdaq National
Market listing fee.
SEC Registration Fee
$
8,827.50
NASD Filing Fee
8,000.00
Nasdaq National Market Listing Fee
Printing costs
Legal fees and expenses
Accounting fees and expenses
Blue Sky fees and expenses
Transfer Agent and Registrar fees
Miscellaneous
Total
$
Item 14.
Indemnification of Directors and
    Officers.
Section 145 of the Delaware General
Corporation Law ("Section 145") permits
indemnification of officers and directors of the Company under
certain conditions and subject to certain limitations.
Section 145 also provides that a corporation has the power
to maintain insurance on behalf of its officers and directors
against any liability asserted against such person and incurred
by him or her in such capacity, or arising out of his or her
status as such, whether or not the corporation would have the
power to indemnify him or her against such liability under the
provisions of Section 145.
Article           ,
Section           ,
of the Registrant's Bylaws provides for mandatory
indemnification of its directors and officers and permissible
indemnification of employees and other agents to the maximum
extent not prohibited by the Delaware General Corporation Law.
The rights to indemnity thereunder continue as to a person who
has ceased to be a director, officer, employee or agent and
inure to the benefit of the heirs, executors and administrators
of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal,
administrative or investigative action, suit or proceeding by
reason of the fact that he or she is or was a director or
officer of the Registrant (or was serving at the
Registrant's request as a director or officer of another
corporation) shall be paid by the Registrant in advance of the
final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by
the Registrant as authorized by the relevant section of the
Delaware General Corporation Law.
As permitted by Section 102(b)(7) of the
Delaware General Corporation Law, the Registrant's
Certificate of Incorporation provides that, pursuant to Delaware
law, its directors shall not be personally liable for monetary
damages for breach of the directors' fiduciary duty as
directors to the Registrant and its stockholders. This provision
in the Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability
for breach of the director's duty of loyalty to the
Registrant for acts or omission not in good faith or involving
international misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director,
and for payment of dividends or approval of Stock repurchases or
redemptions that are unlawful under Section 174 of the
Delaware General Corporation Law. The provision
II-1
also does not affect a director's
responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
The Registrant has entered into indemnification
agreements with each of its directors and executive officers.
Generally, the indemnification agreements attempt to provide the
maximum protection permitted by Delaware law as it may be
amended from time to time. Moreover, the indemnification
agreements provide for certain additional indemnification. Under
such additional indemnification provisions, however, an
individual will not receive indemnification for judgments,
settlements or expenses if he or she is found liable to the
Registrant (except to the extent the court determines he or she
is fairly and reasonably entitled to indemnity for expenses),
for settlements not approved by the Registrant or for
settlements and expenses if the settlement is not approved by
the court. The indemnification agreements provide for the
Registrant to advance to the individual any and all reasonable
expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding.
In order to receive an advance of expenses, the individual must
submit to the Registrant copies of invoices presented to him or
her for such expenses. Also, the individual must repay such
advances upon a final judicial decision that he or she is not
entitled to indemnification.
The Registrant intends to enter into additional
indemnification agreements with each of its directors and
executive officers to effectuate these indemnity provisions and
to purchase directors' and officers' liability
insurance.
In addition to the foregoing, the Underwriting
Agreement contains certain provisions by which the Underwriters
have agreed to indemnify the Registrant, each person, if any,
who controls the Registrant within the meaning of
Section 15 of the Securities Act, each director of the
Registrant, each officer of the Registrant who signs the
Registration Statement, with respect to information furnished in
writing by or on behalf of the Underwriters for use in the
Registration Statement.
At present, there is no pending litigation or
proceeding involving a director, officer, employee or other
agent of the Registrant in which indemnification is being
sought, nor is the Registrant aware of any threatened litigation
that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
Item 15.
Recent Sales of Unregistered
    Securities.
Since December 31, 2000, we have sold and
issued the following securities:
Preferred Stock and Debt Financings
(1) In December 2000, we issued and sold
8,306,239 shares of our Series C Redeemable
Convertible Preferred Stock at a price of $1.50 per share
for net proceeds of approximately $12,315,000.
(2) In January 2000, we repaid a bank note
and interest owed to IKB with the issuance of
1,866,403 shares of Series B Redeemable Convertible
Preferred Stock in an amount totaling $2,799,605.
(3) In December 2000, we also repaid various
convertible bridge loans owed to TVM III Limited
Partnership, Alpinvest International B.V., and Private Equity US
Direct Finance, a portion of a note due to Pharmed Holding GmbH,
an affiliate and accrued interest with the issuance of
2,539,573 share of Series C Redeemable Convertible
Preferred Stock in an amount totaling $3,089,359.
(4) In 2001, we granted options to executive
officers and directors to purchase an aggregate of 428,333
shares of our common stock under our 1995 Stock Option Plan at a
weighted average exercise price of $0.30 per share.
(5) In January 2001, we issued and sold
633,334 shares of Series C Redeemable Convertible
Preferred Stock at a price of $1.50 per share for net
proceeds of $950,000.
(6) In April 2001, the 8.59% minority
interest our subsidiary, EpiCept GmbH was converted into
829,901 shares of our Series A Convertible Preferred
Stock.
(7) In April 2001, we issued
9,945 shares of common stock in connection with the
conversion of 8,448 shares of our Series A Convertible
Preferred Stock.
II-2
(8) In 2002, we granted options to executive
officers and directors to purchase an aggregate of 566,667
shares of our common stock under our 1995 Stock Option Plan at a
weighted average exercise price of $0.30 per share.
(9) In November 2002, we entered into a
convertible bridge loan arrangement in an aggregate amount of up
to $5,000,000. At December 31, 2003, we had received
$4,850,000. The loan bears interest at 8% per annum and
matures on April 30, 2005. The loan is convertible into the
next round of preferred stock, and also has provisions for
optional conversion preferred stock or common stock. Such
conversion shall occur at the lowest price per share by any
purchaser in the qualifying financing of the next round of
preferred stock, or at anti-dilutive conversion rates for
optional conversion preferred stock or common stock based upon
the results of certain milestones.
(10) In connection with the issuance of the
convertible bridge loan, in November 2002, we also issued
warrants to purchase 24,250,000 shares of common stock entitling
the holders of the convertible bridge loan, subject to
adjustments as defined, to purchase a number of shares equal to
50% of the greatest principal amount that has been outstanding
under the note divided by the applicable exercise price as
described in the agreement. The warrants are convertible into
the next round of preferred stock, optional conversion preferred
stock or common stock. The warrants are exercisable at any time
through November 2012 and possess certain anti-dilutive rights
as defined in the agreement.
(11) In 2003, we granted options to
executive officers and directors to purchase an aggregate of
45,000 shares of our common stock under our 1995 Stock
Option Plan at a weighted average exercise price of $0.50 per
share.
The sales of the above securities were deemed to
be exempt from registration in reliance on Section 4(2) of
the Securities Act or Regulation D or Regulation S
promulgated thereunder as transactions by an issuer not
involving any public offering. All recipients were either
accredited, sophisticated investors or non-U.S. persons, as
those terms are defined in the Securities Act and the
regulations promulgated thereunder.. The recipients of
securities in each such transaction represented their intention
to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof
and appropriate legends were affixed to the share certificates
and other instruments issued in such transactions. All
recipients either received adequate information about us or had
access, through employment or other relationships, to such
information.
Stock Options and Stock Purchase
Rights
(1) During 2002, we granted options to
employees to purchase an aggregate of 80,000 shares of our
common stock under our 1995 Stock Option Plan at a weighted
average exercise price of $0.39 per share. In 2002, 28,591
stock options were exercised.
(2) During 2001, we granted options to
employees to purchase an aggregate of 455,000 shares of our
common stock under our 1995 Stock Option Plan at a weighted
average exercise price of $0.30 per share. In 2001, 55,000
stock options were exercised.
The sales of the above securities were deemed to
be exempt from registration in reliance on Rule 701
promulgated under Section 3(b) under the Securities Act as
transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation.
II-3
Item 16.
Exhibits and Financial Statement
    Schedules
Exhibit
Number
Description
*1.1
Form of Underwriting Agreement.
3.1
Amended and Restated Certificate of Incorporation
    of the Registrant.
3.2
Form of Certificate of Incorporation of the
    Registrant to be in effect after the closing of the offering
    made under this Registration Statement.
3.3
Second Amended and Restated Bylaws of the
    Registrant.
3.4
Form of Bylaws of the Registrant to be in effect
    after the closing of the offering made under this Registration
    Statement.
*4.1
Specimen Common Stock Certificate.
4.2
First Amendment to the Amended and Restated
    Registration Rights Agreement, dated as of December 28,
    2000, among the Series A Investors, the Series B
    Investors, the Series C Investors, the Founders and the
    Registrant.
4.3
Form of Third Amended and Restated Convertible
    Term Note.
4.4
Form of Third Amended and Restated Stock Purchase
    Warrant.
*4.5
Warrant for the purchase of Series C
    Convertible Preferred Stock, dated November 30, 2000,
    issued by EpiCept Corporation to Private Equity US Direct
    Finance.
*4.6
Warrant for the purchase of Series B
    Convertible Preferred Stock, dated August 14, 2000, issued
    by EpiCept Corporation to Alpinvest International B.V.
*4.7
Warrant for the purchase of Series B
    Convertible Preferred Stock, dated August 9, 2000, issued
    by EpiCept Corporation to TVM Techno Ventures Enterprises
    No. III Limited Partnership.
*5.1
Opinion of Weil, Gotshal & Manges LLP.
*10.1
Form of Indemnification Agreement between the
    Registrant and each of its directors and officers.
10.2
1995 Stock Option Plan.
*10.3
2005 Equity Incentive Plan.
*10.4
2005 Employee Stock Purchase Plan.
10.5
Employment Agreement, dated as of
    October 28, 2004, between the Registrant and John V. Talley.
10.6
Employment Agreement, dated as of
    October 28, 2004, between the Registrant and Robert Cook.
10.7(1)
License Agreement, dated as of July 23,
    2003, between Adolor Corporation and the Registrant.
10.8
Amendment No. 1 to License Agreement, dated
    as of October 21, 2004, between Adolor Corporation and the
    Registrant.
10.9(1)
License Agreement, dated as of December 18,
    2003, between Endo Pharmaceuticals Inc. and the Registrant.
10.10(1
)
Royalty Agreement, dated as of July 16,
    2003, between the Registrant and R. Douglas Cassel, M.D.
10.11(1
)
Sublicense Agreement, dated as of August 27,
    1999, between Epitome Pharmaceuticals Limited and American
    Pharmed Labs, Inc.
10.12
Lease Agreement between Connecticut General Life
    Insurance Company, as Landlord, and American Pharmed Labs, Inc.,
    as Tenant, dated July 31, 1997.
*10.13
Cooperation Agreement between APL American
    Pharmed Labs, Inc. and Technologie-Beteiligungs-Gesellschaft
    mbH, dated August 1997.
*10.14
Interest Agreement between Pharmed Labs GmbH and
    Technologie-Beteiligungs-Gesellschaft mbH, dated August 1997.
*10.15
Participation Agreement among Pharmed Labs GmbH,
    American Pharmed Labs, Inc. and
    Technologie-Beteiligungs-Gesellschaft mbH, dated
    February 17, 1998.
II-4
Exhibit
Number
Description
*10.16
Letter Agreement, dated March 31, 1998,
    between Pharmed Labs GmbH and IKB Nachrangkapital GmbH.
*10.17
Limited Guaranty, dated April 27, 1998, by
    American Pharmed Labs, Inc. for the benefit of IKB
    Nachrangkaptial GmbH.
*11.1
Statement Regarding Computation of Per Share
    Earnings.
16.1
Letter Regarding Change in Certifying Accountant.
21.1
List of Subsidiaries.
23.1
Consent of Deloitte & Touche LLP.
*23.2
Consent of Weil, Gotshal & Manges LLP
    (included in Exhibit 5.1).
24.1
Power of Attorney (included on signature page).
*
To be filed by amendment.
†
Previously filed.
(1)
Pursuant to a request for confidential treatment,
    portions of the Exhibit have been redacted from the publicly
    filed document and have been furnished separately to the SEC as
    required by Rule 406 under the Securities Act.
(b) Financial Statement Schedules
Schedules not listed above have been omitted
because the information required to be set forth therein is not
applicable or is shown in the financial statements or notes
thereto.
Item 17.
Undertakings.
The undersigned registrant hereby undertakes to
provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any
    liability under the Securities Act of 1933, the information
    omitted from the form of prospectus filed as part of this
    registration statement in reliance upon Rule 430A and
    contained in a form of prospectus filed by the registrant
    pursuant to Rule 424(b)(1) or (4) or 497(h) under the
    Securities Act shall be deemed to be part of this registration
    statement as of the time it was declared effective.
(2) For the purpose of determining any
    liability under the Securities Act of 1933, each post-effective
    amendment that contains a form of prospectus shall be deemed to
    be a new registration statement relating to the securities
    offered therein, and the offering of such securities at that
    time shall be deemed to be the initial bona fide offering
    thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities
Act, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Englewood Cliffs, state of New
Jersey, on January 10, 2005.
EPICEPT CORPORATION
By:
/s/ JOHN V. TALLEY
John V. Talley
President and Chief Executive
    Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below hereby constitutes and
appoints John V. Talley and Robert W. Cook and each of them
singly, as true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities to sign the
Registration Statement filed herewith and any or all amendments
to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to
Rule 462 and otherwise), and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission granting unto said
attorneys-in-fact and agents the full power and authority to do
and perform each and every act and thing requisite and necessary
to be done in and about the foregoing, as to all intents and
purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his substitute, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities
Act, this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
Signature
Title
Date
/s/ JOHN V. TALLEY
John V. Talley
Director, President and Chief Executive Officer
    (Principal Executive Officer)
January 10, 2005
/s/ ROBERT W. COOK
Robert W. Cook
Chief Financial Officer (Principal Financial and
    Accounting Officer)
January 10, 2005
/s/ ROBERT G. SAVAGE
Robert G. Savage
Director
January 10, 2005
/s/ GERT CASPRITZ
Gert Caspritz
Director
January 10, 2005
/s/ ERNST-GUNTER AFTING
Ernst-Gunter Afting
Director
January 10, 2005
/s/ MARK DOCHERTY
Mark Docherty
Director
January 10, 2005
II-6
Signature
Title
Date
/s/ REINER PONSCHAB
Reiner Ponschab
Director
January 10, 2005
/s/ THORLEF SPICKSCHEN
Thorlef Spickschen
Director
January 10, 2005
/s/ GUY C. JACKSON
Guy C. Jackson
Director
January 10, 2005
II-7
EXHIBIT INDEX
Exhibit
Number
Description
*1.1
Form of Underwriting Agreement.
3.1
Amended and Restated Certificate of Incorporation
    of the Registrant.
3.2
Form of Certificate of Incorporation of the
    Registrant to be in effect after the closing of the offering
    made under this Registration Statement.
3.3
Second Amended and Restated Bylaws of the
    Registrant.
3.4
Form of Bylaws of the Registrant to be in effect
    after the closing of the offering made under this Registration
    Statement.
*4.1
Specimen Common Stock Certificate.
4.2
First Amendment to the Amended and Restated
    Registration Rights Agreement, dated as of December 28,
    2000, among the Series A Investors, the Series B
    Investors, the Series C Investors, the Founders and the
    Registrant.
4.3
Form of Third Amended and Restated Convertible
    Term Note.
4.4
Form of Third Amended and Restated Stock Purchase
    Warrant.
*4.5
Warrant for the purchase of Series C
    Convertible Preferred Stock, dated November 30, 2000,
    issued by EpiCept Corporation to Private Equity US Direct
    Finance.
*4.6
Warrant for the purchase of Series B
    Convertible Preferred Stock, dated August 14, 2000, issued
    by EpiCept Corporation to Alpinvest International B.V.
*4.7
Warrant for the purchase of Series B
    Convertible Preferred Stock, dated August 9, 2000, issued
    by EpiCept Corporation to TVM Techno Ventures Enterprises
    No. III Limited Partnership.
*5.1
Opinion of Weil, Gotshal & Manges LLP.
*10.1
Form of Indemnification Agreement between the
    Registrant and each of its directors and officers.
10.2
1995 Stock Option Plan.
*10.3
2005 Equity Incentive Plan.
*10.4
2005 Employee Stock Purchase Plan.
10.5
Employment Agreement, dated as of
    October 28, 2004, between the Registrant and John V. Talley.
10.6
Employment Agreement, dated as of
    October 28, 2004, between the Registrant and Robert Cook.
10.7(1)
License Agreement, dated as of July 23,
    2003, between Adolor Corporation and the Registrant.
10.8
Amendment No. 1 to License Agreement, dated
    as of October 21, 2004, between Adolor Corporation and the
    Registrant.
10.9(1)
License Agreement, dated as of December 18,
    2003, between Endo Pharmaceuticals Inc. and the Registrant.
10.10(1
)
Royalty Agreement, dated as of July 16,
    2003, between the Registrant and R. Douglas Cassel, M.D.
10.11(1
)
Sublicense Agreement, dated as of August 27,
    1999, between Epitome Pharmaceuticals Limited and American
    Pharmed Labs, Inc.
10.12
Lease Agreement between Connecticut General Life
    Insurance Company, as Landlord, and American Pharmed Labs, Inc.,
    as Tenant, dated July 31, 1997.
*10.13
Cooperation Agreement between APL American
    Pharmed Labs, Inc. and Technologie-Beteiligungs-Gesellschaft
    mbH, dated August 1997.
*10.14
Interest Agreement between Pharmed Labs GmbH and
    Technologie-Beteiligungs-Gesellschaft mbH, dated August 1997.
*10.15
Participation Agreement among Pharmed Labs GmbH,
    American Pharmed Labs, Inc. and
    Technologie-Beteiligungs-Gesellschaft mbH, dated
    February 17, 1998.
Exhibit
Number
Description
*10.16
Letter Agreement, dated March 31, 1998,
    between Pharmed Labs GmbH and IKB Nachrangkapital GmbH.
*10.17
Limited Guaranty, dated April 27, 1998, by
    American Pharmed Labs, Inc. for the benefit of IKB
    Nachrangkaptial GmbH.
*11.1
Statement Regarding Computation of Per Share
    Earnings.
16.1
Letter Regarding Change in Certifying Accountant.
21.1
List of Subsidiaries.
23.1
Consent of Deloitte & Touche LLP.
*23.2
Consent of Weil, Gotshal & Manges LLP
    (included in Exhibit 5.1).
24.1
Power of Attorney (included on signature page).
*
To be filed by amendment.
†
Previously filed.
(1)
Pursuant to a request for confidential treatment,
    portions of the Exhibit have been redacted from the publicly
    filed document and have been furnished separately to the SEC as
    required by Rule 406 under the Securities Act.