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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 November&nbsp;24, 2004</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;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B>
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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 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">AlgoRx Pharmaceuticals, Inc.</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="34%"><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="27%"><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">943392501</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 No.)</FONT></I></TD>
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<P align="center">
<B><FONT size="2">500 Plaza Drive, 2nd&nbsp;Floor</FONT></B>

<DIV align="center">
<B><FONT size="2">Secaucus, New Jersey 07094-3619</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(201)&nbsp;325-6900</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>

<P align="center">
<B><FONT size="2">Ronald M.
Burch,&nbsp;M.D.,&nbsp;Ph.D.</FONT></B>

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

<DIV align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">500 Plaza Drive, 2nd&nbsp;Floor</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">Secaucus, New Jersey 07094-3619</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(201)&nbsp;325-6900</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">Stephen M. Davis, Esq.<BR>
    Peter DiIorio, Esq.<BR>
    Heller Ehrman White&nbsp;&#38; McAuliffe LLP<BR>
    120 West 45th Street<BR>
    New York, New York 10036<BR>
    Phone: (212)&nbsp;832-8300<BR>
    Fax: (212)&nbsp;763-7600</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <B><FONT size="2">Paul M. Kinsella,&nbsp;Esq.<BR>
    Paul Laurino,&nbsp;Esq.<BR>
    Ropes&nbsp;&#38; Gray LLP<BR>
    One International Place<BR>
    Boston, MA 02110-2624<BR>
    Phone: (617) 951-7000<BR>
    Fax: (617) 951-7050</FONT></B></TD>
</TR>

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

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule&nbsp;415 under the Securities Act of 1933, check the
following
box:&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

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

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
this Form is a post-effective amendment filed pursuant to
Rule&nbsp;462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering:&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
this Form is a post-effective amendment filed pursuant to
Rule&nbsp;462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering:&nbsp;&nbsp;&nbsp;&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

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

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

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<TR>
    <TD width="41%"><FONT size="2">&nbsp;</FONT></TD>
    <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="28%"><FONT size="2">&nbsp;</FONT></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 colspan="5"></TD>
</TR>

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Proposed Maximum</FONT></B></TD>
    <TD></TD>
    <TD></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">Aggregate</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>

<TR>
    <TD colspan="5" align="center" nowrap><HR size="1" noshade></TD>
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<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common Stock, $0.001&nbsp;par value per share
    </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">$9,503
    </FONT></TD>
</TR>

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

</TR>

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

</TR>

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<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 calculating
    the registration fee pursuant to Rule&nbsp;457(o) of the
    Securities Act of 1933, as amended.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>The
Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section&nbsp;8(a)
of the Securities Act 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.</B>
</FONT>

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</DIV>

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<TABLE width="100%" border="1" cellpadding="5"><TR><TD>
<FONT size="2" color="#E8112D">The information in this
prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.</FONT><FONT size="2"> <BR>
</FONT>
</TD></TR></TABLE>

<P align="center">
<FONT size="2" color="#E8112D">SUBJECT TO COMPLETION, DATED
NOVEMBER&nbsp;24, 2004
</FONT>

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

<P align="center">
<IMG src="y52134b5213400.gif" alt="(ALGORX LOGO)">

<P align="center">
<FONT size="4">Common Stock
</FONT>

<P align="center">
<HR size="1" width="22%" align="center" noshade>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to this offering, there has been no public
market for our common stock. The initial public offering price
of our common stock is expected to be between
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. We have applied for quotation of our common stock on the
Nasdaq National Market under the symbol &#147;AGRX&#148;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriters have an option to 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
of common stock to cover over-allotments of shares.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Investing in our common stock involves risks.
See &#147;Risk Factors&#148; beginning on page&nbsp;7.</FONT></B>

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<TR>
    <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="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>
    <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>
    <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="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Underwriting</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">Price to</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Discounts and</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Proceeds to</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Public</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Commissions</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">AlgoRx</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Per Share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD 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">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top"><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">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;&nbsp;&nbsp;,
2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Neither the Securities and Exchange Commission
nor any state securities commission 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>

<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"><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT><B><FONT size="5">Credit Suisse First Boston</FONT></B></TD>
    <TD align="right"><B><FONT size="5">Citigroup&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B></TD>
</TR>

</TABLE>

<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">Piper Jaffray</FONT></B></TD>
    <TD align="right"><B><FONT size="4">Lazard</FONT></B></TD>
</TR>

</TABLE>

<P align="center">
<FONT size="2">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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<P align="center">
<B><FONT size="2">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">PROSPECTUS SUMMARY
    </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">SUMMARY FINANCIAL DATA
    </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</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">RISK FACTORS
    </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</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">FORWARD-LOOKING 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">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">USE OF PROCEEDS
    </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">DIVIDEND POLICY
    </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">CAPITALIZATION
    </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">DILUTION
    </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">27</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">SELECTED FINANCIAL DATA
    </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">29</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">MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF 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">31</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">BUSINESS
    </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</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">MANAGEMENT
    </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">65</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">CERTAIN RELATIONSHIPS AND RELATED PARTY
    TRANSACTIONS
    </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">72</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">PRINCIPAL STOCKHOLDERS
    </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</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">UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO
    NON-UNITED STATES HOLDERS
    </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">SHARES ELIGIBLE FOR FUTURE SALE
    </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">83</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
    </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">NOTICE TO CANADIAN RESIDENTS
    </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">88</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">VALIDITY OF SECURITIES
    </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">89</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">EXPERTS
    </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">89</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">WHERE YOU CAN FIND MORE INFORMATION
    </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">89</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">INDEX TO 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-1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center">
<HR size="1" width="26%" align="center" noshade>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2"> <B>You should rely only on the information
contained in this document or to which we have referred you. We
have not authorized anyone to provide you with information that
is different. This document may only be used where it is legal
to sell these securities. The information in this document may
only be accurate on the date of this document.</B>
</FONT>

<P align="center">
<B><FONT size="2">Dealer Prospectus Delivery
Obligation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Until &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(25&nbsp;days
after commencement of the offering), all dealers that effect
transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This
is in addition to the dealer&#146;s obligation to deliver a
prospectus when acting as an underwriter and with respect to
unsold allotments or subscriptions.</FONT></B>

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

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

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">You should read the following summary together
with the entire prospectus, including the more detailed
information in our financial statements and related notes
appearing in the back of this prospectus. You should carefully
consider, among other things, the matters discussed in
&#147;Risk Factors.&#148; References in this prospectus to
&#147;we,&#148; &#147;us&#148; and &#147;our&#148; refer to
AlgoRx Pharmaceuticals, Inc. and its subsidiaries, unless the
context requires otherwise.</FONT></I>

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

<P align="left">
<B><FONT size="2">Overview</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are an emerging pharmaceutical company focused
on developing and commercializing a diversified portfolio of
pharmaceutical product candidates to address pain, a large and
under-served market. We have three product candidates that we
are developing in four clinical programs and one preclinical
program. Two of our product candidates are in late-stage
clinical development. Our management team has extensive past
experience developing and commercializing products to treat
pain. In order to create a balanced pipeline, we have
selectively in-licensed or acquired product candidates at
various stages of development that address different segments of
the pain market.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX&nbsp;4975 (capsaicin for injection and
capsaicin gel for intraoperative use) is being developed in
three programs for pain: severe postsurgical pain, post-trauma
neuropathic pain and musculoskeletal pain (including
osteoarthritis and tendonitis). In these programs, we have
completed one phase&nbsp;I clinical trial and two phase&nbsp;II
clinical trials. Each of the phase&nbsp;II clinical trials
yielded statistically significant improvements in pain scores
and has provided us with favorable safety data. We are
continuing to evaluate ALGRX&nbsp;4975 in six phase&nbsp;II
clinical trials across the three programs. ALGRX&nbsp;3268, our
most advanced product candidate, is a powder formulation of the
local anesthetic lidocaine delivered into the skin using our
proprietary needle-free dispenser. We are developing
ALGRX&nbsp;3268 to reduce the pain associated with needle-sticks
from venipuncture (blood draws) or intravenous line insertions
in children. We have recently commenced one of two
phase&nbsp;III clinical trials for ALGRX 3268. We recently
in-licensed a third product candidate, ALGRX&nbsp;1207, a new
molecular entity in a new class of anesthetics that is
undergoing preclinical development as a topical local
anesthetic. We expect to file an investigational new
drug&nbsp;(IND) application for ALGRX&nbsp;1207 with the
U.S.&nbsp;Food and Drug Administration (FDA)&nbsp;in the second
half of 2005.
</FONT>

<P align="left">
<B><FONT size="2">The Market Opportunity</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pain management is a large, under-served market
for which currently used therapies often provide insufficient
efficacy or cause significant side effects. Even with these
shortcomings, drugs that treat pain, known as analgesics,
generated an estimated $28&nbsp;billion of worldwide
prescription sales in 2003 according to Global Industry
Analysts, Inc. Several analgesics that were commercialized
during the past decade have achieved high sales volume even
though they generally represented only minor improvements over
existing therapies and are often associated with patient and
physician dissatisfaction. We believe there is a large market
opportunity for analgesics that address the shortcomings of
current therapies, which 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">insufficient efficacy;
    </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">lack of site specificity;
    </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">occurrence of side effects;
    </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">need for frequent dosing;
    </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">slow onset of action; 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 cause physical dependence.
    </FONT></TD>
</TR>

</TABLE>
</DIV>

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

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

<P align="left">
<B><FONT size="2">Our Product Candidates</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">ALGRX 4975 (capsaicin for injection and
    capsaicin gel for intraoperative use)</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX&nbsp;4975 is our product candidate for the
treatment of site-specific severe or intractable pain. These
types of pain are poorly treated by existing drugs such as
opioids. We are developing ALGRX&nbsp;4975 to treat patients in
three broad areas:
</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">severe postsurgical pain following a variety of
    surgical procedures, including bunion removal surgery, total
    knee replacement and abdominal surgery (such as hernia repair,
    hysterectomy and gall bladder removal);
    </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">post-trauma neuropathic pain;&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">pain resulting from musculoskeletal diseases,
    such as osteoarthritis and tendonitis.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During a surgical procedure, ALGRX 4975 is
applied directly onto the cut surfaces of skin, muscle and bone.
For post-trauma neuropathic pain and musculoskeletal pain,
ALGRX&nbsp;4975 is delivered to the site of pain using a needle
and syringe. Although the active ingredient in ALGRX&nbsp;4975,
capsaicin, has been available for many years in over-the-counter
products, we believe we are the first to evaluate capsaicin as
an injectable formulation for use inside the body. We believe
that by harnessing capsaicin&#146;s ability to cause changes in
nerve endings for periods of up to 16&nbsp;weeks,
ALGRX&nbsp;4975, if approved, may represent a novel method of
providing long lasting, site-specific analgesia without many of
the significant side effects associated with opioids and other
methods of treating pain.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX&nbsp;4975 has been studied in three
AlgoRx-sponsored clinical trials that have enrolled a total of
68&nbsp;patients. An additional six ongoing phase&nbsp;II
clinical trials involving a total of 422&nbsp;patients are
designed to study the safety and efficacy of a variety of doses
in a broad range of pain conditions. In addition, we believe
that ALGRX&nbsp;4975 may provide long lasting pain relief with
infrequent dosing, potentially only four times per year, for
patients with certain chronic pain conditions.
</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">ALGRX 3268 (PowderJect&#174; Dermal
    Lidocaine)</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX&nbsp;3268 is our product candidate that
delivers lidocaine powder into the skin using our proprietary
needle-free dispenser. It is intended to provide rapid,
easy-to-administer local analgesia to reduce the pain associated
with needle-sticks from venipuncture (blood draws) or the
insertion of intravenous lines in patients. Existing products
for this use are characterized by a lengthy onset of action from
at least 10&nbsp;minutes to over an hour. This delay makes the
use of these products inconvenient for both health care
providers and patients. Current topical anesthetic products also
tend to be messy and bulky since they are often formulated as
creams and may require patches to be applied over the treatment
area. By comparison, ALGRX&nbsp;3268 has shown efficacy in one
minute following application and is administered using a
convenient, disposable needle-free dispenser.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The primary target market for ALGRX&nbsp;3268
would be the estimated 42&nbsp;million needle-stick procedures
that are performed in children in the United States each year.
We believe that this market is highly under-served by existing
products. Based on our company estimates of unit sales,
EMLA&#174; and L.M.X.4&#174;, two leading products, are used in
fewer than 15% of pediatric needle-stick procedures. We believe
that, if approved, ALGRX 3268&#146;s rapid onset of action,
convenience of use and efficacy in reducing pain would be
welcomed by health care professionals and would be important
factors for increasing physician use of analgesia prior to
needle-stick procedures.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have completed our clinical program through
phase&nbsp;II involving 1,139&nbsp;adults and children to
evaluate the ability of ALGRX&nbsp;3268 to reduce pain when used
prior to needle-stick procedures. In clinical studies designed
to assess efficacy, ALGRX&nbsp;3268 achieved statistically
significant reductions in pain associated with needle-sticks
when compared to placebo, with no serious side effects. We have
initiated a phase&nbsp;III clinical program to confirm the
safety and efficacy of ALGRX&nbsp;3268. If this phase&nbsp;III
clinical program is successful, we believe that we will submit a
new drug application (NDA) to the FDA for ALGRX&nbsp;3268 by the
end of 2005.
</FONT>
</DIV>

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

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

<P align="left">
<B><FONT size="2">Preclinical Product Candidate</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX&nbsp;1207, our preclinical product
candidate, is a new molecular entity that we are developing as a
topical local anesthetic to potentially treat patients with
certain types of neuropathic pain and for pre-procedural
administration to reduce the pain associated with procedures on
the skin. Certain types of neuropathic pain, including pain
associated with postherpetic neuralgia, painful
HIV&nbsp;polyneuropathy and painful diabetic polyneuropathy
affect almost two million patients in the United States and are
not well-treated by current therapies. We believe that a
simple-to-use, topical, local anesthetic with a long duration of
action and deep penetration into the skin would represent an
improvement over existing therapies. Based on studies in
animals, ALGRX&nbsp;1207 has been shown to provide analgesia
more rapidly and with a longer-lasting effect than currently
available topical anesthetics following direct administration to
the skin. In addition, we believe that ALGRX&nbsp;1207, if
approved, could address a wide variety of procedures involving
the skin, including dermatological surgery, cosmetic skin
treatments and catheter placement, as well as pain arising from
surgical incisions that does not subside after surgery has taken
place.
</FONT>

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

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our goal is to become a leading pharmaceutical
company focused on the commercialization of drugs to treat
various types of pain. The key elements of our strategy for
achieving this goal 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">Continue to build, through acquisition or
    in-licensing, a balanced portfolio of product candidates that
    leverages our understanding of the mechanisms of pain and the
    pain management market;
    </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">Complete clinical development and obtain
    regulatory approval for our product candidates utilizing our
    management team&#146;s extensive experience in developing and
    commercializing drugs for 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">Develop a specialized sales and marketing team to
    commercialize our product candidates, if approved, in the United
    States;&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">Establish corporate partnerships to assist in the
    clinical development, regulatory approval process and
    commercialization of our products in the United States and major
    foreign markets.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Risks</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our business is subject to a number of risks,
which you should be aware of before making an investment
decision. These risks are discussed more fully in &#147;Risk
Factors.&#148; All of our product candidates are in clinical or
preclinical stages of development. Accordingly, we have not
received regulatory approval for, or commercial revenues from,
any of our product candidates. It is possible that we may never
successfully commercialize any of our product candidates. As of
September&nbsp;30, 2004, we had incurred $50.3&nbsp;million in
net losses since inception. 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">Company Information</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We were incorporated in Delaware in March 2001.
Our principal executive offices are located at 500&nbsp;Plaza
Drive, 2nd&nbsp;Floor, Secaucus, New Jersey 07094-3619, and our
telephone number is (201)&nbsp;325-6900.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">&#147;AlgoRx&#148; is our registered trademark.
Other service marks, trademarks and trade names referred to in
this prospectus are the property of their respective owners.
</FONT>
</DIV>

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

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

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

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

<TR>
    <TD width="41%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="56%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <FONT size="2">Common stock offered by AlgoRx:
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size="2">shares
    (&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares if the
    underwriters&#146; over-allotment option is fully exercised)
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT size="2">Common stock to be outstanding<BR>
    after this offering:
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size="2">shares
    (&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares if the
    underwriters&#146; over-allotment option is fully exercised)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <FONT size="2">Proposed Nasdaq National Market<BR>
    symbol:
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">AGRX
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT size="2">Use of proceeds:
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">For general corporate purposes, including
    conducting clinical trials, research and development expenses,
    general and administrative expenses, manufacturing expenses and
    potential acquisitions of companies, products and technologies
    that complement our business. See &#147;Use of Proceeds.&#148;
    </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
152,782,728&nbsp;shares of common stock 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">22,575,140&nbsp;shares of common stock issuable
    upon exercise of outstanding options at a weighted average
    exercise price of $0.12&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">982,397&nbsp;shares of common stock reserved for
    future grants under our 2001 Equity Incentive 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">gives effect to our amended and restated
    certificate of incorporation, which we will file 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">gives effect to a
    1-for-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;reverse stock
    split of our common stock to be effected 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">gives effect to the automatic conversion of all
    outstanding shares of our preferred stock into
    142,757,557&nbsp;shares of common stock upon 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">gives effect to the issuance of
    692,658&nbsp;shares of common stock issuable upon the expected
    exercise of an outstanding warrant at an exercise price of
    $0.5925&nbsp;per share that, by its terms, terminates upon
    completion of this offering;&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">assumes no exercise by the underwriters of their
    option to purchase up
    to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    of our common stock in this offering to cover over-allotments.
    </FONT></TD>
</TR>

</TABLE>
</DIV>

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

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>
<DIV style="width: 100%; border: 1px solid black; padding: 12px;">

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

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes our financial data
for the period from March&nbsp;6, 2001 (inception)&nbsp;to
December&nbsp;31, 2001 and for the years ended December&nbsp;31,
2002 and 2003, and is derived from our audited financial
statements included in this prospectus. We have also included
data from our unaudited financial statements for the nine months
ended September&nbsp;30, 2003 and 2004 and for the period from
March&nbsp;6, 2001 (inception) to September&nbsp;30, 2004. You
should read this data together with our financial statements and
related notes and the information under &#147;Selected Financial
Data&#148; and &#147;Management&#146;s Discussion and Analysis
of Financial Condition and Results of Operations.&#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="19%"><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="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="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="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

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

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6,&nbsp;2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center"><B><FONT size="1">(Inception) to</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center"><B><FONT size="1">(Inception) to</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Years 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>
    <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><HR size="1" noshade></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><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></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">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>
    <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>
</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" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="23"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><B><FONT size="1">(In thousands, except share and 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">Statement 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>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Contract revenues
    </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">149</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100</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">249</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>
</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">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">365</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,745</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,191</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,682</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">34,983</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">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">1,096</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,076</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,477</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,320</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,914</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,564</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">Acquired in-process 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">&#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">5,716</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">5,716</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>

</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 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">1,461</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">20,537</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">15,668</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,259</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,596</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,263</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">Income (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">(1,461</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">(20,388</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">(15,568</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">(13,159</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">(13,596</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">(51,014</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">Gain (loss) on sale 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">(36</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">103</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">67</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 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">(2</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</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">(107</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">(72</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">(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 align="right" valign="bottom" nowrap><FONT size="2">(137</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">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">47</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">237</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">86</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">70</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">429</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">799</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,416</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,191</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15,486</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,059</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,191</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(50,285</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>

</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 net loss per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7.93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11.04</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.98</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.10</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">(1.71</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares used to compute basic and diluted net loss
    per share
    </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">178,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,829,494</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,591,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,559,089</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,695,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Pro forma basic and diluted net loss per share
    (unaudited)
    </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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.52</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.10</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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares used to compute pro forma basic and
    diluted net loss per share (unaudited)
    </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">29,600,282</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">130,032,565</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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>
</DIV>

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

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="56%"><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="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="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="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">As of September&nbsp;30, 2004</FONT></B></TD>
</TR>

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></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">Pro Forma</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>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(Unaudited, in thousands, except shares</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">and per share data)</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">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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash, cash equivalents and short-term investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,573</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,983</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><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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,929</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50,340</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">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">87,484</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">&#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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deficit accumulated during the development stage
    </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">(50,285</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">(50,285</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; equity (net capital
    deficiency)
    </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">(41,072</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">46,823</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Pro forma basic and diluted net loss per common
share is calculated assuming, and the pro forma balance sheet
data as of September&nbsp;30, 2004 gives 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 conversion of all outstanding shares of our
    preferred stock into 142,757,557&nbsp;shares of common stock
    upon completion of this offering as if such conversion had
    occurred at the date of original issuance;&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 issuance of 692,658&nbsp;shares of common
    stock upon the expected exercise in full for cash of an
    outstanding warrant at $0.5925 per share, or $410 in aggregate,
    that, by its terms, terminates upon completion of this offering
    as if such exercise had occurred at the date of original
    issuance.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The pro forma as adjusted balance sheet data as
of September&nbsp;30, 2004 also gives effect to 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 offered by this prospectus at an assumed initial
public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, after deducting underwriting discounts and commissions
and estimated offering expenses.
</FONT>
</DIV>

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

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

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

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Before you invest in our common stock, you
should understand the high degree of risk involved. You should
consider carefully the following risks and other information in
this prospectus, including our historical financial statements
and related notes, before you decide to purchase shares of our
common stock. If any of the following risks actually occurs, our
business, financial condition and operating results could be
adversely affected. As a result, the trading price of our common
stock could decline and you could lose part or all of your
investment.</FONT></I>

<P align="left">
<B><FONT size="2">Risks Related to Our Company</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">Clinical trials may fail to adequately
    demonstrate the safety or efficacy of ALGRX 3268, ALGRX 4975 or
    any future product candidates, preventing or significantly
    delaying their regulatory approval.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Before obtaining regulatory approval to
commercialize any of our product candidates, we must subject
them to extensive preclinical and clinical testing. We have
recently commenced one of two phase&nbsp;III clinical trials for
ALGRX 3268 (PowderJect&#174; Dermal Lidocaine), and we are
currently conducting phase&nbsp;II clinical trials for ALGRX
4975 (capsaicin for injection and capsaicin gel for
intraoperative use). These clinical trials are designed to
provide both efficacy and safety data, which will help determine
the steps we need to take to continue development of these
product candidates.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Clinical trial programs are expensive,
time-consuming and typically take years to complete. In
particular, we do not expect to receive approval from the FDA to
market ALGRX&nbsp;3268 until 2007 at the earliest, if at all. We
believe that ALGRX 4975 will not receive approval for marketing
for any indication until 2009 at the earliest, if at all. We are
developing an injectable formulation of ALGRX 4975 to
potentially treat patients with pain resulting from
musculoskeletal diseases, such as osteoarthritis and tendonitis.
No drug has ever been approved by the FDA for the treatment of
tendonitis or many other musculoskeletal diseases. Thus, it is
difficult to estimate the types of clinical trials that the FDA
might require and the time it will take to complete such trials.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are developing ALGRX 4975 in both a gel and an
injectable formulation. In our clinical trials to date, we have
used only a liquid form of ALGRX 4975, though we plan to use the
gel formulation in some of our later trials. To date, no
clinical trials have been completed using the gel formulation.
We may encounter unexpected difficulties in developing the gel
formulation, which may delay the development of ALGRX 4975 to
treat severe postsurgical pain. This may occur for various
reasons, including efficacy or safety issues arising from the
use of the gel formulation in our later clinical trials and
concerns that may be raised by the FDA about the gel
formulation. Such difficulties may delay or prevent our efforts
to develop a gel formulation of ALGRX 4975.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with clinical trials, we face the
risks that:
</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 product candidate may not prove to be
    efficacious;
    </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 discover that a product candidate causes
    harmful side effects;
    </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">patients may die or suffer other adverse medical
    effects for reasons that may or may not be related to the
    product candidate being tested;
    </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 results may not meet the level of statistical
    significance required by the FDA or other 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 results may not confirm positive results of
    earlier trials;&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 FDA may place a clinical hold on studies of
    our product candidates.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Both ALGRX 4975 and ALGRX 3268 were placed on
clinical hold by the FDA at separate times during 2003. The FDA
lifted each clinical hold after we responded to questions that
it raised. Imposition of additional clinical holds could
substantially delay our current product development efforts. The
FDA may place our clinical trials on clinical hold due to a
variety of factors, including safety concerns, or results
</FONT>

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

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<DIV align="left">
<FONT size="2">obtained from other trials of the same product
candidate. If a clinical trial of ours is placed on hold, we
would have to suspend enrollment or cancel the trial, and would
be unable to enroll any patients unless and until the FDA
allowed us to continue.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The results from the phase&nbsp;II clinical
trials for ALGRX 3268 may not be predictive of results that may
be obtained in our phase&nbsp;III clinical trials. The results
from the phase&nbsp;I and II clinical trials for ALGRX 4975 for
injection may not be predictive of results obtained in
additional phase&nbsp;II and phase&nbsp;III clinical trials.
Future clinical trials may indicate previously undetected side
effects or fail to demonstrate efficacy in a statistically
significant manner. If our ALGRX 4975 or ALGRX 3268 clinical
trials are not completed, significantly delayed or fail to
demonstrate that the product candidates are safe and
efficacious, our business and reputation would be harmed and our
stock price would be negatively affected.
</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">To obtain regulatory approval to market our
    product candidate ALGRX 1207, we will need to conduct
    preclinical studies, and the results of these studies are highly
    uncertain.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As part of the regulatory approval process, we
must conduct, at our own expense, preclinical studies in
laboratory animals and clinical trials in humans. Preclinical
studies for ALGRX 1207 were commenced by Bridge Pharma, Inc.
prior to our in-license of this product candidate in October
2004, and we will be required to continue preclinical studies
for this product candidate. The number of preclinical trials
that the regulatory authorities will require varies depending on
the product candidate, the disease or condition the product
candidate is being developed to address and regulations
applicable to the particular product candidate. We may need to
perform multiple preclinical studies using various doses and
formulations of ALGRX 1207 before we can begin clinical trials,
which could result in delays in our ability to develop ALGRX
1207. Furthermore, preclinical results in animal studies are not
necessarily predictive of outcomes in human clinical trials.
After we have conducted preclinical studies in animals for ALGRX
1207, we must demonstrate in clinical trials that ALGRX 1207 is
safe and efficacious for use on humans in order to receive
regulatory approval for commercial sale. Even if initial results
of preclinical studies for ALGRX 1207 are positive, we may
obtain different results in later stages of drug development,
including failure to show desired safety and efficacy.
</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">Failure to enroll patients for clinical
    trials may cause delays in developing our product candidates,
    and delays in the commencement of clinical testing of our
    current product candidates could result in increased cost to us
    and delay our ability to generate revenues.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently enrolling or seeking to enroll
patients in six clinical trials for our phase&nbsp;II studies of
ALGRX 4975 and in one phase&nbsp;III clinical trial for ALGRX
3268. We will encounter delays or possibly regulatory rejections
if we are unable to enroll enough patients to complete clinical
trials. Patient enrollment depends on many factors, including
the size of the patient population, the nature of the protocol,
the proximity of patients to clinical sites and the eligibility
criteria for the trial. While we have not experienced
significant delays in patient enrollment in our completed or
ongoing clinical trials, any delays in planned patient
enrollment in the future may result in increased costs and
delays, which could harm our ability to develop product
candidates.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Delays in the commencement of clinical testing
could significantly increase our product development costs and
delay product commercialization. In addition, many of the
factors that may cause, or lead to, a delay in the commencement
of clinical trials may also ultimately lead to denial of
regulatory approval of a product candidate. The commencement of
clinical trials can be delayed for a variety of reasons,
including delays 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">demonstrating sufficient safety and efficacy to
    obtain regulatory approval to commence a clinical trial;
    </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">reaching agreement on acceptable terms with
    prospective contract research organizations and trial sites;
    </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">manufacturing sufficient quantities of a product
    candidate;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">8
</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">obtaining approval of an IND application from the
    FDA;&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">obtaining institutional review board approval to
    conduct a clinical trial at a prospective site.
    </FONT></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">There may be delays in developing ALGRX
    4975 because we need to conduct carcinogenicity and drug
    interaction studies.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition to our clinical trials, we are
required to conduct carcinogenicity studies in laboratory
rodents in support of our planned NDA to market ALGRX 4975 for
the treatment of post-trauma neuropathic pain and for pain
resulting from musculoskeletal diseases. Such carcinogenicity
studies require about three years to complete and report. The
time frame of our development program for these indications is
also affected by the International Conference on Harmonisation
(ICH) guidelines that dictate that at least 1,500&nbsp;patients
must be exposed to the drug prior to submission of a
registration application and at least 500&nbsp;patients be
exposed to a new drug for one year. Thus, the length of the
development program for ALGRX 4975 for post-trauma neuropathic
pain and for pain resulting from musculoskeletal diseases is
expected to be longer than our development program seeking
approval of ALGRX 4975 for severe postsurgical pain. In addition
to the time required to conduct such carcinogenicity studies,
the results of such studies may demonstrate harmful side effects
of ALGRX 4975 which would impair or prevent our ability to
develop this product candidate. Assuming there are no delays
with our development program for ALGRX 4975 for post-trauma
neuropathic pain, we could submit an NDA to the FDA by the end
of 2008 at the earliest. We cannot assure you that these studies
will not be delayed or that these studies and tests will produce
results that support our planned NDA.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Further, if we are unsuccessful for any reason in
developing a gel formulation of ALGRX 4975 for intraoperative
use to treat severe postsurgical pain, and instead rely on the
liquid formulation to address this indication, the FDA may raise
concerns of significant off-label use of ALGRX 4975 and may
require that we complete a carcinogenicity program prior to
submission of the NDA for this indication. If such a program is
required, then submission of the NDA for ALGRX 4975 for
intraoperative use to treat severe postsurgical pain will be
delayed considerably.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Osteoarthritis is a chronic disease that mostly
afflicts elderly patients. Since these patients often take many
drugs for a variety of ailments, clinical development of new
products for osteoarthritis tends to require many drug
interaction studies and studies of elderly patients with other
disease conditions, such as liver failure or kidney failure.
Consequently, the development of a new drug for osteoarthritis
requires exposure of far more patients to the drug than for many
other indications. We expect that a submission of an NDA for
treatment of osteoarthritis would require several years and
expect that an NDA submission may not occur before 2010, if at
all. In addition to the time required to conduct such drug
interaction studies and the carcinogenicity studies described
above, the results of such studies may demonstrate adverse side
effects of ALGRX 4975, which would harm our ability to develop
this product candidate to treat osteoarthritis.
</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">The independent clinical investigators and
    contract research organizations that we rely on to conduct
    clinical trials may not be diligent, careful or timely, and may
    make mistakes in conducting our trials.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We depend on several independent clinical
investigators and contract research organizations (CROs) to
conduct our clinical trials under their agreements with us. We
are not employing these investigators, and we cannot control the
amount of time or resources that they devote to our programs.
Our contracts with these investigators may involve fixed fees.
If the costs of performing the clinical trials exceed estimates,
these investigators may fail to devote sufficient time and
resources to our drug development programs, fail to enroll
patients as rapidly as expected, or otherwise fail to perform in
a satisfactory manner, and therefore potential regulatory
approval and introduction of new products would be delayed. We
contract with CROs for execution of our clinical trials for our
product candidates. Failure of the CROs to meet their
obligations could adversely affect clinical development of our
product candidates. Moreover, these independent investigators
and CROs may also have relationships with other commercial
entities, some of which may compete with us.
</FONT>

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

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

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">If we fail to obtain U.S.&nbsp;regulatory
    approvals for product candidates under development, we will not
    be able to generate revenue in the
    U.S.&nbsp;market.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We must receive FDA approval for ALGRX 3268,
ALGRX 4975 and ALGRX 1207 for each indication at a particular
dose before we can commercialize or sell these product
candidates in the United States. The FDA can limit or deny its
approval for many reasons, 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">a product candidate may be found to be unsafe or
    ineffective;
    </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">regulators may interpret data from preclinical
    testing and clinical trials differently and less favorably than
    we do;
    </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">regulators may not approve the manufacturing
    processes or facilities that we use;&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">regulators may change their approval policies or
    adopt new regulations.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Failure to obtain FDA approval or any delay or
setback in obtaining such approval would:
</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">adversely affect our ability to market any drugs
    that we develop and generate product revenues;&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">impose additional costs and diminish any
    competitive advantages that we may attain.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Even if we obtain FDA approval, our product
candidates may not be approved for all indications that we
request, which could limit the uses of our products and
adversely impact our potential product sales and royalties. If
FDA approval of a product is granted, such approval will be
subject to limitations on the indicated uses for which the
product may be marketed or require costly, post-marketing
follow-up studies. As to any product for which marketing
approval is obtained, the labeling, packaging, adverse event
reporting, storage, advertising, promotion and record keeping
related to the product will be subject to extensive regulatory
requirements. The subsequent discovery of previously unknown
problems with the product, such as an adverse side effect, may
result in restrictions on the product, including withdrawal of
the product from the market. We may be slow to adapt, or we may
never adapt, to changes in existing requirements or adoption of
new requirements or policies.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If we fail to comply with applicable
U.S.&nbsp;regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and
criminal prosecution.
</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">If we fail to obtain regulatory approvals
    in other countries for our product candidates under development,
    we will not be able to generate revenue in such
    countries.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In order to market our products outside of the
United States, we must establish and comply with numerous and
varying regulatory requirements of other countries. Approval
procedures vary among countries and can involve additional
product testing and additional administrative review periods.
The time required to obtain approval in other countries might
differ from that required to obtain FDA approval in the United
States. The regulatory approval process in other countries may
include all of the risks detailed above regarding FDA approval.
Regulatory approval in one country does not ensure regulatory
approval in another, but a failure or delay in obtaining
regulatory approval in one country may negatively impact the
regulatory process in others. Failure to obtain regulatory
approval in other countries or any delay or setback in obtaining
such approval could have the same adverse effects detailed above
regarding FDA approval in the United States, including the risk
that our product candidate may not be approved for all
indications that we request, which could limit the uses of our
product and adversely impact our potential royalties and product
sales, and such approval may be subject to limitations on the
indicated uses for which the product may be marketed or require
costly, post-marketing follow-up studies.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If we fail to comply with applicable foreign
regulatory requirements, we may be subject to fines, suspension
or withdrawal of regulatory approvals, product recalls, seizure
of products, operating restrictions and criminal prosecution.
</FONT>

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

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<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">Competition in the biotechnology and
    pharmaceutical industries is intense, and even if our product
    candidates are approved and commercialized, competitive products
    may impede market acceptance of our products.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our business is characterized by extensive
research and development efforts, rapid developments and intense
competition. Our competitors may have or may develop superior
technologies or approaches, which may provide them with
competitive advantages. Our potential products may not compete
successfully. If our competitors get to the marketplace before
we do with better or less expensive drugs, our product
candidates, if approved for commercialization, may not be
profitable to sell or worthwhile to continue to develop.
Technology in the pharmaceutical industry has undergone rapid
and significant change, and we expect that it will continue to
do so. Any compounds, products or processes that we develop may
become obsolete or uneconomical before we recover any expenses
incurred in connection with their development. The success of
our product candidates will depend upon factors such as product
efficacy, safety, reliability, availability, timing, scope of
regulatory approval, acceptance and price, among other things.
Other important factors to our success include speed in
developing product candidates, completing clinical development
and laboratory testing, obtaining regulatory approvals and
manufacturing and selling commercial quantities of potential
products to the market.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our product candidates are intended to compete
directly or indirectly with existing drugs. Even if approved and
commercialized, our products may fail to achieve market
acceptance with hospitals, physicians or patients. Hospitals,
physicians or patients may conclude that our potential products
are less safe or effective or otherwise less attractive than
these existing drugs. If our product candidates do not receive
market acceptance for any reason, our revenue potential would be
diminished, which would materially adversely affect our ability
to become profitable.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX 4975, if approved and commercialized, will
face significant competition. For severe postsurgical pain,
morphine administered by infusion pump is a common treatment
method. Several other oral, injectable and patch opioids are
also used, including Vicodin&#174; (Abbott Labs),
OxyContin&#174; (Purdue Pharma), and Duragesic&#174;
(Johnson&nbsp;&#38; Johnson). For localized neuropathic pain,
Neurontin&#174; (Pfizer) and tricyclic antidepressants (several
manufacturers) are used to treat neuropathic pain. For
later-stage osteoarthritis, hyaluronic acid products, including
Synvisc&#174; (Genzyme), a market leader in 2003, are injected
locally and several oral opioids, most prominently
OxyContin&#174; (Purdue Pharma) and Duragesic&#174;
(Johnson&nbsp;&#38; Johnson) are used. For the treatment of
tendonitis, glucocorticosteroids are used. VR1, which is the ion
channel on the surface of nerves that ALGRX&nbsp;4975 affects,
has become a popular target for the pharmaceutical industry.
There are several high-dose topical capsaicins in development by
NeurogesX and Winston Labs, which may be approved prior to ALGRX
4975. VR1 inhibitors that may also compete with ALGRX 4975 are
being developed by several companies, including Merck-Neurogen,
Amgen, Schwarz Pharma-Amore Pacific, Purdue Pharma, and
PainCeptor. These VR1 inhibitors are expected to advance to
clinical evaluation shortly. We believe there are other products
that are in development that may compete with our current
product candidates.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX 3268, if approved and commercialized, will
face significant competition. During 2003, two leading products
for local anesthesia prior to needle-stick procedures were
L.M.X.4&#174;, a cream-based product (formerly ELA-MAX, Ferndale
Labs), and EMLA&#174;, a cream-based product sold by
AstraZeneca. EMLA&#174; has historically been the market leader,
and in 2003, several generic versions of EMLA&#174; that are
manufactured by Fougera, Atrix, Geneva, and Hi-Tech
Pharmaceuticals were approved by the FDA. These products already
have established distribution channels and are well known to
physicians and hospitals. There are additional products
including Numby Stuff&#174; (Iomed) and LidoSite&#174;
(Braun-Vyteris) with more rapid onset than the cream-based
products above, and two other products, including S-Caine&#174;
Patch (ZARS), for which an NDA has been submitted that may also
compete with ALGRX 3268. If ALGRX 3268 is unable to deliver
lidocaine to patients without pain, the product will not be
readily adopted by hospitals, physicians or patients, if at all.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX 1207, if approved and commercialized, will
face competition from existing products, including
LidoDerm&#174; (Endo), which is a lidocaine patch, and a variety
of local anesthetic creams and
</FONT>

<P align="center"><FONT size="2">11
</FONT>

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<DIV align="left">
<FONT size="2">products with alternative means of delivering
lidocaine, including EMLA&#174; cream (AstraZeneca) and its
generic equivalents, L.M.X.4&#174; (Ferndale Labs),
S-Caine&#174; Patch (ZARS)&nbsp;and LidoSite&#174;
(Braun-Vyteris). If approved, ALGRX 1207, which will also likely
be formulated as a cream or patch, will compete with existing
products based on factors such as efficacy, convenience and
onset time of pain relief.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Most of our competitors, including many of those
listed above, have substantially greater capital resources,
research and development staffs, facilities and experience in
conducting clinical trials and obtaining regulatory approvals,
as well as in manufacturing and marketing pharmaceutical
products. As a result, they may achieve product
commercialization or patent protection earlier than we can.
</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">We have no experience selling, marketing or
    distributing products and have minimal capabilities to do
    so.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If we receive regulatory approval to commence
commercial sales of any of our product candidates, we will have
to establish a sales and marketing organization with appropriate
technical expertise and distribution capability. At present, we
have no sales and only one marketing employee. Factors that may
inhibit our efforts to commercialize our products without
strategic partners or licensees 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">difficulty recruiting and retaining adequate
    numbers of effective sales and marketing 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">the inability of sales personnel to obtain access
    to, or persuade adequate numbers of, physicians to prescribe 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 lack of complementary products to be offered
    by sales personnel, which may put us at a competitive
    disadvantage against companies with broader product
    lines;&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">unforeseen costs associated with creating an
    independent sales and marketing organization.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As an alternative to establishing our own sales
and marketing organization, we may engage other pharmaceutical
or health care companies with an existing distribution system
and direct sales organization to assist us. We may not be able
to negotiate favorable distribution partnering arrangements, if
at all. To the extent we enter co-promotion or other licensing
arrangements, any revenues we receive will depend on the efforts
of third parties and will not be under our control.
</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">If third party manufacturers of our
    products fail to devote sufficient time and resources to our
    concerns, or if their performance is substandard, our clinical
    trials and product introductions may be delayed and our costs
    may rise.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have no manufacturing facilities, and we have
no experience in the commercial manufacturing of drugs or in
designing drug manufacturing processes. We have contracted with
third party manufacturers to produce, in collaboration with us,
our product candidates for clinical trials. We intend to rely on
third party contract manufacturers to manufacture, supply, store
and distribute any resulting products. While we have not
experienced any significant problems with our third party
manufacturers to date, our reliance on these third party
manufacturers, particularly the third party manufacturer who
acts as the sole manufacturer of microcylinders used in our
ALGRX 3268 product candidate, exposes us to the following risks,
any of which could delay or prevent the completion of our
clinical trials, the approval of our product candidates by the
FDA or other regulatory agencies, or the commercialization of
our products, result in higher costs, or deprive us of potential
product revenues:
</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">Contract manufacturers are obliged to operate in
    accordance with FDA-mandated current good manufacturing
    practices, or cGMPs. A failure of any of our contract
    manufacturers to establish and follow cGMPs or to document their
    adherence to such practices may lead to significant delays in
    the availability of material for clinical trials and may delay
    or prevent filing or approval of marketing applications 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">Changing contract manufacturers may be difficult,
    and the number of potential manufacturers is limited. Changing
    manufacturers may require re-validation of the manufacturing
    processes and procedures in accordance with FDA-mandated cGMPs.
    Such re-validation may be costly and time-
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">12
</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">consuming. It may be difficult or impossible for
    us to find replacement manufacturers on acceptable terms
    quickly, if at all.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Drug manufacturers are subject to ongoing,
periodic unannounced inspections by the FDA and corresponding
state and foreign agencies to ensure strict compliance with
cGMPs, other government regulations and corresponding foreign
standards. We are not aware of any violations by our third party
manufacturers of any of these regulations or standards. While we
are obligated to audit the performance of third party
contractors, we do not have control over our third party
manufacturers&#146; compliance with these regulations and
standards. Failure by our third party manufacturers or us to
comply with applicable regulations could result in sanctions
being imposed on us, including fines, injunctions, civil
penalties, failure of the government to grant approval of
product candidates, delays, suspension or withdrawal of
approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions.
</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">Our third party manufacturers may not be
    able to manufacture our product candidates in commercial
    quantities, which would prevent us from commercializing our
    product candidates.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To date, our product candidates have been
manufactured in small quantities by third party manufacturers
for preclinical and clinical trials. If any of these product
candidates are approved by the FDA or other regulatory agencies
for commercial sale, we will need to manufacture them in larger
quantities. Our third party manufacturers may not be able to
successfully increase their manufacturing capacity for any of
our product candidates in a timely or economic manner, or at
all. Significant scale-up of manufacturing may require
additional validation studies, which the FDA must review and
approve. If we are unable to successfully increase the
manufacturing capacity for a product candidate, the regulatory
approval or commercial launch of that product candidate may be
delayed or there may be a shortage in the supply of the product
candidate. Our product candidates require precise, high quality
manufacturing. The failure of our third party manufacturers to
achieve and maintain these 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 harm our business.
</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">Materials necessary to make ALGRX 3268 may
    not be available on commercially reasonable terms, or at all,
    which may delay our development and commercialization of the
    drug.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">There are a small number of suppliers of the
materials which are necessary to manufacture ALGRX 3268 and, in
the case of the microcylinder used in ALGRX 3268, we rely on a
sole supplier. We acquire the microcylinders for our ALGRX 3268
product candidate from PowderJect Technologies Limited under a
long-term supply agreement. PowderJect Technologies Limited is
currently our sole supplier and source of microcylinders, which
are manufactured for PowderJect Technologies Limited by a third
party manufacturer, and to date we have not identified an
alternative source. If we are required to seek an alternative
source for the microcylinders, we might not be successful in
establishing an alternative commercial arrangement with a
supplier, or, if we were successful in finding an alternate
supplier, it could be on terms which are less favorable than our
current supply agreement with PowderJect Technologies Limited.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our contract manufacturers for ALGRX 3268 need to
purchase the materials required for ALGRX 3268 for our clinical
trials and they or we will need to purchase these materials for
commercial distribution if we obtain regulatory approval for
ALGRX 3268. Suppliers may not sell us these materials at the
time we need them or on commercially reasonable terms. If our
manufacturers are unable to obtain these materials for our
clinical trials, product testing and potential regulatory
approval of ALGRX 3268 would be delayed, significantly impacting
our ability to develop the product candidate and potentially
increasing our costs. If we obtain regulatory approval for ALGRX
3268 and our manufacturers or we are unable to purchase these
materials, the commercial launch of ALGRX 3268 would be delayed
or there would be a shortage in supply of ALGRX 3268, which
would harm our ability to generate revenues from the sale of
ALGRX 3268. If suppliers increase the price of these materials,
the price for ALGRX 3268 may increase which may make ALGRX 3268
a less competitive product for the relief of needle-stick pain.
If we change
</FONT>

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

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<FONT size="2">suppliers for any of these materials or any of
our suppliers experiences a shutdown or disruption in the
facilities used to produce these materials, due to technical,
regulatory or other problems, it could harm our ability to
manufacture our products. While we have not suffered any
shortages to date of any of the materials required for ALGRX
3268, our inability to obtain these materials for any reason
could substantially impair our development activities or the
production, marketing and distribution of ALGRX 3268.
</FONT>
</DIV>

<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">If we are unable to retain and recruit
    qualified personnel or if any of our key executives, Ronald M.
    Burch,&nbsp;M.D., Ph.D, Paul R. Hamelin, R.Ph., or Jeffrey D.
    Lazar,&nbsp;M.D., Ph.D, discontinues his employment with us, it
    may delay our development efforts.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">One of our key strategies for successfully
building our company is utilizing the extensive expertise and
experience of our senior management and scientific staff,
especially of our Chief Executive Officer, Ronald M.
Burch,&nbsp;M.D.,&nbsp;Ph.D., our President and Chief Operating
Officer, Paul R. Hamelin, R.Ph. and our Executive Vice President
of Clinical and Regulatory Affairs, Jeffrey D.
Lazar,&nbsp;M.D.,&nbsp;Ph.D. Therefore, we consider our business
to be highly dependent on these individuals. The loss of any of
our key employees could impede the achievement of our
development objectives. We have no key-man insurance on any
members of our management team. Furthermore, recruiting and
retaining qualified personnel to perform research and
development work in the future is critical to our success. We
may be unable to attract and retain personnel on acceptable
terms given the competition among biotechnology and
pharmaceutical companies, universities and non-profit research
institutions for experienced scientists.
</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">We have a history of losses, and we may
    never achieve sustained profitability.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since our inception, we have incurred significant
net losses, including net losses of $13.2&nbsp;million and
$15.5&nbsp;million for the nine months ended September&nbsp;30,
2004 and the year ended December&nbsp;31, 2003, respectively. As
of September&nbsp;30, 2004, our cumulative net loss was
$50.3&nbsp;million. We have not yet completed the development,
including obtaining regulatory approvals, of any of our product
candidates and, consequently, have not generated revenues from
the sale of products. Even if we succeed in developing and
commercializing one or more of our product candidates, we expect
to incur substantial losses for the foreseeable future. We also
expect to continue to incur significant operating and capital
expenditures and anticipate that our expenses will increase
substantially in the foreseeable future 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 the development and the preparation for
    possible commercialization of ALGRX 4975 and ALGRX 3268,
    including establishing sales and marketing 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">continue the preclinical development and commence
    the clinical development of ALGRX 1207 which we recently
    in-licensed in October 2004;
    </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">expand our development programs;&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">increase our administrative functions.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We also expect to experience negative cash flow
for the foreseeable future as we fund our operating losses and
capital expenditures. We will need to generate significant
revenues to achieve profitability. We may not be able to
generate these revenues, and we may never achieve profitability.
Our failure to achieve profitability could negatively impact the
market price of our common stock. Even if we do become
profitable, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
</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">If we cannot raise additional capital on
    acceptable terms, we may be unable to complete planned clinical
    trials, obtain regulatory approvals or commercialize our product
    candidates.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that existing cash reserves, together
with proceeds from this offering, will fund our planned
activities through at least 2006. However, we will require
substantial future capital in order to continue to conduct the
research and development, preclinical and clinical programs and
regulatory activities necessary to bring our product candidates
to market and to establish commercial manufacturing, sales and
marketing capabilities. During the nine months ended
September&nbsp;30, 2004, our net cash used in
</FONT>

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

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<FONT size="2">operating activities was $10.7&nbsp;million and
we had capital expenditures of $48,000 for the same period. Our
future capital requirements depend on many factors, including:
</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">the progress of preclinical development 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 product 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">our plans to establish sales and/or marketing
    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 and maintain selected
    strategic alliances 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 or 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 products.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We may seek additional funding through strategic
collaborations and may seek funding through private or public
sales of our securities or by licensing all or a portion of our
technology. This funding may significantly dilute existing
stockholders or may limit our rights to our technology. We may
not be able to obtain additional funding on favorable terms, or
at all. If we cannot obtain adequate funds, we 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">terminate or delay preclinical development or
    clinical trials for one or more 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">delay establishment, or fail to establish,
    manufacturing, sales, and/or marketing 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">curtail significant product development programs
    that are designed to identify new 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">not be in a position to acquire technologies or
    pursue other business opportunities that require financial
    commitments; and/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">relinquish rights to our product candidates.
    </FONT></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">If we lose our licenses from PowderMed
    Limited for ALGRX 3268, certain individuals for ALGRX 4975 or
    Bridge Pharma, Inc. for ALGRX 1207, we will not be able to
    continue development of our current products.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are party to three significant license
agreements relating to patents, patent applications and know-how
covering the technology relating to ALGRX 4975, ALGRX 3268 and
ALGRX 1207, our three product candidates. These license
agreements impose various diligence, commercialization, royalty
and other obligations on us. If we fail to comply with the
obligations in the license agreements, the licensor may have the
right to terminate the license and we may not be able to market
products that were covered by the license. Our license agreement
with James N. Campbell,&nbsp;M.D., Richard A. Meyer, M.S. and
Marco Pappagallo,&nbsp;M.D. relates to the steps of
administering capsaicin for pain reduction that we use in our
product candidate, ALGRX 4975, and our rights under this
agreement can be terminated on 10&nbsp;days&#146; written notice
if we fail to make a payment or fulfill any material obligation
under the agreement and the failure is not cured by us within
180&nbsp;days of receiving notice of such failure. Our license
agreement with PowderMed Limited (formerly with PowderJect
Research Ltd.) relates to technology underlying our product
candidate, ALGRX 3268. Our agreement with PowderMed Limited can
be terminated immediately by either party if the other party
ceases to do business in the ordinary course, or assigns all or
substantially all of its assets for the benefit of creditors.
Either party can also terminate for material breach if not cured
within 60&nbsp;days of notice or if not cured within
30&nbsp;days of notice if the breach relates to
</FONT>

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

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<FONT size="2">payment provisions. Our agreement with Bridge
Pharma, Inc. relates to proprietary analgesic and local
anesthetic pharmaceutical agents and technology underlying our
product candidate ALGRX 1207, and our rights under this
agreement can be terminated for cause by Bridge Pharma, Inc. if
we breach any material provision of the agreement and fail to
cure the breach within 60&nbsp;days of the receipt of the notice
of breach. Either party may terminate the agreement immediately
in the event the other party suffers certain insolvency events.
To date, we believe we have met all our obligations under all of
these agreements.
</FONT>
</DIV>

<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">If we fail to enter into additional
    in-licensing agreements or if these arrangements are
    unsuccessful, our business and operations might be adversely
    affected, and if we engage in any acquisition or in-licensing,
    we will incur a variety of costs, and we may never realize the
    anticipated benefits of the transaction.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since our inception, we have acquired three
product candidates, ALGRX 4975, ALGRX 3268 and ALGRX 1207,
through in-licensing. One of our strategies for expanding our
business is the acquisition of products and additional product
candidates. The success of this strategy depends upon our
ability to identify, select and acquire the right pharmaceutical
product candidates and products. We may be unable to enter into
any additional in-licensing agreements because suitable product
candidates that are within our expertise may not be available to
us on terms that are acceptable to us or because competitors
with greater resources seek to in-license the same product
candidates. Product candidates that we would like to develop may
not be available to us because they are controlled by
competitors who are unwilling to license the rights to the drug
compound or candidate to us. We may also need to in-license drug
delivery or other technology in order to develop future drug
candidates. If we are unable to enter into additional agreements
to license drug candidates, drug delivery technology or other
technology or if these arrangements are unsuccessful, our
development efforts could be adversely affected.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We may attempt to acquire product candidates, or
other potentially beneficial technologies, through in-licensing
or the acquisition of businesses, services, products or programs
that we believe are a strategic fit with our business. Although
we currently have no commitments or agreements with respect to
any acquisitions, if we undertake an acquisition, the process of
integrating the acquired business, technology, services, product
or programs may result in unforeseen operating difficulties and
expenditures and may divert significant management attention
from our ongoing business operations. Moreover, we may fail to
realize the anticipated benefits of any acquisition for a
variety of reasons, such as an acquired product candidate
proving to not be safe or effective in later clinical trials. We
may fund any future acquisition by issuing equity or
equity-linked securities, which could dilute the ownership
percentage of our equity holders. We may also incur debt to pay
for an acquisition. The holders of the debt may have priority in
the event of a subsequent liquidation or bankruptcy, which would
impair value for our equity holders. Acquisition efforts can
require substantial expenditures, which could detract from our
other programs. In addition, we may devote resources to
potential acquisitions that are never completed.
</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">We may not be able to succeed in our
    business model of seeking to enter into collaborations with
    partners at the early stages of developing our product
    candidates, and even if we do our collaborations would be
    subject to many risks that could prevent us from developing and
    commercializing our product candidates.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our business strategy includes entering into
collaborations or marketing and distribution arrangements with
corporate partners, primarily pharmaceutical companies, for the
development (including clinical development), commercialization,
marketing and distribution of certain of our product candidates.
No such arrangements presently exist. We may enter into a
significant corporate collaboration, or we may not be able to
enter into any. If we are able to enter into a collaboration,
the terms may be onerous and we may be compelled to give up a
large portion of our interest in our products. We do not know at
this time what the extent of such interest may be. We may be
dependent on a corporate collaboration to fund clinical testing,
to make certain regulatory filings and to manufacture and market
products resulting from the collaboration. There can be no
assurance that the arrangements with a corporate collaboration
will be
</FONT>

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

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<FONT size="2">scientifically, clinically or commercially
successful. Risks that we face in connection with entering
collaborations include the following:
</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">collaborators may underfund or not commit
    sufficient resources to the testing, marketing, distribution or
    development 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">collaborators may not properly maintain or defend
    our intellectual property rights, or they may utilize our
    proprietary information in such a way as to invite litigation
    that could jeopardize or potentially invalidate our proprietary
    information or expose us to potential liability;
    </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">collaborators may pursue alternative technologies
    or develop alternative products either on their own or in
    collaboration with others;
    </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">collaborators may encounter conflicts of
    interest, changes in business strategy or other business issues,
    which could adversely affect their willingness or ability to
    fulfill their obligations to us (for example, pharmaceutical and
    biotechnology companies historically have re-evaluated their
    priorities following mergers and consolidations, which have been
    common in recent years in these industries);&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">disputes may arise between us and our
    collaborators delaying or terminating the research, development
    or commercialization of our product candidates, resulting in
    significant litigation or arbitration that could be
    time-consuming and expensive, or causing collaborators to act in
    their own self-interest and not in the interest of our
    stockholders.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A reduction in sales efforts or a discontinuance
of sales of any developed products by any collaborative partner
could result in reduced revenues and have a material adverse
effect on our business, financial position and results of
operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our current strategy for developing and
commercializing our product candidates includes securing
collaborations with pharmaceutical and biotechnology companies
relatively early in the drug development process and for these
collaborators to undertake the advanced clinical development and
commercialization of our product candidates. It may be difficult
for us to find third parties that are willing to enter into
collaborations for our other product candidates at an early
stage of development or on favorable economic terms. If we are
not able to enter into collaborations for our product candidates
at relatively early stages, we could be required to undertake
and fund further development, clinical trials, manufacturing and
marketing activities solely at our own expense. Alternatively,
we would have to substantially reduce our development efforts
which would delay the commercialization of our product
candidates.
</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">Because we have operated as a private
    company, we have no experience attempting to comply with public
    company obligations, including recently enacted changes in
    securities laws and regulations; attempting to comply with these
    requirements will increase our costs and require additional
    management resources and we still may fail to
    comply.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As directed by Section&nbsp;404 of the
Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring
public companies to include a report of management on the
company&#146;s internal controls over financial reporting in
their annual reports on Form&nbsp;10-K. In addition, the public
accounting firm auditing the company&#146;s financial statements
must attest to and report on management&#146;s assessment of the
effectiveness of the company&#146;s internal controls over
financial reporting. This requirement will first apply to our
annual report on Form&nbsp;10-K for our fiscal year ending
December&nbsp;31, 2005. If we are unable to conclude that we
have effective internal controls over financial reporting or, if
our independent auditors are unable to provide us with an
unqualified report as to the effectiveness of our internal
controls over financial reporting as of December&nbsp;31, 2005
and future year ends as required by Section&nbsp;404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in
the reliability of our financial statements, which could result
in a decrease in the value of our securities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are a small company with limited resources. We
have operated as a private company, not subject to many of the
requirements applicable to public companies. The number and
qualifications of our finance
</FONT>

<P align="center"><FONT size="2">17
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<FONT size="2">and accounting staff are consistent with those of
a private company. While we plan to expand our staff if we
become public, we may encounter substantial difficulty
attracting qualified staff with requisite experience due to the
high level of competition for experienced financial
professionals. Furthermore, we have not begun a formal process
to evaluate our internal controls over financial reporting.
Given the status of our efforts, coupled with the fact that
guidance from regulatory authorities in the area of internal
controls continues to evolve, substantial uncertainty exists
regarding our ability to comply by applicable deadlines.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Risks Related to Our Industry</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">Claims that we infringe a third
    party&#146;s intellectual property may give rise to burdensome
    litigation, result in potential liability for damages or stop
    our development and commercialization efforts.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Third parties may assert patent or other
intellectual property infringement claims against us with
respect to technologies used in our potential products. While we
have conducted patent searches to determine whether our products
infringe patents held by third parties, we expect that numerous
patent applications are currently pending and may be filed in
the future for technologies generally related to our
technologies, including many patent applications that remain
confidential after filing. Due to these factors and the inherent
uncertainty in conducting patent searches, we may violate third
party patent rights.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">There may also be patent applications filed by
these or other parties in the United States and various foreign
jurisdictions that are in the same fields as some of our product
candidates. These patent applications, if issued, could subject
us to infringement actions. The owners or licensees of these and
other patents may file one or more infringement actions against
us. Patent litigation can involve complex factual and legal
questions, and its outcome is uncertain. Any claim relating to
infringement of patents that is successfully asserted against us
may require us to pay substantial damages. Even if we were to
prevail, any litigation could be costly and time-consuming and
would divert the attention of our management and key personnel
from our business operations. Furthermore, as a result of a
patent infringement suit brought against us, we may be forced to
stop or delay developing, manufacturing or selling potential
products that are claimed to infringe a third party&#146;s
intellectual property unless that party grants us rights to use
its intellectual property. In such cases, we may be required to
obtain licenses to patents or proprietary rights of others in
order to continue to commercialize our products. However, we may
not be able to obtain any required licenses on acceptable terms,
or at all. Even if we were able to obtain rights to the third
party&#146;s intellectual property, these rights may be
non-exclusive, thereby giving our competitors access to the same
intellectual property. Ultimately, we may be unable to
commercialize some of our potential products or may have to
discontinue development of a product candidate or cease some of
our business operations as a result of patent infringement
claims, which could severely diminish our commercial prospects.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Third parties may also challenge the validity of
our issued patents on various grounds. In fact, one of our
issued European patents covering capsaicin for injection has
been challenged by Grunenthal, a German pharmaceutical company,
in the European Patent Court. In response, we submitted proposed
modifications to the patent, which we expect the patent court to
approve and publish in late 2004. Any party, including
Grunenthal, can object to the amended patent within the two
month period after the amended patent is published by the court.
If any future challenge by Grunenthal or any other party is
ultimately successful in invalidating the patent, then the
ability of third parties to market competing technologies to
ALGRX 4975 in Europe could be enhanced. Also, because the
Grunenthal opposition resulted in our amending the claims of one
of our patents in Europe, a competitor could seek to exploit
that result by using arguments similar to Grunenthal&#146;s to
challenge claims in issued patents, including U.S.&nbsp;patents,
licensed by us and in the same patent family as the amended
European patent.
</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">We may be subject to damages resulting from
    claims that we or our employees have wrongfully used or
    disclosed alleged trade secrets of their former
    employers.</FONT></I></B></TD>
</TR>

</TABLE>

<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
</FONT>

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

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<DIV align="left">
<FONT size="2">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. Even if we are successful in defending
against these claims, litigation could result in substantial
costs and be a distraction to management. If we fail in
defending such claims, in addition to paying money claims, we
may lose valuable intellectual property rights or personnel. A
loss of key personnel or their work product could hamper or
prevent our ability to commercialize certain product candidates,
which would adversely affect our commercial development efforts.
</FONT>
</DIV>

<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">If we are unable to protect our
    intellectual property rights, our competitors may develop and
    market products with similar features that may reduce demand for
    our potential products.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following factors are important to our
success:
</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">receiving patent protection 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">preventing others from infringing our
    intellectual property rights;&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">maintaining our patent rights and trade secrets.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will be able to protect our intellectual
property rights in patents and trade secrets from unauthorized
use by third parties only to the extent that such intellectual
property rights are covered by valid and enforceable patents or
are effectively maintained as trade secrets.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We try to protect our proprietary position by
filing U.S. and foreign patent applications related to our
important proprietary technology, inventions and improvements.
Because the patent position of pharmaceutical companies involves
complex legal and factual questions, the issuance, scope and
enforceability of patents cannot be predicted with certainty.
For instance, the issued patent underlying ALGRX&nbsp;4975
covers &#147;injection&#148; of capsaicin. If that patent were
determined (such as during a patent litigation in a U.S. Federal
Court against a third party infringer) not to cover application
of ALGRX&nbsp;4975 intraoperatively in circumstances where the
capsaicin is applied by means other than through a syringe, we
may not have an exclusive right to that application of capsaicin
unless and until, for instance, we were issued a valid claim
covering non-injection internal use of capsaicin or covering the
gel formulation that we are developing for intraoperative
procedures. Patents, if issued, may be challenged, invalidated
or circumvented. U.S.&nbsp;patents and patent applications may
also be subject to interference proceedings, and
U.S.&nbsp;patents may be subject to reexamination proceedings in
the U.S.&nbsp;Patent and Trademark Office (and foreign patents
may be subject to opposition or comparable proceedings in
corresponding foreign patent offices), which proceedings could
result in either loss of the patent or denial of the patent
application or loss or reduction in the scope of one or more of
the claims of the patent or patent application. In addition,
such interference, reexamination and opposition proceedings may
be costly. Thus, any patents that we own or license from others
may not provide any protection against competitors. Furthermore,
an adverse decision in an interference proceeding can result in
a third party receiving the patent rights sought by us, which in
turn could affect our ability to market a potential product to
which that patent filing was directed. Our pending patent
applications, those we may file in the future, or those we may
license from third parties may not result in patents being
issued. If issued, they may not provide us with proprietary
protection or competitive advantages against competitors with
similar technology. Furthermore, others may independently
develop similar technologies or duplicate any technology that we
have developed. We rely on third party payment services for the
payment of foreign patent annuities and other fees. Non-payment
or delay in payment of such fees, whether intentional or
unintentional, may result in loss of patents or patent rights
important to our business. Many countries, including certain
countries in Europe, have compulsory licensing laws under which
a patent owner may be compelled to grant licenses to third
parties (for example, the patent owner has failed to
&#147;work&#148; the invention in that country, or the third
party has patented improvements). In addition, many countries
limit the enforceability of patents against government agencies
or government contractors. In these countries, the patent owner
may have limited remedies, which could materially diminish the
value of the patent. Moreover, the legal systems of certain
countries, particularly certain developing countries, do not
favor the aggressive enforcement of patent and other
intellectual property protection which makes it difficult to
stop infringement.
</FONT>

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

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<FONT size="2">In addition, our ability to enforce our patent
rights depends on our ability to detect infringement. It is
difficult to detect infringers who do not advertise the
compounds that are used in their products. Also, in the case of
ALGRX&nbsp;4975, it is not the composition of the capsaicin that
is covered by the issued patent, but rather its method of use.
This means that a manufacturer of an injectable form of
capsaicin may not infringe the patent except indirectly, which
is more difficult to prove, and any claim for direct
infringement might be against only a clinician injecting the
product. Any litigation to enforce or defend our patent rights,
even if we were to prevail, could be costly and time-consuming
and would divert the attention of our management and key
personnel from our business operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We also rely on trade secrets, know-how and
technology, which are not protected by patents, to maintain our
competitive position. We try to protect this information by
entering into confidentiality agreements with parties that have
access to it, such as our strategic partners, collaborators,
employees and consultants. Any of these parties may breach these
agreements and disclose our confidential information or our
competitors might learn of the information in some other way. If
any trade secret, know-how or other technology not protected by
a patent was to be disclosed to or independently developed by a
competitor, our business, financial condition and results of
operations could be materially adversely affected.
</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">Governmental and third party payors may
    impose sales and pharmaceutical pricing restrictions or controls
    on our potential products that could limit our future product
    revenues and adversely affect profitability.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The commercial success of our potential products
is substantially dependent on whether third party reimbursement
is available for the ordering of our products by the medical
profession for use by their patients. Medicare, Medicaid, health
maintenance organizations and other third party payors may not
cover or provide adequate payment for our potential products.
They may not view our potential products as cost-effective and
reimbursement may not be available to consumers or may not be
sufficient to allow our potential products to be marketed on a
competitive basis. Reimbursement will most likely not be
available for ALGRX 3268. Hospitals are currently reimbursed a
fixed amount of money for the needle-stick procedures in which
ALGRX 3268 would be used. The cost of ALGRX 3268 would be an
expense associated with that procedure and therefore would
reduce the hospital&#146;s profit. Hospitals may determine that
the cost of ALGRX 3268 is not worth the benefit and decline to
use it. Likewise, legislative or regulatory efforts to control
or reduce health care costs or reform government health care
programs could result in lower prices or rejection of our
potential products that we may commercialize. Changes in
reimbursement policies or health care cost containment
initiatives that limit or restrict reimbursement for our
products may cause our revenue to decline.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Another development that may affect the pricing
of drugs is Congressional action regarding drug reimportation
into the United States. The Medicare Prescription Drug Plan
legislation, which became law in December 2003, requires the
Secretary of Health and Human Services to promulgate regulations
for drug reimportation from Canada into the United States under
some circumstances, including when the drugs are sold at a lower
price than in the United States. The Secretary retains the
discretion not to implement a drug reimportation plan if he
finds that the benefits do not outweigh the cost. Proponents of
drug reimportation may attempt to pass legislation that would
directly allow reimportation under certain circumstances. If
legislation or regulations were passed allowing the
reimportation of drugs, they could decrease the price we receive
for any products that we may commercialize, negatively affecting
our anticipated revenues and prospects for profitability.
</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">We face potential product liability
    exposure far in excess of our limited insurance
    coverage.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The use of any of our product candidates in
clinical trials, and the sale of any approved products, may
expose us to product liability claims. These claims might be
made directly by consumers, health care providers,
pharmaceutical companies or others selling our products. We have
obtained limited product liability insurance coverage for our
clinical trials in the amount of $5&nbsp;million per occurrence
and $5&nbsp;million in the aggregate. However, our insurance may
not reimburse us or may not be sufficient to reimburse us for
expenses or losses we may suffer. Moreover, insurance coverage
is becoming increasingly expensive, and we
</FONT>

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

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<DIV align="left">
<FONT size="2">may not be able to maintain insurance coverage at
a reasonable cost or in sufficient amounts to protect us against
losses due to liability. If we obtain marketing approval for any
of our product candidates in development, we intend to expand
our insurance coverage to include the sale of commercial
products, but we may be unable to obtain commercially reasonable
product liability insurance for any products approved for
marketing. On occasion, juries have awarded large judgments in
class action lawsuits based on drugs that had unanticipated side
effects. In addition, the pharmaceutical and biotechnology
industries, in general, have been subject to significant product
liability litigation. A successful product liability claim or
series of claims brought against us would decrease our cash
reserves and could cause our stock price to fall.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Risks Related to Our Common Stock</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">We expect that our stock price will
    fluctuate significantly.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to this offering, you could not buy or sell
our common stock publicly. An active public market for our
common stock may not develop or be sustained after this
offering. We will negotiate and determine the initial public
offering price with the underwriters based on several factors.
This price may vary from the market price of our common stock
after this offering. You may be unable to sell your shares of
common stock at or above the initial offering price. The stock
market, particularly in recent years, has experienced
significant volatility particularly with respect to
pharmaceutical and biotechnology stocks. The volatility of
pharmaceutical and biotechnology 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">the timing and the results from our clinical
    trial programs, including the initiation and completion of
    phase&nbsp;II clinical trials for ALGRX 4975 and phase&nbsp;III
    clinical trials for ALGRX 3268;
    </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 and results from our preclinical and
    future clinical studies relating to ALGRX 1207;
    </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 in-licensing or acquisition of additional
    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">FDA or international regulatory actions;
    </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">failure of any of our product candidates, if
    approved, to achieve commercial success;
    </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 of new products by 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">market conditions in the pharmaceutical and
    biotechnology sectors;
    </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 concerning 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">litigation or public concern about the safety of
    our potential 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">comments by securities analysts;
    </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 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">deviations in our operating results from the
    estimates of securities analysts;
    </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">rumors relating to 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">third party 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">developments concerning current or future
    strategic alliances.
    </FONT></TD>
</TR>

</TABLE>

<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
</FONT>

<P align="center"><FONT size="2">21
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<DIV align="left">
<FONT size="2">us, we could incur substantial costs defending
the lawsuit. Such a lawsuit could also divert the time and
attention of our management.
</FONT>
</DIV>

<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">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 of
shares of common stock 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
delivered by our executive officers and directors
and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;of
our stockholders and optionholders provide that Credit Suisse
First Boston LLC and Citigroup Global Markets Inc., in their
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
(which period could be extended by those underwriters for up to
an additional 34&nbsp;days under certain circumstances) after
the date of this prospectus. Credit Suisse First Boston LLC and
Citigroup Global Markets Inc. have no pre-established conditions
to waiving the terms of the lock-up agreements, and any decision
by them 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. After this offering, approximately
145,050,215&nbsp;shares of our common stock will be subject to
registration rights. Please see &#147;Shares Eligible for Future
Sale.&#148;
</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">Our directors and management will exercise
    significant control over our company.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">After this offering, our directors and executive
officers and their affiliates will collectively control
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of our outstanding
common stock, assuming that the underwriters&#146;
over-allotment option is not exercised. These stockholders, if
they act together, will be able to influence our management and
affairs and all matters requiring stockholder approval,
including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have
the effect of delaying or preventing a change in control of our
company and might affect the market price of our 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">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 of this offering for 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. We may use the net proceeds 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="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Provisions of Delaware law or our charter
    documents 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 which we plan to adopt immediately prior to this
offering 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 or
members of our board of directors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">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 Chairman of the board of
    directors, the Chief Executive Officer, or the board of
    directors pursuant to a resolution adopted by a majority of the
    total number of authorized 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">advance notice requirements for stockholder
    proposals and nominations;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">22
</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><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a requirement that 66&nbsp;2/3% of stockholders
    approve certain amendments to our certificate of incorporation
    and amendments to our by-laws;&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">As a result, these provisions and others
available under Delaware law could limit the price that
investors are willing to pay in the future for shares of our
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">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 paid no 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. 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="3%"></TD>
    <TD width="97%"></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;&nbsp;per
share. In the past, we issued options and warrants to acquire
common stock at prices significantly below the assumed 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">23
</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">FORWARD-LOOKING STATEMENTS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This prospectus, including the sections entitled
&#147;Prospectus 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">our ability to in-license or acquire new
    technology or 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">the progress, timing and completion of our
    research, development and clinical trials for 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 receive regulatory approvals to
    develop 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">our ability to build an internal sales and
    marketing 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">our ability to contract for and maintain third
    party manufacturing services;
    </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 market acceptance for our
    product candidates and successfully compete in the market;
    </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 enter into collaborative or
    strategic relationships to assist in the clinical development
    and commercialization 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">our ability to protect our intellectual property
    and operate our business without infringing upon the
    intellectual property rights of others;
    </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 estimates for future performance;&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 estimates regarding anticipated operating
    losses, use of proceeds from this offering, future revenues,
    capital requirements and our needs for additional financing.
    </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 of 1933 provides
any protection for statements made in this prospectus.
</FONT>

<P align="center"><FONT size="2">24
</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">USE OF PROCEEDS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We estimate that we will receive net proceeds
from the sale of shares of our common stock in this offering of
approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
($&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
if the underwriters fully exercise their over-allotment option),
based upon 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.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We estimate that we will use approximately
$13&nbsp;million of the net proceeds of this offering to
continue the development of our product candidate ALGRX 3268,
including the continuation of our clinical trial program. We
expect, with these proceeds, to file our NDA with the FDA and
initiate our pre-commercialization activities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We estimate that we will use approximately
$12&nbsp;million of the net proceeds of this offering to
continue the development of our product candidate ALGRX 4975,
including the continuation of our clinical trial program and
toxicology program. We expect, with these proceeds, to complete
multiple phase&nbsp;II clinical trials and begin our
phase&nbsp;III program.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We estimate that we will use approximately
$9&nbsp;million of the net proceeds of this offering to develop
our most recently in-licensed candidate, ALGRX 1207. We expect,
with these proceeds, to complete multiple phase&nbsp;I and
phase&nbsp;II clinical trials.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We intend to use the balance of the net proceeds
of this offering to fund operations, to provide working capital
and for other general corporate purposes, which may include
in-licensing or acquiring additional product candidates. We have
no current agreements or commitments with respect to any future
acquisitions or in-licensing, and we are not currently engaged
in any negotiations with respect to any transactions of that
nature.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of the date of this prospectus, we cannot
specify with certainty all of the particular uses for the net
proceeds to be received upon the completion of this offering.
The amounts and timing of our actual expenditures may vary
significantly from our expectations depending upon numerous
factors, including the progress of our development and
commercialization efforts, the progress of our clinical trials,
and our operating costs and capital expenditures. Accordingly,
our management will have broad discretion in the application of
the net proceeds, and investors will be relying on the judgment
of our management regarding the application of the proceeds of
this offering. Pending these uses, we plan to invest the net
proceeds in short-term, interest-bearing obligations,
investment-grade instruments, certificates of deposit or direct
or guaranteed obligations of the United States. The goal with
respect to the investment of these net proceeds is capital
preservation and liquidity so that funds are readily available
to fund our research and development operations. In March 2004,
our board of directors adopted our written investment policy.
The investment policy imposes restrictions on our investments
designed to ensure that we preserve our principal and maintain
our liquidity. Any investment of the net proceeds from this
offering will be made in accordance with the terms of our
investment policy.
</FONT>

<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">25
</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">CAPITALIZATION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth our capitalization
as of September&nbsp;30, 2004:
</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">on an actual basis;
    </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 a pro forma basis, reflecting the conversion
    of all of our preferred stock into an aggregate of
    142,757,557&nbsp;shares of common stock immediately prior to the
    closing of this offering; reflecting the issuance of
    692,658&nbsp;shares of common stock issuable upon the expected
    exercise for cash of an outstanding warrant at $0.5925 per
    share, or $410,000 in the aggregate, that, by its terms,
    terminates upon completion 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">on a pro forma as adjusted basis giving effect to
    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;&nbsp;per
    share, after deducting underwriting discounts and commissions
    and estimated offering expenses payable by us.
    </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
Financial Data&#148; and &#147;Management&#146;s Discussion and
Analysis of Financial Condition and Results of Operations&#148;
and with our financial statements and related notes.
</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="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="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="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>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">As of September&nbsp;30, 2004</FONT></B></TD>
</TR>

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></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">Pro Forma</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>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">(In thousands, except shares)</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">Convertible preferred stock, $0.001&nbsp;par
    value; actual, 137,405,754&nbsp;shares authorized and
    130,546,942&nbsp;shares issued and outstanding; pro forma, no
    shares authorized, issued or outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">87,483</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><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">Preferred stock, $0.001&nbsp;par value; actual,
    no shares authorized, issued or outstanding; pro forma,
    25,000,000&nbsp;shares authorized and no shares issued or
    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">&#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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock, $0.001&nbsp;par value; actual,
    173,840,266&nbsp;shares authorized, 9,603,346&nbsp;shares issued
    and 9,332,513 shares outstanding; pro forma,
    173,840,266&nbsp;shares authorized, 153,053,561&nbsp;shares
    issued and 152,782,728&nbsp;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">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">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><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">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">17,782</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">105,533</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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 other comprehensive 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">(26</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</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">Deferred 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">(8,552</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">(8,552</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><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">Treasury stock, at cost, 270,833&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">&#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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deficit accumulated during the development stage
    </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">(50,285</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">(50,285</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><FONT size="2">&nbsp;</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 stockholders&#146; 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">(41,072</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">46,823</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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>

</TR>

<TR>
    <TD 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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46,412</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46,823</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The actual number of shares of common stock shown
as issued and outstanding in the table above 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">22,575,140&nbsp;shares of common stock issuable
    upon the exercise of options outstanding as of
    September&nbsp;30, 2004, with exercise prices ranging from $0.10
    to $1.00&nbsp;per share and a weighted average exercise price of
    $0.12&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">982,397 additional shares of common stock
    reserved for future grants under our 2001 Equity Incentive Plan
    as of September&nbsp;30, 2004.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">26
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

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

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our historical net tangible book value as of
September&nbsp;30, 2004 was 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, based
on &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock outstanding as of September&nbsp;30, 2004.
Historical net tangible book value per share is determined by
dividing our total tangible assets less total liabilities and
convertible preferred stock by the actual number of outstanding
shares of our common stock. Our pro forma net tangible book
value as of September&nbsp;30, 2004 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, based
on &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock outstanding after giving effect to the
conversion of all outstanding shares of our convertible
preferred stock into common stock upon the closing of this
offering. Pro forma net tangible book value per share represents
the amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock
outstanding before giving effect to this offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">After giving effect to our 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 based on an assumed initial
public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, less underwriting discounts and commissions and offering
expenses payable by us, our pro forma net tangible book value as
of September&nbsp;30, 2004 would have been
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. This represents an immediate increase in pro forma net
tangible book value per share of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;to
existing stockholders and immediate dilution in pro forma net
tangible book value of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to new investors purchasing our common stock in the
offering at the initial public offering price. Dilution per
share to new investors is determined by subtracting pro forma
net tangible book value per share after this offering from the
assumed initial public offering price per share paid by a new
investor. The following table illustrates the per share dilution
without giving effect to the over-allotment option granted to
the underwriters:
</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="72%"><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="2" 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><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">Historical net tangible book value per share as
    of September&nbsp;30, 2004
    </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">Increase per share due to the conversion of all
    shares of 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>
</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><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">Pro forma net tangible book value per share as of
    September&nbsp;30, 2004
    </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">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="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><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">Pro forma net tangible book value per share after
    the 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>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</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">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><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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT 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
September&nbsp;30, 2004 the number of shares of our common stock
purchased from us, the total cash consideration paid to us and
the average price per share paid to us by existing stockholders,
to be paid by new investors purchasing shares of our common
stock in this offering, before deducting 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="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="41%"><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="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>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></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">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 colspan="2"></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 colspan="2"></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 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 valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" 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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">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 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><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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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="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">The above discussion and tables are based on
9,332,513&nbsp;shares of common stock issued and outstanding as
of September&nbsp;30, 2004 and also reflects the automatic
conversion of all of our preferred stock into an aggregate of
142,757,557&nbsp;shares of common stock and the issuance of
692,658&nbsp;shares of common stock issuable upon the expected
exercise of an outstanding warrant that, by its terms,
terminates upon completion of this offering 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">22,575,140&nbsp;shares of common stock issuable
    upon the exercise of options outstanding as of
    September&nbsp;30, 2004, with exercise prices ranging from $0.10
    to $1.00&nbsp;per share and a weighted average exercise price of
    $0.12 per share;&nbsp;and
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">27
</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">982,397 additional shares of common stock
    reserved for future grants under our 2001 Equity Incentive Plan,
    as of September&nbsp;30, 2004.
    </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">28
</FONT>

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

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

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following selected financial data should be
read in conjunction with &#147;Management&#146;s Discussion and
Analysis of Financial Condition and Results of Operations&#148;
following this section and our financial statements and related
notes included in the back of this prospectus. The selected
financial data for the period from March&nbsp;6, 2001
(inception) to December&nbsp;31, 2001 and for the years ended
December&nbsp;31, 2002 and 2003 and as of December&nbsp;31, 2002
and 2003 are derived from our audited financial statements
included in the back of this prospectus. The selected financial
data for the nine months ended September&nbsp;30, 2003 and 2004
and for the period from March&nbsp;6, 2001 (inception) to
September&nbsp;30, 2004 are derived from our unaudited financial
statements included in the back of this prospectus. The
unaudited financial statements include, in the opinion of
management, all adjustments, consisting only of normal,
recurring adjustments, that management considers necessary for a
fair statement of the results for those aforementioned periods.
The historical results are not necessarily indicative of results
to be expected in any future period, and the results for the
nine months ended September&nbsp;30, 2004 should not be
considered indicative of results expected for the full fiscal
year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The pro forma net loss per share information is
computed using the weighted average number of common shares
outstanding, after giving pro forma effect to the conversion of
all outstanding shares of our convertible preferred stock into,
and the exercise in full of all outstanding warrants for, shares
of our common stock effective upon the completion of this
offering, as if such conversion had occurred at the date of
original issuance.
</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="22%"><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="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="4%"><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 colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6,&nbsp;2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6,&nbsp;2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Inception) to</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Years 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>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Inception) to</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</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>
    <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">2001</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>
    <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>
</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" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="23"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><B><FONT size="1">(In thousands, except shares and 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">
    <FONT size="2">Contract revenues
    </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">149</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100</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">249</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">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>
</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">365</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,745</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,191</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,682</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">34,983</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">1,096</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,076</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,477</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,320</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,914</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,564</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">Acquired in-process 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">&#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">5,716</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">5,716</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>

</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">1,461</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">20,537</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">15,668</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,259</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,596</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,263</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">Income (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">(1,461</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">(20,388</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">(15,568</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">(13,159</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">(13,596</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">(51,014</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">Gain (loss) on sale 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">(36</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">103</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">67</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">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">(2</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</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">(107</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">(72</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">(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 align="right" valign="bottom" nowrap><FONT size="2">(137</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">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">47</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">237</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">86</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">70</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">429</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">799</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>

</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 income (loss)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,416</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,191</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15,486</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,059</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,191</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(50,285</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted net loss per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7.93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11.04</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.98</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.10</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">(1.71</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares used to compute basic and diluted net loss
    per share
    </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">178,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,829,494</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,591,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,559,089</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,695,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Pro forma basic and diluted net loss per share
    (unaudited)
    </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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.52</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.10</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares used to compute pro forma basic and
    diluted net loss per share (unaudited)
    </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">29,600,282</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">130,032,565</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">29
</FONT>

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

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="51%"><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="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="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></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="11" align="center" nowrap><B><FONT size="1">As of 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="11" 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" align="center" nowrap><B><FONT size="1">2001</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>
</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>
    <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 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">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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash, cash equivalents and short-term investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,914</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,873</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,546</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,573</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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,053</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,681</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">7,401</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,929</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">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">9,099</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">32,194</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,194</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">87,484</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">Deficit accumulated during the development stage
    </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">(1,416</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">(21,607</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">(37,093</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">(50,285</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; equity (net capital
    deficiency)
    </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">(1,391</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">(21,277</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">(36,562</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">(41,072</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">30
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<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 the financial statements and the notes to those statements
included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties.
As a result of many factors, such as 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="left">
<B><FONT size="2">Overview</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are an emerging pharmaceutical company focused
on developing and commercializing drugs to treat pain. We have
three product candidates that we are developing in four clinical
programs and one preclinical program. Two product candidates,
ALGRX&nbsp;4975 and ALGRX&nbsp;3268, are in clinical
development, and one product candidate, ALGRX&nbsp;1207, is in
preclinical development. We commenced operations in March 2001.
Since our inception, we have generated significant losses. As of
September&nbsp;30, 2004, we had an accumulated deficit of
$50.3&nbsp;million. We expect to incur substantial and
increasing losses for 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 the development and the preparation for
    commercialization of ALGRX&nbsp;4975 and ALGRX&nbsp;3268,
    including establishing sales and marketing 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">continue the preclinical, and commence the
    clinical development of ALGRX&nbsp;1207, which we in-licensed in
    October 2004;
    </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">expand our research and development
    programs;&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">advance new product candidates into clinical
    development from our existing research programs.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have a limited history of operations. To date,
we have funded our operations primarily through the private
placement of equity securities. As of September&nbsp;30, 2004,
our only revenue since inception has been $0.2&nbsp;million
derived from a collaborative research program and the one-time
upfront payment from an out-license of technology that we do not
plan to develop ourselves. We have had no other income since
inception other than interest income from short-term investments.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We hold exclusive worldwide rights to
commercialize ALGRX 4975, ALGRX&nbsp;3268 and ALGRX&nbsp;1207,
and, if approved, we intend to market these product candidates
ourselves or with a partner in the United States and through
strategic collaborations outside of the United States. We
currently contract with outside firms to manufacture our product
candidates and have no plans to establish internal manufacturing
capabilities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In August 2001, we licensed the intellectual
property underlying ALGRX&nbsp;4975 from James N.
Campbell,&nbsp;M.D., Richard A. Meyer, M.S. and Marco
Pappagallo,&nbsp;M.D. In consideration for the license, we paid
Drs.&nbsp;Campbell and Pappagallo and Mr. Meyer an up-front fee
and are obligated to pay additional fees upon achieving certain
milestones with respect to ALGRX&nbsp;4975. We also granted them
options which vest based on AlgoRx achieving predetermined
milestones. If ALGRX 4975 is commercialized, we will owe
Drs.&nbsp;Campbell and Pappagallo and Mr. Meyer royalties on any
future sales of ALGRX&nbsp;4975.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In March 2002, we acquired the powder injection
delivery business and a license to certain intellectual property
for our product candidate ALGRX 3268 from subsidiaries of
PowderJect Pharmaceuticals plc, in a transaction accounted for
as an acquisition of assets. The purchase price for this
acquisition was approximately $9.9&nbsp;million. In October
2004, we in-licensed the intellectual property underlying
ALGRX&nbsp;1207 from Bridge Pharma, Inc. In consideration for
the license, we paid Bridge Pharma, Inc. an up-front license fee
consisting of a cash payment and shares of our common stock. We
are also obligated to make additional payments and royalties to
Bridge Pharma, Inc. if we achieve certain clinical, regulatory
and commercial milestones.
</FONT>

<P align="center"><FONT size="2">31
</FONT>

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

<P align="left">
<B><FONT size="2">Revenue</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We do not expect to generate revenue from product
sales or royalties until at least 2007, if at all. We intend to
seek to generate revenue from a combination of product sales,
up-front fees and milestone payments in connection with
collaborative or strategic relationships, and royalties
resulting from the license of our intellectual property. We
expect that any revenue we generate will fluctuate from quarter
to quarter as a result of the nature, timing and amount of
milestone payments we may receive from our collaborative or
strategic relationships, as well as revenue we may receive upon
the sale of our products, to the extent any are successfully
commercialized.
</FONT>

<P align="left">
<B><FONT size="2">Research and Development Expenses</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our research and development expenses consist
primarily 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">salaries and related expenses for 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">costs of facilities and equipment;
    </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">fees paid to consultants and clinical research
    organizations in conjunction with independently monitoring our
    clinical trials and acquiring and evaluating data in conjunction
    with 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">fees paid to research organizations in
    conjunction with preclinical animal studies;
    </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">costs of materials used in research and
    development;
    </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">upfront and milestone payments under in-licensing
    agreements;
    </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">consulting fees paid to third parties;&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">depreciation of capital resources used to develop
    our products.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We expense both internal and external research
and development costs as incurred. We expect our research and
development expense to increase as we continue to develop our
product candidates.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We use our employee and infrastructure resources
across several projects, and some of our costs are not
attributable to an individually-named project but rather are
directed across these research projects. Accordingly, we make
certain allocations for these internal research and development
costs on a project-by-project basis. As a result, we cannot
state precisely the total costs incurred for each of our
clinical and preclinical projects on a project-by-project basis.
The following table shows, from inception through
September&nbsp;30, 2004, the total costs associated with
ALGRX&nbsp;4975 and ALGRX&nbsp;3268:
</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="29%"><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="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="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Inception) to</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" 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">(Inception)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</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>
    <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">2001</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>
    <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>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="23"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><B><FONT size="1">(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">ALGRX 4975
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">365</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,047</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,697</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,268</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,446</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,555</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">ALGRX 3268
    </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">6,877</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,129</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">6,308</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,008</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">19,014</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 R&#38;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">&#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">821</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">365</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">228</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,414</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>

</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">365</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,745</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,191</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,939</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,682</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34,983</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We expect that a large percentage of our research
and development expenses in the future will be incurred in
support of our current and future preclinical and clinical
development programs. These expenditures are subject to numerous
uncertainties in timing and cost to completion. We test our
product candidates in numerous preclinical studies for
toxicology, safety and efficacy. We then conduct early stage
clinical trials for each drug candidate. If we are not able to
engage a collaboration partner prior to the commencement of
later stage clinical trials, we may fund these trials ourselves.
As we obtain results from clinical trials, we may elect to
discontinue or delay clinical trials for certain product
candidates or
</FONT>

<P align="center"><FONT size="2">32
</FONT>

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<DIV align="left">
<FONT size="2">programs in order to focus our resources on more
promising product candidates or programs. Completion of clinical
trials by us or our future collaborators may take several years
or more, but the length of time generally varies according to
the type, complexity, novelty and intended use of a drug
candidate. The cost of clinical trials may vary significantly
over the life of a project as a result of differences arising
during clinical development, including, among others:
</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">the number of sites included in the 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 length of time required to enroll suitable
    patient subjects;
    </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 patients that participate in the
    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 number of doses that patients receive;
    </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 duration of patient follow-up;
    </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 phase of development the product is
    in;&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 efficacy and safety profile of the product.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our expenses related to clinical trials are based
on estimates of the services received and efforts expended
pursuant to contracts with multiple research institutions and
clinical research organizations that conduct and manage clinical
trials on our behalf. The financial terms of these agreements
are subject to negotiation and vary from contract to contract
and may result in uneven payment flows. Generally, these
agreements set forth the scope of work to be performed at a
fixed fee or unit price. Payments under the contracts depend on
factors such as the successful enrollment of patients or the
completion of clinical trial milestones. Expenses related to
clinical trials generally are accrued based on contracted
amounts applied to the level of patient enrollment and activity
according to the protocol. If timelines or contracts are
modified based upon changes in the clinical trial protocol or
scope of work to be performed, we modify our estimates of
accrued expenses accordingly on a prospective basis.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">None of our drug candidates has received FDA or
foreign regulatory marketing approval. In order to grant
marketing approval, the FDA or foreign regulatory agencies must
conclude that our and our collaborators&#146; clinical data
establishes the safety and efficacy of our drug candidates.
Furthermore, our strategy includes entering into collaborations
with third parties to participate in the development and
commercialization of our products. In the event that third
parties have control over the preclinical development or
clinical trial process for a product candidate, the estimated
completion date would largely be under control of that third
party rather than under our control. We cannot forecast with any
degree of certainty which of our drug candidates will be subject
to future collaborations or how such arrangements would affect
our development plan or capital requirements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the uncertainties discussed above,
we are unable to determine the duration and completion costs of
our research and development projects or when and to what extent
we will receive cash inflows from the commercialization and sale
of a product.
</FONT>

<P align="left">
<B><FONT size="2">General and Administrative Expenses</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">General and administrative expenses consist
primarily of compensation for employees in executive and
operational functions, including finance, business development
and corporate development. Other significant costs include
facilities costs and professional fees for accounting and legal
services, including legal services associated with obtaining and
maintaining patents. After completion of the offering made by
this prospectus, we anticipate incurring increases in general
and administrative expenses, such as increased costs for
insurance and investor relations associated with operating as a
public company. These increases will also likely include the
hiring of additional personnel and payment to outside
consultants, lawyers and accountants. We also expect to incur
significant costs to comply with the requirements set forth
under the new regulations for corporate governance and internal
controls.
</FONT>

<P align="center"><FONT size="2">33
</FONT>

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<P align="left">
<B><FONT size="2">Critical Accounting Policies</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
U.S.&nbsp;generally accepted accounting principles. 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">

<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">Stock-based compensation represents the
difference between the exercise price of options granted to
employees and directors and the fair value of our common stock
on the date of grant for financial statement purposes in
accordance with Accounting Principles Board Opinion No.&nbsp;25
and its related interpretations. We recognize this compensation
charge over the vesting periods of the shares purchasable upon
exercise of options. Should our assumptions of fair value
change, the amount recorded as intrinsic value will increase or
decrease in the future.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We recorded deferred stock-based compensation
related to stock options granted to employees and directors of
$0.2&nbsp;million and related amortization of $13,000 during
2003, and deferred stock-based compensation of $8.8&nbsp;million
and related amortization of $0.4&nbsp;million during the
nine-month period September&nbsp;30, 2004. We expect to amortize
approximately $8.6&nbsp;million of deferred stock-based
compensation with respect to stock options granted through
September&nbsp;30, 2004 in future periods, including
$0.6&nbsp;million during the fourth quarter of 2004,
$2.2&nbsp;million during 2005, $2.2&nbsp;million during 2006,
$2.2&nbsp;million during 2007 and $1.4&nbsp;million during 2008.
</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">Acquired In-Process Research and
    Development</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Acquired in-process research and development
relates primarily to in-licensed technology, intellectual
property and know-how. We evaluate the stage of development of
acquired projects, taking into account the level of effort, time
and estimated cost associated with further developing the
in-process technology and producing a commercial product. The
nature of the remaining efforts for completion of acquired
in-process research and development projects generally include
completion of clinical trials, completion of manufacturing
validation, interpretation of clinical and preclinical data and
obtaining marketing approval from the FDA and other regulatory
bodies, the cost, length and success of which are extremely
difficult to determine. Numerous risks and uncertainties exist
with timely completion of development projects, including
clinical trial results, manufacturing process development
results, and ongoing feedback from regulatory authorities,
including obtaining marketing approval. In addition, acquired
products under development may never be successfully
commercialized due to the uncertainties associated with the
pricing of new pharmaceuticals, the cost to produce these
products in a commercial setting, changes in the reimbursement
environment, or the introduction of new competitive products. As
a result of the uncertainties noted above, we expense such
acquired in-process research and development projects when
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">Revenue Recognition</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our revenue recognition policies are in
accordance with Securities and Exchange Commission
(SEC)&nbsp;Staff Accounting Bulletins No.&nbsp;101 and
No.&nbsp;104, or SAB&nbsp;101 and 104, and EITF&nbsp;00-21,
<I>Revenue Recognition in Financial Statements</I>, which
provides guidance on revenue recognition in financial statements
and is based on the interpretations and practices developed by
the SEC. SAB&nbsp;101 requires that four basic criteria be met
before revenue can be recognized: (1)&nbsp;persuasive evidence
exists of an
</FONT>

<P align="center"><FONT size="2">34
</FONT>

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<DIV align="left">
<FONT size="2">arrangement; (2)&nbsp;delivery has occurred or
services have been rendered; (3)&nbsp;the fee is fixed and
determinable; and (4)&nbsp;collectibility is reasonably assured.
Determination of criteria (3)&nbsp;and (4)&nbsp;are based on our
management&#146;s judgments regarding the fixed nature of the
fees charged for services rendered and products delivered and
the collectibility of those fees. Should changes in conditions
cause our management to determine that these criteria are not
met for certain future transactions, revenue recognition for
those transactions will be delayed and our revenues could be
adversely affected.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Results of Operations</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">Comparison of the Nine Months Ended
    September&nbsp;30, 2004 and 2003</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Revenue.</FONT></I><FONT size="2"> For the
nine months ended September&nbsp;30, 2004, we did not recognize
any revenues. We recognized $100,000 of revenue during the nine
months ended September&nbsp;30, 2003. This revenue was derived
from the licensing of technology acquired as part of the
PowderJect acquisition that we did not intend to develop
ourselves. Under the terms of the agreement, the licensee paid
us a one-time fee of $100,000 upon the execution of the
agreement, and the licensee is obligated to pay royalties to us
equal to a percentage of sales. To date, no royalty payments
have been paid nor do we expect to receive any in the near
future. We do not expect any future royalty payments under the
agreement to be material.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Research and Development
Expenses.</FONT></I><FONT size="2"> Research and development
expenses were $10.7&nbsp;million for the nine months ended
September&nbsp;30, 2004, compared with $10.9&nbsp;million for
the nine months ended September&nbsp;30, 2003. The
$0.2&nbsp;million decrease in our research and development
expenses reflects an increase of $1.2&nbsp;million for
ALGRX&nbsp;4975 offset by a decrease of $1.3&nbsp;million for
the ALGRX&nbsp;3268 program, a decrease of $0.3&nbsp;million in
other program expenses, and an increase of $0.2&nbsp;million for
amortization of deferred compensation. The $1.2&nbsp;million
increase in costs for the ALGRX&nbsp;4975 program for the first
nine months of 2004 was primarily attributable to an increase of
$1.4&nbsp;million in clinical costs, salary and other costs
necessary to support the increased clinical activity as we
completed two phase&nbsp;II clinical trials begun in 2003,
offset by a decrease of $0.2&nbsp;million in drug safety costs
that were incurred through 2003 and early 2004 to support the
IND for ALGRX&nbsp;4975 and the initiation and planning of
five&nbsp;other clinical trials for ALGRX&nbsp;4975. The
$1.3&nbsp;million decrease in costs for the ALGRX&nbsp;3268
program for the first nine months of 2004 was primarily
attributable to decreased personnel costs of $1.7&nbsp;million
and decreased clinical costs of $0.6&nbsp;million, offset by an
increase of $1.0&nbsp;million in manufacturing, quality
assurance and other costs. The decreased personnel costs were
due to the company&#146;s reduction of force of
28&nbsp;employees in March 2003, all of whom were involved with
the ALGRX 3268 program. The increase in manufacturing, quality
assurance and other costs of $1.0&nbsp;million was due to a
variety of projects necessary to prepare for phase&nbsp;III
clinical trials and potential commercialization of the product
candidate.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In March 2003, we announced a reorganization plan
intended to reduce operating costs at our Fremont facility in
response to a clinical hold placed on ALGRX&nbsp;3268 by the
FDA. The primary focus of the workforce at the Fremont facility
was ALGRX&nbsp;3268. We reduced our staff by 28 employees
(approximately 82% of total employees at the Fremont facility
and 61% of total AlgoRx employees overall as of the date of
reorganization) though no research projects were discontinued.
During the clinical hold period, which lasted three&nbsp;months,
we began an outsourcing program that has since replaced all of
the necessary functions with outside vendors and consultants.
The total restructuring cost of $1.1&nbsp;million was expensed
during 2003. Severance and related costs were $0.8&nbsp;million.
The vesting of certain options held by the terminated employees
was accelerated in connection with this reorganization, and we
recorded a charge of $66,240 related to this acceleration of
vesting. The reorganization resulted in an impairment of the
assembled workforce intangible asset that had been recorded as a
result of the March 2002 acquisition from PowderJect
Pharmaceuticals plc. This impairment of $0.2&nbsp;million was
recorded as accelerated amortization expense during 2003 and was
classified under research and development expenses for the nine
months ended September&nbsp;30, 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">General and Administrative
Expenses.</FONT></I><FONT size="2"> General and administrative
expenses were $2.9&nbsp;million for the nine months ended
September&nbsp;30, 2004, compared with $2.3&nbsp;million for the
nine months ended September&nbsp;30,
</FONT>

<P align="center"><FONT size="2">35
</FONT>
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<DIV align="left">
<FONT size="2">2003. The $0.6&nbsp;million increase was
primarily attributable to the increase in administration, salary
and facility costs.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interest Expense.</FONT></I><FONT size="2">
Interest expense was $24,000 for the nine months ended
September&nbsp;30, 2004, compared with $72,000 for the nine
months ended September&nbsp;30, 2003. The $48,000 decrease was
due to the shorter period of time in 2004 during which the
$9.8&nbsp;million of convertible notes were outstanding.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interest Income.</FONT></I><FONT size="2">
Interest income was $0.4&nbsp;million for the nine months ended
September&nbsp;30, 2004, compared with $70,000 for the nine
months ended September&nbsp;30, 2003. The increase was due to
higher average cash and investment balances.
</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">Comparison of the Years Ended
    December&nbsp;31, 2003 and 2002 and the Period From
    March&nbsp;6, 2001 (Inception) Through December&nbsp;31,
    2001</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Research and Development
Expenses.</FONT></I><FONT size="2"> Research and development
expenses were $12.2&nbsp;million in 2003, $11.7&nbsp;million in
2002 and $0.4&nbsp;million in 2001 (representing the period from
inception on March&nbsp;6, 2001 through December&nbsp;31, 2001).
The expenses are associated with research and development
programs that we conducted during these periods in the areas of
pain management.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The $0.5&nbsp;million increase in our research
and development expenses from 2002 to 2003 reflects an increase
of $0.7&nbsp;million for ALGRX&nbsp;4975 and an increase of
$0.3&nbsp;million for ALGRX&nbsp;3268, offset by a decrease of
$0.5&nbsp;million in other program expenses. The increase in
costs associated with ALGRX&nbsp;4975 was primarily attributable
to an increase in clinical activity in which we completed a
phase&nbsp;I safety trial and initiated two phase&nbsp;II
clinical trials. In 2002, we initiated our first clinical trial
in the second half of the year and only incurred a small amount
of costs. The increase of costs associated with ALGRX&nbsp;3268
in 2003 was primarily attributable to higher salary costs,
severance costs for 28 employees at our California facility in
March 2003, increased clinical activity, and an increase in
facility operating costs, together totaling $0.9&nbsp;million,
offset by a decrease of $0.6&nbsp;million in drug safety studies.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The $11.3&nbsp;million increase in our research
and development expenses from 2001 to 2002 was primarily
attributable to a significant increase in personnel and external
spending following the in-licensing of ALGRX&nbsp;4975 in the
third quarter of 2001 and the purchase and licensing of
technology relating to ALGRX&nbsp;3268 in the first quarter of
2002. This $11.3 million increase in 2002 resulted from an
increase of $3.6&nbsp;million in the costs of our
ALGRX&nbsp;4975 program related to the preparation of the IND
application and the start of our first clinical trial, an
increase of $6.9&nbsp;million due to the initiation of our
efforts in the ALGRX&nbsp;3268 program which we acquired at the
end of the first quarter of 2002, and additional increases of
$0.8&nbsp;million related to other uses of our in-licensed
PowderJect device. The ALGRX&nbsp;3268 program costs of
$6.9&nbsp;million in 2002 were primarily attributable to
$2.4&nbsp;million in salary costs and related expenses,
$1.5&nbsp;million related to drug safety studies,
$1.0&nbsp;million in clinical studies and $1.9&nbsp;million in
facility and other operating costs. The other costs of $0.8
million were $0.4 for salary and related expenses and $0.4 for
drug safety costs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">General and Administrative
Expenses.</FONT></I><FONT size="2"> General and administrative
expenses were $3.5&nbsp;million in 2003, $3.1&nbsp;million in
2002 and $1.1&nbsp;million in 2001. The $0.4&nbsp;million
increase in expenses from 2002 to 2003 was primarily
attributable to termination costs and business development costs
partially offset by lower personnel costs. The $2.0&nbsp;million
increase in expenses from 2001 to 2002 was primarily
attributable to increased staffing and other personnel costs
associated with supporting our programs, particularly due to the
purchase and license of ALGRX&nbsp;3268 in the first quarter of
2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Acquired In-Process Research and
Development.</FONT></I><FONT size="2"> Generally, we determine
the amount of any in-process research and development expense
based on an analysis using risk-adjusted cash flows expected to
be generated by products that may result from the in-process
technologies acquired. We review the acquired project rights to
determine the stage of their development, the probability of
demonstrating in clinical trials sufficient safety and efficacy
for FDA approval and product risk factors inherent in the drug
development process. The product-specific risk factors include
the type of drug under development, likelihood of regulatory
approval, manufacturing process capability, scientific
rationale, preclinical safety
</FONT>

<P align="center"><FONT size="2">36
</FONT>
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<DIV align="left">
<FONT size="2">and efficacy data, target product profile and
development plans. The valuation used to estimate in-process
research and development expense requires us to use significant
estimates and assumptions that, if changed, may result in a
different valuation for in-process technology.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with our license agreement and
acquisition of assets from subsidiaries of PowderJect
Pharmaceuticals plc, we reviewed the rights and assets that we
acquired to determine the stage of development, the probability
of demonstrating in our clinical trials sufficient safety and
efficacy for FDA approval and the technical milestones needed to
be reached before commercialization would be possible. We
determined, as of the acquisition date, there was significant
risk that our clinical trials may not demonstrate the levels of
safety and efficacy needed for FDA approval and that the project
had significant milestones to reach before commercialization. We
also determined that all of the projects had no alternative
future uses if they were not successful. Accordingly, we
classified a portion of the ALGRX&nbsp;3268 and associated
projects as in-process research and development and expensed
$5.7&nbsp;million immediately. The remaining purchase price was
allocated to tangible net assets of $3.7&nbsp;million and
acquired workforce of $0.5&nbsp;million. We valued the assets
acquired based on the value of the consideration that PowderJect
Pharmaceuticals plc and three individuals received in this
transaction, which included 6,166,154&nbsp;shares of
Series&nbsp;B convertible preferred stock and
1,526,154&nbsp;shares of common stock. The Series&nbsp;B
preferred stock was valued at $8.0&nbsp;million based on the
arm&#146;s length Series&nbsp;B preferred stock financing
completed concurrently with the acquisition. The common stock
issued in the acquisition was valued at $0.2&nbsp;million using
the estimated fair value used for option grants to our
employees. The purchase price for the acquisition also included
cash consideration of $0.8&nbsp;million for a minority
interest&#146;s share in the acquired company and assumed
liabilities of $0.2&nbsp;million. The total purchase price for
this acquisition was $9.9&nbsp;million, including transaction
costs of $0.7&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interest Expense.</FONT></I><FONT size="2">
Interest expense was $0.1&nbsp;million in 2003, $4,000 in 2002
and $2,000 in 2001. The increase in interest expense from 2002
to 2003 was due to non-cash accrued interest expense for the
$9.8&nbsp;million of convertible notes.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interest Income.</FONT></I><FONT size="2">
Interest income was $86,000 in 2003, $0.2&nbsp;million in 2002
and $47,000 in 2001. The decrease in interest income from 2002
to 2003 was primarily attributable to lower average cash
balances and the lower interest rate environment. The increase
in interest income from 2001 to 2002 was primarily attributable
to the higher level of cash available during 2002 as proceeds
from the sale of our Series&nbsp;B preferred stock were received
in March 2002.
</FONT>

<P align="left">
<B><FONT size="2">Liquidity and Capital Resources</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To date, we have funded our operations primarily
through the sale of equity securities. As of September&nbsp;30,
2004, we had received approximately $87.8&nbsp;million of cash
proceeds from the sale of equity securities (including the notes
that were converted into preferred stock), net of offering
expenses.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of September&nbsp;30, 2004, we had
$47.6&nbsp;million in cash, cash equivalents and marketable
securities as compared to $4.5&nbsp;million as of
December&nbsp;31, 2003, an increase of $43.1&nbsp;million. This
increase resulted primarily from the issuance of
$65&nbsp;million of Series&nbsp;C preferred stock for
$53.8&nbsp;million of cash proceeds (net of $1.4&nbsp;million of
related transaction costs and conversion into Series&nbsp;C
preferred stock of $9.8&nbsp;million of convertible promissory
notes that were issued in April 2003).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net cash used in operating activities amounted to
$10.7&nbsp;million for the nine months ended September&nbsp;30,
2004 and $11.4&nbsp;million for the nine months ended
September&nbsp;30, 2003. The primary use of cash was to fund our
net losses for these periods, adjusted for non-cash expenses,
including depreciation and amortization of $0.8&nbsp;million for
the nine months ended September&nbsp;30, 2004 and
$1.1&nbsp;million for the nine months ended September&nbsp;30,
2003, non-cash stock based compensation of $0.5&nbsp;million for
the nine months ended September&nbsp;30, 2004 and $82,000 for
the nine months ended September&nbsp;30, 2003 and an increase in
net operating assets and liabilities of $1.2&nbsp;million for
the nine months ended September&nbsp;30, 2004 and
$0.6&nbsp;million for the nine months ended September&nbsp;30,
2003.
</FONT>

<P align="center"><FONT size="2">37
</FONT>
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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net cash used in investing activities (excluding
net proceeds from purchases, sales and maturities of short-term
investments) for the nine months ended September&nbsp;30, 2004
amounted to $47,000 and $0.3&nbsp;million for the nine months
ended September&nbsp;30, 2003. We paid approximately $47,000
during the nine months ended September&nbsp;30, 2004 for
leasehold improvements and capital equipment necessary to
support our anticipated future growth, net of proceeds from the
disposal of equipment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net cash provided by financing activities
amounted to $53.8&nbsp;million for the nine months ended
September&nbsp;30, 2004, and $9.8&nbsp;million for the nine
months ended September&nbsp;30, 2003. These activities consisted
primarily of private sales of our Series&nbsp;C preferred stock
and convertible promissory notes convertible into our
Series&nbsp;C preferred stock, which were offset in part by
stock issuance costs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net cash used in operating activities was
$14.0&nbsp;million in 2003. The primary use of cash was to fund
our net loss, adjusted for non-cash expenses including
depreciation and amortization of $1.3&nbsp;million in 2003,
non-cash stock-based compensation of $88,000 in 2003 and
non-cash interest expense of $0.1&nbsp;million in 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net cash used in investing activities was
$0.2&nbsp;million in 2003. These activities consisted primarily
of purchases, offset by sales, of property and equipment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net cash provided by financing activities was
$9.8&nbsp;million in 2003. This amount was from the sale of
convertible promissory notes, the proceeds from which were
offset by issuance costs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We had a deferred tax asset of $14.4&nbsp;million
as of December&nbsp;31, 2003 offset by a valuation allowance of
$14.4&nbsp;million. The valuation allowance is based on the high
level of uncertainty regarding our ability to generate net
income in the future and utilize the deferred tax asset.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes our long-term
contractual obligations as of September&nbsp;30, 2004:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="39%"><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="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="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="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" align="center" nowrap><B><FONT size="1">Remainder of 2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2005</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2006</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2007</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2008</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Thereafter</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="23"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="23" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR>
    <TD 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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">222</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">123</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have three cancelable license agreements, two
of which relate to ALGRX&nbsp;4975 and ALGRX&nbsp;3268, our two
product candidates in clinical trials, and the other of which
relates to our preclinical product candidate, ALGRX&nbsp;1207.
Under these license agreements, we could be required to pay up
to a total of $6.2&nbsp;million in milestone payments through
product approval, in addition to sales milestones and royalties
on commercial sales if any occur. Under our license with
PowderMed Limited we are obligated and have spent
$1.0&nbsp;million on research and development associated with
the licensed technology during the period July&nbsp;7, 2003 to
July&nbsp;7, 2005. We are also obligated to spend an additional
$1.0&nbsp;million on research and development for every
12&nbsp;month period from July&nbsp;7, 2005 to July&nbsp;7,
2008. We have no material commitments for capital expenditures.
</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">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 product 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">our plans to establish 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>

</TABLE>

<P align="center"><FONT size="2">38
</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">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 products.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that our existing cash and cash
equivalents, together with proceeds from this offering, will be
sufficient to meet our projected operating requirements for at
least the next 24&nbsp;months.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Until we can generate significant cash from our
operations, we expect to continue to fund our operations with
existing cash resources. If we need to raise funds in the
future, we may be required to raise those funds through public
or private financings, strategic relationships or other
arrangements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of September&nbsp;30, 2003 and 2004 and
December&nbsp;31, 2001, 2002 and 2003, we did not have any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
In addition, we do not engage in trading activities involving
non-exchange traded contracts. Therefore, we are not materially
exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in these relationships.
</FONT>

<P align="left">
<B><FONT size="2">Recent Accounting Pronouncements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In January 2003, the FASB issued FIN No.&nbsp;46,
<I>Consolidation of Variable Interest Entities</I>. This
interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks
among parties involved. It explains how to identify variable
interest entities and how an enterprise assesses its interest in
a variable interest entity to decide whether to consolidate that
entity. As amended, this interpretation applies in the first
fiscal year or interim period beginning after December&nbsp;15,
2003, to variable interest entities in which an enterprise holds
a variable interest that it acquired before February&nbsp;1,
2003. The adoption of FIN No.&nbsp;46 did not have a material
impact on our financial position, results of operations or cash
flows.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In May 2003, the FASB issued Statement of
Financial Accounting Standards No.&nbsp;150, <I>Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity</I> (&#147;SFAS&nbsp;150&#148;). This
statement establishes standards for classifying and measuring as
liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. The scope of this pronouncement includes
mandatorily redeemable equity instruments. Application to
pre-existing instruments should be recognized as the cumulative
effect of a change in accounting principle (application by
retroactive restatement is precluded). Exceptions to the
transition requirements were provided for mandatorily redeemable
instruments of non-public companies. Subsequent to the issuance
of SFAS&nbsp;150, the FASB issued FSP&nbsp;150-3, which further
deferred the transition requirements for nonpublic companies
that also are not SEC registrants for instruments that are
mandatorily redeemable on fixed dates that are for fixed
amounts. The classification, measurement, and disclosure
provisions of SFAS&nbsp;150 are effective for fiscal periods
beginning after December&nbsp;15, 2004. The adoption of this
statement is not expected to impact the classification of the
Company&#146;s convertible preferred stock, which will convert
into common stock on the completion of this offering.
</FONT>

<P align="left">
<B><FONT size="2">Quantitative and Qualitative Disclosure About
Market Risk</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our primary exposure to market risk is interest
income sensitivity, which is affected by changes in the general
level of U.S.&nbsp;interest rates, particularly because the
majority of our investments are in short-term marketable
securities. Due to the nature of our short-term investments, we
believe that we are not subject to any material market risk
exposure. We do not have any foreign currency or other
derivative financial instruments.
</FONT>

<P align="center"><FONT size="2">39
</FONT>

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

<P align="left">
<B><FONT size="2">Overview</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are an emerging pharmaceutical company focused
on developing and commercializing a diversified portfolio of
pharmaceutical product candidates to address pain, a large and
under-served market. Our pipeline consists of two clinical
product candidates, ALGRX&nbsp;4975 and ALGRX&nbsp;3268, and one
preclinical product candidate, ALGRX&nbsp;1207. ALGRX&nbsp;4975
(capsaicin for injection and capsaicin gel for intraoperative
use) is being developed as a long lasting, site-specific
treatment for severe or intractable pain in three programs and
is currently being evaluated in six phase&nbsp;II clinical
trials. ALGRX 3268 (PowderJect&#174; Dermal Lidocaine) is a
lidocaine powder delivered into the skin by means of our
proprietary needle-free dispenser. We initiated a phase&nbsp;III
clinical trial for ALGRX&nbsp;3268 in November&nbsp;2004. We are
also developing ALGRX&nbsp;1207, a new molecular entity, in
preclinical trials as a topical local anesthetic for use in a
variety of pain conditions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are developing ALGRX&nbsp;4975 in three
programs, which address site-specific, severe or intractable
pain in acute or chronic settings:
</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">for intraoperative use to treat patients with
    severe postsurgical 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">to treat patients with post-trauma neuropathic
    pain;&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">to treat patients with chronic pain associated
    with musculoskeletal diseases.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To date, we have tested ALGRX&nbsp;4975, of which
the active ingredient is capsaicin, using an injectable liquid.
We will continue using this liquid formulation in the latter two
programs, but for the postsurgical pain program, we plan to
transition to a gel formulation, which would provide greater
ease of use in intraoperative applications.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have evaluated ALGRX&nbsp;4975 in one
phase&nbsp;I clinical trial and two phase&nbsp;II clinical
trials that have yielded favorable safety and efficacy data. We
have six phase&nbsp;II clinical trials underway to further
evaluate ALGRX&nbsp;4975, including a 168-patient phase&nbsp;II
clinical trial for severe postsurgical pain. We plan to begin
additional clinical trials in several indications in early 2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our most advanced product candidate,
ALGRX&nbsp;3268, is a powder formulation of the local anesthetic
lidocaine delivered into the skin using our proprietary
needle-free dispenser. We are evaluating the use of
ALGRX&nbsp;3268 to reduce the pain experienced by patients from
needle-sticks in procedures where blood is drawn or intravenous
lines are inserted. We recently commenced one of two
phase&nbsp;III clinical trials for ALGRX&nbsp;3268 with a goal
of submitting a new drug application (NDA) with the FDA for
ALGRX&nbsp;3268 by the end of 2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX&nbsp;1207 is a new molecular entity that we
in-licensed in October 2004 and are developing in preclinical
trials as a topical local anesthetic. We intend to develop
ALGRX&nbsp;1207 as a therapy for chronic pain stemming from skin
diseases and to reduce the pain associated with surgical
procedures on the skin. We plan to file an investigational new
drug (IND) application covering ALGRX&nbsp;1207 with the FDA in
the second half of 2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our goal is to commercialize drugs for the
treatment of acute and chronic pain, which we believe are poorly
served by existing therapies. We believe that our understanding
of the mechanisms of pain combined with our management&#146;s
clinical development expertise in pain therapeutics will
continue to enable us to identify, in-license or acquire, and
develop promising potential products for treating painful
conditions that are not adequately treated with existing drugs
or other therapies.
</FONT>

<P align="left">
<B><FONT size="2">Pain Description and Classification</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pain is an unpleasant sensation that occurs as a
result of injury to the body or as a manifestation of a diseased
state. Pain can be classified in many ways. For example, pain
can be classified based on its
</FONT>

<P align="center"><FONT size="2">40
</FONT>

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<DIV align="left">
<FONT size="2">duration (acute or chronic), its underlying cause
(nociceptive or neuropathic) or its severity (mild, moderate or
severe).
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Duration.</FONT></I><FONT size="2"> Pain can
be classified as either acute or chronic depending on how long
the pain lasts. Acute pain is brief in nature. Key features of
acute pain are that it is generally experienced in proportion to
the degree of injury or damage to the body and that it resolves
or subsides as the injury heals. Examples of acute pain include
pain resulting from a broken bone, a surgical procedure, or
accidental trauma. Acute pain may serve a protective function by
alerting an individual to tissue damage and by causing the
individual to alter activity to prevent additional injury. By
contrast, chronic pain is pain extending 3 to 6&nbsp;months
beyond onset or beyond the expected period of healing and may
have undetermined causes or may persist inexplicably after acute
pain should have subsided. Importantly, chronic pain can be
accompanied by irritability, social withdrawal, a depressed
mood, disruption of work and social relationships and symptoms
such as changes in sleep and appetite. Examples of chronic pain
include pain associated with cancer or arthritis.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Underlying cause.</FONT></I><FONT size="2">
Pain can be classified as either pain that results directly from
local tissue injury (nociceptive) or pain that follows nerve
injury (neuropathic). Nociceptive pain results from direct
tissue damage. Key features of nociceptive pain are that it can
be experienced as a sharp, dull or aching pain. Examples of
nociceptive pain include pain from surgical incisions, bone pain
from fractures or metastatic cancer and pain from joint diseases
such as osteoarthritis and rheumatoid arthritis.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Neuropathic pain occurs as a result of damage to,
or dysfunction of, the nervous system. Neuropathic pain is
frequently described as burning, tingling or having an
electrical shock-like feeling. Another key feature of this type
of pain is its occurrence upon stimulation that otherwise would
not be expected to cause pain. For example, a condition called
trigeminal neuralgia may cause patients to feel extreme pain
upon a light touch on the cheek. Examples of neuropathic pain
include the pain resulting from diabetes and HIV infection, and
postherpetic neuralgia, which is a painful skin condition caused
by the chicken pox virus long after the initial infection has
healed, in many cases years later. Neuropathic pain frequently
coexists with or follows nociceptive pain, as for example when a
patient that has had a surgical procedure continues to
experience pain long after the wound has healed.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Severity.</FONT></I><FONT size="2"> Pain can
be classified into three categories of severity: mild, moderate
and severe. It is important to determine a patient&#146;s
particular level of pain since doing so will influence the type
of drugs or other treatments prescribed by physicians and other
health care providers. Because there are no clear
differentiating factors among the three categories of pain
severity, health care providers frequently determine severity by
gauging the extent to which pain interferes with a
patient&#146;s daily function or by relying on a patient&#146;s
own opinion of the severity of his or her pain. In clinical
trials, for example, the severity of pain in patients is
sometimes measured by patients on a numerical scale with ratings
of 1 to 4 corresponding to mild pain, 4 to 6 corresponding to
moderate pain, and 6 to 10 corresponding to severe pain.
Examples of mild pain include headaches or joint pain, and
examples of moderate pain include the types of pain often
associated with minor surgery or some forms of arthritis.
Patients experiencing severe pain often suffer from a serious
underlying illness, such as AIDS or cancer. Severe pain can also
result from major surgery, nerve damage, advanced arthritis or
cancer.
</FONT>

<P align="left">
<B><FONT size="2">Pain Management Market</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pain is a worldwide problem with serious health
and economic consequences. The medical effort to treat pain,
known as pain management, addresses a large and under-served
market. Global Industry Analysts, Inc. estimates that the
worldwide prescription market for pain drugs totaled over
$28&nbsp;billion in 2003. IMS Health estimates that nearly
$18&nbsp;billion was spent in 2003 on prescription pain drugs in
the United States. In the United States:
</FONT>
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    <TD width="1%"></TD>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">medical economists estimate that pain results in
    approximately $100&nbsp;billion of costs annually, as reported
    by the National Institutes of Health (NIH). Pain in the hospital
    is associated with increased length of stay, longer recovery
    times and poorer patient outcomes, all of which have health care
    quality and cost implications;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">41
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    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">approximately 25&nbsp;million Americans
    experience acute pain each year due to injury or surgery,
    according to the American Pain Society;&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">approximately 48&nbsp;million Americans suffer
    chronic pain, according to the National Pain Survey published in
    1999 by Ortho-McNeil Pharmaceutical, Inc.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">According to a Global Strategic Business Report
published in 2004 by Global Industry Analysts, Inc., the
prescription pain management market is anticipated to grow at a
compounded annual growth rate of 9% through 2010 due to a number
of factors, including:
</FONT>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a rapidly aging population with an increasing
    need and desire to address pain-related ailments;
    </FONT></TD>
</TR>

<TR>
    <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">longer survival times for patients with painful
    chronic conditions, such as cancer and AIDS;
    </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">patients&#146; increased demand for effective
    pain relief;&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">increasing recognition of the therapeutic and
    economic benefits of effective pain management by physicians,
    other health care providers and payors.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Analgesic Drugs</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Drugs that treat pain are referred to as
analgesics, and the type of analgesic selected for treatment
depends principally upon the severity of the pain. For mild
pain, weak analgesics such as acetaminophen or nonsteroidal
anti-inflammatory drugs (NSAIDs) such as ibuprofen are used. For
moderate pain, NSAIDs, weak opioids such as codeine or
short-acting formulations of strong opioids may be used. Severe
pain requires strong opioids such as morphine, oxycodone,
hydrocodone or fentanyl.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The table below sets forth selected major classes
of analgesics, examples of product brands within each class and
the corresponding prescription revenues in 2003 for each class
as prescribed to treat pain, as reported by IMS Health:
</FONT>

<CENTER>
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<TR>
    <TD width="43%"><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="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>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Class</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Example</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003 US Revenues</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 colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

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

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">NSAIDs (including COX-2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Celebrex&#174;, Bextra&#174;, diclofenac
    </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">6,271</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">Opioids (all delivery methods)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">OxyContin&#174;, Percocet&#174;, Duragesic&#174;,
    injectable morphine, Ultram&#174;
    </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">5,037</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">Antiepileptics (prescribed for pain)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Neurontin&#174;
    </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">928</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">Local anesthetics (injectable and topical)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">lidocaine
    </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">503</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

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

<P align="left">
<FONT size="2">Source: IMS Health, IMS National Sales
Perspectives&#153;, fourth quarter 2004.
</FONT>

<P align="left">
<B><FONT size="2">Shortcomings of Current Pain
Management</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Despite widespread clinical use of drugs for
pain, pain management remains less than optimal due to a variety
of factors, including:
</FONT>
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    <TD align="left">
    <I><FONT size="2">Insufficient
    efficacy.</FONT></I><FONT size="2"> Opioids, the current
    standard of care for severe nociceptive pain, reduce pain less
    than 50% in a majority of situations. Neuropathic pain is
    difficult to treat with existing analgesics because of the
    differing types of nerves and organs involved in, and types of
    injuries causing, this kind of pain. Neuropathic pain does not
    respond to treatment with NSAIDs and responds poorly to
    treatment with opioids at doses that do not impair the ability
    of patients to live reasonably active lifestyles.
    </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">
    <I><FONT size="2">Lack of site
    specificity.</FONT></I><FONT size="2"> Most analgesics,
    including opioids and NSAIDs, are given orally or by intravenous
    infusion and thereby subject the patient to high circulating
    concentrations of drug, even though most types of pain are
    experienced in discrete parts of the body. Opioids must be given
    by mouth or infusion because they provide pain relief by acting
    on nerves all over the body: in the spinal cord, in the brain
    and at the site of injury. As a consequence, opioids do not
    provide site-
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">42
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    <TD></TD>
    <TD align="left">
    <FONT size="2">specific pain relief because their action is not
    targeted specifically to the area of the body that is
    experiencing pain. Moreover, circulating drugs cause side
    effects at parts of the body unrelated to the perception of
    pain. Although there are currently means of delivering
    site-specific analgesia, such as by injection of short-acting
    anesthetics into joints such as the ankle or knee, these
    techniques are reserved to provide relatively short-term
    anesthesia prior to surgery and are not appropriate for
    long-term pain relief.
    </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">
    <I><FONT size="2">Occurrence of side
    effects.</FONT></I><FONT size="2"> NSAIDs may cause
    gastrointestinal ulcers, and between 10,000 and 20,000 patients
    die each year from gastrointestinal bleeding believed to be
    related to the use of NSAIDs. Use of opioids is associated with
    nausea and vomiting in many patients. High-dose opioids cause
    sedation and may also cause respiratory depression, or a
    decrease in the ability to breathe spontaneously. Opioids used
    chronically can cause severe constipation that leads many
    patients to stop using them, and opioids may sometimes cause
    severe itching. All of the drugs used to treat neuropathic pain
    frequently cause problems with coordination and sedation.
    </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">
    <I><FONT size="2">Need for frequent
    dosing.</FONT></I><FONT size="2"> Drugs used to treat
    neuropathic pain require frequent dosing that makes their use
    inconvenient, often leading to reduced 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">
    <I><FONT size="2">Slow onset of
    action.</FONT></I><FONT size="2"> Local anesthetics that are
    used prior to procedures involving manipulation of the skin
    (such as needle-sticks or skin surgery) are typically formulated
    as patches or creams and have a slow onset of pain relief. This
    slow onset (as well as poor efficacy) is due to the poor
    penetration of skin by the anesthetics used in these 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">
    <I><FONT size="2">Potential to cause physical
    dependence.</FONT></I><FONT size="2"> Opioids, when used
    chronically, can cause physical dependence. Fear of physical
    dependence often influences clinicians to prescribe less than
    adequate doses of opioid analgesics. Similar fears lead many
    patients to refuse opioid analgesics.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Given doctors&#146; and patients&#146; desire to
achieve adequate control of pain, and the significant
shortcomings associated with existing treatments, doctors and
patients often struggle to find an appropriate balance between
pain relief and adverse side effects. With both over- and
under-treatment of pain, patients may be suffering
unnecessarily, have poor quality of life and have difficulty
meeting their social, familial and work-related commitments.
</FONT>

<P align="left">
<B><FONT size="2">Our Solution</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Based on our preclinical and clinical trials to
date, we believe our three product candidates, if approved, will
be able to offer patients tangible benefits over existing
treatments for the indications targeted by each of our product
candidates.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">ALGRX&nbsp;4975:</FONT></I><FONT size="2">
ALGRX&nbsp;4975 is our product candidate for the treatment of
site-specific, severe or intractable pain. We believe
ALGRX&nbsp;4975 represents a novel approach to the treatment of
pain because it provides long-lasting analgesia with a single
administration to a discrete part of the body and because it
acts via a different mechanism than any current prescription
analgesic. As a result, ALGRX&nbsp;4975 avoids many of the side
effects of existing pain therapies. In addition, whereas many
existing opioids are not particularly effective for certain
types of severe pain or require frequent dosing,
ALGRX&nbsp;4975, by harnessing capsaicin&#146;s ability to cause
changes in nerve endings lasting up to 16&nbsp;weeks, has been
shown in clinical trials to provide meaningful, long-lasting
pain relief following a single administration. We expect that if
ALGRX&nbsp;4975 does provide more meaningful pain relief with
fewer side effects than opioid analgesics, treatment with
ALGRX&nbsp;4975 can result in improved quality of life for many
patients.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">ALGRX&nbsp;3268:
</FONT></I><FONT size="2">ALGRX&nbsp;3268 is intended to provide
rapid, easy-to-administer local analgesia to reduce the pain
associated with needle-stick procedures in children and in
adults who have fear of needle insertion. Existing therapeutic
products have an onset of analgesia of at least 10&nbsp;minutes,
although the most frequently used products must be applied 30 to
60&nbsp;minutes prior to a needle-stick procedure. This delay
creates logistical difficulties in administering needle-stick
procedures and creates a significant barrier to use in busy
emergency rooms, oncology suites and pediatric offices.
Furthermore, existing products are formulated as creams and
patches, which may be perceived by health care staff and
patients as messy and
</FONT>

<P align="center"><FONT size="2">43
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<FONT size="2">cumbersome to utilize. By contrast, ALGRX 3268
uses a convenient application procedure, and our clinical trials
to date have shown that it is effective in one minute of
application. We believe these are important factors for
increasing physician use of analgesia prior to needle-stick
procedures.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">ALGRX&nbsp;1207:</FONT></I><FONT size="2">
ALGRX&nbsp;1207, our preclinical product candidate, is the first
new molecular entity from a new class of local anesthetics that
will potentially treat patients with certain types of
neuropathic pain and be used for pre-procedural administration
to reduce the pain associated with surgical procedures on the
skin. These types of pain are not well-treated by current
analgesic therapy. The most common existing treatments for these
conditions consist of patches or creams containing a local
anesthetic. These patches and creams have a slow onset of pain
relief, and the desired efficacy may not be achieved due to the
poor penetration into the skin by the anesthetics used in these
products. In addition, these treatments are often inconvenient
to use. Based on preclinical studies in animals, ALGRX 1207 has
been shown to provide analgesia more rapidly following direct
administration to skin and with a longer-lasting effect than
currently available topical anesthetics. In addition, we believe
that ALGRX&nbsp;1207, if approved, could address the pain
associated with a wide variety of procedures involving the skin,
including dermatological surgery, cosmetic skin treatments and
catheter placement, as well as the pain arising from surgical
incisions that does not subside after the surgery has taken
place.
</FONT>

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

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Given the shortcomings of current therapies and
the economic impact of pain on society, our goal is to become a
leading pharmaceutical company focused on the commercialization
of drugs to treat acute and chronic pain. The key elements of
our strategy for achieving this goal are as follows:
</FONT>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
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    <TD></TD>
    <TD>
    <B><I><FONT size="2">Continue to build, through acquisition or
    in-licensing, a balanced portfolio of product candidates that
    leverages our understanding of the mechanisms of pain and the
    pain management market.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We currently have five distinct programs in
various stages of research and development in the areas of acute
and chronic pain management. Each of our product candidates is
in a different stage of development, has a different mechanism
of action and seeks to treat different types of pain conditions.
In building our product pipeline, we intend to leverage our
management&#146;s experience and understanding of the unmet
medical needs in treating pain, the mechanisms of action of
existing therapies and the mechanisms of pain. We intend to
acquire or in-license additional products or product candidates
from a wide range of sources, including academic centers and
biotechnology and pharmaceutical companies, in both domestic and
international markets.
</FONT>

<DIV>&nbsp;</DIV>

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    <TD width="3%"></TD>
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    <TD></TD>
    <TD>
    <B><I><FONT size="2">Complete clinical development and obtain
    regulatory approval for our product candidates utilizing our
    management team&#146;s extensive experience in developing and
    commercializing drugs for pain management.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that our scientific expertise is
broadly applicable across a wide range of drugs. Our management
team has over 100&nbsp;years of cumulative experience in the
pharmaceutical industry, including having previously led the
research and development, approval and commercialization of
numerous products for pain. Our Chief Executive Officer, Ronald
M. Burch,&nbsp;M.D.,&nbsp;Ph.D., has spent over 16&nbsp;years
developing drugs for pain management, and our President and
Chief Operating Officer, Paul R. Hamelin, R.Ph., has spent over
seven years marketing, developing and commercializing pain
drugs, including participating in the development and launch of
Celebrex&#174; in several countries. We believe that our
management team&#146;s experience in the planning and management
of clinical trials will help us maximize the relevance and
utility of our clinical trial programs. We plan to rely on this
experience in seeking to obtain regulatory approval for our
current product candidates in the United States and, where
appropriate, the rest of the world.
</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">Develop a specialized sales and marketing
    team to commercialize our product candidates, if approved, in
    the United States.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We currently retain all global commercialization
rights to our product candidates. We intend to build a
specialized sales and marketing organization to market our
products to physicians and health care
</FONT>

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<DIV align="left">
<FONT size="2">professionals who are prescribers of pain
medications within the United States. We will focus our
marketing efforts on concentrated market segments for our
products. For example, in the management of severe postsurgical
pain with ALGRX&nbsp;4975, we believe that our target market
will be hospital pain clinics, general surgeons and orthopedic
surgeons that are primarily hospital-based and concentrated in
major metropolitan areas. We believe that with such a
specialized sales and marketing organization we will be able to
market ALGRX&nbsp;4975 effectively, if approved.
</FONT>
</DIV>

<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">Establish corporate partnerships to assist
    in the clinical development, regulatory approval process and
    commercialization of our products in the United States and major
    foreign markets.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We intend to form collaborations and partnerships
with leading pharmaceutical, biotechnology or specialty
pharmaceutical companies, both domestically and internationally,
to augment our internal clinical and regulatory resources and to
accelerate the implementation of our strategies. We believe
these selective partnerships will extend and ensure our ability
to market products in a resource-efficient manner in certain
markets in the United States and in large foreign markets such
as Europe and Japan.
</FONT>

<P align="left">
<B><FONT size="2">Our Product Pipeline</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our product pipeline consists of two clinical
product candidates, ALGRX&nbsp;4975 and ALGRX&nbsp;3268, and one
preclinical product candidate, ALGRX&nbsp;1207. ALGRX&nbsp;4975
is currently in several phase&nbsp;II clinical trials and is
being developed as two formulations in three clinical
development programs. We have recently commenced one of two
phase&nbsp;III clinical trials for ALGRX&nbsp;3268, and we
expect to file an IND application for ALGRX&nbsp;1207 with the
FDA in the second half of 2005. The following table summarizes
the current status of our product candidates in clinical and
preclinical development and of our research program:
</FONT>

<P align="center">
<IMG src="y52134b5213401.gif" alt="(PRODUCT TESTING CHART)">

<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">ALGRX&nbsp;4975 (capsaicin for injection
    and capsaicin gel for intraoperative use)</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX&nbsp;4975 is our product candidate for the
treatment of site-specific severe or intractable pain. These
types of pain are poorly treated with existing drugs, many of
which have well-documented and severe side effects. We are
developing two formulations of ALGRX&nbsp;4975 to potentially
treat patients with severe pain: a gel formulation for
intraoperative use in a variety of surgical procedures,
including bunion removal surgery, total knee replacement and
abdominal surgeries, such as hernia repair or hysterectomy;
</FONT>

<P align="center"><FONT size="2">45
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<FONT size="2">and an injectable formulation for post-trauma
neuropathic pain and pain resulting from musculoskeletal
diseases, such as osteoarthritis and tendonitis. During a
surgical procedure, ALGRX&nbsp;4975 is delivered directly onto
the cut surfaces of skin, muscle and bone. For post-trauma
neuropathic pain and pain resulting from musculosketal diseases,
it is delivered to the site of pain using a needle and syringe.
Prior to injection with ALGRX&nbsp;4975, these patients receive
an injection of a local anesthetic to alleviate the transient
pain experienced upon injection of ALGRX&nbsp;4975. We are
currently evaluating ALGRX&nbsp;4975 in a variety of
phase&nbsp;II clinical trials.
</FONT>
</DIV>

<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">Capsaicin</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The active ingredient in ALGRX&nbsp;4975 is
capsaicin. Capsaicin is currently marketed over-the-counter for
topical administration in the form of low dose, non-sterile
creams and patches, which tend to be poorly absorbed into the
skin. There are many brands of capsaicin creams and patches,
including Capzasin-P&#174; (Chattem) and Zostrix&#174; (Rodlen
Laboratories). These formulations are generally crude
preparations of capsaicin that may contain other chemical
entities. Over-the-counter capsaicin creams and patches are used
topically by consumers to relieve pain in conditions such as
osteoarthritis, postherpetic neuralgias, psoriasis and diabetic
neuropathy.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX&nbsp;4975, if approved, would be used in
different clinical settings than current over-the-counter
products. Currently, there are no FDA-approved uses of capsaicin
for analgesia or other indications inside the body. Results of
our clinical trials suggest that capsaicin, when used in the
manner and doses we are investigating, may have analgesic
properties previously unknown to clinical investigators. We
currently own or license three patents and 12 patent
applications related to our capsaicin technology, compounds and
their applications in pharmaceutical development or their use as
pharmaceuticals. We believe these issued patents and pending
patents, if and when issued, will provide us with intellectual
property protection in the methods of purification, manufacture,
medical usage and formulation of capsaicin.
</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">Mechanism of Action</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Three major classes of nerves, or neurons (Ad, Ab
and C), transmit sensory information through the body&#146;s
nervous system. Pain signals are transmitted by two of those
classes: Ad and C&nbsp;neurons. Ad&nbsp;neurons transmit signals
rapidly (giving rise to sharp pain sensations), whereas
C&nbsp;neurons transmit signals slowly (giving rise to severe
dull, aching or throbbing pain sensations). For example, if a
person hits his thumb with a hammer, there is an immediate,
sharp pain that lasts only for an instant, which is transmitted
by Ad&nbsp;neurons, followed by a dull, aching, throbbing pain
that may last for a considerable time, which is transmitted by C
neurons.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Capsaicin works to relieve pain by causing a
localized degradation of the C&nbsp;neuron endings and is the
only analgesic known to relieve pain by this mechanism.
Capsaicin&#146;s activity results from its ability to bind to
and activate a type of ion channel on the surface of neurons
called vanilloid receptor&nbsp;1, or VR1. Under normal
circumstances, when the VR1 ion channel is activated, usually by
changes in extracelluar pH levels, it opens for a short time,
causing the C&nbsp;neurons to transmit a pain signal toward the
brain. When capsaicin binds to and activates VR1, it causes a
series of events within the cell that degrade the pain-sensing
endings of the C&nbsp;neuron, thereby preventing the neuron from
transmitting pain signals. Our animal and human studies have
demonstrated that following capsaicin treatment, the
C&nbsp;neuron terminals usually regenerate over a period of 12
to 16&nbsp;weeks. This unique action is the basis for what we
believe will be ALGRX&nbsp;4975&#146;s ability, if approved, to
provide meaningful, long-lasting pain relief following a single
administration. Because VR1 is found only on C&nbsp;neurons,
capsaicin reduces only the long-term noxious pain associated
with transmission by these neurons. Capsaicin does not affect
the short-lasting, sharp adaptive pain carried by Ad neurons, or
the fine touch, temperature and place perception (involved in
coordination) carried by Ab&nbsp;neurons. As a consequence,
ALGRX&nbsp;4975 may be a highly specific pain therapeutic that
provides long-lasting analgesia.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe the effects of capsaicin are confined
exclusively to the region of application because of low
distribution to other areas of the body after ALGRX&nbsp;4975 is
administered. After injection into a joint
</FONT>

<P align="center"><FONT size="2">46
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<DIV align="left">
<FONT size="2">space or after application in a surgical
procedure to the cut surfaces of skin, muscle and bone,
capsaicin enters the blood slowly by diffusion from its site of
initial application. Thereafter, capsaicin is highly
metabolized, or broken down, by the liver into various inactive
compounds, none of which retains any of capsaicin&#146;s
analgesic properties. As a consequence, capsaicin does not
usually act at sites in the body distant from its initial
application, nor is the body exposed to any derivatives of
capsaicin that could act in a similar manner. By contrast,
opioids and many other analgesics must be given orally or by
intravenous injection, thereby subjecting the patient to
circulation of high concentrations of drug. These high
circulating concentrations may exert undesirable side effects by
acting on parts of the body unrelated to pain perception. For
example, opioids may cause constipation when used chronically.
Opioids also may cause alteration of mood or alertness, and may
cause patients to feel drowsy, euphoric, or sleepy. These
effects, when experienced by patients in the hospital, tend to
increase rehabilitation time because patients are often sedated
and therefore unable to begin the recovery process.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Based on our clinical trial results to date, we
believe that ALGRX 4975 may provide significant pain relief to
patients in postsurgical situations by acting only at the site
of application and without causing sedation or other side
effects, thereby potentially reducing rehabilitation time
following some procedures. We also believe ALGRX 4975 may
provide significant pain relief to patients with post-trauma
neuropathic pain or who suffer from severe musculoskeletal pain.
We expect that if ALGRX&nbsp;4975 provides more meaningful pain
relief with fewer side effects than opioid analgesics, it may
result in improved quality of life for many patients.
</FONT>

<P align="left">
<B><FONT size="2">ALGRX 4975&nbsp;&#151; Capsaicin for the
Treatment of Severe Postsurgical Pain</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">Overview</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are developing ALGRX&nbsp;4975 for
intraoperative use to treat severe postsurgical pain in a
variety of procedures. Opioid analgesics are commonly used for
the treatment of severe postsurgical pain. The common delivery
method for in-hospital pain relief is a patient controlled
morphine pump that provides opioid analgesic infusions directly
into the spinal fluid. The process is expensive, may cause
infections, and since the pain relief from opioid analgesics is
relatively brief, the patient goes through cycles of pain relief
followed by increased pain. We believe that ALGRX&nbsp;4975, by
providing long-lasting analgesia without sedation, may mitigate
the cyclical nature of patient-controlled morphine and also
alleviate the increase in pain suffered by many patients
following discharge from the hospital, as they transition from
opioid analgesic infusions to oral opioids.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Use of opioids following certain types of surgery
such as total knee replacement may also extend rehabilitation
time. For such patients, walking as soon as possible after
surgery is an important factor for both preventing blood clots
from forming in the veins of the legs and for maintaining range
of motion of the knee. Patients taking opioid analgesics
immediately after surgery may be too sedated or drowsy to walk,
thereby diminishing the ability to get out of bed. We believe
that ALGRX&nbsp;4975, if approved, will provide strong analgesia
that could reduce the amount of opioids taken by patients and
therefore decrease rehabilitation time.
</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">Clinical Trials</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table describes the status of our
clinical trials for ALGRX 4975 to treat severe postsurgical pain:
</FONT>

<CENTER>
<TABLE width="90%" 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="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="24%"><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>
</TR>

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

<TR>
    <TD align="center" nowrap><B><FONT size="1">Phase of Clinical Trial</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Status</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Protocol</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Subjects</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Completed
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Bunion removal surgery
    </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">40</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">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Ongoing
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Bunion removal surgery
    </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">168</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">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Ongoing
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Hernia repair
    </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">48</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In our trials to date, we have only used a liquid
form of ALGRX&nbsp;4975, but we plan to use the gel formulation
in later trials because we believe that a gel formulation will
offer improvements over the liquid
</FONT>

<P align="center"><FONT size="2">47
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<DIV align="left">
<FONT size="2">form in surgical procedures. For instance, we
expect that a gel formula will be easier to apply, and will bind
more effectively to cut surfaces of skin, muscle and bone.
</FONT>
</DIV>

<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>
    <I><FONT size="2">Phase&nbsp;II Clinical Trial&nbsp;&#151;
    Bunion Removal Surgery</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In November 2003, we completed a randomized,
double-blind, placebo-controlled phase&nbsp;II clinical trial of
ALGRX&nbsp;4975 in 40 patients evaluating postsurgical pain
following bunion removal surgery at a single center in the
United Kingdom. Just prior to closure of the surgical wound,
either 1,000&nbsp;ug of ALGRX&nbsp;4975 or placebo was instilled
into the wound. The primary endpoint of this trial was to record
the use of rescue medication (opioids given to a patient in the
absence of adequate pain relief from the placebo or
ALGRX&nbsp;4975) during the first 24&nbsp;hours following
surgery. Secondary endpoints included the use of rescue
medication during the first 72&nbsp;hours following surgery, the
quantity of rescue medication used, and the patient pain scores
measured on a visual analog scale (VAS), a commonly used chart
that patients are given to rate the severity of their pain, from
zero (no pain) to 10 (extreme pain). Several safety endpoints
were also evaluated, including pain on administration and wound
healing.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This trial demonstrated a statistically
significant reduction in the use of rescue medication during the
first 72&nbsp;hours following surgery in patients receiving
ALGRX&nbsp;4975 as compared to patients receiving placebo.
During the first 72&nbsp;hours, 45% of patients who received
ALGRX&nbsp;4975 requested rescue medication compared to 90% in
patients who received placebo. Further, this trial indicated
that VAS pain scores were reduced in patients who received
ALGRX&nbsp;4975 as compared to patients who received placebo. No
safety concerns were identified in this study.
</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>
    <I><FONT size="2">Phase&nbsp;II Clinical Trial&nbsp;&#151;
    Bunion Removal Surgery</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently conducting a second randomized,
double-blind, placebo-controlled phase&nbsp;II clinical trial of
ALGRX&nbsp;4975 in 168&nbsp;patients undergoing bunion removal
surgery at two centers in the United States. In this trial,
three dose levels of ALGRX&nbsp;4975, 100&nbsp;ug, 500&nbsp;ug,
and 1,000&nbsp;ug, are being compared to placebo. The primary
endpoint of this clinical trial will be the magnitude and
duration of pain relief in those patients receiving ALGRX 4975
compared to those receiving placebo. Several safety endpoints of
this trial include pain on administration and wound healing.
Pharmacokinetics, the process by which a drug is absorbed,
distributed, metabolized and eliminated by the body, will also
be assessed.
</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>
    <I><FONT size="2">Phase&nbsp;II Clinical Trial&nbsp;&#151;
    Hernia Repair</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently conducting a randomized,
double-blind, placebo-controlled phase&nbsp;II clinical trial in
48&nbsp;patients to evaluate the safety and efficacy of
ALGRX&nbsp;4975 in the treatment of postsurgical pain following
hernia repair at multiple centers in Denmark. In this trial,
1,000&nbsp;ug of ALGRX&nbsp;4975 or placebo will be applied to
the cut surfaces of connective tissue, muscle and skin prior to
closing the surgical wound. The primary endpoint will be the use
of rescue medications following surgery. Secondary endpoints
will include the amount of rescue medication used and VAS pain
scores. A variety of safety endpoints will be evaluated in this
trial, including pain on administration and wound healing.
</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">Regulatory Pathway</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We filed a clinical trial exemption
(CTX)&nbsp;for ALGRX 4975 with the Medicine and Healthcare
Products Regulatory Agency in the United Kingdom in
June&nbsp;2003 and commenced our first clinical trial in severe
postsurgical pain in August&nbsp;2003. This study was completed
in January 2004. We submitted an IND application for
ALGRX&nbsp;4975 with the FDA in May 2004 and initiated our first
U.S.-based phase&nbsp;II clinical trial to study pain following
bunion removal surgery in July 2004. Our clinical program will
consist of phase&nbsp;II clinical trials in a variety of
surgical procedures, followed by several intended pivotal
clinical trials in several surgical procedures. We are
developing this program with the intention that it will satisfy
the requirements for an NDA.
</FONT>

<P align="center"><FONT size="2">48
</FONT>

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<P align="left">
<B><FONT size="2">ALGRX&nbsp;4975&nbsp;&#151; Capsaicin for
Injection for Post-Trauma Neuropathic Pain</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">Overview</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are developing an injectable formulation of
ALGRX&nbsp;4975 to potentially treat patients with post-trauma
neuropathic pain. Post-trauma neuropathic pain is a form of
neuropathic pain that remains long after traumatic injuries such
as limb amputations, accidents or injuries caused by repeated
physical stresses applied to the same area of the body.
Post-trauma neuropathic pain is not well-treated with currently
available drugs, which include tricyclic antidepressants and
antiepileptic agents that are prescribed &#147;off-label&#148;
for this type of pain. These drugs demonstrate meaningful
efficacy in only a minority of patients. When drugs are
unsuccessful in providing meaningful pain relief, patients
suffering from post-trauma neuropathic pain sometimes consider
other procedures that may alleviate pain. One option is surgery
to remove the offending nerve, although this procedure results
in side effects such as the lack of sensation and compromised
motor function. A second option involves killing nerves by
injecting them with alcohol or formaldehyde, which also has side
effects similar to surgical removal. We believe that
ALGRX&nbsp;4975 may provide long-lasting, effective pain relief
in these patients without the side effects caused by damaging or
killing nearby nerves.
</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">Clinical Trials</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table describes the status of our
clinical trial for the injectable formulation of ALGRX&nbsp;4975
for post-trauma neuropathic pain:
</FONT>

<CENTER>
<TABLE width="90%" 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="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="24%"><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>
</TR>

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

<TR>
    <TD align="center" nowrap><B><FONT size="1">Phase of Clinical Trial</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Status</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Protocol</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Subjects</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Ongoing
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Morton&#146;s neuroma
    </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">60</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>
    <I><FONT size="2">Phase&nbsp;II Clinical Trial&nbsp;&#151;
    Morton&#146;s Neuroma</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently enrolling patients in a
randomized, double-blind, placebo-controlled phase&nbsp;II
clinical trial of ALGRX&nbsp;4975 in patients with Morton&#146;s
neuroma or related neuromas at two centers in the United States.
Morton&#146;s neuroma is an abnormal enlargement of two nerves
that are located between the bones of the feet. This enlargement
is typically seen in women who wear high-heeled shoes and in
long-distance runners, all of whom subject their feet to
repetitive stresses. The primary endpoint of this trial will be
to evaluate the magnitude of pain relief for 1,000&nbsp;ug of
ALGRX&nbsp;4975 compared to placebo, measured for each of the
four weeks following administration. Safety endpoints to be
evaluated in this trial will include pain on administration.
Pharmacokinetics will also be assessed.
</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">Regulatory Pathway</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our clinical trial program for post-trauma
neuropathic pain is being conducted under the IND application
that we submitted to the FDA in May 2004. Our first clinical
trial under the IND application is a phase&nbsp;II clinical
trial studying Morton&#146;s neuroma. In addition to our
phase&nbsp;II clinical trial studying Morton&#146;s neuroma, we
expect to initiate phase&nbsp;II clinical trials to study other
types of post-trauma neuropathic pain. Based on the results of
those studies, we will develop a phase&nbsp;III program.
</FONT>

<P align="left">
<B><FONT size="2">ALGRX 4975&nbsp;&#151; Capsaicin for Injection
for Musculoskeletal Diseases</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">Overview</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are developing an injectable formulation of
ALGRX&nbsp;4975 to potentially treat patients with pain
resulting from musculoskeletal diseases such as osteoarthritis
and tendonitis. Early-stage osteoarthritis is usually treated
using acetaminophen and, as pain increases, COX-2 inhibitors. As
the disease progresses and joint damage increases, most patients
reach a point at which they do not experience sufficient pain
relief from COX-2 inhibitors. At this point, patients have
several options. Some patients opt for hyaluronic acid
injections directly into the joint space. The injected
hyaluronic acid acts as a lubricant to enhance joint mobility,
thereby reducing pain. Other patients may begin using opioid
analgesics, which provide
</FONT>

<P align="center"><FONT size="2">49
</FONT>
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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2">better pain relief than the COX-2 inhibitors, but
still may not provide adequate pain relief. We believe that by
administering ALGRX&nbsp;4975 directly into the joint space,
approximately once every three to four months, patients may
experience meaningful pain relief with few side effects. Because
joint replacement is usually the only remaining option for
patients whose pain from osteoarthritis becomes intolerable, the
potential ability to delay these procedures through more
adequate pain relief could represent a substantial advance over
the current range of therapeutic options.
</FONT>
</DIV>

<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">Clinical Trials</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table describes the status of our
clinical trials for the injectable formulation of ALGRX 4975 for
musculoskeletal diseases:
</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="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="27%"><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>
</TR>

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

<TR>
    <TD align="center" nowrap><B><FONT size="1">Phase of Clinical Trial</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Status</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Protocol</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Subjects</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Phase&nbsp;I
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Completed
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">End-stage osteoarthritis
    </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">16</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">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Completed
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">End-stage osteoarthritis
    </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">12</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">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Ongoing
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Osteoarthritis of the knee
    </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">52</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">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Ongoing
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Osteoarthritis of the knee
    </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">54</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">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Ongoing
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Tendonitis
    </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">40</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>
    <I><FONT size="2">Phase&nbsp;I Clinical Trial&nbsp;&#151;
    End-stage Osteoarthritis</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In April 2003, we completed a randomized,
double-blind, placebo-controlled phase&nbsp;I clinical trial of
ALGRX&nbsp;4975 in 16&nbsp;patients in one center in the United
Kingdom, the first study of ALGRX&nbsp;4975 in humans. In this
study, ALGRX&nbsp;4975 was injected directly into the knee joint
space of patients with end-stage osteoarthritis who were
scheduled for knee replacement surgery. Patients were allocated
to one of four treatment groups based on the time between the
administration of ALGRX&nbsp;4975 or placebo and the date
scheduled for the patient&#146;s surgery (two days, four days,
10&nbsp;days or 14&nbsp;days). Patients received either a
10&nbsp;ug, 100&nbsp;ug, or 300&nbsp;ug dose of ALGRX&nbsp;4975
or placebo. Each patient received an injection of a local
anesthetic (lidocaine)&nbsp;directly into the joint space ten
minutes prior to injection of ALGRX&nbsp;4975 in order to
alleviate the transient pain experienced by patients upon
injection of capsaicin. Since this was a phase&nbsp;I clinical
trial, the primary endpoints evaluated safety of
ALGRX&nbsp;4975. Secondary endpoints included pharmacokinetics
and pain relief assessed using a VAS pain scale. Furthermore,
because all patients in this trial subsequently underwent
surgery, this study allowed for the direct examination of the
knee to evaluate side effects caused by the drug.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This phase&nbsp;I clinical trial demonstrated
that ALGRX 4975 was well-tolerated. Although dose-related pain
on administration was found despite pretreatment with lidocaine,
pain was adequately managed in all patients with placement of an
icepack on the knee. Pain reduction was also observed in this
trial following the administration of ALGRX&nbsp;4975. When
assessed on the scheduled day of surgery, pain was found to be
reduced on average by 64% when compared to patients&#146;
baseline scores. The pain reduction data from this trial was not
statistically significant because this trial was designed to
demonstrate safety rather than efficacy.
</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>
    <I><FONT size="2">Phase&nbsp;II Clinical Trial&nbsp;&#151;
    End-stage Osteoarthritis</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2003, we completed a randomized,
double-blind, placebo-controlled phase&nbsp;II clinical trial of
ALGRX 4975 in 12&nbsp;patients with end-stage osteoarthritis of
the knee at one center in the United Kingdom. In this study,
patients received treatment with either a single dose of
1,000&nbsp;ug of ALGRX&nbsp;4975 or placebo. Knee replacement
surgery was scheduled between three and six weeks following the
administration of ALGRX&nbsp;4975. As in the previous study,
injection of ALGRX&nbsp;4975 was preceded by injection of
lidocaine into the joint space. The primary endpoint of this
trial was to evaluate the magnitude of pain and duration of
reduction in pain at week three following administration of
ALGRX&nbsp;4975 (since no patient had undergone surgery at that
time).
</FONT>

<P align="center"><FONT size="2">50
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In this study, ALGRX 4975 was shown to reduce
pain at each of the assessed time points (weeks one, two, three,
four, five and six) compared to the pain experienced by patients
prior to the administration of ALGRX&nbsp;4975. This trial
demonstrated a statistically significant reduction in pain at
week three. At all time points, pain was found to have been
reduced by approximately 50% to 60% in the patients treated with
ALGRX&nbsp;4975. Pain was not meaningfully reduced in patients
who received placebo. Most patients who received injections of
ALGRX&nbsp;4975 experienced transient burning pain (the median
lasting 20&nbsp;minutes) upon administration of ALGRX&nbsp;4975.
In most of these patients, ice packs were used to manage the
transient pain.
</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>
    <I><FONT size="2">Phase&nbsp;II Clinical Trials&nbsp;&#151;
    Osteoarthritis of the Knee</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Two clinical trials are ongoing in osteoarthritis
of the knee. In the first, a randomized, double-blind,
placebo-controlled trial in 52&nbsp;patients at one center in
the United States, either 300&nbsp;ug of ALGRX&nbsp;4975 or
placebo is injected into the knee joint space, following
lidocaine, in patients who no longer receive adequate pain
relief from nonsteroidal antiinflammatory drugs. The primary
efficacy endpoint is the magnitude and length of time that
arthritis pain is reduced in the treated knee following a single
administration, which will be evaluated at one and two weeks
following administration, then monthly until treatment failure,
or the point in time at which patients cease to experience
analgesia. A variety of safety endpoints will be evaluated,
including pain on administration.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are conducting a second, open-label,
phase&nbsp;II clinical trial in 54&nbsp;patients at two centers
in Poland. Lidocaine will be injected into the joint and, at
various times thereafter, either a single dose of ALGRX 4975 or
placebo will be injected. In other subjects, a set dose of
lidocaine will be injected, followed by a daily dose of
ALGRX&nbsp;4975 at three weekly intervals. The primary endpoint
of this trial will be the efficacy of lidocaine administration
to reduce pain after administration of ALGRX&nbsp;4975.
</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>
    <I><FONT size="2">Phase&nbsp;II Clinical Trial&nbsp;&#151;
    Tendonitis</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are currently conducting a randomized,
double-blind, placebo-controlled phase&nbsp;II trial of
ALGRX&nbsp;4975 in 40&nbsp;patients with tennis elbow (lateral
epicondylitis) at two centers in Slovakia. In this trial,
100&nbsp;ug of ALGRX&nbsp;4975 is being compared to placebo. The
primary endpoint of this trial will be magnitude and duration of
pain relief compared to placebo. There will be several safety
endpoints of this trial including pain on administration.
</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">Regulatory Pathway</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We initiated our first clinical trial, a
phase&nbsp;I clinical trial in end stage osteoarthritis, in
November 2002 under approval from the Institutional Review Board
of Charing Cross Hospital in London, England. The trial was
designed to provide safety data on ALGRX&nbsp;4975. We then
filed a CTX in the United Kingdom and initiated a phase&nbsp;II
clinical trial in end-stage osteoarthritis. In September 2003,
we submitted an IND application to the FDA. In August 2004, we
initiated a phase&nbsp;II clinical trial in osteoarthritis in
the United States. We also initiated a phase&nbsp;II clinical
trial in tendonitis in November 2004 in Slovakia, also under the
IND. Because osteoarthritis is a long term chronic condition,
often suffered by the elderly, the FDA typically requires longer
trials with a larger amount of patients for osteoarthritis
drugs. We expect that the next phase&nbsp;II clinical trial for
osteoarthritis will include multiple administrations over a
period of at least a year per patient. We will develop our
phase&nbsp;III plan based on the results of that trial.
</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">Commercialization Plan</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Currently, we retain worldwide marketing rights
to ALGRX&nbsp;4975, and if we receive regulatory approval to
market this product, we intend to create a sales and marketing
team to launch the product in the United States. Because we
expect that ALGRX&nbsp;4975, if approved, would have two
formulations, address multiple indications and be utilized
across different physician specialties, we plan to pursue
multiple sales and marketing strategies tailoring our efforts to
specific market segments. We expect that
</FONT>

<P align="center"><FONT size="2">51
</FONT>

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<DIV align="left">
<FONT size="2">our own sales and marketing infrastructure would
target certain markets for ALGRX&nbsp;4975 in the United States,
and we may also seek a development and marketing partner to
maximize the opportunity for this product candidate in other
market segments in the United States. In major markets abroad,
we intend to collaborate with or create co-development or
co-marketing partnerships with pharmaceutical companies who have
greater sales and marketing capabilities than we do. We expect
that these partners would help fund the development costs of
ALGRX&nbsp;4975 and the costs associated with the launch of
ALGRX&nbsp;4975 outside the United States.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">ALGRX 3268
(PowderJect&#174;</FONT></B><FONT size="2"> <B>Dermal
Lidocaine)</B>
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX 3268 (PowderJect&#174; Dermal Lidocaine) is
our product candidate that delivers a powder formulation of the
local anesthetic lidocaine into the skin using our proprietary
needle-free dispenser. ALGRX&nbsp;3268 is intended to provide
rapid, easy-to-administer local analgesia to reduce the pain
associated with needle-stick procedures in children and also in
adults who have fear of needle insertion. The primary market for
ALGRX&nbsp;3268 is the estimated 42&nbsp;million needle-stick
procedures that are performed on children in the United States
each year. We believe that this market is highly under-served by
existing products, and we believe that the medical community is
interested in reducing the pain associated with needle-stick
procedures. In fact, a joint recommendation from the American
Academy of Pediatrics and American Pain Society has urged
consideration of local anesthetics and strategies to soothe and
minimize distress even for simple procedures such as blood
draws. We also believe that there is also an opportunity to
serve the adult market, which consists of an estimated
315&nbsp;million procedures annually where blood is drawn or
intravenous lines are inserted.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Existing therapeutic products have an onset of
analgesia of at least 10 minutes, although the most frequently
used products direct the health care provider to apply the
products at least 30 to 60&nbsp;minutes prior to a needle-stick
procedure. This delay requires that a patient first be seen by a
nurse or other caregiver in order to have the analgesic product
applied; the patient must then wait until appropriate analgesia
ensues, after which the needle-stick procedure can be done. In
practice, this creates logistical difficulties and other
inconveniences as patients and health care providers must wait
for analgesia to set in. These inconveniences are a significant
barrier to use in busy emergency rooms, oncology suites and
pediatric offices. Furthermore, existing products are formulated
as creams and patches, which may be perceived by health care
providers and patients as messy and cumbersome to use. By
contrast, ALGRX 3268 uses a convenient application procedure,
and our clinical trials to date have shown that it is effective
in one minute following administration. We believe these are
important factors for increasing physician use of analgesia
prior to needle-stick procedures.
</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">Method of Application</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX 3268 contains lidocaine, a currently used,
commercially approved drug, in powder form. ALGRX&nbsp;3268 is
designed to deliver lidocaine powder exclusively into the skin
with a sterile, single-use, needle-free disposable dispenser.
Pressing a button on the dispenser releases compressed helium
gas from an enclosed microcylinder, which ruptures the cassette
that contains the lidocaine powder. The lidocaine powder is
accelerated in the gas stream and penetrates the skin, where it
provides analgesia to the skin at the site of application. Based
on the results of our clinical trials to date, ALGRX 3268 is
effective in one minute following administration. We believe
this rapid onset will allow the health care provider to prepare
and sterilize the injection site, administer ALGRX 3268, and
prepare the needle set and insert it, all without having to wait
between steps. We believe that ALGRX 3268, if approved, would
eliminate much of the inconvenience that is currently associated
with the administration of cream- and patch-based formulations
and provide a more efficient and satisfactory experience to
health care providers and patients.
</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">Clinical Trials</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Development of ALGRX 3268 was initiated by
Chiroscience Group plc and PowderJect Pharmaceuticals plc. Our
license to this technology was acquired by us in connection with
our acquisition of certain of PowderJect&#146;s assets in 2002.
In a series of clinical trials conducted by Chiroscience and
PowderJect, nearly
</FONT>

<P align="center"><FONT size="2">52
</FONT>

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<DIV align="left">
<FONT size="2">2,000&nbsp;administrations of this product were
given to adults and children using various doses of lidocaine
powder and various helium pressures (measured in units called
bars). These trials were intended to help refine the powder
injection device. Since in-licensing this product candidate, we
have completed our clinical program for ALGRX&nbsp;3268 through
phase&nbsp;II in approximately 1,100&nbsp;adults and children
using various doses of lidocaine powder and various helium
pressures. We had an end of phase&nbsp;II meeting with the FDA
in November 2004, and we recently commenced one of two
phase&nbsp;III clinical trials for ALGRX&nbsp;3268 and
anticipate an NDA filing at the end of 2005.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table describes the status of our
clinical trials for ALGRX&nbsp;3268:
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="62%"><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="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="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

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

<TR>
    <TD align="center" nowrap><B><FONT size="1">Phase of Clinical Trial</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Status</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Age Group</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Subjects</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 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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Phase&nbsp;I
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Completed
    </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">Adult</FONT></TD>
    <TD><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">272</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">Phase&nbsp;I
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Completed
    </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">Adult</FONT></TD>
    <TD><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">38</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">Phase&nbsp;I
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Completed
    </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">Adult</FONT></TD>
    <TD><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">183</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">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Completed
    </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">Children</FONT></TD>
    <TD><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">195</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">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Completed
    </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">Children</FONT></TD>
    <TD><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">145</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">Phase&nbsp;II
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Completed
    </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">Children</FONT></TD>
    <TD><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">306</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">Phase&nbsp;III
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Ongoing
    </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">Children</FONT></TD>
    <TD><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">500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The clinical development program for ALGRX 3268
consisted of evaluation of safety and efficacy in adults and
children following application at either the antecubital fossa
(inside of the elbow) or back of the hand, after which pain was
elicited by means of inserting a needle into a vein and drawing
blood. The studies in adults were phase&nbsp;I clinical trials
performed in normal volunteers, whereas the studies in children
were phase&nbsp;II clinical trials performed in children
visiting clinics for scheduled blood draws.
</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>
    <I><FONT size="2">Phase&nbsp;I Clinical Trial&nbsp;&#151; Adult
    Antecubital Fossa</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In October 2002, we completed a randomized,
double-blind, placebo-controlled phase&nbsp;I clinical trial
that studied the safety and efficacy of ALGRX&nbsp;3268 in
adults at one center in the United States. For three
configurations of the device (0.25&nbsp;mg of lidocaine and
20&nbsp;bar helium pressure; 0.50&nbsp;mg and 20&nbsp;bar;
0.50&nbsp;mg and 40 bar), we evaluated skin irritation caused by
the lidocaine particle injection. We examined the patients&#146;
skin for the appearance of redness, swelling, and pinpoint blood
spots. Each of these effects was measured using a five-point
scale, on which scores of three or higher are considered
clinically significant. Neither of the configurations with
20&nbsp;bar helium pressure caused clinically significant
redness, swelling or pinpoint blood spots, whereas the
configuration with 40&nbsp;bar helium pressure caused scores of
three or greater in several subjects. Thus, we concluded that a
device using 40&nbsp;bar pressure was not acceptable.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Following administration of ALGRX&nbsp;3268 at
the antecubital fossa, it was found that each of the three
configurations of ALGRX&nbsp;3268 used in this trial reduced
pain on needle insertion in a statistically significant manner
compared with placebo when administered&nbsp;1, 3, or
5&nbsp;minutes prior to needle insertion. With all
configurations, efficacy was not apparent when ALGRX 3268 was
administered 10&nbsp;minutes or more prior to needle insertion.
From the study, we concluded that a dose of 0.25 mg lidocaine
was suboptimal and that the configuration with 0.50&nbsp;mg
lidocaine delivered at 20&nbsp;bar pressure was the most
suitable for further development to provide procedural analgesia
at the antecubital fossa.
</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>
    <I><FONT size="2">Phase&nbsp;I Clinical Trial&nbsp;&#151; Adult
    Back of Hand</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2003, we completed a randomized,
double-blind, placebo-controlled phase&nbsp;I clinical trial
that studied the safety and efficacy of ALGRX 3268 in adults at
one center in the United States. Skin irritation caused by
lidocaine particle injection was evaluated for two
configurations (0.50&nbsp;mg at 20 bar; 0.50&nbsp;mg at
40&nbsp;bar). We examined patients&#146; skin for the appearance
of redness, swelling, and pinpoint blood spots. Each of these
was measured using a five-point scale, on which scores of three
or higher are considered clinically significant. The
configuration with 20&nbsp;bar helium pressure caused no
clinically
</FONT>

<P align="center"><FONT size="2">53
</FONT>

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<DIV align="left">
<FONT size="2">significant redness, swelling or pinpoint blood
spots, whereas the configuration with 40&nbsp;bar helium
pressure caused scores of three or greater in several subjects.
Thus, we concluded that a device using 40&nbsp;bar pressure was
not acceptable.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Following administration at the back of the hand,
it was found that both of the configurations of ALGRX&nbsp;3268
used in this trial reduced pain on needle insertion in a
statistically significant manner compared with placebo when
administered&nbsp;1, 3, or 5&nbsp;minutes prior to needle
insertion. With each configuration, efficacy was not apparent
when ALGRX&nbsp;3268 was administered 10&nbsp;minutes or more
prior to needle insertion. We were also able to conclude from
this study that the configuration with 0.50&nbsp;mg of lidocaine
delivered at 20&nbsp;bar pressure was the most suitable for
further development to provide procedural analgesia at the back
of the hand.
</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>
    <I><FONT size="2">Phase&nbsp;I Clinical Trial&nbsp;&#151;
    Pharmacokinetics Following Administration to the Antecubital
    Fossa in Adults</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2002, we completed a randomized,
double-blind, placebo-controlled phase&nbsp;I clinical trial at
one center in the United States that studied the circulation of
ALGRX&nbsp;3268 in the blood of adult subjects after
administration. Lidocaine circulating in the blood at
concentrations of approximately 100&nbsp;ng/ml or more may be
associated with heart rhythm abnormalities and seizures. Thus,
we investigated the amount of lidocaine circulating in the blood
following administration of ALGRX&nbsp;3268 in the antecubital
fossa in adults. We found that following administration of a
dose of 0.50&nbsp;mg of ALGRX&nbsp;3268 at 20&nbsp;bar helium
pressure, the concentration of lidocaine in each subject&#146;s
blood plasma was below 5&nbsp;ng/ml at every time point of the
study. Thus, this trial demonstrated that, following
administration of ALGRX 3268, the concentration of lidocaine in
the blood was at a level unlikely to cause adverse side effects.
The low blood concentrations of lidocaine in this trial resulted
from the very small dose necessary to achieve local anesthesia
with this highly-targeted method.
</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>
    <I><FONT size="2">Phase&nbsp;II Clinical Trial&nbsp;&#151; Child
    Antecubital Fossa</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2003, we completed a randomized,
double-blind, placebo-controlled phase&nbsp;II clinical trial
that studied the safety and efficacy of ALGRX&nbsp;3268 in
children at one center in Poland. Skin irritation caused by
particle injection was evaluated in this trial. We examined
patients&#146; skin for the appearance of redness, swelling, and
pinpoint blood spots. Each of these was measured using a
five-point scale, on which scores of three or higher are
considered clinically significant. Neither of the device
configurations used in this trial (0.25&nbsp;mg at 20&nbsp;bar;
0.50&nbsp;mg at 20&nbsp;bar) caused clinically significant
redness, swelling or the appearance of pinpoint blood spots.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Following administration at the antecubital
fossa, it was found that a dose of 0.25&nbsp;mg of ALGRX 3268 at
20 bar helium pressure did not reduce pain on needle insertion
in a statistically significant manner when administered 1 to
3&nbsp;minutes prior to needle insertion. In contrast, a dose of
0.50&nbsp;mg of ALGRX 3268 at 20 bar helium pressure was found
to reduce pain on needle insertion in a statistically
significant manner in children aged 3 to 12&nbsp;years and in
children 13 to 18&nbsp;years of age when compared to placebo.
Therefore, we determined that the configuration of
ALGRX&nbsp;3268 most suitable for further development, when
assessed at the antecubital fossa in children, was 0.50&nbsp;mg
at 20 bar helium pressure, the same configuration as in adults.
</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>
    <I><FONT size="2">Phase&nbsp;II Clinical Trial&nbsp;&#151; Child
    Back of Hand</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In January 2004, we completed a randomized,
double-blind, placebo-controlled phase&nbsp;II clinical trial
that studied the safety and efficacy of ALGRX&nbsp;3268 in
children at one center in Poland. Skin irritation caused by
lidocaine particle injection was evaluated in this study. We
examined the patients&#146; skin for the appearance of redness,
swelling and pinpoint blood spots. Each of these was measured
using a five-point scale, on which scores of three or higher are
considered clinically significant. In this study,
ALGRX&nbsp;3268 did not cause clinically significant redness,
swelling or pinpoint blood spots.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Following administration at the antecubital
fossa, it was found that a dose of 0.25&nbsp;mg of ALGRX 3268 at
20 bar helium pressure did not reduce pain on needle insertion
in a statistically significant manner
</FONT>

<P align="center"><FONT size="2">54
</FONT>

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<DIV align="left">
<FONT size="2">when administered 1 to 3&nbsp;minutes prior to
needle insertion. In contrast, a dose of 0.5&nbsp;mg of
ALGRX&nbsp;3268 at 20&nbsp;bar helium pressure was shown to
reduce pain on needle insertion in a statistically significant
manner in children aged 3 to 7 when compared to placebo.
Children aged 8 to 18&nbsp;years of age reported only mild pain
on needle insertion, and ALGRX 3268 did not further reduce pain
in a statistically significant manner. Given the lack of reports
of pain in the older age groups, we decided to conduct an
additional clinical study.
</FONT>
</DIV>

<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>
    <I><FONT size="2">Phase&nbsp;II Clinical Trial&nbsp;&#151; Child
    Back of Hand</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In August 2004, we completed a randomized,
double-blind, placebo-controlled phase&nbsp;II clinical trial
that studied the safety and efficacy of ALGRX 3268 in children
at one center in the United States. Skin irritation caused by
lidocaine particle injection was evaluated in this study. We
examined the patients&#146; skin for the appearance of redness,
swelling and pinpoint blood spots. Each of these was measured
using a five-point scale, on which scores of three or higher are
considered clinically significant. In this study, ALGRX 3268 did
not cause clinically significant redness, swelling or pinpoint
blood spots.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In this trial, a dose of 0.5&nbsp;mg of ALGRX
3268 at 20 bar helium pressure administered 1 to 3 minutes prior
to needle insertion, was shown to reduce pain in a statistically
significant manner in children aged 3 to 12 and in children aged
13 to 18 when compared to placebo.
</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>
    <I><FONT size="2">Phase&nbsp;III Clinical Trial&nbsp;&#151;
    Child Antecubital Fossa and Back of Hand</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In November 2004, we initiated a randomized,
double-blind, placebo-controlled phase&nbsp;III clinical trial
to study the safety and efficacy of ALGRX 3268 in up to six
centers in the United States. We will study the reduction in
needle-stick pain caused by 0.50 mg of lidocaine at 20 bar
helium pressure in 500&nbsp;children aged 3 to 18, when applied
3&nbsp;minutes prior to needle-stick procedures at the
antecubital fossa or back of hand. The safety indices to be
measured in this study include redness, swelling and the
appearance of pinpoint blood spots.
</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">Regulatory Pathway</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In March 2002, the IND application for ALGRX 3268
was transferred to us by PowderJect Technologies Inc. All of our
clinical trials to date have been conducted under this IND
application. In November 2004, we had an end of phase&nbsp;II
meeting with the FDA to discuss our results to date and to
discuss our proposed phase&nbsp;III clinical program and
manufacturing plan. Based on the results of this meeting, we
initiated a phase&nbsp;III clinical trial. If our phase&nbsp;III
clinical trial program is successful, we expect to submit an NDA
with the FDA at the end of 2005 seeking marketing approval for
ALGRX 3268.
</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">Commercialization Plan</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In preparation for the potential approval and
launch of ALGRX 3268, our most advanced product candidate, we
plan to build a sales and marketing team to target the most
highly concentrated U.S.&nbsp;market segments for this product
candidate. We believe such a sales team will be able to market
ALGRX 3268 to hospital- and medical center-based pediatric
centers, emergency rooms, urgent care centers and pediatric and
adult oncology centers within the top 50 to 100 major
metropolitan areas in the United States. In addition to building
our own sales and marketing team within the United States, we
will also evaluate partnering with one or more pharmaceutical
companies to help penetrate primary care markets and other
specialty health care audiences not highly concentrated in
hospitals or major medical centers within the United States. We
expect that such partners would also have marketing
responsibility for ALGRX 3268 in key regions outside the United
States, including Europe and Japan.
</FONT>

<P align="center"><FONT size="2">55
</FONT>

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<P align="left">
<B><FONT size="2">ALGRX 1207&nbsp;&#151; Topical local
anesthetic for painful conditions of the skin</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">Overview</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX 1207, our preclinical product candidate, is
a new molecular entity we are developing as a topical local
anesthetic to potentially treat patients with certain types of
neuropathic pain and for pre-procedural administration to reduce
the pain associated with surgical procedures on the skin. Nearly
two million patients in the United States suffer from the types
of neuropathic pain that are readily treatable by topical
application of drugs. Among the various types of neuropathic
pain, the most severe is postherpetic neuralgia, which has a
prevalence of approximately 200,000&nbsp;patients in the United
States. The most common neuropathic pain condition results from
diabetic polyneuropathy, which is caused by nerve damage in
patients with diabetes as a result of high circulating levels of
blood sugar. Symptoms of diabetic polyneuropathy include
numbness, pain, tingling or burning in the hands, lower legs and
feet, and of the more than 3.5&nbsp;million patients in the
United States who suffer from diabetic polyneuropathy,
approximately 14% of these patients experience pain as one of
the symptoms. Neuropathic pain is also experienced in patients
with HIV. Nearly one&nbsp;million people in the United States
are infected with HIV, and, among those people, approximately
20% experience pain as a result of nerve damage caused by HIV
infection.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Postherpetic neuralgia and diabetic
polyneuropathy are not well-treated by current analgesic
therapy. In the United States, the most common treatment
involves application of patches containing a local anesthetic to
the painful area. Lidoderm&#174; (Endo) is the most commonly
used treatment for postherpetic neuralgia. As with other
existing topical treatments, Lidoderm&#174; is inconvenient to
use and requires that large patches be worn for 12&nbsp;hours
and then removed for 12&nbsp;hours in order to avoid harmful
side effects. For some neuropathic pain diseases, such as
painful HIV polyneuropathy and painful diabetic polyneuropathy,
application of patches is difficult. To treat the pain
associated with such diseases, creams containing local
anesthetics must first be applied, followed by application of a
dressing. Both patches and creams containing local anesthetics
have a slow onset of pain relief, and efficacy may be poor due
to the poor penetration of skin by the local anesthetics that
are currently available. We believe that a simple-to-use local
anesthetic with a long duration of action and deep penetration
into the skin would provide significant analgesia and would
therefore represent an improvement over existing patches and
creams. Based on preclinical studies in animals, ALGRX 1207 has
been shown to provide analgesia following direct administration
to skin more rapidly and with a longer-lasting effect than
currently available topical anesthetics. In addition, we believe
that ALGRX 1207, if approved, could address the pain associated
with a wide variety of procedures involving the skin, including
dermatological surgery, cosmetic skin treatments, and catheter
placement, as well as the pain arising from surgical incisions
that does not subside after the surgery has taken place.
</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">Preclinical Results</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To date, ALGRX 1207 has been studied in
preclinical trials. In these animal studies, analgesia following
the administration of ALGRX 1207 was demonstrated within ten
minutes of application, compared to more than 30 minutes
following lidocaine. These studies also demonstrated that ALGRX
1207 provides analgesia lasting about five hours compared to
less than one-half hour for lidocaine.
</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">Regulatory Pathway</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">ALGRX 1207 is currently undergoing drug safety
evaluation and formulation development in preclinical trials. We
plan to file an IND covering ALGRX 1207 with the FDA in the
second half of 2005 and, thereafter, evaluate the safety and
effectiveness of ALGRX 1207 in humans in phase&nbsp;I clinical
trials.
</FONT>

<P align="left">
<B><FONT size="2">Intellectual Property</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following factors are important to our
success:
</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">receiving patent protection for our product
    candidates;
    </FONT></TD>
</TR>

</TABLE>

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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">not infringing on the intellectual property
    rights of others;
    </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">preventing others from infringing our
    intellectual property rights;&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">maintaining our patent rights and trade secrets.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We actively seek, when appropriate, protection
for our products, technologies and proprietary information
through U.S. and foreign patents. In addition, we rely upon
trade secrets and contractual arrangements to protect our
proprietary information.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of September&nbsp;30, 2004, we own or license
approximately 10 U.S.&nbsp;patents, 30 U.S.&nbsp;patent
applications, 90 foreign patents and 140 foreign patent
applications related to our technologies, compounds and their
applications in pharmaceutical development or their use as
pharmaceuticals. We face the risk that one or more of the above
patent applications may be denied. We also face the risk that
our issued patents may be challenged or circumvented or may
otherwise not provide protection for any commercially viable
products we develop. We also note that U.S.&nbsp;patents and
patent applications may be subject to interference proceedings,
and U.S.&nbsp;patents may be subject to reexamination
proceedings in the U.S.&nbsp;Patent and Trademark Office (and
foreign patents may be subject to opposition or comparable
proceedings in the corresponding foreign patent office), which
could result in either loss of the patent or denial of the
patent application or loss or reduction in the scope of one or
more of the claims of the patent or patent application. In
addition, such interference, reexamination and opposition
proceedings may be costly. Furthermore, an adverse decision in
an interference proceeding can result in a third party receiving
the very patent rights sought by us, which in turn could affect
our ability to market a potential product to which that patent
filing was directed. In the event that we seek to enforce any of
our owned or exclusively licensed patents against an infringing
party, it is likely that the party defending the claim will seek
to invalidate the patents we assert, which, if successful, would
result in the entire loss of our patent or the relevant portion
of our patent and not just with respect to that particular
infringer. Any litigation to enforce or defend our patent
rights, even if we were to prevail, could be costly and
time-consuming and would divert the attention of our management
and key personnel from our business operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, our ability to assert our patents
against a potential infringer depends on our ability to detect
the infringement in the first instance. Many countries,
including certain European countries, have compulsory licensing
laws under which a patent owner may be compelled to grant
licenses to third parties in some circumstances (for example,
when the patent owner has failed to &#147;work&#148; the
invention in that country, or the third party has patented
improvements). In addition, many countries limit the
enforceability of patents against government agencies or
government contractors. In these countries, the patent owner may
have limited remedies, which could materially diminish the value
of the patent. Compulsory licensing of life saving drugs is also
becoming increasingly popular in developing countries either
through direct legislation or international initiatives. Such
compulsory licenses could be extended to include some of our
product candidates, which could limit our potential revenue
opportunities. Moreover, the legal systems of certain countries,
particularly certain developing countries, do not favor the
aggressive enforcement of patent and other intellectual property
protection.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our success will also depend in part upon our not
infringing patents issued to others. If our product candidates
are found to infringe the patents of others, our development,
manufacture and sale of such potential products could be
severely restricted or prohibited. In fact, one of our issued
European patents covering capsaicin for injection has been
challenged by Grunenthal, a German pharmaceutical company, in
the European Patent Court. In response to this challenge, we
submitted proposed modifications to the patent which we expect
the patent court to approve and publish in late 2004. The
amended patent can be objected to by Grunenthal or any other
third party within two months following publication of the
amended patent by the court. If any future challenge by
Grunenthal or any other party is ultimately successful in
invalidating the patent, the ability of third parties to market
competing technologies to ALGRX 4975 in Europe could be enhanced.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Patent litigation can involve complex factual and
legal questions and its outcome is uncertain. Any claim relating
to infringement of patents that is successfully asserted against
us may require us to pay
</FONT>

<P align="center"><FONT size="2">57
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<DIV align="left">
<FONT size="2">substantial damages. Even if we were to prevail,
any litigation could be costly and time-consuming and would
divert the attention of our management and key personnel from
our business operations. Furthermore, if a patent infringement
suit were brought against us or our future strategic partners or
licensees, if any, we or they may be forced to stop or delay
developing, manufacturing or selling potential products that are
claimed to infringe a third party&#146;s intellectual property
unless that party grants us or our strategic partners or
licensees rights to use its intellectual property. In such
cases, we may be required to obtain licenses to patents or
proprietary rights of others in order to continue to
commercialize our products. However, we may not be able to
obtain any licenses required under any patents or proprietary
rights of third parties on acceptable terms, or at all. Even if
our strategic partners, licensees or we were able to obtain
rights to the third party&#146;s intellectual property, these
rights may be non-exclusive, thereby giving our competitors
access to the same intellectual property. Ultimately, we may be
unable to commercialize some of our potential products or may
have to cease some of our business operations as a result of
patent infringement claims, which could severely harm our
business.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Much of our technology and many of our processes
depend upon the knowledge, experience and skills of our
scientific and technical personnel. To protect rights to our
proprietary know-how and technology, we generally require all
employees, contractors, consultants, advisors, visiting
scientists and collaborators as well as potential collaborators
to enter into confidentiality agreements that prohibit the
disclosure of confidential information. The agreements with
employees and consultants also require disclosure and assignment
to us of ideas, developments, discoveries and inventions. These
agreements may not effectively prevent disclosure of our
confidential information or provide meaningful protection for
our confidential information.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Many of our employees were previously employed by
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. Even if we are successful in defending
against these claims, litigation could result in substantial
costs and be a distraction to management. If we fail in
defending such claims, in addition to paying money claims, we
may lose valuable intellectual property rights or personnel.
</FONT>

<P align="left">
<B><FONT size="2">License Agreements</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">License Agreement with James N.
    Campbell,&nbsp;M.D., Richard A. Meyer, M.S. and Marco
    Pappagallo,&nbsp;M.D.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In August 2001, we entered into an agreement with
James N. Campbell,&nbsp;M.D., Richard A. Meyer, M.S. and Marco
Pappagallo,&nbsp;M.D. to acquire the exclusive, worldwide
license to U.S.&nbsp;Patent Application No.&nbsp;09/041294
(U.S.&nbsp;Patent No.&nbsp;5,962,532) and all applications and
products relating thereto directed to methods and kits for
relieving pain using capsaicin and an anesthetic. The technology
licensed under the agreement relates to the steps of
administering capsaicin for pain reduction that we use in our
product ALGRX 4975. This license excludes topical applications
of capsaicin and analogues to the skin. Upon execution of the
agreement, we paid to the licensees an aggregate license fee of
approximately $42,000, granted options to the licensees for an
aggregate of 361,110&nbsp;shares of our common stock and
reimbursed the licensees for expenses associated with filing,
prosecution and maintenance of the patent. We are obligated to
pay Drs.&nbsp;Campbell and Pappagallo and Mr.&nbsp;Meyer
royalties on any future sales of ALGRX 4975 by us and any of our
sublicensees. We are also obligated to pay up to $775,000 in
milestone payments under the agreement, of which, as of
September&nbsp;30, 2004, we have paid an aggregate of $200,000.
The license terminates on March&nbsp;12, 2018, the date of
expiration of the patent (U.S.&nbsp;Patent No.&nbsp;5,962,532),
or earlier upon the date of the invalidation of the patent. Our
rights under this agreement can be terminated on
10&nbsp;days&#146; written notice if we fail to fulfill any
material obligation under the agreement and the failure is not
cured by us within 180&nbsp;days of receiving notice of such
failure. We can terminate the agreement upon 30&nbsp;days&#146;
prior notice for any reason or upon 10&nbsp;days prior notice
for the failure of any counterparty to fulfill a material
obligation not cured within 90&nbsp;days of our giving notice of
the failure. The license is subject to a license granted by
Drs.&nbsp;Campbell and Pappagallo and Mr.&nbsp;Meyer to
</FONT>

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<DIV align="left">
<FONT size="2">Johns Hopkins University for non-profit purposes.
The license is subject to a sublicense to the inventors for
research and development, with no right to commercialization.
</FONT>
</DIV>

<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">License Agreement with Marco
    Pappagallo,&nbsp;M.D.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In August 2001, we entered into a non-exclusive,
worldwide license agreement with Marco Pappagallo,&nbsp;M.D. for
U.S.&nbsp;Provisional Patent Application No.&nbsp;60/006,385 and
U.S.&nbsp;Utility Patent Application No.&nbsp;08/746,207
(U.S.&nbsp;Patent No.&nbsp;6,248,788) directed to methods of
treating neuropathic pain using capsaicin anesthetic, and all
applications and patents relating thereto. The licensed
technology relates to the use of capsaicin for pain relief. The
primary patent underlying the license expires on
November&nbsp;6, 2016. This license agreement makes reference to
the August 2001 license agreement between us and
Drs.&nbsp;Campbell and Pappagallo and Mr.&nbsp;Meyer and
provides that if Dr.&nbsp;Pappagallo develops or has any right
to any technology under U.S.&nbsp;Patent No.&nbsp;6,248,788
relating to an injectable product or service using capsaicin and
its analogues for pain relief, the technology will be licensed
to us pursuant to the terms of the August 2001 license agreement
with Drs.&nbsp;Campbell and Pappagallo and Mr.&nbsp;Meyer. We
are also obligated to pay up to $222,000 in milestone payments,
and we have made no milestone payments to date. With respect to
the licensed technology, we are obligated to pay
Dr.&nbsp;Pappagallo royalties on any future sales by us or our
sublicensees of transdermal or topical products or services
developed from the licensed technology. If at any time
Dr.&nbsp;Pappagallo becomes the exclusive owner of the licensed
technology, the royalty payments that we are obligated to pay
will increase and we will be obligated to make milestone
payments of up to $666,000. Our rights under the agreement can
be terminated on 10&nbsp;days&#146; written notice if we fail to
fulfill any material obligation under the agreement and the
failure is not cured by us within 180&nbsp;days of receiving
notice of such failure. We can terminate the agreement upon
30&nbsp;days&#146; prior notice for any reason or upon
10&nbsp;days&#146; prior notice for the failure of any
counterparty to fulfill a material obligation not cured within
90&nbsp;days of our giving notice of the failure. The license is
subject to a sublicense to the inventors for research and
development, with no right to commercialization.
</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">License with PowderMed Limited (formerly
    with PowderJect Research Limited)</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In March 2002, we acquired from PowderJect
Research Limited the exclusive, worldwide license to
intellectual property consisting of over 150 patents and
applications relating to the methods and apparatus for the
delivery of powder forms of medications. The technology licensed
under this agreement with PowderJect includes the technology
underlying our product ALGRX 3268. PowderJect Research Limited
is part of the Chiron group of companies operating under the
Chiron Corporation. In May 2004, PowderJect Research Limited
assigned its rights and obligations under the license agreement
to PowderMed Limited, except that any royalties under the
license for any future sales by us or sublicencees of ALGRX 3268
or other products derived from, or produced with the licensed
technology will be payable by us to Chiron Vaccines Holdings
Limited. With respect to ALGRX 3268, we are required to pay
royalties to Chiron Vaccines Holdings Limited on any future
direct sales and any future sales effected by any sublicensee.
For products other than ALGRX 3268 resulting from the licensed
technology, we are also obligated to pay Chiron royalties on any
future direct sales. We must also pay royalties on licensing
fees, milestone payments and other consideration that we receive
from any sublicensees. Under the agreement from July&nbsp;7,
2003 to July&nbsp;7, 2005, we are obligated to spend $1,000,000
researching and developing products associated with the licensed
technology, plus an additional $1,000,000 for every 12 month
period from July&nbsp;7, 2005 to July&nbsp;7, 2008.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The term of the license commenced on
March&nbsp;22, 2002 and continues until the expiration of the
last patent to expire licensed under the agreement unless the
agreement is otherwise terminated. The primary patents licensed
under the agreement and used by us in connection with ALGRX 3268
expire in 2014. The agreement can be terminated by either party
if the other party ceases to do business in the ordinary course,
or assigns all or substantially all of its assets for the
benefit of creditors. Either party can also terminate for
material breach if not cured within 60&nbsp;days of notice or if
not cured within 30&nbsp;days of notice if the breach relates to
payment provisions. The license agreement also implemented an
intellectual property sharing arrangement pursuant to which we
and PowderMed Limited are obligated to share with
</FONT>

<P align="center"><FONT size="2">59
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<DIV align="left">
<FONT size="2">one another any improvements and modifications to
the licensed technology. The sharing arrangement expires on
March&nbsp;22, 2007.
</FONT>
</DIV>

<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">Collaboration, Development and License
    Agreement with Bridge Pharma, Inc.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In October 2004, we entered into an agreement
with Bridge Pharma, Inc. under which we acquired the exclusive
worldwide license to proprietary technology relating to certain
analgesic and local anesthetic pharmaceutical agents and
compounds. The licensed technology relates to our product
candidate, ALGRX 1207. The agreement also grants us the right to
research, develop, sell, import or otherwise commercialize
products based on such compounds, provided such products are an
analgesic and/or local anesthetic for human or animals in any
route of administration, including without limitation, dermal,
mucosal, dental, ophthalmic or injection. Upon execution of the
agreement, we paid Bridge Pharma, Inc. an up-front license fee
consisting of a cash payment and shares of our common stock. We
are obligated to pay Bridge Pharma, Inc. royalties on any future
sales by us or our sublicensees and additional payments if we
achieve certain clinical, regulatory and commercial milestones.
To date, we have paid no milestone payments. We are responsible
for our costs, and those costs of Bridge Pharma, Inc. that we
approve, associated with the research, development and
commercialization of products using the underlying technology.
The term of the agreement commenced on October&nbsp;28, 2004 and
continues until our obligation to pay royalties to Bridge
Pharma, Inc. expires, or earlier if terminated by either party.
Either party may terminate the agreement for material breach if
not cured within 60&nbsp;days of notice, or with immediate
effect if the other party makes an assignment to benefit
creditors, files an insolvency petition in bankruptcy or
commences any similar action such as a liquidation or
reorganization.
</FONT>

<P align="left">
<B><FONT size="2">Government Regulation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The FDA and comparable regulatory agencies in
foreign countries, as well as local and state or other regional
governmental agencies, impose substantial requirements upon the
clinical development, manufacture and marketing of
pharmaceutical products. 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 products.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The process required by the FDA before product
candidates may be marketed in the United States generally
involves 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">preclinical laboratory and animal tests;
    </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">submission of an investigational new drug
    application, or IND application, which must become effective
    before clinical trials may begin;
    </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">adequate and well-controlled human clinical
    trials to establish the safety and efficacy of the proposed drug
    for its intended 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">pre-approval inspection of manufacturing
    facilities, company regulatory files, and selected clinical
    investigators;&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">FDA approval of a new drug application, or NDA,
    or NDA supplement, for an approval of a new indication if the
    product is already approved for another indication.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The testing and approval process requires
substantial time, effort and financial resources, and we cannot
be certain that any new approvals for our product candidates
will be granted on a timely basis, if at all.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to commencing the first human clinical
trial, we must submit an IND application to the FDA. The IND
application 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 preclinical drug
testing or nonclinical safety evaluation in animals, or the
design or conduct of the first proposed clinical trial and
places the study on clinical hold. In such a case, the IND
sponsor and the FDA must resolve any outstanding concerns before
the clinical trial may begin. Our submission of an IND
application may not result in FDA
</FONT>

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</FONT>

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<DIV align="left">
<FONT size="2">authorization to commence a clinical trial. In
fact, with respect to our first IND application for ALGRX 4975
and our IND application for ALGRX 3268, the FDA placed our
clinical trials on hold, subsequently lifting each hold to allow
us to initiate or continue the trials after we submitted more
information to address FDA concerns. A separate submission to
the existing IND application must be made for each successive
clinical trial conducted during product development, and the FDA
must not object to the submission before each clinical trial may
start and continue. Further, an independent institutional review
board for investigation in human subjects within each medical
center in which an investigator wishes to participate in the
clinical trial must review and approve the preclinical drug
testing and nonclinical safety evaluation and efficacy in
animals or prior human trials as well as the design and goals of
the proposed clinical trial before the clinical trial commences
at that center. Regulatory authorities or an institutional
review board 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.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">For purposes of NDA approval, human clinical
trials are typically conducted in three sequential phases that
may overlap.
</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">
    <I><FONT size="2">Phase&nbsp;I:</FONT></I><FONT size="2">
    Phase&nbsp;I clinical studies are initially conducted in a
    limited patient population to evaluate the product candidate for
    safety, dosage tolerance, absorption, metabolism, distribution
    and excretion in healthy humans or patients.
    </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">
    <I><FONT size="2">Phase&nbsp;II:</FONT></I><FONT size="2">
    Phase&nbsp;II clinical studies are conducted in a limited
    patient population to further identify and measure possible
    adverse effects or other safety risks, to determine the efficacy
    of the product for specific targeted diseases and to determine
    dosage 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. The first, limited phase&nbsp;II
    clinical trials may be termed &#147;phase&nbsp;IIa&#148; trials
    to denote that only a few patients are enrolled in order to
    obtain preliminary safety and efficacy data. Later, larger
    phase&nbsp;II clinical trials may be termed
    &#147;phase&nbsp;IIb&#148; trials to denote that preliminary
    evidence of safety and efficacy has already been obtained, and
    the current trial is intended to confirm the finding of the
    earlier trial, as well as to enroll additional subjects in order
    to further refine the estimate of the optimal dose and to detect
    less common side effects. In some instances, a phase&nbsp;IIb
    trial may be declared acceptable by a regulatory agency, such as
    the FDA, as a &#147;pivotal&#148; trial necessary for purposes
    of obtaining marketing authorization for a drug.
    </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">
    <I><FONT size="2">Phase&nbsp;III:</FONT></I><FONT size="2"> When
    phase&nbsp;II clinical evaluations demonstrate that a dosage
    range of the product appears to be effective and has an
    acceptable safety profile, phase&nbsp;III clinical trials are
    undertaken in large patient populations to further evaluate
    dosage, to confirm clinical efficacy and to evaluate safety in
    yet larger and more diverse patient populations at multiple
    clinical trial sites.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The FDA may require, or companies may pursue,
additional clinical trials after a product is approved. These
so-called phase&nbsp;IV clinical studies may be made a condition
to be satisfied after a drug receives approval. The results of
phase&nbsp;IV clinical studies may confirm the effectiveness of
a product and may provide important safety information to
augment the FDA&#146;s voluntary adverse drug reaction reporting
system.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The results of product development, preclinical
studies and clinical trials are submitted to the FDA as part of
an NDA, or as part of an NDA supplement. The FDA may deny
approval of an NDA or NDA supplement 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 are submitted, the FDA may
ultimately decide that the NDA or NDA supplement does not
satisfy the criteria for approval. The FDA may withdraw product
approval, once issued, if ongoing regulatory standards are not
met or if safety problems occur after the product reaches the
market. In addition, the FDA may require testing and
surveillance programs to monitor the effect of approved products
which have been commercialized, and the FDA has the power to
prevent or limit further marketing of a product based on the
results of these post-marketing programs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Satisfaction of FDA 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
</FONT>

<P align="center"><FONT size="2">61
</FONT>

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<DIV align="left">
<FONT size="2">type, complexity and novelty of the product or
disease. Typically, if a drug product is intended to treat a
chronic disease, as is the case with some of the product
candidates we are developing, safety and efficacy data must be
gathered over an extended period of time, which can range from
one to three years or more. Government regulation may delay or
prevent marketing of product candidates for new indications 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 product candidates
on a timely basis, if at all. Success in early stage clinical
trials does not ensure success in later stage clinical trials.
Data obtained from clinical activities is not always conclusive
and may be susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. Even if a product
candidate receives regulatory approval, the approval may be
significantly limited to specific disease states, patient
populations and dosages. Further, even after regulatory approval
is obtained, later discovery of previously unknown problems with
a product may result in restrictions on the product or even
complete withdrawal of the product from the market. Delays in
obtaining, or failures to obtain, additional regulatory
approvals for our products would harm our business. In addition,
we cannot predict what adverse governmental regulations may
arise from future U.S.&nbsp;or foreign governmental action.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Any products manufactured or distributed by us
pursuant to FDA approvals are subject to continuing regulation
by the FDA, including record-keeping requirements and reporting
of adverse experiences 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 good manufacturing
practices, which impose certain procedural and documentation
requirements upon us and our third party manufacturers. We
cannot be certain that we or our present or future suppliers
will be able to comply with the good manufacturing practices
regulations and other FDA regulatory requirements. If our
present or future 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 marketing and
promotion of drugs. A company is permitted to 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 criminal penalties. Physicians may prescribe
legally available drugs for uses that are not described in the
product&#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,
restrict manufacturers&#146; communications on the subject of
off-label use.
</FONT>

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

<P align="left">
<B><FONT size="2">Supply Agreement</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In March 2002, we entered into a supply agreement
with PowderJect Technologies Limited to supply us with the
microcylinders for ALGRX 3268. PowderJect Technologies Limited
is part of the Chiron group of companies operating under the
Chiron Corporation. PowderJect Technologies Limited is currently
our sole supplier of microcylinders, and we currently have no
alternate supplier or source of microcylinders. The
microcylinders are exclusively manufactured for PowderJect
Technologies Limited by a third party manufacturer pursuant to
supply and manufacturing agreements by and between PowderJect
Technologies Limited and the third party manufacturer. We are
not a party to any agreements with that third party
manufacturer. If the third party manufacturer breaches its
obligations to PowderJect Technologies Limited and the breach
results in PowderJect Technologies Limited&#146;s inability to
supply us with microcylinders, PowderJect Technologies Limited,
under the terms of its supply agreement with us, must take all
reasonable steps to enforce its rights under its agreements with
the third party manufacturer and seek remedies that are in the
best
</FONT>

<P align="center"><FONT size="2">62
</FONT>

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<DIV align="left">
<FONT size="2">interest of AlgoRx and PowderJect Technologies
Limited, including without limitation, seeking specific
performance or injunctive relief. Although we have not
experienced any shortages of microcylinders to date, our
inability to obtain the microcylinders for any reason could
substantially impair our development activities or the
production, marketing and distribution of ALGRX 3268.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The term of our supply agreement with PowderJect
Technologies Limited commenced on March&nbsp;22, 2002 and
continues until the later of March&nbsp;22, 2012 and the
termination of the agreement with the third party manufacturer,
unless terminated earlier. We have an option to extend the term
of the agreement until March 2014, if the agreement with the
third party manufacturer terminates on mutually agreeable terms
before March 2010. We can terminate our supply agreement with
PowderJect Technologies Limited on account of a material uncured
breach. If we materially breach our payment obligations under
the supply agreement with PowderJect Technologies Limited,
PowderJect Technologies Limited can suspend its supply
obligations to us if we fail to cure the breach within
60&nbsp;days of the date of notice of such breach. Our cost per
microcylinder are based on a number of factors including,
PowderJect Technologies Limited&#146;s direct cost of materials
and labor and fixed costs, such as utilities and rent, allocated
to us by PowderJect Technologies Limited.
</FONT>

<P align="left">
<B><FONT size="2">Manufacturing</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have no manufacturing facilities. We have
entered into arrangements with various third parties for the
formulation and manufacture of our clinical supplies. These
supplies and the manufacturing facilities must comply with
regulations and current good laboratory practices or cGLPs, and
current good manufacturing practices or cGMPs, enforced by the
FDA. We plan to continue to outsource formulation and
manufacturing for our clinical trials and potential
commercialization. Other than the microcylinder used in ALGRX
3268 described above, we believe that there are alternate
manufacturers available to produce our clinical supplies and, if
our product candidates are approved by the FDA, commercial
supplies of our product components.
</FONT>

<P align="left">
<B><FONT size="2">Competition</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We compete in the segment of the pharmaceutical
market that treats pain, which is highly competitive. We face
significant competition from most pharmaceutical companies as
well as biotechnology companies that are also researching and
selling products designed to treat pain. Many of our competitors
have significantly greater financial, manufacturing, marketing
and product development resources than we do. Large
pharmaceutical companies in particular have extensive experience
in clinical testing and in obtaining regulatory approvals for
drugs. These companies also have significantly greater research
capabilities than we do. In addition, many universities and
private and public research institutes are active in
neurological research, some in direct competition with us. We
also must compete with these organizations to recruit scientists
and clinical development personnel.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that our ability to successfully
compete will depend on, 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">the efficacy, safety and reliability 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">the timing and scope of 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 speed at which we develop 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 manufacture and sell commercial
    quantities of a product to the market;
    </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">product acceptance by physicians and other health
    care providers;
    </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 quality and breadth of our technology;
    </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 skills of our employees and our ability to
    recruit and retain skilled employees;
    </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 protection 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">the availability of substantial capital resources
    to fund development and commercialization activities.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">63
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">ALGRX 4975.</FONT></I><FONT size="2"> If ALGRX
4975 is approved and commercialized, it will face significant
competition. For treatment of severe postsurgical pain, morphine
(several manufacturers) administered by infusion pump is a
leading product. Several other oral, injectable and patch opioid
formulations are also used, including Vicodin&#174; (Abbott
Labs), OxyContin&#174; (Purdue Pharma) and Duragesic&#174;
(Johnson&nbsp;&#38; Johnson). For treatment of localized
neuropathic pain, Neurontin&#174; (Pfizer) and tricyclic
antidepressants (several manufacturers) are used. For treatment
of later-stage osteoarthritis, Synvisc&#174; (Genzyme) and other
hyaluronic acid products are injected locally into the knee, and
several opioids, most prominently OxyContin&#174; (Purdue
Pharma) and Duragesic&#174; (Johnson&nbsp;&#38; Johnson) are
also used. There are several high-dose topical capsaicins in
development by NeurogesX and Winston Labs, which may be approved
prior to ALGRX 4975. Another VR1 agonist, resiniferatoxin, which
is currently in phase&nbsp;II clinical trials, has similar
attributes as capsaicin, is being developed for topical delivery
by ICOS and may compete with ALGRX 4975. VR1 inhibitors are
being developed by several companies. Among these, products
being developed by Merck-Neurogen, Amgen, Schwarz Pharma-Amore
Pacific, Purdue Pharma and PainCeptor are expected to advance to
clinical evaluation in late 2004 through 2005.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">ALGRX 3268.</FONT></I><FONT size="2"> If ALGRX
3268 is approved and commercialized, it will face significant
competition. During 2003, the leading products for local
anesthesia prior to needle-stick procedures were L.M.X.4&#174;,
a cream-based product (formerly ELA-MAX&#174;, Ferndale Labs),
and EMLA&#174;, a cream-based product sold by AstraZeneca.
EMLA&#174; has historically been the market leader.
Additionally, beginning in 2003, several generic versions of
EMLA&#174; manufactured by companies including Fougera, QLT,
Geneva, and Hi-Tech Pharmacal were approved by the FDA. Products
with more rapid onset than the cream-based products listed above
include Numby Stuff&#174; (Iomed) and two products for which
NDAs have been submitted, LidoSite&#174; (Braun-Vyteris) and
S-Caine&#174; Patch (ZARS).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">ALGRX 1207.</FONT></I><FONT size="2"> If ALGRX
1207 is approved and commercialized, it will face significant
competition from existing products, including LidoDerm&#174;
(Endo), which is a lidocaine patch, and a variety of local
anesthetic creams and products with alternative means of
delivering lidocaine, including EMLA&#174; cream (AstraZeneca)
and its generic equivalents, L.M.X.4&#174; (Ferndale Labs),
S-Caine&#174; Patch (ZARS) and LidoSite&#174; (Braun-Vyteris).
If approved, ALGRX 1207, which will also likely be formulated as
a cream or patch, will compete with existing products based on
factors such as efficacy, convenience and onset time of pain
relief.
</FONT>

<P align="left">
<B><FONT size="2">Legal Proceedings</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are not involved in any material legal
proceedings.
</FONT>

<P align="left">
<B><FONT size="2">Facilities</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We currently lease and occupy 10,693&nbsp;square
feet of office space in Secaucus, New Jersey. The lease expires
on July&nbsp;6, 2009, although we have an option to extend the
lease for an additional five years at the then market rate. We
also lease 24,800&nbsp;square feet of office and laboratory
space in Fremont, California, but have since scaled back
operations in California. The Fremont, California lease expires
on January&nbsp;31, 2005, and we are currently seeking to lease
approximately 2,300&nbsp;square feet of new office space near
our current Fremont, California facility to occupy upon the
expiration of our current Fremont lease. We believe our
facilities are adequate for our present operations.
</FONT>

<P align="left">
<B><FONT size="2">Employees</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of September&nbsp;30, 2004, we had
23&nbsp;full-time employees. We believe our relations with our
employees are good.
</FONT>

<P align="center"><FONT size="2">64
</FONT>

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

<P align="left">
<B><FONT size="2">Executive Officers, Directors and Key
Employees</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our executive officers, directors and key
employees, as of November&nbsp;1, 2004, are as follows:
</FONT>

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

<TR>
    <TD width="44%"><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="46%"><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">Positions</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">Ronald M.
    Burch,&nbsp;M.D.,&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">49</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">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">Paul R. Hamelin, R.Ph.
    </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="top">
    <FONT size="2">President and Chief Operating Officer
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jeffrey D.
    Lazar,&nbsp;M.D.,&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">58</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Senior Vice President, Clinical Research and
    Regulatory Affairs
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jeffrey A. Rona
    </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">36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Vice President, Finance and Chief Financial
    Officer
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Badri N. Dasu
    </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">41</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Vice President, Manufacturing and Process
    Development
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Diana Davidson
    </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="top">
    <FONT size="2">Vice President, Marketing
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Charles&nbsp;M. Cohen,&nbsp;Ph.D.(1)
    </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="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Rodney A. Ferguson,&nbsp;J.D.,&nbsp;Ph.D.(1)
    </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="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Arnold L. Oronsky,&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">63</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Michael&nbsp;F. Powell,&nbsp;Ph.D.(1)
    </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">50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Director
    </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">Member of the audit and compensation committees.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Ronald M.
Burch,&nbsp;M.D.,&nbsp;Ph.D.</FONT></B><FONT size="2">
co-founded AlgoRx Pharmaceuticals, Inc. in March 2001, and
served as our President until September 2004 and as Chief
Executive Officer since inception. Prior to joining AlgoRx,
Dr.&nbsp;Burch was employed at Purdue Pharma, a privately held
pharmaceutical company, from 1995 until 2001, serving in a
number of managerial positions, including Vice President,
Scientific Evaluations and Immunotherapeutics and Project
Manager and Medical Safety Officer for several pain development
programs. From 1993 to 1995, Dr.&nbsp;Burch served as Director,
Pharmacology at Zeneca Pharmaceuticals, a pharmaceutical
company. In 1992, Dr.&nbsp;Burch served as Director, Immunology
and Bone Metabolism at Rhone Poulenc-Rorer, a global
pharmaceutical company, and as Director, Pain and Inflammation
at Nova Pharmaceutical Corp., a pharmaceutical company. From
1987 to 1991, Dr.&nbsp;Burch served in various capacities at
Nova Pharmaceutical, including as Director, Pain and
Inflammation, Research Technology. Dr.&nbsp;Burch obtained a
Ph.D. in Pharmacology and M.D. from the Medical University of
South Carolina, and served as a Medical Staff Fellow at the
National Institute of Health.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Paul R. Hamelin, R.Ph.
</FONT></B><FONT size="2">has served as our President and Chief
Operating Officer since September 2004. Prior to joining us,
Mr.&nbsp;Hamelin served as President and Chief Executive Officer
of Elitra Pharmaceuticals, a biotechnology company with a focus
on antimicrobial drugs, from 2002 to 2004. From 2000 to 2002, he
served as Senior Vice President of Global Commercial Operations
at Millennium Pharmaceuticals, a biopharmaceutical company.
Prior to joining Millennium Pharmaceuticals, Mr.&nbsp;Hamelin
served as Senior Vice President at Pharmacia/ Searle, a
pharmaceutical company, from 1995 to 2000. Prior to Pharmacia/
Searle, Mr.&nbsp;Hamelin spent 6&nbsp;years at Abbott
Laboratories, a pharmaceutical company, and 10&nbsp;years at Eli
Lilly and Company, a pharmaceutical company. At these
pharmaceutical companies, Mr.&nbsp;Hamelin had many different
sales and marketing roles, including the responsibility of
launching several products. Mr.&nbsp;Hamelin obtained a
Bachelor&#146;s Degree in Pharmacy&nbsp;&#151; Clinical
Pharmacist from Ferris State University in 1980 and a B.S. in
Zoology from Michigan State University in 1976.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Jeffrey D. Lazar,&nbsp;M.D.,&nbsp;Ph.D.
</FONT></B><FONT size="2">has served as our Senior Vice
President, Clinical Research and Regulatory Affairs since 2002.
From 1999 to 2002, he served as President, Lazar Associates,
LLC, a consulting firm to pharmaceutical companies. Prior to his
work with Lazar Associates, Dr.&nbsp;Lazar served as Senior
Medical Director at Purdue Pharma from 1997 to 1999. From 1996
to 1997, he served as Director of the Clinical Trials Management
Office for the Greenville Hospital System. From 1992 to 1995, he
served as Executive Vice President of Pharmaco Dynamics
Research, Inc. From 1985 to 1992, he served
</FONT>

<P align="center"><FONT size="2">65
</FONT>

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<DIV align="left">
<FONT size="2">as Director in Clinical Pharmacology at Pfizer.
Dr.&nbsp;Lazar received his M.D. from the University of Michigan
in 1974 and his Ph.D. from the University of Heidelberg in 1973.
He was also a fellow at Vanderbilt University.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Jeffrey A. Rona </FONT></B><FONT size="2">has
served as our Chief Financial Officer since February 2004. Prior
to becoming our Chief Financial Officer, he served as our Vice
President of Finance from September of 2002 to February of 2004.
Prior to joining us, Mr.&nbsp;Rona was in the Investment Banking
Department at UBS Warburg, a global securities and investment
banking firm, from 2000 to 2002. From 1998 to 2000,
Mr.&nbsp;Rona served as the Director of Finance and Corporate
Development at Antigenics Inc., a biotechnology firm developing
products to treat cancer, infectious diseases and autoimmune
disorders. In 1998, Mr.&nbsp;Rona was employed by
Carr&nbsp;&#38; Company, a private equity firm. From 1990 to
1997, Mr.&nbsp;Rona was with Coopers and Lybrand and its
wholly-owned subsidiary Coopers&nbsp;&#38; Lybrand Securities,
serving in a variety of capacities. Mr.&nbsp;Rona received a
B.S. in Accounting from Case Western Reserve University in 1990.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Badri N. Dasu </FONT></B><FONT size="2">has
served as our Vice President, Manufacturing and Process
Development since 2002. Prior to joining us, he was employed at
PowderJect Technologies Inc., a pharmaceutical company, from
2000 until 2002, serving in a number of positions including Vice
President, Manufacturing, Process Development and Device
Development. From 1996 to 2002, Mr.&nbsp;Dasu served in a
variety of engineering positions including Director, Process
Development and Product Transfer at Metrika Inc., a maker of
micro optical, disposable medical diagnostics. From 1992 to
1996, Mr.&nbsp;Dasu was an Engineer at Cygnus Inc., a maker of
drug delivery systems. Mr.&nbsp;Dasu has a M.S. in Chemical
Engineering from the University of Tulsa.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Diana Davidson </FONT></B><FONT size="2">has
served as our Vice President, Marketing since July 2003. Prior
to joining us, she served in a variety of positions at Elan
Corporation, a pharmaceutical company developing products for
neurological and autoimmune diseases, from 1994 to 2003,
including Vice President of Marketing for Elan Drug Delivery
from 1994 to 2003. From 1986 to 1994, she worked at Pharmacia
Deltec and held a number of positions including Director of
Marketing and Director of Strategic Planning. Ms.&nbsp;Davidson
received a B.S. in Laboratory Technology from the University of
Oklahoma in 1977.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Charles M. Cohen,&nbsp;Ph.D.
</FONT></B><FONT size="2">has served as a member of our board of
directors since February 2004. Since May 2003, Dr.&nbsp;Cohen
has been a partner at Advent International, a global venture
capital firm. Currently Dr.&nbsp;Cohen is the Chairman,
Supervisory Board of Cellzome AG, a post-genomics
biopharmaceutical company. From 2000 to 2002, Dr.&nbsp;Cohen was
the Chief Executive Officer of Cellzome AG. Before this,
Dr.&nbsp;Cohen co-founded Creative BioMolecules, Inc., a
biotechnology company, in 1982 and was a director and its
President and Chief Executive Officer from 1985 to 1995.
Dr.&nbsp;Cohen serves on the board of directors of several
companies including Exelixis, Inc. and Anadys Pharmaceuticals,
Inc. He has been the Chief Executive Officer of several
companies. He received his Ph.D. from New York University School
of Medicine.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Rodney A.
Ferguson,&nbsp;J.D.,&nbsp;Ph.D.</FONT></B><FONT size="2"> has
served as a member of our board of directors since March 2001.
Dr.&nbsp;Ferguson is a Partner on the Life Sciences venture
capital team at JPMorgan Partners, a global private equity firm.
Prior to joining JPMorgan Partners in January 2001,
Dr.&nbsp;Ferguson was a Partner at InterWest Partners, a venture
capital firm, focusing on investments in medical technology,
from July 1999 to December 2000. Prior to joining InterWest,
Dr.&nbsp;Ferguson was Senior Director of Business and Corporate
Development at Genentech, Inc., a biotechnology company. Prior
to joining the business and corporate development department at
Genentech in 1993, Dr.&nbsp;Ferguson was Senior Corporate
Counsel in Genentech&#146;s legal department. Prior to joining
Genentech in 1988, Dr.&nbsp;Ferguson was an associate at
McCutchen, Doyle, Brown&nbsp;&#38; Enersen in
San&nbsp;Francisco. Dr.&nbsp;Ferguson is also a director and
chairman of Corgentech Inc. and a director of Santarus, Inc.
Dr.&nbsp;Ferguson holds a Ph.D. in Biochemistry from the State
University of New York at Buffalo and a J.D. from Northwestern
University.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Arnold L.
Oronsky,&nbsp;Ph.D.</FONT></B><FONT size="2"> has served as a
member of our board of directors since March 2001.
Dr.&nbsp;Oronsky is General Partner with InterWest Partners, a
venture capital firm focusing on investments in medical
technology. Dr.&nbsp;Oronsky joined InterWest in a full-time
capacity in 1994 after serving as a special limited partner
since 1989. In addition to the position of General Partner at
InterWest, he also serves as a
</FONT>

<P align="center"><FONT size="2">66
</FONT>

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<DIV align="left">
<FONT size="2">senior lecturer in the Department of Medicine at
Johns Hopkins Medical School. From 1980 to 1993,
Dr.&nbsp;Oronsky was the Vice President for Discovery Research
at the Lederle Laboratories division of American Cyanamid
Company, a pharmaceutical company. From 1970 to 1972,
Dr.&nbsp;Oronsky was assistant professor at Harvard Medical
School, where he also served as a research fellow from 1968 to
1970. From 1973 to 1976, Dr.&nbsp;Oronsky was the head of the
Inflammation, Allergy, and Immunology Research program for
Ciba-Geigy Pharmaceutical Company. Dr.&nbsp;Oronsky is also a
director of Myogen Inc., Corixa Corporation, Metabasis
Therapeutics, Inc. and Dynavax Technologies Corp.
Dr.&nbsp;Oronsky holds a Ph.D. from Columbia University&#146;s
College of Physicians and Surgeons.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">Michael F.
Powell,&nbsp;Ph.D.</FONT></B><FONT size="2"> has served as a
member of our board of directors since March 2001. He has served
as Managing Director of Sofinnova Ventures, a venture capital
firm, since 1998. Previously, he was a Group Leader at Genentech
from December 1990 to June 1997 and Director of Product
Development for Cytel Corporation, a biotechnology company, from
September 1987 to December 1990. In 1993, Dr.&nbsp;Powell was
honored as a Fellow by the American Association of
Pharmaceutical Scientists. Dr.&nbsp;Powell is the author of
nearly 100 publications and books, including a treatise on
vaccine design. Dr.&nbsp;Powell is also a director of Seattle
Genetics, Inc. Dr.&nbsp;Powell received a Ph.D. in Chemistry
from the University of Toronto in 1981 and was a postdoctoral
fellow in Bio-Organic Chemistry at the University of California,
Berkeley.
</FONT>

<P align="left">
<B><FONT size="2">Scientific and Clinical Advisory
Board</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following individuals are members of our
Scientific and Clinical Advisory Board:
</FONT>

<CENTER>
<TABLE width="100%" 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="54%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Current Positions</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">James N. Campbell,&nbsp;M.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Professor of Neurosurgery and Vice Chairman,
    Department of Neurosurgery, The Johns Hopkins University School
    of Medicine and Director of the Blaustein Pain Treatment
    Program, The Johns Hopkins Hospital; President and Chairman,
    American Pain Foundation
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Richard B. Carter,&nbsp;Ph.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Executive Director, Neuroscience, Global
    Pharmaceutical Development, Novartis
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ronald Dubner, D.D.S.,&nbsp;Ph.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Professor and Chair, Department of Bio-Medical
    Sciences, University of Maryland Dental School; Director,
    University of Maryland Pain Center
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Michael G. Ehrlich,&nbsp;M.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Vincent Zecchino Professor and Chairman,
    Surgeon-in- Chief, Department of Orthopedics, Brown Medical
    School
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Henrik Kehlit,&nbsp;M.D.,&nbsp;Ph.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Professor of Surgery, University of Copenhagen
    School of Medicine; Department of Surgical Gastroenterology,
    Hvidovre Hospital, Hvidovre, Denmark
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Kenneth A. Selzer,&nbsp;M.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">General Partner, Neuropractice; Founder and
    Director, INC Research, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Davis L. Temple,&nbsp;Jr.,&nbsp;Ph.D.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">President, Temple Consulting; Director, Cortex
    Pharmaceutical; Director, Arcaris Genetics; Director,
    InternetSound.com
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">Composition of our Board of
Directors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Immediately prior to this offering, our board of
directors will be divided into three staggered classes of
directors of the same or nearly the same number and each of our
directors will be assigned to one of the three classes. At each
annual meeting of stockholders, a class of directors will be
elected for a three-year term to succeed the directors of the
same class whose terms are then expiring. The terms of the
directors will expire upon election and qualification of
successor directors at the annual meeting of stockholders to
</FONT>

<P align="center"><FONT size="2">67
</FONT>

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<DIV align="left">
<FONT size="2">be held during the years 2005 for the
Class&nbsp;I directors, 2006 for the Class&nbsp;II directors and
2007 for the Class&nbsp;III directors.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our certificate of incorporation and bylaws
provide that the number of our directors shall be fixed from
time to time by a resolution of the majority of our board of
directors. Any additional directorships resulting from an
increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class
shall consist of one third of the directors. There are no family
relationships among any of our directors or executive officers.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The division of our board of directors into three
classes with staggered three-year terms may delay or prevent
stockholder efforts to effect a change of our management or a
change in control.
</FONT>

<P align="left">
<B><FONT size="2">Committees of our Board of Directors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our board of directors has established an audit
committee and a compensation committee and intends, in
conjunction with this offering, to establish a nominating and
corporate governance committee.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Audit Committee.</FONT></I><FONT size="2"> Our
audit committee is a standing committee of our board of
directors and operates under a written charter adopted by our
board. Our audit committee consists of Dr.&nbsp;Charles M. Cohen
(Chairman), Dr.&nbsp;Rodney A. Ferguson and Dr.&nbsp;Michael F.
Powell. The audit committee reviews and monitors our accounting
practices and financial statements; appoints, determines funding
for, and oversees our independent auditors; reviews the results
and scope of audits; approves the retention of the independent
auditors to perform any proposed permissible non-audit services;
and reviews and evaluates our audit and control functions.
Dr.&nbsp;Cohen is an audit committee financial expert under the
rules and regulations of the Securities and Exchange Commission.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Compensation
Committee.</FONT></I><FONT size="2"> Our compensation committee
is a standing committee of, and will operate under a written
charter to be adopted by, our board of directors. Our
compensation committee consists of Dr.&nbsp;Charles M. Cohen,
Dr.&nbsp;Rodney A. Ferguson and Dr.&nbsp;Michael F. Powell. The
compensation committee makes decisions and recommendations
regarding salaries, benefits and incentive compensation for our
directors and executive officers, and administers our incentive
compensation and benefit plans, including our 2001 Equity
Incentive Plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Nominating and Corporate Governance
Committee.</FONT></I><FONT size="2"> In conjunction with this
offering, we intend to establish a nominating and corporate
governance committee of our board of directors and adopt a
written charter for the committee. The nominating and corporate
governance committee will be authorized to identify and approve
individuals qualified to serve as members of our board of
directors, select director nominees for our annual meetings of
stockholders, evaluate our board&#146;s performance and develop
and recommend to our board corporate governance guidelines and
provide oversight with respect to corporate governance and
ethical conduct.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Other Committees.</FONT></I><FONT size="2">
Our board of directors may establish other committees as it
deems necessary or appropriate from time to time.
</FONT>

<P align="left">
<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="left">
<B><FONT size="2">Director Compensation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We reimburse our directors who are not employees
for their reasonable expenses incurred in attending meetings of
the board of directors. Our directors are eligible to
participate in our 2001 Equity Incentive Plan.
</FONT>

<P align="center"><FONT size="2">68
</FONT>

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<P align="left">
<B><FONT size="2">Limitation of Liability and Indemnification of
Officers and Directors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our certificate of incorporation limits the
liability of directors to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except
liability for:
</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">any breach of their duty of loyalty to the
    corporation or its stockholders;
    </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">acts or omissions not in good faith or which
    involve intentional misconduct or a knowing violation of law;
    </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">unlawful payments of dividends or unlawful stock
    repurchases or redemptions;&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">any transaction from which the director derived
    an improper personal benefit.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our bylaws provide that we will indemnify our
directors and officers to the fullest extent permitted by law,
including if he or she is serving as a director, officer,
employee or agent of another company at our request. We believe
that indemnification under our bylaws covers at least negligence
and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability
arising out of his or her actions in connection with their
services to us.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In conjunction with this offering, we intend to
enter into separate indemnification agreements with our
directors and executive officers, in addition to the
indemnification provided for in our bylaws. These agreements,
among other things, will provide that we will indemnify our
directors and executive officers for certain expenses (including
attorneys&#146; fees), judgments, fines and settlement amounts
incurred by a director or executive officer in any action or
proceeding arising out of such person&#146;s services as one of
our directors or executive officers, or any of our subsidiaries
or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons
as directors and executive officers.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">There is no pending litigation or proceeding
involving any of our directors or executive officers as to which
indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a
claim for indemnification.
</FONT>

<P align="left">
<B><FONT size="2">Executive Compensation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth information
regarding the compensation that we paid to our Chief Executive
Officer and each of our other most highly compensated executive
officers during the year ended December&nbsp;31, 2003. We refer
to these officers in this prospectus as the &#147;named
executive officers.&#148;
</FONT>

<P align="center">
<B><FONT size="2">Summary Compensation Table</FONT></B>

<P align="center">
<B><FONT size="2">2003 Annual Compensation</FONT></B>

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

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <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="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="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="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 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">All Other</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">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(1)</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><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 bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ronald M.
    Burch,&nbsp;M.D.,&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="bottom" nowrap><FONT size="2">278,000</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">2,940</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(2)</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">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>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jeffrey D. Lazar,&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="bottom" nowrap><FONT size="2">255,000</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">3,236</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(2)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Senior Vice President, Clinical Research 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>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jeffrey A. Rona&nbsp;</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">177,000</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">13,000</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">2,246</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(2)</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Vice President, Finance and
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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 bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Chief Financial 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>
</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">In accordance with the rules of the SEC, the
    compensation described in this table does not include medical,
    group life insurance or other benefits which are available
    generally to all of our salaried
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">69
</FONT>

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

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

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

<TR valign="top">
    <TD></TD>
    <TD align="left">
    <FONT size="2">employees and certain perquisites and other
    personal benefits received which do not exceed the lesser of
    $50,000 or 10% of any named executive officer&#146;s salary and
    bonus disclosed in this table.
    </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">Represents 401(k) matching contributions.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth the number and
value of securities underlying options held as of
December&nbsp;31, 2003 by each of our named executive officers.
Options shown as exercisable in the table below are immediately
exercisable.
</FONT>

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

<TR>
    <TD width="31%"><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="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="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="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>
    <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="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="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">Number of Shares</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"></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">In-the-Money Options at</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Options at Fiscal Year-End</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Fiscal Year-End(1)</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">Value</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">Acquired</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Realized</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ronald M. Burch,&nbsp;M.D.,&nbsp;Ph.D.
    </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">&#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="top" 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="top" nowrap><FONT size="2">1,760,578</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="top" 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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jeffrey D. Lazar,&nbsp;M.D.,&nbsp;Ph.D.
    </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">&#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="top" 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="top" nowrap><FONT size="2">950,041</FONT></TD>
    <TD><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">&#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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jeffrey A. Rona
    </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">&#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="top" 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="top" nowrap><FONT size="2">134,000</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="top" 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>
</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">These values have been calculated based on an
    assumed initial public offering price of
    $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
    share, less the applicable exercise price per share, multiplied
    by the underlying shares, without taking into account any taxes
    that may be payable in connection with the transaction.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Benefit Plans</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">2001 Equity Incentive Plan</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We maintain a stock incentive plan which allows
for the grant of incentive stock options, nonqualified stock
options, stock bonuses and rights to acquire restricted stock to
our employees, directors and consultants. The plan has a ten
year term that commenced on March&nbsp;30, 2001 and terminates
on March&nbsp;30, 2011 and may be administered by our board of
directors or any committee of one or more directors appointed by
the board. Currently, the plan is administered by our board of
directors. We have reserved 23,365,159&nbsp;shares of our common
stock for issuance pursuant to awards under this plan. As of
September&nbsp;30, 2004, options to purchase a total of
22,575,140&nbsp;shares of common stock, with a weighted average
price of $0.12 per share, were outstanding under this plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The administrative committee selects the
individuals to receive awards under the stock incentive plan and
sets the terms and conditions of each award. The administrative
committee has plenary authority to interpret the stock incentive
plan and to make all determinations relating to the plan. After
the date that awards under this plan are no longer exempt from
the provisions of Section&nbsp;162(m) of the Code, the maximum
number of shares of our common stock that may be subject to
awards of options or stock appreciation rights for any single
individual in any year cannot exceed 125,000&nbsp;shares.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Options granted under our stock incentive plan
may be incentive stock options or nonqualified stock options.
The exercise price and vesting schedules for options will be set
by the administrative committee at the time of grant, provided
that the per share exercise price for incentive stock options
and nonqualified stock options intended to be exempt from the
provisions of Section&nbsp;162(m) of the Code cannot be less
than the fair market value of a share of our common stock on the
date of grant. Fair market value is defined in the stock
incentive plan as the closing price of our common stock on the
Nasdaq National Market, or such national securities exchange
upon which our common stock is listed, on the trading date
immediately prior to the date of grant. The exercise price for
nonqualified stock options cannot be less than the par value of
our common stock. The term of each option will be set by the
administrative committee, provided no term can exceed ten years
from the date of grant. Options may expire earlier upon an
optionee&#146;s termination of employment. Upon exercise, the
exercise price for an option may be paid in cash or by bank
check or, in the discretion of the administrative committee,
through delivery of shares of our common stock or other property
having an aggregate value equal to the aggregate exercise price,
or
</FONT>

<P align="center"><FONT size="2">70
</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">through a brokered exercise procedure not in
violation of any law. The administrative committee may allow for
the voluntary surrender of options in exchange for the grant of
new options with similar or different terms.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Shares of restricted stock granted under the
stock incentive plan will be non-transferable and subject to
forfeiture upon the termination of employment. The holder of a
restricted stock award will generally have the rights and
privileges of a stockholder, including the right to vote such
shares. Cash and stock dividends on such shares, if any, may be
distributed to the holder of a restricted stock award or held
for the account of the holder, as determined by the
administrative committee.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The administrative committee may grant other
cash, stock or stock-related awards under the stock incentive
plan, including stock appreciation rights, limited stock
appreciation rights, phantom stock awards, the bargain purchase
of our common stock and stock bonuses. The terms and conditions
of any such other stock-based awards will be determined by the
administrative committee, in its sole discretion.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All outstanding awards under the stock incentive
plan, the maximum number of shares available under the stock
incentive plan and the maximum number of shares of our common
stock available pursuant to the grant of options and stock
appreciation rights to any single person in any year, if
applicable, are subject to adjustment or substitution, as
determined by the administrative committee in the event of
certain corporate transactions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The stock incentive plan may be terminated or
amended at any time by our board of directors, provided that
without stockholder approval no such amendment 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">materially increase the number of shares of our
    common stock available or the formula for automatic increase of
    shares under the stock incentive 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">extend the maximum term of any option beyond ten
    years;
    </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">extend the expiration date of the plan;&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">change the class of persons eligible to receive
    awards under the plan without stockholder approval.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Except for adjustments subject to certain
corporate transactions, alterations to outstanding awards under
the stock incentive plan may be made only with the consent of
the award recipient.
</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">401(k) Plan</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have established a tax-qualified employee
savings and retirement plan for all employees who satisfy
certain eligibility requirements, including requirements
relating to age and length of service. Under our 401(k) plan,
employees may elect to reduce their current compensation by up
to 15% or the statutory limit, $13,000 in 2004, whichever is
less, and have us contribute the amount of this reduction to the
401(k) plan. In addition, we match a percentage of an
employee&#146;s contribution that we establish from time to
time. As of September&nbsp;30, 2004, we had 23 employees
eligible for participation in our 401(k) plan. We made matching
contributions of $52,843 in 2003 and $34,825 in the nine month
period ended September&nbsp;30, 2004.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We intend for the 401(k) plan to qualify under
Section&nbsp;401 of the Internal Revenue Code of 1986, as
amended, so that contributions by employees or by us to the
401(k) plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) plan. Our
contributions, if any, will be deducted by us when made.
</FONT>

<P align="center"><FONT size="2">71
</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">CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since March&nbsp;6, 2001, there has not been, nor
is there currently planned, any transaction or series of similar
transactions to which we were or are a party in which the amount
involved exceeds $60,000 and in which any director, executive
officer or holder of more than 5% of our capital stock or any
member of such person&#146;s immediate family had or will have a
direct or indirect material interest other than agreements which
are described under the caption &#147;Management&#148; and the
transactions described below.
</FONT>

<P align="left">
<B><FONT size="2">Purchases of Securities</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Since March&nbsp;6, 2001, the following executive
officers, directors, holders of more than 5% of our capital
stock and members of such person&#146;s immediate family
purchased securities in the amounts and as of the dates shown
below.
</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="29%"><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="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="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 colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of Shares</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"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">of Series&nbsp;A</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">of Series&nbsp;B</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">of Series&nbsp;C</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Name of Purchaser</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Common Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Preferred Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Preferred Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Preferred Stock</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>
</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">Entities Affiliated with Directors:</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>
</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">Entities affiliated with InterWest Partners(1)
    </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">3,000,000</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">4,676,923</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,877,637</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">Entities affiliated with J.P.&nbsp;Morgan
    Partners(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">&#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">3,000,000</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">4,676,923</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,877,637</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">Entities affiliated with Sofinnova Ventures(3)
    </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">3,000,000</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">2,338,462</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">6,683,544</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">
    <B><FONT size="2">Other 5% Stockholders:</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>
</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">Entities affiliated with Advent International
    Corporation(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">11,814,345</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">Entities affiliated with Index Ventures(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">9,282,700</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">Entities affiliated with Pacific Rim(6)
    </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">9,282,700</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">S.R. One, Limited
    </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">9,282,700</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">
    <B><FONT size="2">Directors and Executive Officers:</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>
</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">Ronald M.
    Burch,&nbsp;M.D.,&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="bottom" nowrap><FONT size="2">1,000,000</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">100,000</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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jeffrey D.
    Lazar,&nbsp;M.D.,&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="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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Jeffrey A. Rona
    </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>
</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">Charles&nbsp;M. Cohen,&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="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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Rodney A.
    Ferguson,&nbsp;J.D.,&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="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">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Arnold L. Oronsky,&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="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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Michael&nbsp;F. Powell,&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="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 colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Price Per Share:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0010</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.0000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.3000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.5925</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">Date(s) of Purchases:
    </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">03/2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">04-09/2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">03/2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">02/2004</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">Represents shares held by InterWest Partners
    VIII, L.P., InterWest Investors Q VIII, L.P., and InterWest
    Investors VIII, L.P. Includes the conversion of convertible
    promissory notes, issued to the InterWest Funds in April 2003,
    in the aggregate principal amount of $3,920,000. The convertible
    promissory notes were converted into Series&nbsp;C preferred
    stock in February 2004 at a rate of $0.5925 per share.
    Dr.&nbsp;Arnold L. Oronsky, one of our directors, is a Managing
    Director of InterWest Management Partners VIII, LLC, the general
    partner of InterWest Partners VIII, L.P., InterWest Investors Q
    VIII, L.P., and InterWest Investors VIII, L.P.
    </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">Represents shares held by J.P.&nbsp;Morgan
    Partners (SBIC), LLC, J.P.&nbsp;Morgan Partners Global
    Investors, L.P., J.P.&nbsp;Morgan Partners Global Investors A,
    L.P., J.P.&nbsp;Morgan Partners Global Investors
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">72
</FONT>

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

<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 align="left">
    <FONT size="2">(Cayman), L.P., and J.P.&nbsp;Morgan Partners
    Global Investors (Cayman) II, L.P. Includes the conversion of
    convertible promissory note, issued to J.P.&nbsp;Morgan Partners
    (SBIC), LLC in April 2003, in the aggregate principal amount of
    $3,920,000. The convertible promissory note was converted into
    Series&nbsp;C preferred stock in February 2004 at a rate of
    $0.5925 per share. Dr.&nbsp;Rodney A. Ferguson, one of our
    directors, is a Managing Director of J.P.&nbsp;Morgan Partners
    (SBIC), LLC, and JPMP Capital Corp.
    </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">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Represents shares held by Sofinnova Partners V,
    LP, Sofinnova Affiliates V, LP. and Sofinnova Venture Principals
    V, LP. Includes the conversion of convertible promissory notes,
    issued to Sofinnova Partners V, LP, Sofinnova Affiliates V, LP.
    and Sofinnova Venture Principals V, LP. in April 2003, in the
    aggregate principal amount of $3,920,000. The convertible
    promissory notes were converted into Series&nbsp;C preferred
    stock in February 2004 at a rate of $0.5925 per share.
    Dr.&nbsp;Michael&nbsp;F. Powell, one of our directors, is a
    Managing Director of each of these partnerships.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Represents shares held by Advent Healthcare and
    Life Science III LP, Advent Healthcare and Life Sciences III-A,
    LP, Advent Partners HLS III LP and Advent
    Partners&nbsp;II&nbsp;LP.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(5)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Represents shares held by Index Ventures II
    (Jersey) II LP, Index Ventures II (Delaware) LP, Index Ventures
    II GmbH Co. KG, Index Ventures II Parallel Entrepreneur Fund
    (Jersey-A) LP, Index Ventures II Parallel Entrepreneur Fund
    (Jersey-A) LP and Index Ventures Management SA on behalf of
    Index Employee Investment Plan.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(6)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Represents shares held by Pacific Rim AQUA Life
    Science No.&nbsp;1 Investment Partnership, Pacific Rim AQUA Life
    Science No.&nbsp;2 Investment Partnership, Pacific Rim AQUA Life
    Science No.&nbsp;3 Investment Partnership, Pacific Rim AQUA Life
    Science No.&nbsp;4 Investment Partnership and Pacific Rim AQUA
    Life Science No.&nbsp;5 Investment Partnership.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Indemnification Agreements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As permitted by the Delaware General Corporation
Law, we have adopted provisions in our certificate of
incorporation and bylaws that authorize and require us to
indemnify our officers and directors to the full extent
permitted under Delaware law, subject to limited exceptions. See
&#147;Management&nbsp;&#151; Limitation of Liability and
Indemnification of Officers and Directors.&#148;
</FONT>

<P align="left">
<B><FONT size="2">Stock Option Grants</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have granted options to purchase shares of our
common stock to our executive officers and directors. See
&#147;Principal Stockholders.&#148;
</FONT>

<P align="left">
<B><FONT size="2">Amended and Restated Investor Rights
Agreement</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We and our preferred stockholders have entered
into an agreement under which our preferred stockholders have
registration rights with respect to their shares of common stock
following this offering. Upon closing of this offering, all our
currently outstanding shares of preferred stock will be
converted into shares of our common stock. See &#147;Description
of Capital Stock&nbsp;&#151; Registration Rights&#148; for a
further description of the terms of this agreement.
</FONT>

<P align="center"><FONT size="2">73
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<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 presents information
concerning the beneficial ownership of the shares of our common
stock as of November&nbsp;22, 2004 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 person we know to be the beneficial owner of
    5% or more of our outstanding shares of our capital 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 our named executive officers listed on
    the Summary Compensation Table;
    </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 executive officers and directors as a
    group.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The information set forth in the table gives
effect to the conversion of all of our preferred stock and the
exercise of an outstanding warrant that, by its terms,
terminates upon completion of this offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Beneficial ownership is determined under the
rules of the SEC and generally includes voting or investment
power over securities. Except in cases where community property
laws apply or as indicated in the footnotes to this table, we
believe that each stockholder identified in the table possesses
sole voting and investment power over all shares of common stock
shown as beneficially owned by the stockholder. Percentage of
beneficial ownership is based on 154,382,728&nbsp;shares of
common stock outstanding as of November&nbsp;22, 2004,
and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock outstanding after the completion of this
offering. Shares of common stock subject to options that are
currently exercisable or exercisable within 60&nbsp;days of
November&nbsp;22, 2004, are considered outstanding and
beneficially owned by the person holding the options for the
purpose of computing the percentage ownership of that person but
are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. Unless indicated
below, the address of each individual listed below is
c/o&nbsp;AlgoRx Pharmaceuticals, Inc., 500&nbsp;Plaza Drive,
2nd&nbsp;floor, Secaucus, New Jersey 07094-3619.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="59%"><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="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="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">Percentage of Shares</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Outstanding</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="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">Beneficially</FONT></B></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">After the</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">Owned(1)</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</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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Stockholders owning approximately 5% or
    more</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Entities affiliated with InterWest Partners(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">29,148,406</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">18.9</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">Entities affiliated with JPMorgan Partners(3)
    </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">29,148,406</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">18.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">Entities affiliated with Sofinnova Ventures(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">14,978,929</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">Entities affiliated with Advent International(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">11,814,345</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">7.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">Entities affiliated with Index Ventures(6)
    </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">9,282,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">Entities affiliated with Pacific Rim(7)
    </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">9,282,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">S.R. One, Limited(8)
    </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">9,282,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">
    <B><FONT size="2">Directors and Executive Officers</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ronald M. Burch,&nbsp;M.D.,&nbsp;Ph.D.(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">2,902,278</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">1.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">Jeffrey D. Lazar,&nbsp;M.D.,&nbsp;Ph.D.(10)
    </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">978,727</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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>
    <TD><FONT size="2">&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">Jeffrey A. Rona(11)
    </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">159,000</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">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Charles M. Cohen,&nbsp;Ph.D.(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">11,814,345</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">7.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">Rodney A. Ferguson,&nbsp;J.D.,&nbsp;Ph.D.(3)
    </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">29,148,406</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">18.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">Arnold L. Oronsky,&nbsp;Ph.D.(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">29,148,406</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">18.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">Michael F. Powell,&nbsp;Ph.D.(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">14,978,929</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><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">All directors and executive officers as a group
    (8&nbsp;persons)(12)
    </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">89,130,091</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">56.7</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">74
</FONT>

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

<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">Less than 1%.
    </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">Includes shares of common stock issuable pursuant
    to options exercisable within 60&nbsp;days of November&nbsp;22,
    2004.
    </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">Includes 28,715,249&nbsp;shares held by InterWest
    Partners VIII, L.P., 338,673&nbsp;shares held by InterWest
    Investors Q VIII, L.P., and 94,484&nbsp;shares held by InterWest
    Investors VIII, L.P., collectively, the InterWest Funds.
    Dr.&nbsp;Arnold L. Oronsky, one of our directors, is a Managing
    Director of InterWest Management Partners VIII, LLC, the general
    partner of the InterWest Funds. Dr.&nbsp;Oronsky has shared
    voting and dispositive powers over the shares held by the
    InterWest Funds. He disclaims beneficial ownership of the shares
    held by the InterWest Funds, except to the extent of his
    pecuniary interest therein. The address for InterWest Partners
    is 2710&nbsp;Sand Hill Road, Second Floor, Menlo Park, CA 94025.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes 26,773,816&nbsp;shares held by
    J.P.&nbsp;Morgan Partners (SBIC), LLC, or JPMP SBIC,
    1,387,154&nbsp;shares held by J.P.&nbsp;Morgan Partners Global
    Investors, LLC, 213,141&nbsp;shares held by J.P.&nbsp;Morgan
    Partners Global Investors A, L.P., 696,414&nbsp;shares held by
    J.P.&nbsp;Morgan Partners Global Investors (Cayman), L.P., and
    77,881&nbsp;shares held by J.P.&nbsp;Morgan Partners Global
    Investors (Cayman)&nbsp;II, L.P. JPMP SBIC is a wholly owned
    subsidiary of J.P.&nbsp;Morgan Partners (BHCA), L.P., the
    general partner of which is JPMP Master Fund Manager, L.P. or
    &#147;MF&nbsp;Manager&#148;. JPMP Global Investors, L.P. is the
    general partner of each of J.P.&nbsp;Morgan Partners Global
    Investors, L.P., J.P.&nbsp;Morgan Partners Global
    Investors&nbsp;A, L.P., J.P.&nbsp;Morgan Partners Global
    Investors (Cayman), L.P. and J.P.&nbsp;Morgan Partners Global
    Investors (Cayman)&nbsp;II, L.P. JPMP Capital Corp., or
    &#147;JPMP Capital&#148;, a wholly owned subsidiary of
    J.P.&nbsp;Morgan Chase&nbsp;&#38; Co., or &#147;JPM Chase&#148;,
    is the general partner of each of MF&nbsp;Manager and Global
    Investors. As a result thereof, each of MF Manager, JPMP Capital
    and JPM Chase may be deemed to beneficially own the shares held
    by JPMP SBIC, and each of JPMP Global Investors L.P., JPMP
    Capital and JPM Chase may be deemed to beneficially own the
    share held by each of J.P.&nbsp;Morgan Partners Global
    Investors, L.P., J.P.&nbsp;Morgan Partners Global
    Investors&nbsp;A, L.P., J.P.&nbsp;Morgan Partners Global
    Investors (Cayman), L.P. and J.P.&nbsp;Morgan Partners Global
    Investors (Cayman)&nbsp;II, L.P. Rodney A. Ferguson, one of our
    directors, is a Managing Director of JPMP SBIC, JPMP Capital and
    each of J.P.&nbsp;Morgan Partners Global Investors, L.P.,
    J.P.&nbsp;Morgan Partners Global Investors&nbsp;A, L.P.,
    J.P.&nbsp;Morgan Partners Global Investors (Cayman), L.P. and
    J.P.&nbsp;Morgan Partners Global Investors (Cayman)&nbsp;II,
    L.P., and as a result, Dr.&nbsp;Ferguson may be deemed to be the
    beneficial owner of the shares held by JPMP SBIC and each of
    J.P.&nbsp;Morgan Partners Global Investors, L.P.,
    J.P.&nbsp;Morgan Partners Global Investors&nbsp;A, L.P.,
    J.P.&nbsp;Morgan Partners Global Investors (Cayman), L.P. and
    J.P.&nbsp;Morgan Partners Global Investors (Cayman)&nbsp;II,
    L.P. Additionally, Jeffrey C. Walker as President of JPMP
    Capital, may be deemed to have beneficial ownership of the
    shares held by JPMP SBIC and each of J.P.&nbsp;Morgan Partners
    Global Investors, L.P., J.P.&nbsp;Morgan Partners Global
    Investors&nbsp;A, L.P., J.P.&nbsp;Morgan Partners Global
    Investors (Cayman), L.P. and J.P.&nbsp;Morgan Partners Global
    Investors (Cayman)&nbsp;II, L.P. since pursuant to policies and
    procedures adopted by JPMP Capital, Mr.&nbsp;Walker has
    dispositive power of such shares. The foregoing, however, shall
    not be an admission that Dr.&nbsp;Ferguson, MF&nbsp;Manager,
    JPMP Global Investors L.P., JPMP Capital or JPM Chase are the
    beneficial owners of such shares and each disclaims beneficial
    ownership except to the extent of their pecuniary interest in
    each of the applicable entities. The address for
    J.P.&nbsp;Morgan is 1221&nbsp;Avenue of the Americas, New York,
    NY 10020.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes 14,289,685&nbsp;shares held by Sofinnova
    Partners&nbsp;V, LP, 470,132&nbsp;shares held by Sofinnova
    Affiliates&nbsp;V, LP. and 219,112&nbsp;shares held by Sofinnova
    Venture Principals&nbsp;V, LP. Dr.&nbsp;Michael&nbsp;F. Powell
    is a Managing Director of each of these partnerships, shares
    voting and dispositive power with respect to the shares held by
    each of Sofinnova Partners&nbsp;V, LP, Sofinnova
    Affiliates&nbsp;V, LP. and Sofinnova Venture Principals&nbsp;V,
    LP and disclaims beneficial ownership of such shares in which he
    has no pecuniary interest. The address for Sofinnova Venture
    Partners is 140&nbsp;Geary Street, 10th Floor, San Francisco, CA
    94106.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">75
</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="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(5)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes the ownership by the following venture
    capital funds managed by Advent International Corporation:
    4,047,257&nbsp;shares held by Advent Healthcare and Life
    Science&nbsp;III LP, 7,589,873&nbsp;shares held by Advent
    Healthcare and Life Sciences&nbsp;III-A, LP, 143,460&nbsp;shares
    held by Advent Partners HLS III LP and 33,755&nbsp;shares held
    by Advent Partners II LP. In its capacity as manager or general
    partner of these funds, Advent International Corporation
    exercises sole voting and investment power with respect to all
    shares held by these funds. Dr.&nbsp;Charles&nbsp;M. Cohen, a
    partner at Advent International, may be deemed to be a
    beneficial owner of the shares held by these Advent funds.
    Dr.&nbsp;Cohen disclaims beneficial ownership of these shares
    held by Advent except to the extent of his pecuniary interest
    therein. The address for Advent International Corporation is
    75&nbsp;State Street, 29th Floor, Boston, Massachusetts, 02109.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(6)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes 2,840,692&nbsp;shares held by Index
    Ventures (Jersey) II LP, 5,222,911&nbsp;shares held by Index
    Ventures&nbsp;II (Delaware) LP, 835,072&nbsp;shares held by
    Index Ventures&nbsp;II GmbH&nbsp;&#38; Co. KG,
    95,333&nbsp;shares held by Index Ventures&nbsp;II Parallel
    Entrepreneur Fund (Jersey-A) LP, 149,451&nbsp;shares held by
    Index Ventures&nbsp;II Parallel Entrepreneur Fund (Jersey-B) LP
    and 139,241&nbsp;shares held by Index Ventures Management SA on
    behalf of Index Employee Investment Plan. Index Venture
    Associates&nbsp;II Limited is the general partner for each of
    Index Ventures&nbsp;II (Jersey)&nbsp;II LP, Index
    Ventures&nbsp;II (Delaware) LP, Index Ventures&nbsp;II Parallel
    Entrepreneur Fund (Jersey-A) LP, Index Ventures&nbsp;II Parallel
    Entrepreneur Fund (Jersey-B) LP. Index Ventures&nbsp;II (SLP)
    Limited is the special limited partner of Index Ventures&nbsp;II
    Gmbh KG. The address for the Index funds is No.&nbsp;1 Seaton
    Place, St.&nbsp;Helier, Jersey, Channel Islands JE4 8YJ.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(7)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes 1,614,800&nbsp;shares held by Pacific
    Rim AQUA Life Science No.&nbsp;1 Investment Partnership,
    1,906,600&nbsp;shares held by Pacific Rim AQUA Life Science
    No.&nbsp;2 Investment Partnership, 1,092,800&nbsp;shares held by
    Pacific Rim AQUA Life Science No.&nbsp;3 Investment Partnership,
    2,136,900&nbsp;shares held by Pacific Rim AQUA Life Science
    No.&nbsp;4 Investment Partnership and 2,531,600&nbsp;shares held
    by Pacific Rim AQUA Life Science No.&nbsp;5 Investment
    Partnership. Pacific Rim Ventures Co., Ltd is the general
    partner of each of the above referenced Pacific Rim entities and
    exercises sole voting and investment power with respect to all
    shares held by these funds. The address for Pacific Rim Ventures
    Co.&nbsp;Ltd is Green Plaza, 2nd flr., 3-7-&nbsp;Komazawa,
    Setagaya-ku, Tokyo 154-0012 Japan.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(8)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The address for S.R.&nbsp;One, Limited is Four
    Tower Bridge, 200&nbsp;Barr Harbor Drive, Suite&nbsp;250,
    W.&nbsp;Conshohocken, PA 19428.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(9)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes 1,802,278&nbsp;shares of common stock
    issuable upon the exercise of stock options exercisable within
    60&nbsp;days of November&nbsp;22, 2004.
    </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 978,727&nbsp;shares of common stock
    issuable upon the exercise of stock options exercisable within
    60&nbsp;days of November&nbsp;22, 2004.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(11)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes 159,000&nbsp;shares of common stock
    issuable upon the exercise of stock options exercisable within
    60&nbsp;days of November&nbsp;22, 2004.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD><FONT size="2">(12)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Our executive officers included in the table
    consist of our named executive officers and Paul&nbsp;R.
    Hamelin. This total includes 2,940,005&nbsp;shares of common
    stock issuable upon exercise of stock options exercisable within
    60&nbsp;days of November&nbsp;22, 2004. This total also includes
    the shares described in notes&nbsp;(2) through (5) above.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">76
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<P align="center">
<B><FONT size="2">DESCRIPTION OF CAPITAL STOCK</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon the closing of this offering, our authorized
capital stock will consist of 150,000,000&nbsp;shares of common
stock, par value $0.001&nbsp;per share, and
25,000,000&nbsp;shares of preferred stock, par value
$0.001&nbsp;per share. As of September&nbsp;30, 2004, there were
152,782,728&nbsp;shares of common stock outstanding (after
giving effect to the automatic conversion of all outstanding
shares of preferred stock into shares of common stock, and the
expected exercise of an outstanding warrant that, by its terms,
terminates upon completion of this offering and the
1-for-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;reverse
stock split). As of September&nbsp;30, 2004, we had
approximately 62 record holders of our capital stock. All of our
outstanding shares of preferred stock will automatically convert
into shares of common stock immediately prior to the closing of
this offering. After the closing of this offering and after
giving effect to the conversion of our preferred stock, the
expected exercise of an outstanding warrant that, by its term,
terminates upon completion of this offering and the
1-for-&nbsp;reverse stock split, we will
have &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock and no shares of preferred stock outstanding. In
addition, as of September&nbsp;30, 2004, 982,397&nbsp;shares of
our common stock were reserved for future grants under our 2001
Equity Incentive Plan and options to
purchase&nbsp;22,575,140&nbsp;shares of our common stock were
outstanding. Also, as of September&nbsp;30, 2004,
692,658&nbsp;shares of our common stock were issuable under an
outstanding warrant that, by its terms, terminates upon
completion of this offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following description of our capital stock
and provisions of our certificate of incorporation and bylaws
are summaries of material terms and provisions and are qualified
by reference to our certificate of incorporation and bylaws,
copies of which have been filed with the SEC as exhibits to the
registration statement of which this prospectus is a part. The
descriptions of the common stock and preferred stock reflect
amendments to our certificate of incorporation and bylaws that
will become effective upon closing of this offering.
</FONT>

<P align="left">
<B><FONT size="2">Common Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon the closing of this offering, we will be
authorized to issue one class of common stock. Stockholders will
be entitled to one vote for each share of our common stock held
of record on all matters on which stockholders are entitled or
permitted to vote. Our common stock will not have cumulative
voting rights in the election of directors. As a result, holders
of a majority of the shares of our common stock voting for the
election of directors can elect all the directors standing for
election. Holders of our common stock will be entitled to
receive dividends out of legally available funds when and if
declared from time to time by our board of directors. See
&#147;Dividend Policy.&#148; In the event of our liquidation,
dissolution or winding up, the holders of our common stock will
be entitled to share ratably in all assets remaining after
payment of liabilities, subject to the rights of any then
outstanding preferred stock. The rights, preferences and
privileges of holders of our common stock will be subject to,
and may be adversely affected by, the rights of holders of
shares of any series of preferred stock that we may designate
and issue in the future. All outstanding shares of our common
stock are fully paid and nonassessable, and the shares of common
stock offered hereby will be fully paid and nonassessable.
</FONT>

<P align="left">
<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, all
outstanding shares of our preferred stock will be converted into
an aggregate of 142,757,557&nbsp;shares of common stock. Under
our certificate of incorporation, upon the closing of this
offering, we will be authorized, subject to the limits imposed
by the Delaware General Corporation Law, to issue
25,000,000&nbsp;shares of preferred stock in one or more series,
to establish from time to time the number of shares to be
included in each series, to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any
of its qualifications, limitations, restrictions. Our board of
directors can also increase or decrease the number of shares of
any series of our preferred stock, but not below the number of
shares of that series then outstanding, without any further vote
or action by our stockholders.
</FONT>

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</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of our common
stockholders. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying or
preventing our change in control and may cause the market price
of our common stock to decline or impair the voting and other
rights of the holders of our common stock. We have no current
plans to issue any shares of preferred stock.
</FONT>

<P align="left">
<B><FONT size="2">Warrant</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In February 2004, in connection with our
Series&nbsp;C preferred stock financing transaction, we issued a
warrant to purchase an aggregate of 692,658&nbsp;shares of our
Series&nbsp;C preferred stock at an exercise price of
$0.5925&nbsp;per share to an investment adviser. The termination
date of this warrant is the earlier of February&nbsp;19, 2009
and the closing of this offering. 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 any
stock dividend or stock split. After giving effect to the
pre-offering reverse stock split and automatic conversion of the
outstanding shares of preferred stock into common stock upon the
completion of this offering, the warrant will become exercisable
for 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 at an exercise price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share.
</FONT>

<P align="left">
<B><FONT size="2">Registration Rights</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon completion of this offering, assuming the
expected exercise of an outstanding warrant that, by its terms,
terminates upon completion of this offering, the holders of
approximately 145,050,216&nbsp;shares of common stock will be
entitled to rights with respect to the registration of these
shares under the Securities Act as described below. We have
delivered notice to the holders of registration rights informing
them of the exercise of the underwriters&#146; right to exclude
all sales by such holders from this offering. In addition, all
holders with registration rights have agreed not to exercise
their registration rights without the prior written consent of
Credit Suisse First Boston LLC and Citigroup Global Markets Inc.
for a period of 180&nbsp;days after the date of this prospectus
(which period could be extended by those underwriters for up to
an additional 34 days under certain circumstances).
</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">Demand Registration Rights</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At any time 180&nbsp;days after the closing of
this offering, the holders of a majority of the shares having
demand registration rights can demand that we file a
registration statement for those shares so long as the demand
covers at least a majority of the shares subject to these
registration rights or the aggregate offering price of the
shares is greater than $10.0&nbsp;million. We will effect the
registration as requested, unless the underwriters decide to
limit the number of shares that may be included in the
registration due to marketing factors. We are only obligated to
satisfy two demand registrations, and we may defer a
registration for up to 120&nbsp;days under specified
circumstances not more than twice in any 12-month period. We are
not obligated to satisfy a demand registration if the
registrable shares may be immediately registered pursuant to a
registration statement on Form&nbsp;S-3, as described below.
</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">Piggyback Registration Rights</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If we register any securities for public sale,
the holders of the shares having piggyback registration rights
may include their shares in the registration statement. If the
registration relates to an underwritten offering, the
underwriters have the right to limit the number of shares having
registration rights that may be included in the registration
statement, subject to certain limitations.
</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">Form&nbsp;S-3 Registration
    Rights</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If we are eligible to file a registration
statement on Form&nbsp;S-3, any holders of the shares having
Form&nbsp;S-3 registration rights can demand that we file a
registration statement on Form&nbsp;S-3 or any similar
short-form registration statement, so long as (i)&nbsp;the
aggregate amount of securities to be sold under the
</FONT>

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<DIV align="left">
<FONT size="2">registration statement on Form&nbsp;S-3 or any
similar short-form registration statement is at least
$5.0&nbsp;million and (ii)&nbsp;we have not already effected two
registrations on Form&nbsp;S-3. We may defer a Form&nbsp;S-3
registration by up to 90&nbsp;days under specified circumstances
once per 12-month period.
</FONT>
</DIV>

<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>
    <I><FONT size="2">Expenses of Registration</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will pay for all registration expenses,
including in specified situations the reasonable legal expenses
of a single counsel for the holders not to exceed $25,000,
relating to any demand, piggyback or Form&nbsp;S-3 registration,
other than the underwriting discount and selling commissions
applicable to the sale. However, we are generally not required
to pay for the expenses of any demand or Form&nbsp;S-3
registration if the request is subsequently withdrawn by the
holders of a majority of the shares having registration rights.
</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>
    <I><FONT size="2">Expiration of Registration Rights</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The registration rights described above will
expire five years after the date of the closing of this
offering. The registration rights will terminate earlier for a
particular stockholder if (i)&nbsp;we have completed our initial
public offering and are subject to the Securities Exchange Act
of 1934, as amended, (ii)&nbsp;such holder (together with its
affiliates, partners and former partners) holds less than 1% of
our outstanding common stock (assuming the conversion of any
outstanding preferred stock into common stock) and
(iii)&nbsp;such holder can resell all of its securities in a
90-day period under Rule&nbsp;144 of the Securities Act.
</FONT>

<P align="left">
<B><FONT size="2">Antitakeover Effects of Delaware Law and
Provisions of our Certificate of Incorporation and
Bylaws</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">Delaware Takeover Statute</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are subject to Section&nbsp;203 of the
Delaware General Corporation Law. This statute regulating
corporate takeovers prohibits a Delaware corporation from
engaging in any business combination with any interested
stockholder for three years following the date that the
stockholder 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">upon completion of the transaction that resulted
    in the interested stockholder becoming an interested
    stockholder, the interested 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&nbsp;2/3% 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 business combination includes a
merger, asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. An interested
stockholder is a person who, together with affiliates and
associates, owns or, within three years prior to the
determination of interested stockholder status, did own 15% or
more of a corporation&#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 discourage takeover attempts that might result in a premium
over the market price for the shares of common stock held by
stockholders.
</FONT>

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<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">Certificate of Incorporation and Bylaw
    Provisions</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, which will become effective upon the closing of this
offering, may have the effect of making it more difficult for a
third party to acquire, or discourage a third party from
attempting to acquire, control of our company by means of a
tender offer, a proxy contest or otherwise. These provisions may
also make the removal of incumbent officers and directors more
difficult. These provisions are intended to discourage certain
types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of
AlgoRx to first negotiate with us. These provisions could also
limit the price that investors might be willing to pay in the
future for shares of our common stock. These provisions may make
it more difficult for stockholders to take specific corporate
actions and could have the effect of delaying or preventing a
change in control.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In particular, our certificate of incorporation
and bylaws, which will become effective upon the closing of this
offering, will provide for the following:
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Staggered Board of Directors.
</FONT></I><FONT size="2">Our board of directors is divided into
three classes of the same or nearly the same number of
directors, each serving staggered three-year terms, which means
that only one class of directors may be elected at each annual
meeting or special meeting in lieu of such annual meeting. These
provisions may make the removal of incumbent directors difficult
and may discourage third parties from attempting to circumvent
the anti-takeover effects of our certificate of incorporation
and bylaws by removing our incumbent directors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">No Written Consent of
Stockholders.</FONT></I><FONT size="2"> Any action to be taken
by our stockholders must be effected at a duly called annual or
special meeting and may not be effected by written consent.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Special Meetings of
Stockholders.</FONT></I><FONT size="2"> Special meetings of our
stockholders may be called only by (i)&nbsp;the Chairman of the
board of directors, (ii)&nbsp;the Chief Executive Officer, or
(iii)&nbsp;the board of directors pursuant to a resolution
adopted by a majority of the total number of authorized
directors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Advance Notice
Requirement.</FONT></I><FONT size="2"> Stockholder proposals to
be brought before an annual meeting of our stockholders must
comply with advance notice procedures. These advance notice
procedures require timely notice and apply in several
situations, including stockholder proposals relating to the
nominations of persons for election to the board of directors.
Generally, to be timely, notice must be received at our
principal executive offices not less than 90&nbsp;days nor more
than 120&nbsp;days prior to the first anniversary date of the
annual meeting for the preceding year.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Issuance of Undesignated Preferred
Stock.</FONT></I><FONT size="2"> Our board of directors is
authorized to issue, without further action by the stockholders,
up to 25,000,000&nbsp;shares of undesignated preferred stock
with rights and preferences, including voting rights, designated
from time to time by the board of directors. The existence of
authorized but unissued shares of preferred stock enables our
board of directors to render more difficult or to discourage an
attempt to obtain control of us by means of a merger, tender
offer, proxy contest or otherwise.
</FONT>

<P align="left">
<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 American Stock Transfer &#38; Trust Company.
</FONT>

<P align="left">
<B><FONT size="2">Listing</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have applied for our common stock to be quoted
on the Nasdaq National Market under the trading symbol
&#147;AGRX.&#148;
</FONT>

<P align="center"><FONT size="2">80
</FONT>

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<P align="center">
<B><FONT size="2">UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES</FONT></B>

<DIV align="center">
<B><FONT size="2">TO NON-UNITED STATES HOLDERS</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following is a general discussion of the
material United States federal income tax consequences of the
ownership and disposition of our common stock to a non-United
States holder. For the purpose of this discussion, a non-United
States holder is any beneficial holder of our common stock that
for United States federal income tax purposes is not a United
States person. For purposes of this discussion, the term United
States person means:
</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">an individual citizen or resident of the United
    States;
    </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 corporation or other entity taxable as a
    corporation or a partnership or entity taxable as a partnership
    created or organized in the United States or under the laws of
    the United States or any political subdivision thereof;
    </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 estate whose income is subject to United
    States federal income tax regardless of its source;&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">a trust (i)&nbsp;whose administration is subject
    to the primary supervision of a United States court and which
    has one or more United States persons who have the authority to
    control all substantial decisions of the trust or
    (ii)&nbsp;which has made an election to be treated as a United
    States person.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If a partnership holds common stock, the tax
treatment of a partner will generally depend on the status of
the partner and upon the activities of the partnership.
Accordingly, we urge partnerships which hold our common stock
and partners in such partnerships to consult their tax advisors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This discussion assumes that non-United States
holders will hold our common stock issued pursuant to the
offering as a capital asset (generally, property held for
investment). This discussion does not address all aspects of
United States federal income taxation that may be relevant in
light of a non-United States holder&#146;s special tax status or
special tax situations. United States expatriates, life
insurance companies, tax-exempt organizations, dealers in
securities or currency, banks or other financial institutions,
holders whose functional currency is other than the United
States dollar, and investors that hold common stock as part of a
hedge, straddle or conversion transaction are among those
categories of potential investors that are subject to special
rules not covered in this discussion. This discussion does not
address any tax consequences arising under the laws of any
state, local or non-United States taxing jurisdiction.
Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended,
legislative history and Treasury Regulations and administrative
and judicial interpretations thereof, all as in effect on the
date hereof, and all of which are subject to change, possibly
with retroactive effect. Accordingly, we urge each non-United
States Holder to consult a tax advisor regarding the United
States federal, state, local and non-United States income and
other tax consequences of acquiring, holding and disposing of
shares of our common stock.
</FONT>

<P align="left">
<B><FONT size="2">Dividends</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have not paid any dividends on our common
stock, and we do not plan to pay any dividends for the
foreseeable future. However, if we do pay dividends on our
common stock, those payments will constitute dividends for
United States tax purposes to the extent paid from our current
and accumulated earnings and profits, as determined under United
States federal income tax principles. To the extent those
dividends exceed our current and accumulated earnings and
profits, the dividends will constitute a return of capital and
will first reduce a holder&#146;s basis, but not below zero, and
then will be treated as gain from the sale of stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Any dividend (out of earnings and profits) paid
to a non-United States holder of common stock generally will be
subject to United States withholding tax either at a rate of 30%
of the gross amount of the dividend or such lower rate as may be
specified by an applicable tax treaty. In order to receive a
reduced treaty rate, a non-United States holder must provide us
with an IRS Form&nbsp;W-8BEN certifying, under penalty of
perjury, the holder&#146;s status as a non-United States person
and qualification for the reduced rate.
</FONT>

<P align="center"><FONT size="2">81
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Dividends received by a non-United States holder
that are effectively connected with a United States trade or
business conducted by the non-United States holder are exempt
from such withholding tax. In order to obtain this exemption, a
non-United States holder must provide us with an IRS
Form&nbsp;W-8ECI properly certifying such exemption. Such
effectively connected dividends, although not subject to
withholding tax, are taxed at the same graduated rates
applicable to United States persons, net of certain deductions
and credits. In addition to the graduated tax described above,
dividends received by a corporate non-United States holder that
are effectively connected with a United States trade or business
of the corporate non-United States holder may also be subject to
a branch profits tax at a rate of 30% or such lower rate as may
be specified by an applicable tax treaty.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A non-United States holder of common stock that
is eligible for a reduced rate of withholding tax pursuant to a
tax treaty may obtain a refund of any excess amounts currently
withheld if an appropriate claim for refund is filed with the
Internal Revenue Service, or IRS.
</FONT>

<P align="left">
<B><FONT size="2">Gain on Disposition of Common Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A non-United States holder generally will not be
subject to United States federal income tax on any gain realized
upon the sale or other disposition of our 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 effectively connected with a United
    States trade or business of the non-United States holder (which
    gain, in the case of a corporate non-United States holder, must
    also be taken into account for branch profits tax purposes);
    </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 non-United States holder is an individual who
    holds his or her common stock as a capital asset (generally, an
    asset held for investment purposes) and who is present in the
    United States for a period or periods aggregating 183&nbsp;days
    or more during the calendar year in which the sale or
    disposition occurs and certain 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">our common stock constitutes a United States real
    property interest by reason of our status as a &#147;United
    States real property holding corporation&#148; for United States
    federal income tax purposes at any time within the shorter of
    the five-year period preceding the disposition or the
    holder&#146;s holding period for our common stock. We believe
    that we are not currently, and that we will not become, a
    &#147;United States real property holding corporation&#148; for
    United States federal income tax purposes.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Backup Withholding and Information
Reporting</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Generally, we must report annually to the IRS the
amount of dividends paid, the name and address of the recipient,
and the amount, if any, of tax withheld. Subject to certain
exceptions, a similar report is sent to the holder. Pursuant to
tax treaties or other agreements, the IRS may make its reports
available to tax authorities in the recipient&#146;s country of
residence.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Payments of dividends or of proceeds on the
disposition of stock made to a non-United States holder may be
subject to backup withholding unless the non-United States
holder establishes an exemption, for example, by properly
certifying its non-United States status on a Form&nbsp;W-8BEN or
another appropriate version of Form&nbsp;W-8. Notwithstanding
the foregoing, backup withholding may apply if either we or our
paying agent has actual knowledge, or reason to know, that the
holder is a United States person.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Backup withholding is not an additional tax.
Rather, the United States income tax liability of persons
subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes,
a refund may be obtained, provided that the required information
is furnished to the IRS.
</FONT>

<P align="center"><FONT size="2">82
</FONT>

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

<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 common stock, and there can be no assurance that
a significant public market for the common stock will develop or
be sustained after this offering. Future sales of substantial
amounts of our common stock, including shares issued upon
exercise of outstanding options, in the public market following
this offering could adversely affect market prices prevailing
from time to time and could impair our ability to raise capital
through the sale of our equity securities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon completion of this offering and based on
shares outstanding at September&nbsp;30, 2004, we will have
outstanding &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. All the shares sold in this offering, plus any
shares issued upon exercise of the underwriters&#146; option to
purchase additional shares from us, will be freely tradable
without restriction under the Securities Act, unless purchased
by our &#147;affiliates&#148; as that term is defined in
Rule&nbsp;144 under the Securities Act.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The
remaining &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock outstanding are &#147;restricted
securities&#148; within the meaning of Rule&nbsp;144 under the
Securities Act. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption
from registration under Rule&nbsp;701 or meet the safe harbor
qualifications under Rule&nbsp;144 under the Securities Act as
summarized below.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our directors, officers
and &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;of
our stockholders, who combined hold
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of our stock, have
entered into lock-up agreements with the underwriters of this
offering generally providing that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise
dispose of our shares of common stock or any securities
exercisable for or convertible into our common stock owned by
them prior to this offering for a period of 180&nbsp;days after
the date of this prospectus (which period could be extended by
those underwriters for up to an additional 34&nbsp;days under
certain circumstances) without the prior written consent of
Credit Suisse First Boston LLC and Citigroup Global Markets Inc.
on behalf of our underwriters. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for
sale under the provisions of Rules&nbsp;144, 144(k) and 701,
shares subject to lock-up agreements may not be sold until such
agreements expire or are waived by Credit Suisse First Boston
LLC and Citigroup Global Markets Inc. on behalf of our
underwriters. Credit Suisse First Boston LLC and Citigroup
Global Markets Inc. have advised us that it has no current
intention to shorten or release any of the shares subject to the
lock-up agreements prior to the expiration of the lock-up
period. Based on shares outstanding as of September&nbsp;30,
2004, taking into account the lock-up agreements, and assuming
Credit Suisse First Boston LLC and Citigroup Global Markets Inc.
do not release stockholders from these agreements prior to the
expiration of the 180-day lock-up period, the following shares
will be eligible for sale in the public market at the following
times:
</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">beginning on the date of this prospectus,
    the &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    sold in this offering will be immediately available for sale in
    the public market;
    </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">beginning 180&nbsp;days after the date of this
    prospectus (which period could be extended by those underwriters
    for up to an additional 34&nbsp;days under certain
    circumstances),
    approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
    shares will become eligible for sale under Rule&nbsp;144 or 701,
    subject to volume restrictions as described below;&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 remainder of the restricted securities will
    be eligible for sale from time to time thereafter, subject in
    some cases to compliance with Rule&nbsp;144.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In general, under Rule&nbsp;144 as currently in
effect, a person who has beneficially owned restricted shares
for at least one year, including the holding period of any prior
owner except an affiliate, would 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">1% of the number of shares of common stock then
    outstanding, which will equal
    approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    immediately after this offering;&nbsp;or
    </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="center"><FONT size="2">83
</FONT>

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<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. Under
Rule&nbsp;144(k), a person who is not deemed to have been an
affiliate of us at any time during the three months preceding a
sale, and who has beneficially owned the shares proposed to be
sold for at least two years, including the holding period of any
prior owner except an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule&nbsp;144.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Any of our employees, officers, directors or
consultants who purchased shares under a written compensatory
plan or contract may be entitled to rely on the resale
provisions of Rule&nbsp;701. Rule&nbsp;701 permits affiliates to
sell their Rule&nbsp;701&nbsp;shares under Rule&nbsp;144 without
complying with the holding period requirements of Rule&nbsp;144.
Rule&nbsp;701 further provides that non-affiliates may sell such
shares in reliance join on Rule&nbsp;144 without having to
comply with the holding period, public information, volume
limitation or notice provisions of Rule&nbsp;144. All holders of
Rule&nbsp;701&nbsp;shares are required to wait until
90&nbsp;days after the effective date of this offering before
selling such shares.
However, &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Rule&nbsp;701&nbsp;shares
are subject to lock-up agreements and will only become eligible
for sale upon the expiration of the 180-day lock-up (or of any
extension of up to 34 additional days of that lock-up period)
agreements unless Credit Suisse First Boston LLC and Citigroup
Global Markets Inc. waive the lock-up on behalf of the
underwriters. Credit Suisse First Boston LLC and Citigroup
Global Markets Inc. have advised us that they have no current
intention to shorten or release any of the shares subject to the
lock-up agreements prior to the expiration of the lock-up period.
</FONT>

<P align="center"><FONT size="2">84
</FONT>

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

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the terms and subject to the conditions
contained in an underwriting agreement
dated &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2005, we have agreed to sell to the underwriters named below,
for whom Credit Suisse First Boston LLC, Citigroup Global
Markets Inc., Piper Jaffray&nbsp;&#38; Co. and Lazard
Fr&#232;res&nbsp;&#38; Co. LLC are acting as representatives,
the following respective numbers of shares of common stock:
</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="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 colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number</FONT></B></TD>
</TR>

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

<TR>
    <TD colspan="2" align="center" nowrap>&nbsp;<B><FONT size="1">Underwriter</FONT></B></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">Credit Suisse First Boston 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">Citigroup Global Markets Inc.&nbsp;</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">Piper Jaffray&nbsp;&#38; Co.&nbsp;</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">Lazard Fr&#232;res&nbsp;&#38; Co. 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"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</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><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="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Credit Suisse First Boston LLC and Citigroup
Global Markets Inc. are acting as joint book-running managers
for this offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriting agreement provides that the
underwriters are obligated to purchase all the shares of common
stock in the offering if any are purchased, other than those
shares covered by the over-allotment option described below. The
underwriting agreement also provides that if an underwriter
defaults the purchase commitments of non-defaulting underwriters
may be increased or the offering may be terminated.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have granted to the underwriters a 30-day
option to purchase on a pro rata basis up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
shares at the initial public offering price less the
underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriters propose to offer the shares of
common stock initially at the public offering price on the cover
page of this prospectus and to selling group members at that
price less a selling concession of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. The underwriters and selling group members may allow a
discount of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share on sales to other broker/ dealers. After the initial
public offering, the representatives may change the public
offering price and concession and discount to broker/ dealers.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes the compensation
and estimated expenses we will pay:
</FONT>

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Per Share</FONT></B></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="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">Without Over-</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">With Over-</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Without Over-</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">With Over-</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">allotment</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">allotment</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">allotment</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">allotment</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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Underwriting Discounts and Commissions paid by us
    </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">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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">Expenses payable by us
    </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">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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">The underwriters have informed us that they do
not expect sales to accounts over which the underwriters have
discretionary authority to exceed 5% of the shares of common
stock being offered.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have agreed that we will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Securities and Exchange Commission
a registration statement under the Securities Act of 1933 (the
&#147;Securities Act&#148;) relating to, any shares of our
common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, pledge,
disposition or filing, without the prior written consent of
Credit Suisse First Boston LLC and Citigroup Global Markets Inc.
for a period of 180&nbsp;days after the date of this prospectus.
However, in the event that either (1)&nbsp;during the last
17&nbsp;days of the &#147;lock-up&#148; period, we release
earnings results or material news or a material event relating
to us occurs or (2)&nbsp;prior to the expiration of the
&#147;lock-up&#148; period, we announce that we will release
earnings results during the 16-day period beginning on the last
day of the &#147;lock-up&#148; period, then in either case the
expiration of the &#147;lock-up&#148; will be extended until the
expiration of the 18-day period beginning on the date of the
release of the
</FONT>

<P align="center"><FONT size="2">85
</FONT>

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<DIV align="left">
<FONT size="2">earnings results or the occurrence of the
material news or event, as applicable, unless Credit Suisse
First Boston LLC and Citigroup Global Markets Inc. waive, in
writing, such an extension.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our officers, directors and security holders, who
combined hold &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;of our
stock, have agreed that they will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock,
enter into a transaction that would have the same effect, or
enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of
ownership of our common stock, whether any of these transactions
are to be settled by delivery of our common stock or other
securities, in cash or otherwise, or publicly disclose the
intention to make any offer, sale, pledge or disposition, or to
enter into any transaction, swap, hedge or other arrangement,
without, in each case, the prior written consent of Credit
Suisse First Boston LLC and Citigroup Global Markets Inc. for a
period of 180&nbsp;days after the date of this prospectus.
However, in the event that either (1)&nbsp;during the last
17&nbsp;days of the &#147;lock-up&#148; period, we release
earnings results or material news or a material event relating
to us occurs or (2)&nbsp;prior to the expiration of the
&#147;lock-up&#148; period, we announce that we will release
earnings results during the 16-day period beginning on the last
day of the &#147;lock-up&#148; period, then in either case the
expiration of the &#147;lock-up&#148; will be extended until the
expiration of the 18-day period beginning on the date of the
release of the earnings results or the occurrence of the
material news or event, as applicable, unless Credit Suisse
First Boston LLC and Citigroup Global Markets Inc. waive, in
writing, such an extension.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The underwriters have reserved for sale at the
initial public offering price up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of the common stock for employees, directors and other persons
associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for
sale to the general public in the offering will be reduced to
the extent these persons purchase the reserved shares. Any
reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the
other shares.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to
payments that the underwriters may be required to make in that
respect.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have applied for quotation of our common stock
on the Nasdaq National Market under the symbol &#147;AGRX.&#148;
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Piper Jaffray&nbsp;&#38; Co., an underwriter of
this offering, is affiliated with Piper Jaffray Healthcare
Fund&nbsp;IV, L.P., which holds 4,050,632&nbsp;shares of our
Series&nbsp;C preferred stock purchased from us in February 2004
for an aggregate purchase price of $2.4&nbsp;million and with
respect to which underlying common shares it has the
registration rights described under the section of this
prospectus entitled &#147;Description of Capital
Stock&nbsp;&#151; Registration Rights.&#148;
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to the offering, there has been no public
market for the shares. The initial public offering price has
been negotiated among the company and the underwriters. Among
the factors to be considered in determining the initial public
offering price of the shares, in addition to prevailing market
conditions, will be the company&#146;s historical performance,
estimates of the business potential and earnings prospects of
the company, an assessment of the company&#146;s management and
the consideration of the above factors in relation to market
valuation of companies in related businesses. We cannot be sure
that the initial public offering price will correspond to the
price at which the common stock will trade in the public market
following this offering or that an active trading market for the
common stock will develop and continue after this offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the offering, the underwriters
may engage in stabilizing transactions, over-allotment
transactions, syndicate covering transactions and penalty bids
in accordance with Regulation&nbsp;M under the Securities
Exchange Act of 1934.
</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">Stabilizing transactions permit bids to purchase
    the underlying security so long as the stabilizing bids do not
    exceed a specified maximum.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">86
</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="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">Over-allotment involves sales by the underwriters
    of shares in excess of the number of shares the underwriters are
    obligated to purchase, which creates a syndicate short position.
    The short position may be either a covered short position or a
    naked short position. In a covered short position, the number of
    shares over-allotted by the underwriters is not greater than the
    number of shares that they may purchase in the over-allotment
    option. In a naked short position, the number of shares involved
    is greater than the number of shares in the over-allotment
    option. The underwriters may close out any covered short
    position by either exercising their over-allotment option and/or
    purchasing shares in the open market.
    </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">Syndicate covering transactions involve purchases
    of the common stock in the open market after the distribution
    has been completed in order to cover syndicate short positions.
    In determining the source of shares to close out the short
    position, the underwriters will consider, among other things,
    the price of shares available for purchase in the open market as
    compared to the price at which they may purchase shares through
    the over-allotment option. If the underwriters sell more shares
    than could be covered by the over- allotment option, a naked
    short position, the position can only be closed out by buying
    shares in the open market. A naked short position is more likely
    to be created if the underwriters are concerned that there could
    be downward pressure on the price of the shares in the open
    market after pricing that could adversely affect investors who
    purchase in the 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">Penalty bids permit the representatives to
    reclaim a selling concession from a syndicate member when the
    common stock originally sold by the syndicate member is
    purchased in a stabilizing or syndicate covering transaction to
    cover syndicate short positions.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">These stabilizing transactions, syndicate
covering transactions and penalty bids may have the effect of
raising or maintaining the market price of our common stock or
preventing or retarding a decline in the market price of the
common stock. As a result, the price of our common stock may be
higher than the price that might otherwise exist in the open
market. These transactions may be effected on the Nasdaq
National Market or otherwise and, if commenced, may be
discontinued at any time.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A prospectus in electronic format will be made
available on the web sites maintained by one or more of the
underwriters, or selling group members, if any, participating in
this offering and one or more of the underwriters participating
in this offering may distribute prospectuses electronically. The
representatives may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make internet distributions on the same basis as other
allocations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each underwriter has represented, warranted and
agreed that: (i)&nbsp;it has not offered or sold and, prior to
the expiry of a period of six months from the closing of the
offering, will not offer or sell any shares to persons in the
United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (ii)&nbsp;it has only communicated or caused
to be communicated and will not communicate or cause to be
communicated any invitation or inducement to engage in
investment and will only communicate or cause to be communicated
any invitation or inducement to engage in investment activity
(within the meaning of section&nbsp;21 of the Financial Services
and Markets Act 2000 (&#147;FSMA&#148;)) received by it in
connection with the issue or sale of any shares in circumstances
in which section&nbsp;21(1) of the FSMA does not apply to
Foundation Coal Holdings, Inc.; and (iii)&nbsp;it has complied
and will comply with all applicable provisions of the FSMA with
respect to anything done by it in relation to the shares in,
from or otherwise involving the United Kingdom.
</FONT>

<P align="center"><FONT size="2">87
</FONT>

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<P align="center">
<B><FONT size="2">NOTICE TO CANADIAN RESIDENTS</FONT></B>

<P align="left">
<B><FONT size="2">Resale Restrictions</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The distribution of our common stock in Canada is
being made only on a private placement basis exempt from the
requirement that we prepare and file a prospectus with the
securities regulatory authorities in each province where trades
of common stock are made. Any resale of our common stock in
Canada must be made under applicable securities laws which will
vary depending on the relevant jurisdiction, and which may
require resales to be made under available statutory exemptions
or under a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised
to seek legal advice prior to any resale of shares of common
stock.
</FONT>

<P align="left">
<B><FONT size="2">Representations of Purchasers</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">By purchasing our common stock in Canada and
accepting a purchase confirmation, a purchaser is representing
to us and the dealer from whom the purchase confirmation is
received that:
</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 purchaser is entitled under applicable
    provincial securities laws to purchase the shares of common
    stock without the benefit of a prospectus qualified under those
    securities laws,
    </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">where required by law, that the purchaser is
    purchasing as principal and not as agent,&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 purchaser has reviewed the text above under
    Resale Restrictions.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Rights of Action&nbsp;&#151; Ontario
Purchasers Only</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under Ontario securities legislation, a purchaser
who purchases a security offered by this prospectus during the
period of distribution will have a statutory right of action for
damages, or while still the owner of the shares of common stock,
for rescission against us in the event that this prospectus
contains a misrepresentation. A purchaser will be deemed to have
relied on the misrepresentation. The right of action for damages
is exercisable not later than the earlier of 180&nbsp;days from
the date the purchaser first had knowledge of the facts giving
rise to the cause of action and three years from the date on
which payment is made for the shares. The right of action for
rescission is exercisable not later than 180&nbsp;days from the
date on which payment is made for the shares. If a purchaser
elects to exercise the right of action for rescission, the
purchaser will have no right of action for damages against us.
In no case will the amount recoverable in any action exceed the
price at which the shares of common stock were offered to the
purchaser and if the purchaser is shown to have purchased the
securities with knowledge of the misrepresentation, we will have
no liability. In the case of an action for damages, we will not
be liable for all or any portion of the damages that are proven
to not represent the depreciation in value of the shares of
common stock as a result of the misrepresentation relied upon.
These rights are in addition to, and without derogation from,
any other rights or remedies available at law to an Ontario
purchaser. The foregoing is a summary of the rights available to
an Ontario purchaser. Ontario purchasers should refer to the
complete text of the relevant statutory provisions.
</FONT>

<P align="left">
<B><FONT size="2">Enforcement of Legal Rights</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All of our directors and officers as well as the
experts named herein may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect
service of process within Canada upon us or those persons. All
or a substantial portion of our assets and the assets of those
persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against us or those
persons in Canada or to enforce a judgment obtained in Canadian
courts against us or those persons outside of Canada.
</FONT>

<P align="left">
<B><FONT size="2">Taxation and Eligibility for
Investment</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Canadian purchasers of our common stock should
consult their own legal and tax advisors with respect to the tax
consequences of an investment in our common stock in their
particular circumstances
</FONT>

<P align="center"><FONT size="2">88
</FONT>
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<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="left">
<FONT size="2">and about the eligibility of the shares of common
stock for investment by the purchaser under relevant Canadian
legislation.
</FONT>
</DIV>

<P align="center">
<B><FONT size="2">VALIDITY OF SECURITIES</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The validity of the common stock offered hereby
will be passed upon for us by Heller Ehrman White&nbsp;&#38;
McAuliffe LLP and for the underwriters by Ropes&nbsp;&#38; Gray
LLP. As of September&nbsp;30, 2004, persons and entities
affiliated with Heller Ehrman White&nbsp;&#38; McAuliffe LLP
beneficially owned 84,388&nbsp;shares of our common stock
immediately prior to the closing of this offering.
</FONT>

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

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Ernst&nbsp;&#38; Young LLP, independent auditors,
have audited our financial statements at December&nbsp;31, 2001,
2002 and 2003, for the period from March&nbsp;6, 2001
(inception) to December&nbsp;31, 2001, for the years ended
December&nbsp;31, 2002 and 2003 and for the period March&nbsp;6,
2001 (inception) to December&nbsp;31, 2003, as set forth in
their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in
reliance of Ernst&nbsp;&#38; Young LLP&#146;s report, given on
their authority as experts in accounting and auditing.
</FONT>

<P align="center">
<B><FONT size="2">WHERE YOU CAN FIND MORE INFORMATION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have filed with the SEC a registration
statement on Form&nbsp;S-1 under the Securities Act that
registers the shares of our common stock to be sold in this
offering. This prospectus does not contain all of the
information set forth in the registration statement and the
exhibits and schedules filed as part of the registration
statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the
exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning
the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed
as an exhibit to the registration statement, we refer you to the
copy of the contract or document that has been filed. Each
statement in this prospectus relating to a contract or document
filed as an exhibit is qualified in all respects by the filed
exhibit. The reports and other information we file with the SEC
can be read and copied at the SEC&#146;s Public Reference Room
at 450&nbsp;Fifth Street, N.W., Washington D.C. 20549. Copies of
these materials can be obtained at prescribed rates from the
Public Reference Section of the SEC at the principal offices of
the SEC, 450&nbsp;Fifth Street, N.W., Washington D.C. 20549. You
may obtain information regarding the operation of the public
reference room by calling 1(800) SEC-0330. The SEC also
maintains a web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding
issuers that file electronically with the SEC.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon completion of this offering, we will become
subject to the reporting and information requirements of the
Exchange Act and, as a result, will file periodic reports, proxy
statements and other information with the SEC. These periodic
reports, proxy statements and other information will be
available for inspection and copying at the SEC&#146;s public
reference room and the web site of the SEC referred to above.
</FONT>

<P align="center"><FONT size="2">89
</FONT>

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

<P align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">INDEX TO 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="91%"><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 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, 2002 and 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">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
    period from March&nbsp;6, 2001 (inception) to December&nbsp;31,
    2001, the years ended December&nbsp;31, 2002 and 2003 and the
    period from March&nbsp;6, 2001 (inception) to 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">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 Stockholders&#146;
    Deficiency for the period from March&nbsp;6, 2001 (inception) to
    December&nbsp;31, 2001, the years ended December&nbsp;31, 2002
    and 2003 and the period from March&nbsp;6, 2001 (inception) to
    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">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
    period from March&nbsp;6, 2001 (inception) to December&nbsp;31,
    2001, the years ended December&nbsp;31, 2002 and 2003 and the
    period from March&nbsp;6, 2001 (inception) to 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">F-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">Notes to Audited 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-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">Consolidated Balance Sheets as of
    December&nbsp;31, 2003 and September&nbsp;30, 2004 (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-21</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 Operations for the
    nine months ended September&nbsp;30, 2003 and 2004 and the
    period from March&nbsp;6, 2001 (inception) to September&nbsp;30,
    2004 (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-22</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
    nine months ended September&nbsp;30, 2003 and 2004 and the
    period from March&nbsp;6, 2001 (inception) to September&nbsp;30,
    2004 (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-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">Notes to Unaudited 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-24</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All other schedules for which provision is made
in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
</FONT>

<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">The Board of Directors and Stockholders <BR>
 AlgoRx Pharmaceuticals, Inc.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have audited the accompanying consolidated
balance sheets of AlgoRx Pharmaceuticals, Inc. (a development
stage company) as of December&nbsp;31, 2002 and 2003, and the
related consolidated statements of operations,
stockholders&#146; equity (deficiency)&nbsp;and cash flows for
the period from March&nbsp;6, 2001 (inception) to
December&nbsp;31, 2001, and for the years ended
December&nbsp;31, 2002 and 2003, and for the period from
March&nbsp;6, 2001 (inception)&nbsp;to December&nbsp;31, 2003.
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 the
standards of the Public Company 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, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of AlgoRx Pharmaceuticals, Inc.
at December&nbsp;31, 2002 and 2003, and the consolidated results
of their operations and their cash flows for the period from
March&nbsp;6, 2001 (inception) to December&nbsp;31, 2001 and for
the years ended December&nbsp;31, 2002 and 2003, and for the
period from March&nbsp;6, 2001 (inception)&nbsp;to
December&nbsp;31, 2003, in conformity with U.S.&nbsp;generally
accepted accounting principles.
</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">/s/ Ernst&nbsp;&#38; Young LLP
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">MetroPark, New Jersey <BR>
 November&nbsp;23, 2004
</FONT>

<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">AlgoRx Pharmaceuticals, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">CONSOLIDATED BALANCE SHEETS</FONT></B>

<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="62%"><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="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 colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></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">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></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="11" align="center" valign="top">
    <B><FONT size="2">ASSETS</FONT></B></TD>
</TR>

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

<TR valign="bottom" bgcolor="#EEEEEE">
    <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">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,873,270</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,545,976</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">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">162,709</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">183,961</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>
    <TD><FONT size="2">&nbsp;</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="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">9,035,979</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,729,937</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">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">3,155,598</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,373,840</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">Acquired workforce, 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">274,161</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">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">&#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">82,377</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">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">214,993</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">214,993</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>
    <TD><FONT size="2">&nbsp;</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="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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,680,731</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,401,147</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="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="11"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="11" align="center" valign="top">
    <B><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146; EQUITY
    (DEFICIENCY)</FONT></B></TD>
</TR>

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

<TR valign="bottom" bgcolor="#EEEEEE">
    <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">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">274,476</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">493,530</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">Accrued 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">128,533</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">273,399</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <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">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">1,360,848</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,202,453</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">Convertible notes
    </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">9,800,000</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>
    <TD><FONT size="2">&nbsp;</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="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">1,763,857</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,769,382</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">Series&nbsp;A convertible preferred stock,
    $0.001&nbsp;par value; 9,150,000&nbsp;shares authorized, issued
    and outstanding at December&nbsp;31, 2002 and 2003, respectively
    (aggregate liquidation preference of $9,150,000 at
    December&nbsp;31, 2002 and 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">9,099,428</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,099,428</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">Series&nbsp;B convertible preferred stock,
    $0.001&nbsp;par value; 26,350,000&nbsp;shares authorized at
    December&nbsp;31, 2002 and 2003; 17,858,462 issued and
    outstanding at December&nbsp;31, 2002 and 2003, respectively
    (aggregate liquidation preference of $23,216,000 at
    December&nbsp;31, 2002 and 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">23,094,410</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">23,094,410</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">Stockholders&#146; equity (deficiency):
    </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 colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock, $0.001&nbsp;par value,
    50,000,000&nbsp;shares authorized at December&nbsp;31, 2002 and
    2003; 3,365,654 and 3,412,904&nbsp;shares issued at
    December&nbsp;31, 2002 and 2003, respectively; 3,365,654 and
    3,142,071&nbsp;shares outstanding at December&nbsp;31, 2002 and
    2003, respectively
    </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">3,366</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,413</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">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">326,978</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">670,785</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <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">Deferred 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">&#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">(142,564</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">Treasury stock, at cost; 0 and
    270,833&nbsp;shares at December&nbsp;31, 2002 and 2003,
    respectively
    </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">(271</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deficit accumulated during the development stage
    </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">(21,607,308</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">(37,093,436</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="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="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; equity (deficiency)
    </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">(21,276,964</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">(36,562,073</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="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="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities and stockholders&#146; equity
    (deficiency)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,680,731</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,401,147</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="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-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">AlgoRx Pharmaceuticals, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<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="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="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="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="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>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(inception) to</FONT></B></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">(inception) to</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31, 2001</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">December&nbsp;31, 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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Contract revenues
    </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">149,216</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">249,216</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">Costs 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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">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">365,303</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,745,089</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,190,813</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,301,205</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">1,096,671</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,075,615</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,477,329</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">7,649,615</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">Acquired in-process research and development and
    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">&#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">5,716,247</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">5,716,247</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total costs and 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">1,461,974</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">20,536,951</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">15,668,142</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,667,067</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>

</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">(1,461,974</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">(20,387,735</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">(15,568,142</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">(37,417,851</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">Gain (loss) on sale 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">(36,101</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">103,324</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">67,223</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">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">(1,577</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">(4,353</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">(107,310</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">(113,240</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">Interest and other income, 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">47,333</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">237,099</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">86,000</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">370,432</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>

</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,416,218</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,191,090</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15,486,128</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(37,093,436</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted net loss per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7.93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11.04</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">(5.98</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="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="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares outstanding&nbsp;&#151;
    basic and diluted
    </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">178,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,829,494</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,591,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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="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>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Unaudited pro forma basic and diluted net loss
    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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT 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">(0.52</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT 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="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Unaudited pro forma weighted average shares
    outstanding&nbsp;&#151; basic and diluted
    </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">29,600,282</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT 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-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">AlgoRx Pharmaceuticals, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146;
DEFICIENCY</FONT></B>

<DIV align="center">
<B><FONT size="2">Period from March&nbsp;6, 2001
(inception)&nbsp;to December&nbsp;31, 2003</FONT></B>
</DIV>

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

<TR>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="29%"><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>
    <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="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><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="3%"><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="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="3%"><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="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="1">&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="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deficit</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></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">Total</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></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"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Treasury Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">During the</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stockholders&#146;</FONT></B></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">Paid-In</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deferred</FONT></B></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">Development</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Equity</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></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">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">Stage</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Deficiency)</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>
    <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="1">Balance at March&nbsp;6, 2001 (inception)
    </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 align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</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 align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</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 align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of common stock to founders for $0.001
    per share in March 2001
    </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">1,500,000</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">1,500</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">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,500</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of common stock upon exercise of stock
    options in April 2001
    </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">238,000</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">238</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">23,562</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">23,800</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss and comprehensive 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">(1,416,218</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">(1,416,218</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><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 colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Balance at December&nbsp;31, 2001
    </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">1,738,000</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">1,738</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">23,562</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,416,218</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">(1,390,918</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of common stock upon exercise of stock
    options in March 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">101,500</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">102</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">10,048</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">10,150</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of common stock at $0.15 per share for
    acquisition of PowderJect Technologies, Inc. in March 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">1,526,154</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,526</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">227,397</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">228,923</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Stock-based compensation resulting from stock
    options granted to nonemployees
    </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">65,971</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">65,971</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss and comprehensive 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">(20,191,090</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">(20,191,090</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><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 colspan="2" 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">3,365,654</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,366</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">326,978</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(21,607,308</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">(21,276,964</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Issuance of common stock upon exercise of stock
    options in 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">47,250</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">47</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,540</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,587</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Accrued interest costs
    </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">107,310</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">107,310</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Deferred compensation related to 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">155,856</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(155,856</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>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Noncash 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">66,240</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">66,240</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Repurchase of common 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">(270,833</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">(271</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">(271</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Amortization of deferred 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">13,292</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">13,292</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Stock-based compensation resulting from stock
    options granted to nonemployees
    </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">8,861</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">8,861</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss and comprehensive 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">(15,486,128</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">(15,486,128</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><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 colspan="2" 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">3,412,904</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,413</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">670,785</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(142,564</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(270,833</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(271</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(37,093,436</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(36,562,073</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><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-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">AlgoRx Pharmaceuticals, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<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="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="39%"><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="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 colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from</FONT></B></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">Period from</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6,</FONT></B></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">March&nbsp;6,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(inception) to</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(inception) to</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></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">December&nbsp;31,</FONT></B></TD>
</TR>

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

<TR>
    <TD colspan="3"></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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">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>
</TR>

<TR>
    <TD colspan="3" 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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,416,218</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,191,090</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15,486,128</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(37,093,436</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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">Adjustments to reconcile net loss to net cash
    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>
</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">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">9,920</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">956,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,059,889</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,026,009</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <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">Noncash 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">&#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">65,971</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">88,393</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">154,364</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">Non-cash 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">&#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">107,310</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">107,310</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <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">Acquired in-process 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">&#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">5,716,247</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">5,716,247</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">Amortization of intangible 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">174,138</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">274,161</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">448,299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <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">Loss on disposal of 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">36,101</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">36,101</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">Gain on disposal of 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">(103,324</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">(103,324</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Changes in operating assets and 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><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">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">(41,169</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">(75,012</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">(21,252</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">(137,433</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><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">(16,594</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">(82,377</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">(98,971</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">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">203,742</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">53,358</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">219,053</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">476,153</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">Accrued 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">103,814</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(62,806</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">144,866</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">185,874</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 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">&#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">1,271,766</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(161,775</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">1,109,991</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>
    <TD><FONT size="2">&nbsp;</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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash 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">(1,156,505</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">(12,055,127</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">(13,961,184</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">(27,172,816</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="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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases 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">(48,071</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">(529,889</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">(394,373</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">(972,333</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from disposal of 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">30,000</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">222,947</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">252,947</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">Acquisition of PowderJect Technologies,
    Inc.&nbsp;</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">(1,442,029</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">(1,442,029</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other acquisition related expenditures
    </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">(96,613</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">&#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">(96,613</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="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="3" 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">(48,071</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">(2,038,531</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">(171,426</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">(2,258,028</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="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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Repayment of capital lease obligations
    </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">(5,998</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">(37,313</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">(43,311</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from issuance of convertible preferred
    stock, net of issuance 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">9,099,428</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,078,410</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">&#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">24,177,838</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">Proceeds from issuances 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">25,300</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,677</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,587</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42,564</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">Funds used to repurchase 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">&#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">(271</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">(271</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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">Proceeds from debt
    </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">9,800,000</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">9,800,000</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>
    <TD><FONT size="2">&nbsp;</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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by 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">9,118,730</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,052,774</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,805,316</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,976,820</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>
    <TD><FONT size="2">&nbsp;</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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net (decrease) increase 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">7,914,154</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">959,116</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,327,294</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">4,545,976</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">Cash and cash equivalents, 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">&#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">7,914,154</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,873,270</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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="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>
    <TD><FONT size="2">&nbsp;</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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents, end of period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,914,154</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,873,270</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,545,976</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,545,976</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="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="3" 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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash paid during the year for interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,577</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,353</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">5,930</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="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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Supplemental 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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of $8,016,000 of convertible preferred
    stock and $228,923 of common stock in connection with
    acquisition of PowderJect Technologies, Inc.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,244,923</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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">8,244,923</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="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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Equipment acquired under capital leases
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,311</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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">43,311</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="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-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">AlgoRx Pharmaceuticals, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>

<DIV align="center">
<B><FONT size="2">December&nbsp;31, 2003</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">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">Organization, Description of Business and
    Basis of Presentation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">AlgoRx Pharmaceuticals, Inc. (the
&#147;Company&#148; or &#147;AlgoRx&#148;) was incorporated on
March&nbsp;6, 2001 in Delaware. During 2003, the Company was
headquartered in Cranbury, New Jersey, with facilities also in
Fremont, California. In July of 2004, the Company moved its
headquarters to Secaucus, New Jersey. AlgoRx is focused on
building a diversified portfolio of pharmaceutical products and
technologies to address the pain therapeutic market. The
Company&#146;s activities since inception have consisted
principally of acquiring product and technology rights, raising
capital, establishing facilities and performing research and
development. Accordingly, the Company is considered to be in the
development stage as defined by Statement of Financial
Accounting Standards No.&nbsp;7, <I>Accounting and Reporting by
Development Stage Enterprises.</I> The Company operates in one
business segment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company expects to continue to incur
substantial losses over the next several years during its
development phase. To fully execute its business plan, the
Company will need to complete certain research and development
activities and clinical trials. Further, the Company&#146;s
product candidates will require regulatory approval prior to
commercialization. These activities may span many years and
require substantial expenditures to complete and may ultimately
be unsuccessful. Any delays in completing these activities could
adversely impact the Company. The Company plans to meet its
capital requirements primarily through issuances of equity
securities, research and development contract revenue, and in
the longer term, revenue from product sales (see Note&nbsp;13).
</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 U.S.&nbsp;generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
</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">Principles of Consolidation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The consolidated financial statements include the
accounts of AlgoRx and, beginning on March&nbsp;22, 2002, its
wholly owned subsidiary, AlgoRx Technologies, Inc. (formerly
PowderJect Technologies, Inc.), located in Fremont, California.
Intercompany accounts and transactions have been eliminated.
</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 and Cash Equivalents</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Cash and cash equivalents consist of highly
liquid instruments purchased with an original maturity of three
months or less.
</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">Property and Equipment</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is provided over the
estimated useful lives of the respective assets, which range
from three to five years, using the straight-line method.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Leasehold improvements are amortized over the
lives of the related leases or their estimated useful lives,
whichever is shorter, using the straight-line method.
</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>

<DIV align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (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">Intangible Asset</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Intangible asset consists of the assembled
workforce acquired in the acquisition of PowderJect
Technologies, Inc. (see Note&nbsp;2). The acquired workforce is
being amortized on a straight-line basis over two years, which
represents the estimated retention period for the related
employees. Acquired workforce amortization is recorded in
research and development 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">Long-Lived Assets</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Long-lived assets and certain identifiable
intangible assets to be held and used are reviewed for
impairment when events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. In the event that such cash
flows are not expected to be sufficient to recover the carrying
amount of the assets, the assets are written down to their
estimated fair values. Long-lived assets and certain
identifiable assets to be disposed of are reported at the lower
of carrying amount or fair value less cost to sell.
</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 carrying values of the Company&#146;s
financial instruments, which include cash and cash equivalents,
accounts payable and accrued expenses, approximates their fair
values.
</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&#146;s revenue recognition policies
are in accordance with Securities and Exchange Commission
(SEC)&nbsp;Staff Accounting Bulletins No.&nbsp;101 and
No.&nbsp;104, or SAB&nbsp;101 and 104, and EITF&nbsp;00-21,
<I>Revenue Recognition in Financial Statements</I>, which
provides guidance on revenue recognition in financial statements
and is based on the interpretations and practices developed by
the SEC. SAB&nbsp;101 requires that four basic criteria be met
before revenue can be recognized: (1)&nbsp;persuasive evidence
exists of an arrangement; (2)&nbsp;delivery has occurred or
services have been rendered; (3)&nbsp;the fee is fixed and
determinable; and (4)&nbsp;collectibility is reasonably assured.
Determination of criteria (3)&nbsp;and (4)&nbsp;are based on
management&#146;s judgments regarding the fixed nature of the
fees charged for services rendered and products delivered and
the collectibility of those fees.
</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">Research and Development
    Costs</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Research and development costs are expensed as
incurred. Research and development costs consist of salaries,
employee benefits, laboratory supplies, consulting services,
clinical services and facility costs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Acquired in-process research and development
relates primarily to in-licensed technology, intellectual
property and know-how. The Company evaluates the stage of
development of acquired projects, taking into account the level
of effort, time and estimated cost associated with further
developing the in-process technology and producing a commercial
product. The nature of the remaining efforts for completion of
acquired in-process research and development projects generally
include completion of clinical trials, completion of
manufacturing validation, interpretation of clinical and
preclinical data and obtaining marketing approval from the FDA
and other regulatory bodies, the cost, length and success of
which are extremely difficult to determine. Numerous risks and
uncertainties exist with timely completion of development
projects, including clinical trial results, manufacturing
process development results, and ongoing feedback from
regulatory authorities, including obtaining marketing approval.
In addition, acquired products under development may never be
successfully commercialized due to the uncertainties associated
with the pricing of new pharmaceuticals, the cost to produce
these products in a commercial setting,
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">changes in the reimbursement environment, or the
introduction of new competitive products. As a result of the
uncertainties noted above, the Company expenses such acquired
in-process research and development projects when 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">Concentration of Credit Risk</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s financial instruments that are
exposed to credit risks consist primarily of cash and cash
equivalents. The Company maintains its cash and cash equivalents
in bank accounts, which, at times, exceed federally insured
limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to significant
credit risk related to cash and 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">Income Taxes</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company accounts for income taxes under
Statement of Financial Accounting Standards No.&nbsp;109,
Accounting for Income Taxes. Under this method, deferred tax
assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that
will be in effect when the differences are expected to reverse.
A valuation allowance is provided when it is more likely than
not that some portion or all of a deferred tax asset will not be
realized.
</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 total comprehensive loss is
the same as its net loss for all periods presented.
</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">Net Loss Per Share</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company computes net loss per share in
accordance with Statement of Financial Accounting Standards
No.&nbsp;128, &#147;Earnings per Share&#148;
(&#147;SFAS&nbsp;128&#148;). Under the provisions of
SFAS&nbsp;128, basic net loss per common share (&#147;Basic
EPS&#148;) is computed by dividing net loss by the
weighted-average number of common shares outstanding (excluding
unvested founders&#146; shares subject to repurchase). Diluted
net loss per common share (&#147;Diluted EPS&#148;) is computed
by dividing net loss by the weighted-average number of common
shares and dilutive common shares equivalents then outstanding.
Common equivalent shares consist of the incremental common
shares issuable upon the conversion of preferred stock,
convertible debt, shares issuable upon the exercise of stock
options, and unvested founders&#146; shares subject to
repurchase. Diluted EPS is identical to Basic EPS since common
equivalent shares are excluded from the calculation, as their
effect is anti-dilutive.
</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">Unaudited Pro Forma
    Information</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The unaudited pro forma net loss per share is
computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic
conversion of all outstanding convertible preferred stock and
the exercise in full of all outstanding warrants 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 the date of original
issuance.
</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 the Financial Accounting
Standards Board (&#147;FASB&#148;) Statement No.&nbsp;123,
Accounting for Stock-Based Compensation
(&#147;SFAS&nbsp;123&#148;), as amended, the Company accounts
for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No.&nbsp;25, Accounting for
Stock Issued to Employees (&#147;APB&nbsp;25&#148;), and related
interpretations, in accounting for its
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">stock-based compensation plans. Under
APB&nbsp;25, when the exercise price of the Company&#146;s
employee stock options equals or exceeds the estimated fair
value of the underlying stock on the date of grant, no
compensation expense is recorded.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pro forma information regarding net loss and net
loss per share has been determined as if the Company had
accounted for its employee stock options under the fair value
method proscribed by SFAS&nbsp;123. The resulting effect on pro
forma net loss disclosed is not likely to be representative of
the effects of loss on a pro forma basis in future years due to
additional grants and years of vesting in subsequent years. Pro
forma compensation related to stock option grants is expensed
over their respective vesting periods.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Had compensation cost for options granted under
the Company&#146;s stock option plan been determined based on
the fair value at the grant dates for the awards under a method
prescribed by SFAS&nbsp;123, the Company&#146;s net loss would
have been adjusted to the following pro forma amounts:
</FONT>

<CENTER>
<TABLE width="80%" 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="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="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="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(inception) to</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</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="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">2001</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>
</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">Net loss, as reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,416,218</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,191,090</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">(15,486,128</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">Add: Noncash employee compensation as reported
    </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">13,292</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">Deduct: Stock-based employee compensation expense
    under the fair value based method for all awards, net of tax
    </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">(5,464</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">(140,391</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">(199,622</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss, pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,421,682</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,331,481</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">(15,672,458</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>

</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 loss attributable to common
    stockholders per share, as reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7.93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11.04</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">(5.98</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>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss attributable to common
    stockholders per share, SFAS&nbsp;123, pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7.96</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11.11</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">(6.05</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>

</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 net loss
    per share (Note&nbsp;1) SFAS&nbsp;123, pro forma
    </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">(0.53</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT 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 fair values of stock options granted to
employees for the period from March&nbsp;6, 2001
(inception)&nbsp;to December&nbsp;31, 2001 and for the years
ended December&nbsp;31, 2002 and 2003 were estimated on the
respective dates of grant using the minimum value option-pricing
model with the following weighted-average assumptions:
</FONT>

<CENTER>
<TABLE width="90%" 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="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="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></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(inception) to</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</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="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">2001</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>
</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">Risk-free interest 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">4.50</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">4.61</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">4.02</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">Expected life (in years)
    </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">9.0</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">9.0</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">9.0</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">Dividend yield
    </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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fair value
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.09</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.14</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">0.99</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has also granted stock options to
purchase stock to consultants, advisors, and other vendors. The
Company accounts for stock awards issued to such nonemployees in
accordance with the provisions of SFAS&nbsp;123 and Emerging
Issues Task Force (&#147;EITF&#148;) Issue No.&nbsp;96-18,
Accounting for
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods
or Services (&#147;Issue No.&nbsp;96-18&#148;). Under
SFAS&nbsp;123 and Issue No.&nbsp;96-18, stock awards to
nonemployees are accounted for at their respective fair values
using the Black-Scholes option-pricing model unless a more
readily determinable fair value is available. The fair value of
options granted to nonemployees is periodically remeasured as
the underlying options vest.
</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">Recently Issued Accounting
    Standards</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In January 2003, the FASB issued Interpretation
No.&nbsp;46 (&#147;FIN&nbsp;46&#148;), <I>Consolidation of
Variable Interest Entities</I>, which addresses consolidation of
variable interest entities (&#147;VIEs&#148;). FIN&nbsp;46
requires a VIE to be consolidated by a parent company if that
company is subject to a majority of the risk of loss from the
variable interest entity&#146;s activities or entitled to
receive a majority of the entity&#146;s residual returns or
both. A VIE is a corporation, partnership, trust or any other
legal structure used for business purposes that either does not
have equity investors with voting rights or has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. The consolidation requirements
of FIN&nbsp;46 apply immediately to VIEs created after
January&nbsp;31, 2003. For entities created prior to
February&nbsp;1, 2003, the effective date of these requirements
has been deferred so as not to apply until the first period
ending after December&nbsp;15, 2004. The adoption of the
provisions applicable to special purpose entities
(&#147;SPEs&#148;) and all other variable interests obtained
after January&nbsp;31, 2003 had no impact on the Company&#146;s
financial statements. The Company is currently evaluating the
impact of adopting FIN&nbsp;46-R applicable to non-SPEs created
prior to February&nbsp;1, 2003, but does not expect a material
impact on its financial position, results of operations or cash
flows.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In May 2003, the FASB issued Statement of
Financial Accounting Standards No.&nbsp;150, <I>Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity</I> (&#147;SFAS&nbsp;150&#148;). This
statement establishes standards for classifying and measuring as
liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. The scope of this pronouncement includes
mandatorily redeemable equity instruments. Application to
pre-existing instruments should be recognized as the cumulative
effect of a change in accounting principle (application by
retroactive restatement is precluded). Exceptions to the
transition requirements were provided for mandatorily redeemable
instruments of non-public companies. Subsequent to the issuance
of SFAS&nbsp;150, the FASB issued FSP 150-3, which further
deferred the transition requirements for nonpublic companies
that also are not SEC registrants for instruments that are
mandatorily redeemable on fixed dates that are for fixed
amounts. The classification, measurement, and disclosure
provisions of SFAS&nbsp;150 are effective for fiscal periods
beginning after December&nbsp;15, 2004. The adoption of this
statement is not expected to impact the classification of the
Company&#146;s convertible preferred stock.
</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">Acquisition of PowderJect Technologies,
    Inc.</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On March&nbsp;22, 2002, the Company acquired all
of the outstanding shares of PowderJect Technologies, Inc.
(&#147;PowderJect&#148;), a development stage company, for a
total purchase price of approximately $9.9&nbsp;million. This
purchase price included 6,166,154&nbsp;shares of the
Company&#146;s Series&nbsp;B convertible preferred stock,
1,526,154&nbsp;shares of common stock, cash consideration of
$718,150 for a minority interest&#146;s share in the acquired
company, acquisition related costs of $723,879 and assumed
liabilities of $192,458. The Series&nbsp;B convertible preferred
stock was valued based on the arm&#146;s length Series&nbsp;B
financing completed during that year and the common stock
consideration was valued using the Company&#146;s estimated fair
value used for option grants made to employees. PowderJect was
in the business of developing drug applications for a patented,
needle-free, delivery system developed by its parent company,
PowderJect Pharmaceuticals plc. The Company also entered into a
supply agreement with PowderJect Technologies Limited
(subsequently purchased by Chiron Corporation) for
microcylinders. The micro-
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">cylinders are a key component of the product
candidate, ALGRX&nbsp;3268, and PowderJect Technologies Limited
is the sole supplier. No other supplier has been identified by
the Company.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The acquisition was completed to provide the
Company with the ability to exploit the opportunities associated
with its in-process lidocaine technology, as well as gain access
to the patented drug delivery technology. The purchase price was
determined in accordance with Statement of Financial Accounting
Standards No.&nbsp;141, <I>Business Combinations
</I>(&#147;SFAS&nbsp;141&#148;), and Statement of Financial
Accounting Standards No.&nbsp;142, <I>Goodwill and Other
Intangible Assets</I> (&#147;SFAS&nbsp;142&#148;). A summary of
the determination of the purchase price during 2002 was as
follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="84%"><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 valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">6,166,154&nbsp;shares&nbsp;&#151; Series&nbsp;B
    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">8,016,000</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">1,526,154&nbsp;shares&nbsp;&#151; 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">228,923</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 for minority interest buyout
    </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">718,150</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 related 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">723,879</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">Assumed 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">192,458</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>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total purchase price
    </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">9,879,410</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The acquisition was accounted for as an
acquisition of assets rather than as a business combination as
PowderJect was a development stage company that had not
commenced its planned principal operations. PowderJect lacked
the necessary elements of a business because it did not have
completed products and, therefore, no ability to access
customers. The PowderJect operating results have been included
in the Company&#146;s consolidated results of operations since
March&nbsp;23, 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company allocated the purchase price in
accordance with the provisions of SFAS&nbsp;142 related to the
purchase of a group of assets. SFAS&nbsp;142 provides that the
cost of a group of assets acquired in a transaction other than a
business combination shall be allocated to the individual assets
acquired based on their relative fair values and shall not give
rise to goodwill.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In accordance with the provisions of
SFAS&nbsp;142, all identifiable intangible assets and acquired
in-process research and development were assigned a portion of
the purchase price based on their relative fair values. To this
end, a third party valuation was used to assist management in
determining the fair value of the identifiable assets and
acquired in-process research and development. Based on this
valuation, the Company allocated the total consideration as
follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="84%"><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 valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Acquired in-process research and development and
    other
    </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">5,716,247</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">Tangible net 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">3,714,864</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">Acquired workforce
    </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">448,299</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>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total purchase price
    </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">9,879,410</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The income approach was used to estimate the fair
value of the acquired in-process research and development based
on projected cash flows, assuming a 30% discount rate. This
discount rate is a significant assumption and is based on the
Company&#146;s estimated weighted average cost of capital taking
into account the risks associated with the projects acquired.
The projected cash flows from such projects were based on
estimates of revenues and operating profits related to such
projects considering the stage of development of each potential
product acquired, the time and resources needed to complete each
product, the estimated life of each potential commercialized
product and associated risks which included the inherent
difficulties and uncertainties in developing a drug compound,
obtaining FDA and other regulatory approvals, and risks related
to the viability of, and potential alternative treatments in,
any future target markets. Approximately $4.5&nbsp;million of
the purchase price was allocated to acquired in-process research
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">and development due to PowderJect&#146;s
incomplete research and development programs that had not yet
reached technological feasibility as of March 2002 and had no
alternative future use as of that date.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The relief from royalty approach was also used to
determine the estimated fair value of the patent license based
on its favorable royalty rate. In light of the number of years
required to achieve product commercialization, the associated
technology risk, and therefore the risk that the asset value
will not be realized, the Company has recorded, as an expense,
the value of the favorable patent license, which is
$1.2&nbsp;million, similar to the treatment afforded the
acquired in-process research and development.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The cost approach was used to determine the value
of the acquired workforce. The value allocated to the acquired
workforce is attributable to 31 employees hired by the Company
from PowderJect following the asset acquisition, which
eliminated the need to hire replacement employees. The value of
the acquired workforce was determined by estimating the cost of
assembling a new workforce, including costs of salaries,
benefits, training, and recruiting.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002 and 2003, the
Company&#146;s intangible assets are as follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="73%"><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>
</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">December&nbsp;31,</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">2002</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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Acquired workforce
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">448,299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">448,299</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">Accumulated 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">(174,138</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">(448,299</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>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net balance
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">274,161</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Amortization expense was $174,138, $274,161 and
$448,299 for the years ended December&nbsp;31, 2002 and 2003 and
from March&nbsp;6, 2001 (inception)&nbsp;to December&nbsp;31,
2003, respectively. Included in the 2003 amortization was
$227,461 related to the acquired workforce that was written off
in connection with the restructuring described in Note&nbsp;3.
</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">Restructuring</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In March 2003, the Company announced a
reorganization plan intended to reduce operating costs and
reduced its staff by 28 employees (approximately 61% of total
employees as of the date of reorganization); however, no
research projects were discontinued. The reorganization resulted
in an impairment of the assembled workforce intangible asset of
$227,461 recorded as accelerated amortization expense during
2003. This expense is classified under research and development
expenses for the year ended December&nbsp;31, 2003. In addition,
the vesting of certain options held by such employees at the
time of termination was accelerated. The Company recorded a
charge of $66,240 related to this acceleration of vesting. The
total restructuring cost of $1,122,444 was charged to research
and development expense.
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<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="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="70%"><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="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</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">2002</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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,025,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,987,027</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">Computer and office 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">234,426</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">127,048</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">Lab 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">894,030</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">850,081</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">Construction-in-process
    </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">801,324</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">562,616</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">Furniture and fixtures
    </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">87,165</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">87,165</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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,042,445</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,613,937</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">Less accumulated 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">(886,847</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">(1,240,097</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>

</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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,155,598</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,373,840</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">Depreciation and amortization expense was $9,920,
$956,200, $1,059,889 and $2,026,009 for the period from
March&nbsp;6, 2001 (inception)&nbsp;to December&nbsp;31, 2001,
for the years ended December&nbsp;31, 2002 and 2003 and for the
period from March&nbsp;6, 2001 (inception)&nbsp;to
December&nbsp;31, 2003, respectively. During 2003, the Company
sold certain computer and lab equipment that was determined to
be unnecessary due to the reduction in force. The sale resulted
in a recognized gain on disposal of approximately $103,000.
</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="70%" 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="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="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="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December&nbsp;31,</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">2002</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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued patent costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">294,000</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">Accrued research and development 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">684,558</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">341,158</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 legal
    </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">41,411</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">141,356</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 vacation
    </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">122,557</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">130,611</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">362,322</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">295,328</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>
    <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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,360,848</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,202,453</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">6.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Commitments</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">Leases</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company leased certain office facilities and
office equipment under operating and capital leases during the
year ended December&nbsp;31, 2003. As of December&nbsp;31, 2003,
the Company had satisfied its obligation under its capital
leases. The future minimum payments for all noncancelable
operating leases as of December&nbsp;31, 2003 are as follows:
</FONT>

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

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="83%"><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 valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Years ending December&nbsp;31,
    </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">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">665,397</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">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">51,530</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">Thereafter
    </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>
</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>

</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">716,927</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>

<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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">See Note&nbsp;13 for information concerning
leases entered into after December&nbsp;31, 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Rent expense under operating leases was
approximately $184,000, $500,000, $660,000 and $1,344,000, for
the period from March&nbsp;6, 2001 (inception)&nbsp;to
December&nbsp;31, 2001, for the years ended December&nbsp;31,
2002 and 2003 and for the period from March&nbsp;6, 2001
(inception)&nbsp;to December&nbsp;31, 2003, 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">Other Commitments</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the Company&#146;s license agreements, the
Company could be required to pay up to a total of $1,366,000 in
milestone payments through product approval, in addition to
sales milestones and royalties on commercial sales if any occur.
The Company has no material commitments for capital expenditures.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under our license with PowderMed Limited we are
obligated and have spent $1,000,000 on research and development
associated with the licensed technology during the period
July&nbsp;7, 2003 to July&nbsp;7, 2005. We are also obligated to
spend an additional $1,000,000 on research and development for
every 12&nbsp;month period from July&nbsp;7, 2005 to
July&nbsp;7, 2008.
</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">7.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Capital Structure</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">Common Stock</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is authorized to issue
50,000,000&nbsp;shares of common stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Dividends on common stock will be paid when, and
if, declared by the Board of Directors. Each holder of common
stock is entitled to vote on all matters and is entitled to one
vote for each share held. The Company will, at all times,
reserve and keep available, out of its authorized but unissued
shares of common stock, sufficient shares to affect the
conversion of the shares of the convertible preferred stock and
stock options. As of December&nbsp;31, 2003, the Company has
reserved 31,612,547&nbsp;shares of common stock for future
issuance. Common shares issued to the founders of the Company
vest over a four-year period. Unvested shares are subject to
repurchase by the Company at the original issuance price. As of
December&nbsp;31, 2003, there were 421,875 founders shares
subject to repurchase at an aggregate price of $422.
</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">Convertible Preferred Stock</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is authorized to issue
35,500,000&nbsp;shares of preferred stock. In April 2001, the
Company issued 9,150,000&nbsp;shares of Series&nbsp;A
convertible preferred stock (&#147;Series&nbsp;A&#148;). In
March 2002, the Company issued 17,858,462&nbsp;shares of
Series&nbsp;B convertible preferred stock
(&#147;Series&nbsp;B&#148;). Such stock is subject to the
following rights and privileges:
</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>
    <I><FONT size="2">Voting</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Series&nbsp;A and B stockholders are entitled to
the number of votes equal to the number of shares of common
stock into which each share of preferred stock is convertible.
</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>
    <I><FONT size="2">Dividends</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The holders of Series&nbsp;A and B are entitled
to receive annual dividends at a rate of 8% of the original
purchase price in advance of any distributions to common
shareholders. Dividends are payable when, and as, declared by
the Board of Directors and are noncumulative. No dividends have
been declared through December&nbsp;31, 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>
    <I><FONT size="2">Conversion</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Series&nbsp;A and B stockholders are entitled, at
any time, to cause their shares to be converted into fully paid
and nonassessable shares of common stock. Shares of
Series&nbsp;A and B will be converted into common
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">stock based on a one-for-one basis, subject to
adjustment for antidilution. Additionally, the preferred stock
will convert automatically (i)&nbsp;upon the affirmative
election of the holders of at least a majority of the
outstanding shares of preferred stock, or (ii)&nbsp;immediately
upon the closing of a public offering pursuant to an effective
registration statement under the Securities Act of 1933 covering
the offer and sale of common stock, which results in aggregate
net proceeds to the Company of at least $25,000,000 and a per
share price of at least $5.00 (appropriately adjusted for any
stock dividend, stock split or recapitalization).
</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>
    <I><FONT size="2">Liquidation</FONT></I></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 Company, including a change of control, either
voluntary or involuntary, the holders of Series&nbsp;A and B are
entitled to receive, in preference to common stock, an amount
equal to the purchase price per share, plus all declared but
unpaid dividends (appropriately adjusted for any stock dividend,
stock split or recapitalization). After payment of these
preferential amounts, the remaining assets of the Company shall
be distributed among the holders of common and preferred stock
(assuming conversion of preferred 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>
    <I><FONT size="2">Convertible Notes</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In April 2003, the Company entered into several
loan agreements with various financial institutions, whereby the
financial institutions agreed to loan the Company an aggregate
principal amount of $9,800,000. The interest on these loans was
1.46%&nbsp;per annum and was payable on December&nbsp;31, 2004
if the notes were held and not converted on such date. The loans
were converted into Series&nbsp;C stock in February 2004 (see
Note&nbsp;13)&nbsp;and no interest was paid to the financial
institutions in accordance with the loan agreements. In
accordance with EITF 85-17: <I>Accrued Interest upon Conversion
of Convertible Debt</I>, the interest cost of $107,310 was
accrued through December&nbsp;31, 2003 and the corresponding
credit was recorded as a component of additional paid-in capital.
</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">Stock Option Plan</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On March&nbsp;30, 2001, the Company&#146;s Board
of Directors and shareholders approved the Company&#146;s 2001
Equity Incentive Plan (the &#147;2001 Plan&#148;). The 2001 Plan
provides for the granting of options to purchase common stock in
the Company to employees and consultants at a price not less
than the estimated fair value at the date of grant, or 110% of
the estimated fair value at the date of grant if the optionee is
a 10% owner of the Company. Under the provisions of the 2001
Plan, no option will have a term in excess of ten years.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the granting of employee stock
options in 2003, the Company recorded deferred compensation of
approximately $156,000. Deferred compensation is being amortized
over the vesting period of the options resulting in non-cash
stock-based compensation expense of approximately $13,000 for
the year ended December&nbsp;31, 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The 2001 Plan is intended to encourage ownership
of stock by employees and consultants of the Company and to
provide additional incentives for them to promote the success of
the Company&#146;s business. The Board of Directors is
responsible for determining the individuals to receive option
grants, the number of options each individual will receive, the
option price per share and the exercise period of each option.
Options granted pursuant to the 2001 Plan generally vest over
four years and have been granted at the estimated fair value of
the Company&#146;s common stock, as determined by the Board of
Directors, as of each grant date. The 2001 Plan allows the
option holders to exercise their options early, which are then
subject to repurchase by the Company at the original exercise
price of such options.
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes stock option
activity for the Company:
</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="37%"><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="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="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="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Options Outstanding</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" 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">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></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">Available for</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</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">Average</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Grant</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">Per Share</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>
    <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">Balance at March&nbsp;6, 2001 (inception)
    </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 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>
</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">Shares authorized
    </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">2,716,666</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">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">(726,166</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">726,166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom" nowrap><FONT size="2">0.10&nbsp;- 1.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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>
</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">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">&#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">(238,000</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">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">0.10</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Balance 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">1,990,500</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">488,166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom" nowrap><FONT size="2">0.10&nbsp;- 1.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares authorized
    </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">5,200,308</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">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">(6,748,477</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">6,748,477</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom" nowrap><FONT size="2">0.10&nbsp;- 0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.15</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">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">&#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">(101,500</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">0.10</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">0.10</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">Forfeited
    </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">920,041</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(920,041</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">0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.15</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Balance 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">1,362,372</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,215,102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom" nowrap><FONT size="2">0.10&nbsp;- 1.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.18</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">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">(192,000</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">192,000</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">0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.15</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">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">&#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">(47,250</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="center" valign="bottom" nowrap><FONT size="2">0.10&nbsp;- 0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.11</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">Forfeited
    </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">1,090,221</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,090,221</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">0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.15</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Balance 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">2,260,593</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,269,631</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom" nowrap><FONT size="2">0.10&nbsp;- 1.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.18</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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 following table summarizes information about
vested stock options outstanding:
</FONT>

<CENTER>
<TABLE width="70%" 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="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="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="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
</TR>

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

<TR>
    <TD></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">2002</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Vested 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">95,000</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">181,667</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,038,728</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 exercise price
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.38</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.25</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">0.15</FONT></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="50%" 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="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><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="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="13%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="12%"><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" align="center" nowrap><B><FONT size="1">Weighted Average</FONT></B></TD>
</TR>

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

<TR>
    <TD align="center" nowrap><B><FONT size="1">Exercise Price</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">Vested</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Contractual Life</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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="center" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$0.10
    </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">305,000</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">212,187</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">7.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$0.15
    </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">4,747,965</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,796,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="center" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$1.00
    </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">216,666</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,000</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">7.7</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><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="right" valign="bottom" nowrap><FONT size="2">5,269,631</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,038,728</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.3</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><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 Company also grants options to purchase
common stock to consultants, advisors, and others (collectively,
the &#147;nonemployees&#148;). The Company has granted options
to purchase&nbsp;474,918&nbsp;shares of common stock to
nonemployees during the period from March&nbsp;6, 2001
(inception)&nbsp;to December&nbsp;31, 2003. Of these options,
288,252&nbsp;vest over time periods ranging from immediate
vesting to 24&nbsp;months and 186,666 have performance-based
vesting criteria. The Black-Scholes option-pricing model is used
to calculate the fair values of the stock options to
nonemployees as the vesting periods of respective awards lapse.
The Company recognized stock-based compensation expense of
approximately $66,000 and $9,000 during the years ended
December&nbsp;31, 2002 and 2003, respectively, related to the
fair value of the vested portions of nonemployee stock option
awards. Stock-based compensation expense was insignificant for
the period from March&nbsp;6, 2001 (inception)&nbsp;to
December&nbsp;31, 2001. Additional stock-based compensation
expense will be recorded in future periods for the remaining
unvested portion of the stock option awards.
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<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">Employee Benefit Plan</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company maintains a defined contribution
401(k) plan available to employees. Employee contributions are
voluntary and are determined on an individual basis, limited by
the maximum amounts allowable under federal tax regulations.
Company contributions totaled $0, $27,738, $40,052 and $67,790,
for the period from March&nbsp;6, 2001 (inception)&nbsp;to
December&nbsp;31, 2001, for the years ended December&nbsp;31,
2002 and 2003 and for the period from March&nbsp;6, 2001
(inception)&nbsp;to December&nbsp;31, 2003, respectively.
</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">As of December&nbsp;31, 2002 and 2003, the
Company had deferred tax assets of $6,566,000 and $14,425,000,
respectively. Realization of the deferred tax assets is
dependent upon the Company generating future taxable income, if
any, the amount and timing of which are uncertain. Accordingly,
the deferred tax assets have been fully offset by a valuation
allowance at December&nbsp;31, 2002 and 2003. The net valuation
allowance increased by approximately $600,000, $5,966,000 and
$7,859,000 for the period from March&nbsp;6, 2001
(inception)&nbsp;to December&nbsp;31, 2001, and for the years
ended December&nbsp;31, 2002 and 2003, respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company&#146;s deferred tax
assets relate primarily to net operating loss carryforwards.
Significant components of the Company&#146;s deferred tax assets
are as follows:
</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="66%"><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="6%"><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">December&nbsp;31,</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" 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>
</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">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>
</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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,098,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,472,000</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">Research credits
    </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">100,000</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">657,000</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">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">221,000</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">1,232,000</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 temporary differences
    </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">147,000</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">64,000</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total gross 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">6,566,000</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">14,425,000</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">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">(6,566,000</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">(14,425,000</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net deferred tax assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A reconciliation of the statutory tax rates and
the effective tax rates for the period from March&nbsp;6, 2001
(inception)&nbsp;to December&nbsp;31, 2001, and for the years
ended December&nbsp;31, 2002 and 2003, is as follows:
</FONT>

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

<TR>
    <TD width="73%"><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></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">2002</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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Statutory 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</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</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</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 and local income taxes (net of federal tax
    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">(6</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</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</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">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">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">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">40</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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Effective tax rates
    </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</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</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</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2003, the Company had
federal net operating loss carryforwards of approximately
$31,000,000. The Company also had federal research and
development tax credit carryforwards of approximately $657,000.
The federal net operating loss and tax credit carryforwards will
expire at various dates beginning in 2021, if not utilized.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Utilization of the net operating loss
carryforwards and credits may be subject to a substantial annual
limitation due to the ownership change limitations provided by
the Internal Revenue Code of 1986, as
</FONT>

<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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">amended, and similar state provisions. The
Company has not performed a detailed analysis to determine
whether an ownership change under Section&nbsp;382 of the
Internal Revenue Code has occurred. The effect of an ownership
change would be the imposition of an annual limitation on the
use of net operating loss carryforwards attributable to periods
before the change.
</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">11.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Loss Per Share</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth the computation of
basic and diluted net loss attributable to common stockholders
per share.
</FONT>

<CENTER>
<TABLE width="80%" 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="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="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="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Inception) to</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</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="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">2001</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>
</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">Numerator for basic and diluted net loss per
    share&nbsp;&#151; net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,416,218</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,191,090</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">(15,486,128</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>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Denominator for basic and dilutive net loss per
    share&nbsp;&#151; weighted average 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">178,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,829,494</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,591,820</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>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted net loss per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7.93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11.04</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">(5.98</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table shows dilutive common share
equivalents outstanding, which are not included in the above
historical calculations, as the effect of their inclusion is
anti-dilutive during each period. Restricted stock that is not
yet vested is included as dilutive common share equivalents
because the Company considers such securities as the equivalent
of stock options.
</FONT>

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

<TR>
    <TD width="55%"><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="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>
</TR>

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Inception) to</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</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="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">2001</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>
</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">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">9,150,000</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">27,008,462</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">27,008,462</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">Restricted 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">1,500,000</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">914,063</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">421,875</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 notes
    </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">16,540,084</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">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">486,166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,215,102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,269,631</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">11,136,166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34,137,627</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,240,052</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>

<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">Selected Quarterly Financial Data
    (Unaudited)</FONT></B></TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="39%"><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="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="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="15"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">Quarter Ended</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="3" align="center" nowrap><B><FONT size="1">March&nbsp;31</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June&nbsp;30</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">December&nbsp;31</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">
    <B><FONT size="2">2002</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Contract revenues
    </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">112,586</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,630</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR 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">(7,115,358</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">(3,202,117</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">(4,851,854</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">(5,021,761</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">Basic and diluted net loss per common share*
    </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">(24.86</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">(1.41</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">(2.08</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">(2.09</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">
    <B><FONT size="2">2003</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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Contract revenues
    </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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#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">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">(6,720,543</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">(3,418,805</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">(2,919,406</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">(2,427,374</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">Basic and diluted net loss per common share*
    </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">(2.72</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">(1.34</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">(1.10</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">(.90</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

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

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

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

<TR valign="top">
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Per common share amounts for the quarters and
    full years have been calculated separately. Accordingly,
    quarterly amounts do not add to the annual amount because of
    differences in the weighted average common shares outstanding
    during each period principally due to the effect of the
    Company&#146;s issuing shares of its common stock during the
    year.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;
<FONT size="2"> Diluted EPS is identical to Basic EPS since
common equivalent shares are excluded from the calculation, as
their effect is anti-dilutive.
</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">13.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Subsequent Events</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">Financing</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In February 2004, the Company completed a
Series&nbsp;C convertible preferred stock financing. The Company
issued 109,704,634&nbsp;shares of Series&nbsp;C preferred stock
at a price of $0.59&nbsp;per share for gross consideration of
approximately $65&nbsp;million. The Company also issued a
warrant to purchase 692,658 shares of Series&nbsp;C preferred
stock to the placement agent. The Company valued the warrant at
$285,000 utilizing the Black-Scholes model and reflected the
value as an addition to additional paid-in capital and a
deduction to Series&nbsp;C convertible preferred stock in the
balance sheet. This consideration included cash proceeds of
approximately $55&nbsp;million which was offset by approximately
$1.4&nbsp;million of issuance costs and the conversion of
$9.8&nbsp;million of promissory notes, issued in April 2003,
into 16,540,084&nbsp;shares of Series&nbsp;C preferred stock. In
addition, this financing required an adjustment to the
conversion prices for the Series&nbsp;A and B convertible
preferred stock as a result of antidilution provisions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Certain holders of the Company&#146;s
Series&nbsp;B preferred shares did not participate in the
Series&nbsp;C financing. As a result, their holdings, totaling
6,166,154&nbsp;shares of Series&nbsp;B preferred stock converted
to an equal number of shares of 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">Office Lease</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In May 2004, the Company entered into a lease for
office space in Secaucus, New Jersey which will be the
Company&#146;s new headquarters. The lease commitment for 2004
is $81,980 and is $245,939 each year for 2005, 2006, 2007 and
2008 and $122,970 for 2009. The entire commitment is $1,188,706
for the five year lease.
</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">License Agreement</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In October 2004, the Company licensed the
intellectual property underlying ALGRX&nbsp;1207 from Bridge
Pharma, Inc. In consideration for the license, the Company paid
Bridge Pharma, Inc. an up-front license fee consisting of a cash
payment and shares of its common stock. Such amounts were
expensed during the fourth quarter of 2004. The Company is also
obligated to pay additional fees to Bridge Pharma, Inc. if it
achieves certain clinical, regulatory and commercial milestones.
</FONT>

<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>

<P align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<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="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="48%"><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="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>
</TR>

<TR>
    <TD colspan="2"></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>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September&nbsp;30, 2004</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">2004</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Pro forma (Note&nbsp;1)</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>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="14" align="center" valign="top">
    <B><FONT size="2">ASSETS</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" 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>
</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">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,545,976</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,875,314</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">15,285,714</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">Marketable securities
    </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">32,697,490</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">32,697,490</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">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">183,961</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">573,286</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">573,286</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>
    <TD colspan="2" 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">4,729,937</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,146,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,556,490</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">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">2,373,840</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">1,582,329</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">1,582,329</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">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">82,377</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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 colspan="2" 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">214,993</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">201,046</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">201,046</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>
    <TD colspan="2" 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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,401,147</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,929,465</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">50,339,865</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>

<TR>
    <TD colspan="14"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="14" align="center" valign="top">
    <B><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146; EQUITY
    (DEFICIENCY)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" 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>
</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">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">493,530</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">126,659</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">126,659</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 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">273,399</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,078</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,078</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 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">1,202,453</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">3,312,258</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">3,312,258</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">Convertible notes
    </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">9,800,000</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 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 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">11,769,382</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,516,995</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,516,995</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;A convertible preferred stock,
    $0.001&nbsp;par value; 9,150,000&nbsp;shares authorized, issued
    and outstanding at December&nbsp;31, 2003 and September&nbsp;30,
    2004, respectively; and no shares issued and outstanding pro
    forma (aggregate liquidation preference of $9,150,000 at
    December&nbsp;31, 2003 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">9,099,428</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,099,428</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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 colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;B convertible preferred stock,
    $0.001&nbsp;par value; 26,350,000 and 17,858,462&nbsp;shares
    authorized at December&nbsp;31, 2003 and September&nbsp;30,
    2004, respectively; 17,858,462 and 11,692,308&nbsp;shares issued
    and outstanding at December&nbsp;31, 2003 and September&nbsp;30,
    2004, respectively; and no shares issued and outstanding pro
    forma (aggregate liquidation preference of $23,216,000 at
    December&nbsp;31, 2003 and $15,200,000 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">23,094,410</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">15,078,409</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Series&nbsp;C convertible preferred stock,
    $0.001&nbsp;par value; 0 and 110,397,292&nbsp;shares authorized
    at December&nbsp;31, 2003 and September&nbsp;30, 2004,
    respectively; 0 and 109,704,634 issued and outstanding at
    December&nbsp;31, 2003 and September&nbsp;30, 2004,
    respectively; and no shares issued and outstanding pro forma
    (aggregate liquidation preference of $0 and $97,500,000 at
    December&nbsp;31, 2003 and September&nbsp;30, 2004, respectively)
    </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">63,306,585</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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 colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; equity (deficiency):
    </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">Common stock, $0.001&nbsp;par value, 50,000,000,
    173,840,266 and 173,840,266&nbsp;shares authorized at
    December&nbsp;31, 2003, September&nbsp;30, 2004 and pro forma,
    respectively; 3,412,904, 9,603,346 and 153,053,561&nbsp;shares
    issued at December&nbsp;31, 2003, September&nbsp;30, 2004 and
    pro forma, respectively; 3,142,071, 9,332,513 and
    152,782,728&nbsp;shares outstanding at December&nbsp;31, 2003,
    September&nbsp;30, 2004 and pro forma, respectively
    </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">3,413</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,604</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">152,783</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">670,785</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,781,520</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">105,533,163</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">&#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">(26,183</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">(26,183</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">Deferred 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">(142,564</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">(8,552,086</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">(8,552,086</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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">Treasury stock, at cost, 270,833&nbsp;shares at
    December&nbsp;31, 2003 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">(271</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">(271</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">(271</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">Deficit accumulated during the development stage
    </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">(37,093,436</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">(50,284,536</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">(50,284,536</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>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; equity (deficiency)
    </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">(36,562,073</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">(41,071,952</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">46,822,870</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 liabilities and stockholders&#146; equity
    (deficiency)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,401,147</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,929,465</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">50,339,865</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>

<P align="center">
<FONT size="2">See accompanying notes.
</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>

<P align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF
OPERATIONS</FONT></B>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

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

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" 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">(Inception) to</FONT></B></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">2004</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>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></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">Contract revenues
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#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">249,216</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">Costs 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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">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">10,939,257</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,681,730</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34,982,935</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">2,319,821</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,914,695</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">10,564,310</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">Acquired in-process research and development and
    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">&#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">5,716,247</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>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total costs and 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">13,259,078</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,596,425</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">51,263,492</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">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">(13,159,078</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">(13,596,425</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">(51,014,276</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">Gain on sale 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">102,150</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">261</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">67,484</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">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">(71,540</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">(23,847</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">(137,087</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">Interest and other income, 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">69,714</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">428,911</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">799,343</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">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,058,754</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,191,100</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">(50,284,536</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted net loss per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.10</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.71</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="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="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares outstanding&nbsp;&#151;
    basic and diluted
    </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">2,559,089</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,695,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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="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>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma basic and diluted net loss 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 align="right" valign="bottom" nowrap><FONT size="2">(0.10</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT 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="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma weighted average shares
    outstanding&nbsp;&#151; basic and diluted
    </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="bottom" nowrap><FONT size="2">130,032,565</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT 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-22
</FONT>

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

<P align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<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="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="50%"><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>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Nine Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;6, 2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" 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">(Inception) to</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></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="3"></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>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2004</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></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="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">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>
</TR>

<TR>
    <TD colspan="3" 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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,058,754</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,191,100</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">(50,284,536</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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">Adjustments to reconcile net loss to net cash
    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>
</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">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">792,860</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">837,746</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,863,755</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <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">Noncash 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">81,746</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">461,402</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">615,766</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">Non-cash 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">71,540</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,847</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">131,157</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <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">Acquired in-process 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">&#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">5,716,247</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">Amortization of intangible 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">274,161</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">448,299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <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">Loss on disposal of 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">36,101</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">Gain on disposal of 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">(102,150</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">(261</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">(103,585</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 colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other non-cash 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">&#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">3,631</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,631</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">Changes in operating assets and 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>
</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">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">(24,333</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">(389,325</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">(526,758</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">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">&#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">13,947</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(85,024</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><FONT size="2">&nbsp;</FONT></TD>
    <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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(110,592</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">(366,871</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">109,282</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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued 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">(79,962</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">(195,321</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">(9,447</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><FONT size="2">&nbsp;</FONT></TD>
    <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">768,826</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,109,805</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,219,796</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>
    <TD><FONT size="2">&nbsp;</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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash 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">(11,386,658</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">(10,692,500</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">(37,865,316</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="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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">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>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases 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">(345,044</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">(47,696</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">(1,020,029</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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">Proceeds from disposal of 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">66,223</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">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">253,447</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">Purchases of marketable securities
    </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">(37,801,272</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">(37,801,272</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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">Sales of marketable securities
    </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">5,077,600</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">5,077,600</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">Acquisition of PowderJect Technologies,
    Inc.&nbsp;</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">(1,442,029</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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">Other acquisition related expenditures
    </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">(96,613</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="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="3" 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">(278,821</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">(32,770,868</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">(35,028,896</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="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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">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>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Repayment of capital lease obligations
    </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">(43,311</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</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">Proceeds from issuance of convertible preferred
    stock, net of issuance 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">53,791,581</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">77,969,419</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">Proceeds from issuances 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">5,587</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,125</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,689</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">Funds used to repurchase 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">(271</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">(271</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from debt
    </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">9,800,000</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">9,800,000</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>
    <TD><FONT size="2">&nbsp;</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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by 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">9,805,316</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">53,792,706</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">87,769,526</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>
    <TD><FONT size="2">&nbsp;</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="3" 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">(1,860,163</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">10,329,338</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,875,314</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">Cash and cash equivalents, 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">8,873,270</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,545,976</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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="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>
    <TD><FONT size="2">&nbsp;</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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents, end of period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,013,107</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,875,314</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">14,875,314</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="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="3" 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>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash paid during the year for interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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">5,529</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="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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Supplemental 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>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of $8,016,000 of convertible preferred
    stock and $228,923 of common stock in connection with
    acquisition of PowderJect Technologies, Inc.&nbsp;</FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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">8,244,923</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="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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Conversion of convertible preferred stock to
    common 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">8,016,000</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">8,016,000</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="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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Conversion of convertible notes to 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">9,800,000</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">9,800,000</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="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="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Equipment acquired under capital leases
    </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">43,311</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="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-23
</FONT>

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

<P align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>

<DIV align="center">
<B><FONT size="2">September&nbsp;30, 2004</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">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">Organization, Description of Business and
    Basis of Presentation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">AlgoRx Pharmaceuticals, Inc. (the
&#147;Company&#148; or &#147;AlgoRx&#148;) was incorporated on
March&nbsp;6, 2001 in Delaware. During 2003, the Company&#146;s
headquarters were located in Cranbury, New Jersey, with
facilities also in Fremont, California. In July of 2004, the
Company moved its headquarters to Secaucus, New Jersey. AlgoRx
is focused on building a diversified portfolio of pharmaceutical
products and technologies to address the pain therapeutic
market. The Company&#146;s activities since inception have
consisted principally of acquiring product and technology
rights, raising capital, establishing facilities and performing
research and development. Accordingly, the Company is considered
to be in the development stage as defined by Statement of
Financial Accounting Standards No.&nbsp;7, <I>Accounting and
Reporting Development Stage Enterprise.</I> The Company operates
in one business segment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company expects to continue to incur
substantial losses over the next several years during its
development phase. To fully execute its business plan, the
Company will need to complete certain research and development
activities and clinical trials. Further, the Company&#146;s
future products may require regulatory approval prior to
commercialization. These activities may span many years and
require substantial expenditures to complete and may ultimately
be unsuccessful. Any delays in completing these activities could
adversely impact the Company. The Company plans to meet its
capital requirements primarily through issuances of equity
securities, research and development contract revenue, and in
the longer term, revenue from product sales.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In February 2004, the Company completed a
Series&nbsp;C convertible preferred stock financing. The Company
issued 109,704,634&nbsp;shares of its Series&nbsp;C preferred
stock at a price of $0.59&nbsp;per share for gross consideration
of approximately $65&nbsp;million. The Company also issued a
warrant to purchase 692,658&nbsp;shares of Series&nbsp;C
preferred stock to the placement agent. The Company valued the
warrant at $285,000 utilizing the Black-Scholes model and
reflected the value as an addition to additional paid-in capital
and a deduction to Series&nbsp;C convertible preferred stock in
the balance sheet. This consideration included cash proceeds of
approximately $55&nbsp;million which was offset by approximately
$1.4&nbsp;million of issuance costs and the conversion of
$9.8&nbsp;million of promissory notes held by certain
Series&nbsp;C investors, issued to them in April 2003, into
16,540,084&nbsp;shares of Series&nbsp;C convertible preferred
stock. In addition, this financing required an adjustment to the
conversion prices of the Series&nbsp;A convertible preferred
stock and the Series&nbsp;B convertible preferred stock as a
result of antidilution provisions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Certain holders of the Company&#146;s
Series&nbsp;B preferred shares did not participate in the
Series&nbsp;C financing. As a result, their holdings, totaling
6,166,154&nbsp;shares of Series&nbsp;B preferred stock,
converted to an equal number of shares of 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">Interim Financial Statements</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The financial statements as of September&nbsp;30,
2004 and for the nine months ended September&nbsp;30, 2003 and
2004 have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the
financial position and the results of operations and cash flows
for the nine months ended September&nbsp;30, 2003 and 2004 and
the period from March&nbsp;6, 2001 (inception) to
September&nbsp;30, 2004 have been made. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting
principles have been condensed or eliminated.
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (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">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 U.S.&nbsp;generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
</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">Principles of Consolidation</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The consolidated financial statements include the
accounts of AlgoRx and, beginning on March&nbsp;22, 2002, its
wholly owned subsidiary, AlgoRx Technologies, Inc. (formerly
PowderJect Technologies, Inc.), located in Fremont, California.
Intercompany accounts and transactions have been eliminated.
</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 and Cash Equivalents</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Cash and cash equivalents consist of highly
liquid instruments purchased with an original maturity of three
months or less.
</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">Marketable Securities</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Investments classified as available for sale are
carried at estimated fair value with unrealized gains and losses
recorded as a component of accumulated other comprehensive
income. Management determines the appropriate classification of
its investment in debt and equity securities at the time of
purchase and reevaluates such determination at each balance
sheet 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">Property and Equipment</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is provided over the
estimated useful lives of the respective assets, which range
from three to five years, using the straight-line method.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Leasehold improvements and assets under capital
leases are amortized over the lives of the related leases or
their estimated useful lives, whichever is shorter, using the
straight-line method.
</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">Intangible Asset</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Intangible asset consists of the acquired
workforce acquired in the acquisition of PowderJect
Technologies, Inc. (see Note&nbsp;2). The acquired workforce is
being amortized on a straight-line basis over two years, which
represents the estimated retention period for the related
employees. Acquired workforce amortization is recorded in
research and development 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">Long-Lived Assets</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Long-lived assets and certain identifiable
intangible assets to be held and used are reviewed for
impairment when events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. In the event that such cash
flows are not expected to be sufficient to recover the carrying
amount of the assets, the assets are written down to their
estimated fair values. Long-lived assets and certain
identifiable assets to be disposed of are reported at the lower
of carrying amount or fair value less cost to sell.
</FONT>

<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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (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">Fair Value of Financial
    Instruments</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The carrying values of the Company&#146;s
financial instruments, which include cash and cash equivalents,
investments, accounts payable, accrued expenses and convertible
notes approximates their fair values.
</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&#146;s revenue recognition policies
are in accordance with Securities and Exchange Commission
(SEC)&nbsp;Staff Accounting Bulletins No.&nbsp;101 and
No.&nbsp;104, or SAB&nbsp;101 and 104, and EITF&nbsp;00-21,
<I>Revenue Recognition in Financial Statements</I>, which
provides guidance on revenue recognition in financial statements
and is based on the interpretations and practices developed by
the SEC. SAB&nbsp;101 requires that four basic criteria be met
before revenue can be recognized: (1)&nbsp;persuasive evidence
exists of an arrangement; (2)&nbsp;delivery has occurred or
services have been rendered; (3)&nbsp;the fee is fixed and
determinable; and (4)&nbsp;collectibility is reasonably assured.
Determination of criteria (3)&nbsp;and (4)&nbsp;are based on
management&#146;s judgments regarding the fixed nature of the
fees charged for services rendered and products delivered and
the collectibility of those fees.
</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">Research and Development
    Costs</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Research and development costs are expensed as
incurred. Research and development costs consist of salaries,
employee benefits, laboratory supplies, consulting services,
clinical services and facility costs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Acquired in-process research and development
relates primarily to in-licensed technology, intellectual
property and know-how. The Company evaluates the stage of
development of acquired projects, taking into account the level
of effort, time and estimated cost associated with further
developing the in-process technology and producing a commercial
product. The nature of the remaining efforts for completion of
acquired in-process research and development projects generally
include completion of clinical trials, completion of
manufacturing validation, interpretation of clinical and
preclinical data and obtaining marketing approval from the FDA
and other regulatory bodies, the cost, length and success of
which are extremely difficult to determine. Numerous risks and
uncertainties exist with timely completion of development
projects, including clinical trial results, manufacturing
process development results, and ongoing feedback from
regulatory authorities, including obtaining marketing approval.
In addition, acquired products under development may never be
successfully commercialized due to the uncertainties associated
with the pricing of new pharmaceuticals, the cost to produce
these products in a commercial setting, changes in the
reimbursement environment, or the introduction of new
competitive products. As a result of the uncertainties noted
above, the Company expenses such acquired in-process research
and development projects when 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">Concentration of Credit Risk</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s financial instruments that are
exposed to credit risks consist primarily of cash and cash
equivalents. The Company maintains its cash and cash equivalents
in bank accounts, which, at times, exceed federally insured
limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to significant
credit risk related to cash and 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">Income Taxes</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company utilizes the asset and liability
method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates that will be in
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">effect when the differences are expected to
reverse. A valuation allowance is provided when it is more
likely than not that some portion or all of a deferred tax asset
will not be realized.
</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 reports comprehensive loss in
accordance with Statement of Financial Accounting Standards
No.&nbsp;130, <I>Reporting Comprehensive Income
</I>(&#147;SFAS&nbsp;130&#148;). SFAS&nbsp;130 establishes rules
for the reporting and display of comprehensive loss and its
components. SFAS&nbsp;130 requires unrealized loss on available
for sale securities to be included in other comprehensive loss.
</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">Net Loss Per Share</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company computes net loss per share in
accordance with Statement of Financial Accounting Standards
No.&nbsp;128, &#147;Earnings per Share&#148;
(&#147;SFAS&nbsp;128&#148;). Under the provisions of
SFAS&nbsp;128, basic net loss per common share
(&#147;Basic&nbsp;EPS&#148;) is computed by dividing net loss by
the weighted-average number of common shares outstanding
(excluding unvested founders&#146; shares subject to
repurchase). Diluted net loss per common share
(&#147;Diluted&nbsp;EPS&#148;) is computed by dividing net loss
by the weighted-average number of common shares and dilutive
common shares equivalents then outstanding. Common equivalent
shares consist of the incremental common shares issuable upon
the conversion of preferred stock, shares issuable upon the
exercise of stock options, the conversion of preferred stock
upon the exercise of warrants and unvested founders&#146; shares
subject to repurchase. Diluted&nbsp;EPS is identical to
Basic&nbsp;EPS since common shares equivalent are excluded from
the calculation, as their effect is anti-dilutive.
</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">Unaudited Pro Forma
    Information</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The unaudited pro forma balance sheet as of
September&nbsp;30, 2004 reflects the automatic conversion of all
outstanding shares of the Company&#146;s convertible preferred
stock into an aggregate of 142,757,557&nbsp;shares of common
stock upon completion of the Company&#146;s initial public
offering. The unaudited pro forma balance sheet as of
September&nbsp;30, 2004 also includes the exercise for cash of
692,658&nbsp;outstanding warrants exercisable for shares of the
Company&#146;s common stock at an exercise price of
$0.5925&nbsp;per share, or $410,000 in aggregate, upon the
assumed closing of the Company&#146;s initial public offering.
Any of these warrants that are not exercised prior to the
completion of the assumed closing of the Company&#146;s initial
public offering will be cancelled.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Unaudited pro forma net loss per share is
computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic
conversion of all outstanding convertible preferred stock and
the exercise in full of all outstanding warrants 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 the date of the original
issuance.
</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 the Financial Accounting
Standards Board (&#147;FASB&#148;) Statement No.&nbsp;123,
Accounting for Stock-Based Compensation
(&#147;SFAS&nbsp;123&#148;), as amended, the Company accounts
for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No.&nbsp;25, Accounting for
Stock Issued to Employees (&#147;APB&nbsp;25&#148;), and related
interpretations, in accounting for its stock-based compensation
plans. Under APB&nbsp;25, when the exercise price of the
Company&#146;s employee stock options equals or exceeds the
estimated fair value of the underlying stock on the date of
grant, no compensation expense is recorded.
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the granting of employee stock
options in 2003 and for the nine months ended September&nbsp;30,
2004, the Company recorded deferred compensation of
approximately $156,000 and $8,847,000, respectively. Deferred
compensation is being amortized over the vesting period of the
options resulting in non-cash stock-based compensation expense
of approximately $4,000 and $461,000 for the nine months ended
September&nbsp;30, 2003 and 2004, respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pro forma information regarding net loss and net
loss per share has been determined as if the Company had
accounted for its employee stock options under the fair value
method proscribed by SFAS&nbsp;123. The resulting effect on pro
forma net loss disclosed is not likely to be representative of
the effects of loss on a pro forma basis in future years due to
additional grants and years of vesting in subsequent years. Pro
forma compensation related to stock option grants is expensed
over their respective vesting periods.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Had compensation cost for options granted under
the Company&#146;s stock option plan been determined based on
the fair value at the grant dates for the awards under a method
prescribed by SFAS&nbsp;123, the Company&#146;s net loss would
have been adjusted to the following pro forma amounts:
</FONT>

<CENTER>
<TABLE width="80%" 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="7"></TD>
</TR>

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(Unaudited)</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">Net loss, as reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,058,754</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,191,100</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">Add: Noncash employee compensation as reported
    </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">3,551</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">437,390</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">Deduct: Stock-based employee compensation expense
    under the fair value based method for all awards, net of tax
    </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">(144,765</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">(655,177</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>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss, 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">(13,199,968</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">(13,408,887</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>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per share, as reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.10</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.71</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>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted loss per share, SFAS&nbsp;123
    pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.16</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.74</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>

<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 net loss
    per share (Note&nbsp;1) SFAS&nbsp;123, pro forma
    </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 align="right" valign="bottom" nowrap><FONT size="2">(0.10</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT 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 fair values of stock options granted to
employees for the nine months ended September&nbsp;30, 2003 and
2004 were estimated on the respective dates of grant using the
minimum value option-pricing model with the following
weighted-average assumptions:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="79%"><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>
</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">Nine Months</FONT></B></TD>
</TR>

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

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(Unaudited)</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">Risk-free interest 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">4</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</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">Expected life (in years)
    </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</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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</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">Dividend yield
    </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>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fair value
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.99</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.59</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has also granted stock options to
purchase stock to consultants, advisors, and other vendors. The
Company accounts for stock awards issued to such nonemployees in
accordance with the provisions of SFAS&nbsp;123 and Emerging
Issues Task Force (&#147;EITF&#148;) Issue No.&nbsp;96-18,
Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods
or Services (&#147;Issue No.&nbsp;96-18&#148;). Under
SFAS&nbsp;123 and Issue No.&nbsp;96-18, stock awards to
</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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">nonemployees are accounted for at their
respective fair values using the Black-Scholes option-pricing
model unless a more readily determinable fair value is
available. The fair value of options granted to nonemployees is
periodically remeasured as the underlying options vest.
</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">Recently Issued Accounting
    Standards</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In January 2003, the FASB issued Interpretation
No.&nbsp;46 (&#147;FIN&nbsp;46&#148;), <I>Consolidation of
Variable Interest Entities</I>, which addresses consolidation of
variable interest entities (&#147;VIEs&#148;). FIN&nbsp;46
requires a VIE to be consolidated by a parent company if that
company is subject to a majority of the risk of loss from the
variable interest entity&#146;s activities or entitled to
receive a majority of the entity&#146;s residual returns or
both. A VIE is a corporation, partnership, trust or any other
legal structure used for business purposes that either does not
have equity investors with voting rights or has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. The consolidation requirements
of FIN&nbsp;46 apply immediately to VIEs created after
January&nbsp;31, 2003. For entities created prior to
February&nbsp;1, 2003, the effective date of these requirements
has been deferred so as not to apply until the first period
ending after December&nbsp;15, 2004. The adoption of the
provisions applicable to special purpose entities
(&#147;SPEs&#148;) and all other VIEs obtained after
January&nbsp;31, 2003 had no impact on the Company&#146;s
financial statements. The Company is currently evaluating the
impact of adopting FIN&nbsp;46-R applicable to non-SPEs created
prior to February&nbsp;1, 2003, but does not expect a material
impact on its financial position, results of operations or cash
flows.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In May 2003, the FASB issued Statement of
Financial Accounting Standards No.&nbsp;150, <I>Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity.</I> (&#147;SFAS&nbsp;150&#148;) This
statement establishes standards for classifying and measuring as
liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. The scope of this pronouncement includes
mandatorily redeemable equity instruments. Application to
pre-existing instruments should be recognized as the cumulative
effect of a change in accounting principle (application by
retroactive restatement is precluded). Exceptions to the
transition requirements were provided for mandatorily redeemable
instruments of non-public companies. Subsequent to the issuance
of SFAS&nbsp;150, the FASB issued FSP 150-3, which further
deferred the transition requirements for nonpublic companies
that also are not SEC registrants for instruments that are
mandatorily redeemable on fixed dates that are for fixed
amounts. The classification, measurement, and disclosure
provisions of SFAS&nbsp;150 are effective for fiscal periods
beginning after December&nbsp;15, 2004. The adoption of this
statement is not expected to impact the classification of the
Company&#146;s convertible preferred stock.
</FONT>

<P align="left">
<B><FONT size="2">2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Acquisition of
PowderJect Technologies, Inc.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On March&nbsp;22, 2002, the Company acquired all
of the outstanding shares of PowderJect Technologies, Inc.
(&#147;PowderJect&#148;), a development stage company, for a
total purchase price of approximately $9.9&nbsp;million. This
purchase price included 6,166,154&nbsp;shares of the
Company&#146;s Series&nbsp;B convertible preferred stock,
1,526,154&nbsp;shares of common stock, cash consideration of
$718,150 for a minority interest&#146;s share in the acquired
company, acquisition related costs of $723,879 and assumed
liabilities of $192,458. The Series&nbsp;B convertible preferred
stock was valued based on the arm&#146;s length Series&nbsp;B
financing completed during that year and the common stock
consideration was valued using the Company&#146;s estimated fair
value used for option grants made to employees. PowderJect was
in the business of developing drug applications for a patented,
needle-free delivery system developed by its parent company,
PowderJect Pharmaceuticals plc. The Company also entered into a
supply agreement with PowderJect Technologies Limited
(subsequently purchased by Chiron Corporation) for
microcylinders. The microcylinders are a key component of the
product candidate, ALGRX&nbsp;3268, and PowderJect Technologies
Limited is the sole supplier. No other supplier has been
identified by the Company.
</FONT>

<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">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The acquisition was completed to provide the
Company with the ability to exploit the opportunities associated
with its in-process lidocaine technology, as well as gain access
to the patented drug delivery technology. The purchase price was
determined in accordance with Statement of Financial Accounting
Standards No.&nbsp;141, <I>Business Combinations
</I>(&#147;SFAS&nbsp;141&#148;), and Statement of Financial
Accounting Standards No.&nbsp;142, <I>Goodwill and Other
Intangible Assets</I> (&#147;SFAS&nbsp;142&#148;). A summary of
the determination of the purchase price during 2002 was as
follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="84%"><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 valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">6,166,154&nbsp;shares&nbsp;&#151; Series&nbsp;B
    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">8,016,000</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">1,526,154&nbsp;shares&nbsp;&#151; 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">228,923</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 for minority interest buyout
    </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">718,150</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 related 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">723,879</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">Assumed 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">192,458</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>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total purchase price
    </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">9,879,410</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The acquisition was accounted for as an
acquisition of assets rather than as a business combination as
PowderJect was a development stage company that had not
commenced its planned principal operations. PowderJect lacked
the necessary elements of a business because it did not have
completed products and, therefore, no ability to access
customers. The PowderJect operating results have been included
in the Company&#146;s consolidated results of operations since
March&nbsp;23, 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company allocated the purchase price in
accordance with the provisions of SFAS&nbsp;142 related to the
purchase of a group of assets. SFAS&nbsp;142 provides that the
cost of a group of assets acquired in a transaction other than a
business combination shall be allocated to the individual assets
acquired based on their relative fair values and shall not give
rise to goodwill.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In accordance with the provisions of
SFAS&nbsp;142, all identifiable intangible assets and acquired
in-process research and development were assigned a portion of
the purchase price based on their relative fair values. To this
end, a third party valuation was used to assist management in
determining the fair value of the identifiable assets and
acquired in-process research and development. Based on this
valuation, the Company allocated the total consideration as
follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="84%"><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 valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Acquired in-process research and development and
    other
    </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">5,716,247</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">Tangible net 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">3,714,864</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">Acquired workforce
    </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">448,299</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>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total purchase price
    </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">9,879,410</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The income approach was used to estimate the fair
value of the acquired in-process research and development based
on projected cash flows, assuming a 30% discount rate. This
discount rate is a significant assumption and is based on the
Company&#146;s estimated weighted average cost of capital taking
into account the risks associated with the projects acquired.
The projected cash flows from such projects were based on
estimates of revenues and operating profits related to such
projects considering the stage of development of each potential
product acquired, the time and resources needed to complete each
product, the estimated life of each potential commercialized
product and associated risks which included the inherent
difficulties and uncertainties in developing a drug compound,
obtaining FDA and other regulatory approvals, and risks related
to the viability of, and potential alternative treatments in,
any future target markets. Approximately $4.5&nbsp;million of
the purchase price was allocated to acquired in-process research
and development due to PowderJect&#146;s incomplete research and
development programs that had not yet reached technological
feasibility as of March 2002 and had no alternative future use
as of that date.
</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>

<DIV align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The relief from royalty approach was also used to
determine the estimated fair value of the patent license based
on its favorable royalty rate. In light of the number of years
required to achieve product commercialization, the associated
technology risk, and therefore the risk that the asset value
will not be realized, the Company has recorded, as an expense,
the value of the favorable patent license, which is
$1.2&nbsp;million, similar to the treatment afforded the
acquired in-process research and development.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The cost approach was used to determine the value
of the acquired workforce. The value allocated to the acquired
workforce is attributable to 31 employees hired by the Company
from PowderJect following the asset acquisition, which
eliminated the need to hire replacement employees. The value of
the acquired workforce was determined by estimating the cost of
assembling a new workforce, including costs of salaries,
benefits, training, and recruiting.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Amortization expense was $46,700 and $0 for the
nine months ended September&nbsp;30, 2003 and 2004,
respectively, and $448,299 from March&nbsp;6, 2001
(inception)&nbsp;to September&nbsp;30, 2004. Included in the
2003 amortization was $227,461 related to the acquired workforce
that was written off in connection with the restructuring
described in Note&nbsp;3 during the first quarter of 2003 and,
accordingly, the net intangible assets as of December&nbsp;31,
2003 and September&nbsp;30, 2004 was $0.
</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">Restructuring</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In March 2003, the Company announced a
reorganization plan intended to reduce operating costs and
reduced its staff by 28 employees (approximately 61% of total
employees as of the date of reorganization); however, no
research projects were discontinued. The reorganization resulted
in an impairment of the assembled workforce intangible asset of
$227,461 recorded as accelerated amortization expense during
2003. This expense is classified under research and development
expenses for the nine months ended September&nbsp;30, 2003. In
addition, the vesting of certain options held by such employees
was accelerated. The Company recorded a charge of $66,240
related to this acceleration of vesting. The total restructuring
cost of $1,122,444 was charged to research and development
expense.
</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">Available for Sale Investments</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following is a summary of available for sale
investments as of September&nbsp;30, 2004:
</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="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="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>
    <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="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" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></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">Unrealized</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Unrealized</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Cost</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gains</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Losses</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fair Value</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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Maturities within one year:
    </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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Commercial paper
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,090,858</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,062</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,088,796</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">U.S.&nbsp;Treasury Notes
    </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">13,977,481</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">(12,587</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">13,964,894</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>

</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="right" valign="bottom" nowrap><FONT size="2">20,068,339</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">(14,649</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">20,053,690</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">Maturities between one to five years:
    </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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">U.S.&nbsp;Treasury Notes
    </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">12,655,334</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">(11,534</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">12,643,800</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>

</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
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,723,673</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(26,183</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,697,490</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>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-31
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<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="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">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>
    <TD></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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued patent costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">294,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">366,000</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">Accrued research and development 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">341,158</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,373,095</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 legal
    </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">141,356</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">Accrued vacation
    </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">130,611</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">165,159</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">295,328</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">408,004</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>
    <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">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,202,453</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,312,258</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">6.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Commitments</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">Leases</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In May 2004, the Company entered into a lease for
office space in Secaucus, New Jersey which is the Company&#146;s
new headquarters. The entire commitment is $1,188,706 for the
five year lease. The future minimum payments for all
noncancelable operating leases as of September&nbsp;30, 2004 are
as follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="84%"><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 valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Remainder of 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">222,300</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">299,039</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">245,939</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">245,939</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">2008
    </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">245,939</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">Thereafter
    </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">122,970</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>

</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">1,382,126</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Rent expense under operating leases was $498,094,
$527,762 and $1,871,762, for the nine months ended
September&nbsp;30, 2003 and 2004 and for the period from
March&nbsp;6, 2001 (inception)&nbsp;to 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><B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Other Commitments</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the Company&#146;s license agreements, the
Company could be required to pay up to a total of
$6.2&nbsp;million in milestone payments through product
approval, in addition to sales milestones and royalties on
commercial sales if any occur. The Company has no material
commitments for capital expenditures.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under our license with PowderMed Limited we are
obligated and have spent $1,000,000 on research and development
associated with the licensed technology during the period
July&nbsp;7, 2003 to July&nbsp;7, 2005. We are also obligated to
spend an additional $1,000,000 on research and development for
every 12&nbsp;month period from July&nbsp;7, 2005 to
July&nbsp;7, 2008.
</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">7.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Stock Option Plan</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On March&nbsp;30, 2001, the Company&#146;s Board
of Directors and shareholders approved the Company&#146;s 2001
Equity Incentive Plan (the &#147;2001 Plan&#148;). The 2001 Plan
provides for the granting of options to purchase common stock in
the Company to employees and consultants at a price not less
than the
</FONT>

<P align="center"><FONT size="2">F-32
</FONT>

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

<DIV align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">estimated fair value at the date of grant, or
110% of the estimated fair value at the date of grant if the
optionee is a 10% owner of the Company. Under the provisions of
the 2001 Plan, no option will have a term in excess of ten years.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the granting of employee stock
options in 2004, the Company recorded deferred compensation of
approximately $8,845,000. Deferred compensation is being
amortized over the vesting period of the options resulting in
non-cash compensation expense of approximately $4,000 and
$437,000 for the nine months ended September&nbsp;30, 2003 and
2004, respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The 2001 Plan is intended to encourage ownership
of stock by employees and consultants of the Company and to
provide additional incentives for them to promote the success of
the Company&#146;s business. The Board of Directors is
responsible for determining the individuals to receive option
grants, the number of options each individual will receive, the
option price per share and the exercise period of each option.
Options granted pursuant to the 2001 Plan generally vest over
four years and have been granted at the estimated fair value of
the Company&#146;s common stock, as determined by the Board of
Directors, as of each grant date. The 2001 Plan allows the
option holders to early exercise their options which are then
subject to repurchase by the Company at the original exercise
price.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes stock option
activity for the Company.
</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="37%"><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="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="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="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Options Outstanding</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" 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">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></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">Available for</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</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">Average</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Grant</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">Per Share</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>
    <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">Balance at March&nbsp;6, 2001 (inception)
    </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 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 align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares authorized
    </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">2,716,666</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">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">(726,166</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">726,166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.10-1.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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>
</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">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">&#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">(238,000</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">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">0.10</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Balance 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">1,990,500</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">488,166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.10-1.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Shares authorized
    </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">5,200,308</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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>
</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">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">(6,748,477</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">6,748,477</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.10-0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.15</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">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">&#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">(101,500</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">0.10</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">0.10</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">Forfeited
    </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">920,041</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(920,041</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">0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.15</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Balance 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">1,362,372</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,215,102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.10-1.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.18</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">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">(192,000</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">192,000</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">0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.15</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">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">&#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">(47,250</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">0.10-0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.11</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">Forfeited
    </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">1,090,221</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,090,221</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">0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.15</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Balance 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">2,260,593</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,269,631</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.10-1.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.18</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">Shares authorized
    </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">16,051,601</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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>
</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">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">(17,390,085</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">17,390,085</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">0.10-0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.10</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">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">&#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">(24,288</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">0.10-0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.15</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">Forfeited
    </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">60,288</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(60,288</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">0.10-0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.13</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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">Balance at September&nbsp;30, 2004 (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">982,397</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,575,140</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">0.10-1.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.12</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><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&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-33
</FONT>

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

<DIV align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes information about
vested stock options outstanding:
</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">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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Vested 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">2,038,728</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,354,560</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 exercise price
    </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">$0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">$0.15</FONT></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 September&nbsp;30, 2004:
</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="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>
    <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="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><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" align="center" nowrap><B><FONT size="1">Weighted Average</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">Remaining</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Exercise Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options Vested</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Contractual Life</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>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$0.10
    </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">17,479,023</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,378,963</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.1</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">$0.15
    </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">4,879,451</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,883,375</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.7</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">$1.00
    </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">216,666</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">92,222</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">7.0</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><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="right" valign="bottom" nowrap><FONT size="2">22,575,140</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">4,354,560</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.8</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><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 Company also grants options to purchase
common stock to consultants, advisors, and others (collectively,
the &#147;nonemployees&#148;). The Company has granted options
to purchase 474,918&nbsp;shares of common stock to nonemployees
during the period from March&nbsp;6, 2001 (inception)&nbsp;to
September&nbsp;30, 2004. Of these options, 288,252 vest over
time periods ranging from immediate vesting to 24&nbsp;months
and 186,666 have performance-based vesting criteria. The
Black-Scholes option-pricing model is used to calculate the fair
values of the stock options to nonemployees as the vesting
periods of respective awards lapse. The Company recognized
stock-based compensation expense of approximately $66,000 and
$9,000 and $65,971 during the nine months ended
September&nbsp;30, 2003 and 2004, respectively, related to the
fair value of the vested portions of non-employee stock option
awards. Additional stock-based compensation expense will be
recorded in future periods for the remaining unvested portion of
the non-employee stock option awards.
</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">Income Taxes</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2003 and
September&nbsp;30, 2004, the Company had deferred tax assets of
approximately $14,425,000 and $19,389,000, respectively.
Realization of the deferred tax assets is dependent upon the
Company generating future taxable income, if any, the amount and
timing of which are uncertain. Accordingly, the deferred tax
assets have been fully offset by valuation allowances at
December&nbsp;31, 2003 and September&nbsp;30, 2004. The net
valuation allowance increased by approximately $4,964,000 for
the nine months ended September&nbsp;30, 2004. Deferred tax
assets primarily relate to net operating loss and tax credit
carryforwards.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The
</FONT>

<P align="center"><FONT size="2">F-34
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always">&nbsp;</H5><P>

<DIV align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">Company&#146;s deferred tax assets relate
primarily to net operating loss carryforwards. Significant
components of the Company&#146;s deferred tax assets 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="61%"><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 colspan="2"></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 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">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>
</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>
</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 align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,472,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,900,000</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">Research credits
    </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">657,000</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">470,000</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">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">1,232,000</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">777,000</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 temporary differences
    </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">1,242,000</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total gross 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">14,425,000</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">19,389,000</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">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">(14,425,000</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">(19,389,000</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net deferred tax assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A reconciliation of the statutory tax rates and
the effective tax rates for the nine months ended
September&nbsp;30, 2002 and 2003 is as follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="81%"><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>
</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>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(Unaudited)</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">Statutory 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</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</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 and local income taxes (net of federal tax
    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">(6</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</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">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">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">40</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>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Effective tax rates
    </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</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</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">As of September&nbsp;30, 2004, the Company had
federal net operating loss carryforwards of approximately
$42,000,000. The Company also had federal research and
development tax credit carryforwards of approximately $470,000.
The federal net operating loss and tax credit carryforwards will
expire at various dates beginning in 2022, if not utilized.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Utilization of the net operating loss
carryforwards and credits may be subject to a substantial annual
limitation due to the ownership change limitations provided by
the Internal Revenue Code of 1986, as amended, and similar state
provisions. The Company has not performed a detailed analysis to
determine whether an ownership change under Section&nbsp;382 of
the Internal Revenue Code has occurred. The effect of an
ownership change would be the imposition of an annual limitation
on the use of net operating loss carryforwards attributable to
periods before the change.
</FONT>

<P align="center"><FONT size="2">F-35
</FONT>

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

<DIV align="center">
<B><FONT size="2">AlgoRx Pharmaceuticals, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(a development stage company)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<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">Loss Per Share</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth the computation of
basic and diluted net loss attributable to common stockholders
per share.
</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="61%"><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 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">Nine Months Ended September&nbsp;30,</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" 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>
</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">(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">Numerator for basic and diluted net loss per
    share&nbsp;&#151; net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,058,754</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,191,100</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>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Denominator:
    </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">Denominator for basic and dilutive net loss per
    share&#150;weighted&nbsp;&#151; average 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">2,559,089</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,695,820</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><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Basic and diluted net loss per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.10</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.71</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>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table shows dilutive common share
equivalents outstanding, which are not included in the above
historical calculations, as the effect of their inclusion is
anti-dilutive during each period. Restricted stock that is not
yet vested is included as a dilutive common share equivalent
because the Company considers such securities as the equivalent
of options.
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="70%"><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="7"></TD>
</TR>

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

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">(Unaudited)</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">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">27,008,462</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">130,546,942</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">Restricted 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">468,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">281,250</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 notes
    </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">16,540,084</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></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">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">&#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">692,658</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">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">5,269,631</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,575,140</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>
    <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 align="right" valign="bottom" nowrap><FONT size="2">49,286,927</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">154,095,990</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="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">10.</FONT></B></TD>
    <TD>
    <B><FONT size="2">Subsequent Events</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">License Agreement</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In October 2004, the Company licensed the
intellectual property underlying ALGRX 1207 from Bridge Pharma,
Inc. In consideration for the license, the Company paid Bridge
Pharma, Inc. an up-front license fee consisting of a cash
payment and shares of its common stock. Such amounts were
expensed during the fourth quarter of 2004. The Company is also
obligated to pay additional fees to Bridge Pharma, Inc. if it
achieves certain clinical, regulatory and commercial milestones.
</FONT>

<P align="center"><FONT size="2">F-36
</FONT>

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

<P align="center">
<IMG src="y52134b5213400.gif" alt="(ALGORX LOGO)">

<DIV>&nbsp;</DIV>

<!-- 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 all expenses,
other than the underwriting discounts and commissions, payable
by the registrant in connection with the sale of the common
stock being registered. All the amounts shown are estimates
except the registration fee and the NASD filing fee.
</FONT>

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

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="83%"><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" 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>
</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">9,503</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</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 initial listing 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">*</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">Blue sky qualification fees and 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">*</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">Printing and engraving 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">*</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">Legal fees and 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">*</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">Accounting fees and 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">*</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 align="right" valign="bottom" nowrap><FONT size="2">*</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 align="right" valign="bottom" nowrap><FONT size="2">*</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>

</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 align="right" valign="bottom" nowrap><FONT size="2">*</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>

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

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

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

<TR valign="top">
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">To be supplied by amendment.
    </FONT></TD>
</TR>

</TABLE>

<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 Officers and
    Directors</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 authorizes a court to award, or a
corporation&#146;s board of directors to grant, indemnity to
directors and officers in terms sufficiently broad to permit
such indemnification under certain circumstances for liabilities
(including reimbursement for expenses incurred) arising under
the Securities Act of 1933, as amended (the &#147;Securities
Act&#148;).
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As permitted by the Delaware General Corporation
Law, our amended and restated certificate of incorporation
includes a provision that eliminates the personal liability of
our directors for monetary damages for breach of fiduciary duty
as a director, except for liability (1)&nbsp;for any breach of
the director&#146;s duty of loyalty to us or our stockholders,
(2)&nbsp;for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law,
(3)&nbsp;under section&nbsp;174 of the Delaware General
Corporation Law (regarding unlawful dividends and stock
purchases) or (4)&nbsp;for any transaction from which the
director derived an improper personal benefit.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As permitted by the Delaware General Corporation
Law, our amended and restated bylaws provide that (1)&nbsp;we
are required to indemnify our directors and officers to the
fullest extent permitted by the Delaware General Corporation
Law, subject to certain very limited exceptions, (2)&nbsp;we may
indemnify our other employees and agents as set forth in the
Delaware General Corporation Law, (3)&nbsp;we are required to
advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions and (4)&nbsp;the
rights conferred in the amended and restated bylaws are not
exclusive.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We also intend to enter into indemnification
agreements with each of our directors and executive officers to
give such directors and officers additional contractual
assurances regarding the scope of the indemnification set forth
in our amended and restated certificate of incorporation and to
provide additional procedural protections. We also intend to
enter into indemnification agreements with any new directors and
executive officers in the future.
</FONT>

<P align="center"><FONT size="2">II-1
</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">The Underwriting Agreement to be filed as
Exhibit&nbsp;1.1 to this Registration Statement will provide for
indemnification by the underwriters of our officers, directors
and controlling persons against certain liabilities, including
liabilities arising under the Securities Act, in connection with
matters specifically provided in writing by the underwriters for
inclusion in the Registration Statement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The indemnification provisions in our restated
certificate of incorporation, restated bylaws and the
indemnification agreements to be entered into between us and
each of our directors and executive officers may be sufficiently
broad to permit indemnification of our directors and executive
officers for liabilities arising under the Securities Act.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We also intend to maintain director and officer
liability insurance, if available on reasonable terms, to insure
our directors and officers against the cost of defense,
settlement or payment of a judgment under certain circumstances.
</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 March&nbsp;6, 2001, the registrant has sold
and issued the following unregistered securities:
</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;Since March&nbsp;6, 2001, the registrant
    granted stock options and stock awards to employees, directors
    and consultants under its 2001 Equity Incentive Plan covering an
    aggregate of 25,056,728&nbsp;shares of common stock, at exercise
    prices ranging from $0.10 to $1.00&nbsp;per share. Of these
    options, an aggregate of 2,070,550 were canceled without being
    exercised.
    </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;Since March&nbsp;6, 2001, the registrant
    sold an aggregate of 411,038&nbsp;shares of its common stock to
    employees, directors and consultants for cash consideration in
    the aggregate amount of $43,180 upon the exercise of stock
    options under its 2001 Equity Incentive Plan.
    </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">(3)&nbsp;In April 2001 and September 2001, the
    registrant sold a total of 9,150,000 of Series&nbsp;A preferred
    stock to nine purchasers at $1.00&nbsp;per share, for an
    aggregate purchase price of $9,150,000. Shares of Series&nbsp;A
    preferred stock were originally convertible into shares of
    common stock at the rate of one share of common stock for each
    share of Series&nbsp;A preferred stock owned. As a result of
    subsequent antidilution adjustments, the shares of Series&nbsp;A
    preferred stock are convertible at the rate of 1.44&nbsp;shares
    of common stock for each share of Series&nbsp;A preferred stock.
    </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">(4)&nbsp;In March 2002, the registrant sold
    11,692,308&nbsp;shares of Series&nbsp;B preferred stock to seven
    purchasers, at $1.30&nbsp;per share, for an aggregate purchase
    price of $15,200,000. Shares of Series&nbsp;B preferred stock
    were originally convertible into shares of common stock at the
    rate of one share of common stock for each share of
    Series&nbsp;B preferred stock owned. As a result of subsequent
    anti-dilution adjustments, the shares of Series&nbsp;B preferred
    stock are convertible at the rate of 1.70&nbsp;shares of common
    stock for each share of Series&nbsp;B preferred stock.
    </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">(5)&nbsp;In April 2003, the registrant issued
    convertible promissory notes in the aggregate principal amount
    of $9,800,000 convertible into Series&nbsp;C preferred stock to
    seven investors in connection with a bridge loan. The
    convertible promissory notes converted at the rate of
    $0.5925&nbsp;per share.
    </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">(6)&nbsp;In February 2004, the registrant sold
    109,704,634&nbsp;shares of Series&nbsp;C preferred stock to
    45&nbsp;purchasers, at $0.5925&nbsp;per share, for an aggregate
    purchase price of $64,999,996. Shares of Series&nbsp;C preferred
    stock are convertible into shares of common stock at the rate of
    one share of common stock for each share of Series&nbsp;C
    preferred stock owned.
    </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">(7)&nbsp;In February 2004, the registrant issued
    a warrant to purchase&nbsp;692,658&nbsp;shares of Series&nbsp;C
    preferred stock to an investor for financial services rendered
    total registrant in connection with its Series&nbsp;C Preferred
    Stock financing. The warrant has an exercise price of
    $0.5925&nbsp;per share. The warrant is currently exercisable in
    whole or in part and shall terminate on the earlier of
    February&nbsp;19, 2009 or the consummation of our initial public
    offering. The warrant shall terminate unless exercised prior to
    the closing of this offering.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">II-2
</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="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(8)&nbsp;In October 2004, the registrant issued
    1,600,000&nbsp;shares of common stock to one party in connection
    with a licensing transaction.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The registrant claimed exemption from
registration under the Securities Act for the sales and
issuances of securities in the transactions described in
paragraphs&nbsp;(1)&nbsp;and (2)&nbsp;above under
Section&nbsp;4(2) under the Securities Act in that such sales
and issuances did not involve a public offering or under
Rule&nbsp;701 promulgated under the Securities Act, in that they
were offered and sold either pursuant to written compensatory
plans or pursuant to a written contract relating to
compensation, as provided by Rule&nbsp;701.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The registrant claimed exemption from
registration under the Securities Act for the sale and issuance
of securities in the transactions described in
paragraphs&nbsp;(3)&nbsp;through (7)&nbsp;by virtue of
Section&nbsp;4(2) and/or Regulation&nbsp;D promulgated
thereunder as transactions not involving any public offering.
All of the purchasers of unregistered securities for which the
registrant relied on Regulation&nbsp;D and/or Section&nbsp;4(2)
represented that they were accredited investors as defined under
the Securities Act. The registrant claimed such exemption on the
basis that (a)&nbsp;the purchasers in each case represented that
they intended to acquire the securities for investment only and
not with a view to the distribution thereof and that they either
received adequate information about the registrant or had
access, through employment or other relationships, to such
information and (b)&nbsp;appropriate legends were affixed to the
stock certificates issued in such transactions.
</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;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="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>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="81%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit No.</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">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">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">Third Amended and Restated Certificate of
    Incorporation, as currently in effect
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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 Amended Restated Certificate of
    Incorporation (to be filed in connection with the closing of
    this offering)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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">Bylaws, as currently in effect
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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 Amended and Restated Bylaws (to be
    effective upon the closing of this offering)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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">Second Amended and Restated Investor Rights
    Agreement, entered into as of February&nbsp;17, 2004, by and
    among AlgoRx Pharmaceuticals, Inc. and certain investors named
    therein
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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">Investor Rights Agreement entered into as of
    October&nbsp;28, 2004, by and between AlgoRx Pharmaceuticals,
    Inc. and Bridge Pharma, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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">Specimen Common Stock Certificate
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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 Heller Ehrman White&nbsp;&#38;
    McAuliffe 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">2001 Equity Incentive Plan, as amended and
    restated
    </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">Form of Stock Option Grant Notice under AlgoRx
    Pharmaceuticals, Inc. 2001 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">Form of Stock Option Agreement for Employee under
    AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive 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 align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Stock Option Agreement for Senior
    Management under AlgoRx Pharmaceuticals, Inc. 2001 Equity
    Incentive Plan
    </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 align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Stock Option Agreement for Senior
    Management under AlgoRx Pharmaceuticals, Inc. 2001 Equity
    Incentive Plan with acceleration provisions
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Early Exercise Stock Purchase Agreement
    under AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan
    </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">Lease Agreement dated August&nbsp;27, 1997, by
    and between AlgoRx Technologies, Inc. (formerly PowderJect
    Technologies, Inc.) and John Arrillaga, or his Successor
    Trustee, UTA dated 07/20/77 (the John Arrillaga Survivor&#146;s
    Trust) as amended and Richard T. Peery, Trustee, or his
    Successor Trustee, UTA 7/20/77 (Richard T. Peery Separate
    Property Trust) as amended
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

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

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<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="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>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="81%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit No.</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">10.9</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 dated May&nbsp;10, 2004, between AlgoRx
    Pharmaceuticals, Inc. and 500 Plaza Drive Corp.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.10</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">License Agreement entered into as of
    August&nbsp;28, 2001, among AlgoRx Pharmaceuticals, Inc. and
    James N. Campbell,&nbsp;M.D., Richard Meyer, M.S. and Marco
    Pappagallo,&nbsp;M.D.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.11</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">License Agreement entered into as of
    August&nbsp;28, 2001, between AlgoRx Pharmaceuticals, Inc. and
    Marco Pappagallo,&nbsp;M.D.
    </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 align="left" valign="top" nowrap><B><FONT size="2">&#134;</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">License Agreement entered into as of
    March&nbsp;22, 2002, by and between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
    </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 align="left" valign="top" nowrap><B><FONT size="2">&#134;</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">First Amendment to License Agreement entered into
    as of July&nbsp;7, 2003, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
    </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">Assignment, Assumption and Consent Agreement made
    as of May&nbsp;14, 2004 by and among PowderMed Limited,
    PowderJect Research Limited, PowderJect Technologies Limited,
    AlgoRx Pharmaceuticals, Inc. and AlgoRx Technologies, Inc.
    </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">Letter Agreement entered into as of
    September&nbsp;30, 2004, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.16</FONT></TD>
    <TD align="left" valign="top" nowrap><B><FONT size="2">&#134;</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Supply Agreement entered into as of
    March&nbsp;22, 2002, between AlgoRx Pharmaceuticals, Inc. and
    PowderJect Research Ltd.
    </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 align="left" valign="top" nowrap><B><FONT size="2">&#134;</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">First Amendment to Supply Agreement entered into
    as of July&nbsp;7, 2003, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Technologies Limited.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.18</FONT></TD>
    <TD align="left" valign="top" nowrap><B><FONT size="2">&#134;</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Collaboration, Development and License Agreement
    made as of October&nbsp;28, 2004, between AlgoRx
    Pharmaceuticals, Inc. and Bridge Pharma, Inc.
    </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 Ernst&nbsp;&#38; Young LLP,
    independent auditors
    </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 Heller Ehrman White&nbsp;&#38;
    McAuliffe 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="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">To be filed by Amendment.
    </FONT></TD>
</TR>

</TABLE>
<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">**&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Indicates a management contract or compensatory
    plan.
    </FONT></TD>
</TR>

</TABLE>
<P>

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

<TR>
    <TD width="1%"></TD>
    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#134;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Application has been made to the Securities and
    Exchange Commission to seek confidential treatment of certain
    provisions of this exhibit under Rule&nbsp;406 of the Securities
    Act of 1933. Omitted material for which confidential treatment
    has been requested has been filed separately with the Securities
    and Exchange Commission.
    </FONT></TD>
</TR>

</TABLE>

<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 described in Item&nbsp;14
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 of 1933 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 of 1933 and will be governed by
the final adjudication of such issue.
</FONT>

<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>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The undersigned registrant 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 the 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,&nbsp;and
    </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 <I>bona fide </I>offering
    thereof.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">II-5
</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">SIGNATURES</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to the requirements of the Securities
Act of 1933, the registrant has caused this Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Secaucus, State of New
Jersey, on the 24th day of November, 2004.
</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">ALGORX PHARMACEUTICALS, INC.
    </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/ RONALD M. BURCH
    </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">Ronald M. Burch,&nbsp;M.D.,&nbsp;Ph.D.
    </FONT></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="center">
    <I><FONT size="2">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">We, the undersigned directors and/or officers of
AlgoRx Pharmaceuticals, Inc. (the &#147;Registrant&#148;),
hereby severally constitute and appoint Ronald M. Burch, Chief
Executive Officer, and Jeffery A. Rona, Vice President, Finance
and Chief Financial Officer, and each of them individually, with
full powers of substitution and resubstitution, our true and
lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below,
the Registration Statement on Form&nbsp;S-1 filed with the
Securities and Exchange Commission, and any and all amendments
to said Registration Statement (including post-effective
amendments), and any registration statement filed pursuant to
Rule&nbsp;462(b) under the Securities Act of 1933 in connection
with the registration under the Securities Act of 1933 of the
Registrant&#146;s equity securities, and to file or cause to be
filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys, and each of them, full
power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming
all that said attorneys, and each of them, or their substitute
or substitutes, shall do or cause to be done by virtue of this
Power of Attorney.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to the requirements of the Securities
Act of 1933, this Registration Statement has been signed below
by the following persons in the capacities and on the dates
indicated.
</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="38%"><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="14%"><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/ RONALD M. BURCH<BR>
    <HR size="1" noshade>Ronald M.
    Burch,&nbsp;M.D.,&nbsp;Ph.D.&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Chief Executive Officer&nbsp;&#38; Director<BR>
     <I>(Principal Executive Officer)</I>
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">November&nbsp;24, 2004
    </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/ JEFFREY A. RONA<BR>
    <HR size="1" noshade>Jeffrey A. Rona
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Vice President, Finance&nbsp;&#38; Chief
    Financial Officer<BR>
     <I>(Principal Financial&nbsp;&#38;<BR>
    Accounting Officer)</I>
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">November&nbsp;24, 2004
    </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/ CHARLES M. COHEN<BR>
    <HR size="1" noshade>Charles M. Cohen, Ph.D
    </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="center" valign="top">
    <FONT size="2">November&nbsp;24, 2004
    </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/ ARNOLD L. ORONSKY<BR>
    <HR size="1" noshade>Arnold L. Oronsky, Ph.D
    </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="center" valign="top">
    <FONT size="2">November&nbsp;24, 2004
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

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

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<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="38%"><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="14%"><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/ RODNEY A. FERGUSON<BR>
    <HR size="1" noshade>Rodney A. Ferguson,&nbsp;J.D.,
    Ph.D.&nbsp;</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="center" valign="top">
    <FONT size="2">November&nbsp;24, 2004
    </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/ MICHAEL F. POWELL<BR>
    <HR size="1" noshade>Michael F. Powell,&nbsp;Ph.D.&nbsp;</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="center" valign="top">
    <FONT size="2">November&nbsp;24, 2004
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-7
</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">EXHIBIT INDEX</FONT></B>

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

<TR>
    <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>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="81%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit No.</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">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">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">Third Amended and Restated Certificate of
    Incorporation, as currently in effect
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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 Amended Restated Certificate of
    Incorporation (to be filed in connection with the closing of
    this offering)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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">Bylaws, as currently in effect
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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 Amended and Restated Bylaws (to be
    effective upon the closing of this offering)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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">Second Amended and Restated Investor Rights
    Agreement, entered into as of February&nbsp;17, 2004, by and
    among AlgoRx Pharmaceuticals, Inc. and certain investors named
    therein
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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">Investor Rights Agreement entered into as of
    October&nbsp;28, 2004, by and between AlgoRx Pharmaceuticals,
    Inc. and Bridge Pharma, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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">Specimen Common Stock Certificate
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">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 Heller Ehrman White&nbsp;&#38;
    McAuliffe 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">2001 Equity Incentive Plan, as amended and
    restated
    </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">Form of Stock Option Grant Notice under AlgoRx
    Pharmaceuticals, Inc. 2001 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">Form of Stock Option Agreement for Employee under
    AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive 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 align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Stock Option Agreement for Senior
    Management under AlgoRx Pharmaceuticals, Inc. 2001 Equity
    Incentive Plan
    </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 align="left" valign="top" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Stock Option Agreement for Senior
    Management under AlgoRx Pharmaceuticals, Inc. 2001 Equity
    Incentive Plan with acceleration provisions
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Form of Early Exercise Stock Purchase Agreement
    under AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan
    </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">Lease Agreement dated August&nbsp;27, 1997, by
    and between AlgoRx Technologies, Inc. (formerly PowderJect
    Technologies, Inc.) and John Arrillaga, or his Successor
    Trustee, UTA dated 07/20/77 (the John Arrillaga Survivor&#146;s
    Trust) as amended and Richard T. Peery, Trustee, or his
    Successor Trustee, UTA 7/20/77 (Richard T. Peery Separate
    Property Trust) as amended
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.9</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 dated May&nbsp;10, 2004, between AlgoRx
    Pharmaceuticals, Inc. and 500 Plaza Drive Corp.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.10</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">License Agreement entered into as of
    August&nbsp;28, 2001, among AlgoRx Pharmaceuticals, Inc. and
    James N. Campbell,&nbsp;M.D., Richard Meyer, M.S. and Marco
    Pappagallo,&nbsp;M.D.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.11</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">License Agreement entered into as of
    August&nbsp;28, 2001, between AlgoRx Pharmaceuticals, Inc. and
    Marco Pappagallo,&nbsp;M.D.
    </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 align="left" valign="top" nowrap><B><FONT size="2">&#134;</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">License Agreement entered into as of
    March&nbsp;22, 2002, by and between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
    </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 align="left" valign="top" nowrap><B><FONT size="2">&#134;</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">First Amendment to License Agreement entered into
    as of July&nbsp;7, 2003, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
    </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">Assignment, Assumption and Consent Agreement made
    as of May&nbsp;14, 2004, by and among PowderMed Limited,
    PowderJect Research Limited, PowderJect Technologies Limited,
    AlgoRx Pharmaceuticals, Inc. and AlgoRx Technologies, Inc.
    </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">Letter Agreement entered into as of
    September&nbsp;30, 2004, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.16</FONT></TD>
    <TD align="left" valign="top" nowrap><B><FONT size="2">&#134;</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Supply Agreement entered into as of
    March&nbsp;22, 2002, between AlgoRx Pharmaceuticals, Inc. and
    PowderJect Research Ltd.
    </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 align="left" valign="top" nowrap><B><FONT size="2">&#134;</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">First Amendment to Supply Agreement entered into
    as of July&nbsp;7, 2003, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Technologies Limited.
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.18</FONT></TD>
    <TD align="left" valign="top" nowrap><B><FONT size="2">&#134;</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Collaboration, Development and License Agreement
    made as of October&nbsp;28, 2004, between AlgoRx
    Pharmaceuticals, Inc. and Bridge Pharma, Inc.
    </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>
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    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exhibit No.</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Description</FONT></B></TD>
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    <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 Ernst&nbsp;&#38; Young LLP,
    independent auditors
    </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 Heller Ehrman White&nbsp;&#38;
    McAuliffe LLP (included in Exhibit&nbsp;5.1)
    </FONT></TD>
</TR>

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    <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)
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">To be filed by Amendment.
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    <TD><FONT size="2">**&nbsp;</FONT></TD>
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    <FONT size="2">Indicates a management contract or compensatory
    plan.
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    <TD><FONT size="2">&#134;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Application has been made to the Securities and
    Exchange Commission to seek confidential treatment of certain
    provisions of this exhibit under Rule&nbsp;406 of the Securities
    Act of 1933. Omitted material for which confidential treatment
    has been requested has been filed separately with the Securities
    and Exchange Commission.
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{"company-data": {"conformed-name": "ALGORX PHARMACEUTICALS INC", "cik": "0001139029", "irs-number": "000000000"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-120757", "film-number": "041166816"}, "business-address": {"street1": "500 PLAZA DRIVE", "street2": "2ND FLOOR", "city": "SECAUCUS", "state": "NJ", "zip": "07094", "phone": "201-325-6900"}, "mail-address": {"street1": "500 PLAZA DRIVE", "street2": "2ND FLOOR", "city": "SECAUCUS", "state": "NJ", "zip": "07094"}, "former-company": {"former-conformed-name": "NOCICEPTECH PHARMACEUTICALS INC", "date-changed": "20010423"}}
FORM S-1
As filed with the Securities and Exchange
Commission on November 24, 2004
Registration
No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AlgoRx Pharmaceuticals, Inc.
(Exact name of Registrant as specified in its
charter)
Delaware
2834
943392501
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
500 Plaza Drive, 2nd Floor
Secaucus, New Jersey 07094-3619
(201) 325-6900
(Address, including zip code and telephone
number,
including area code, of Registrant's
principal executive offices)
Ronald M.
Burch, M.D., Ph.D.
Chief Executive Officer
AlgoRx Pharmaceuticals, Inc.
500 Plaza Drive, 2nd Floor
Secaucus, New Jersey 07094-3619
(201) 325-6900
(Name, address, including zip code and
telephone number,
including area code, of agent for
service)
Copies to:
Stephen M. Davis, Esq.
Peter DiIorio, Esq.
Heller Ehrman White & McAuliffe LLP
120 West 45th Street
New York, New York 10036
Phone: (212) 832-8300
Fax: (212) 763-7600
Paul M. Kinsella, Esq.
Paul Laurino, Esq.
Ropes & Gray LLP
One International Place
Boston, MA 02110-2624
Phone: (617) 951-7000
Fax: (617) 951-7050
Approximate
date of commencement of proposed sale to public:
As soon as
practicable after this Registration Statement becomes effective.
If
any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box:
o
If
this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering:
o
If
this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering:
o
If
this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering:
o
If
delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box:
o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Title of Each Class of
Aggregate
Amount of
Securities to be Registered
Offering Price(1)
Registration Fee
Common Stock, $0.001 par value per share
$75,000,000
$9,503
(1)
Estimated solely for the purpose of calculating
    the registration fee pursuant to Rule 457(o) of the
    Securities Act of 1933, as amended.
The
Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act 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
prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED
NOVEMBER 24, 2004
Shares
Common Stock
Prior to this offering, there has been no public
market for our common stock. The initial public offering price
of our common stock is expected to be between
$          and
$           per
share. We have applied for quotation of our common stock on the
Nasdaq National Market under the symbol "AGRX".
The underwriters have an option to purchase a
maximum
of                      shares
of common stock to cover over-allotments of shares.
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 7.
Underwriting
Price to
Discounts and
Proceeds to
Public
Commissions
AlgoRx
Per Share
$
$
$
Total
$
$
$
Delivery of the shares of common stock will be
made on or
about                     ,
2005.
Neither the Securities and Exchange Commission
nor any state securities commission 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.
Credit Suisse First Boston
Citigroup
Piper Jaffray
Lazard
The date of this prospectus
is                     ,
2005.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY
1
SUMMARY FINANCIAL DATA
5
RISK FACTORS
7
FORWARD-LOOKING STATEMENTS
24
USE OF PROCEEDS
25
DIVIDEND POLICY
25
CAPITALIZATION
26
DILUTION
27
SELECTED FINANCIAL DATA
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS
31
BUSINESS
40
MANAGEMENT
65
CERTAIN RELATIONSHIPS AND RELATED PARTY
    TRANSACTIONS
72
PRINCIPAL STOCKHOLDERS
74
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO
    NON-UNITED STATES HOLDERS
81
SHARES ELIGIBLE FOR FUTURE SALE
83
UNDERWRITING
85
NOTICE TO CANADIAN RESIDENTS
88
VALIDITY OF SECURITIES
89
EXPERTS
89
WHERE YOU CAN FIND MORE INFORMATION
89
INDEX TO FINANCIAL STATEMENTS
F-1
You should rely only on the information
contained in this document or to which we have referred you. We
have not authorized anyone to provide you with information that
is different. This document may only be used where it is legal
to sell these securities. The information in this document may
only be accurate on the date of this document.
Dealer Prospectus Delivery
Obligation
Until                     (25 days
after commencement of the offering), all dealers that effect
transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to
unsold allotments or subscriptions.
PROSPECTUS SUMMARY
You should read the following summary together
with the entire prospectus, including the more detailed
information in our financial statements and related notes
appearing in the back of this prospectus. You should carefully
consider, among other things, the matters discussed in
"Risk Factors." References in this prospectus to
"we," "us" and "our" refer to
AlgoRx Pharmaceuticals, Inc. and its subsidiaries, unless the
context requires otherwise.
Our Business
Overview
We are an emerging pharmaceutical company focused
on developing and commercializing a diversified portfolio of
pharmaceutical product candidates to address pain, a large and
under-served market. We have three product candidates that we
are developing in four clinical programs and one preclinical
program. Two of our product candidates are in late-stage
clinical development. Our management team has extensive past
experience developing and commercializing products to treat
pain. In order to create a balanced pipeline, we have
selectively in-licensed or acquired product candidates at
various stages of development that address different segments of
the pain market.
ALGRX 4975 (capsaicin for injection and
capsaicin gel for intraoperative use) is being developed in
three programs for pain: severe postsurgical pain, post-trauma
neuropathic pain and musculoskeletal pain (including
osteoarthritis and tendonitis). In these programs, we have
completed one phase I clinical trial and two phase II
clinical trials. Each of the phase II clinical trials
yielded statistically significant improvements in pain scores
and has provided us with favorable safety data. We are
continuing to evaluate ALGRX 4975 in six phase II
clinical trials across the three programs. ALGRX 3268, our
most advanced product candidate, is a powder formulation of the
local anesthetic lidocaine delivered into the skin using our
proprietary needle-free dispenser. We are developing
ALGRX 3268 to reduce the pain associated with needle-sticks
from venipuncture (blood draws) or intravenous line insertions
in children. We have recently commenced one of two
phase III clinical trials for ALGRX 3268. We recently
in-licensed a third product candidate, ALGRX 1207, a new
molecular entity in a new class of anesthetics that is
undergoing preclinical development as a topical local
anesthetic. We expect to file an investigational new
drug (IND) application for ALGRX 1207 with the
U.S. Food and Drug Administration (FDA) in the second
half of 2005.
The Market Opportunity
Pain management is a large, under-served market
for which currently used therapies often provide insufficient
efficacy or cause significant side effects. Even with these
shortcomings, drugs that treat pain, known as analgesics,
generated an estimated $28 billion of worldwide
prescription sales in 2003 according to Global Industry
Analysts, Inc. Several analgesics that were commercialized
during the past decade have achieved high sales volume even
though they generally represented only minor improvements over
existing therapies and are often associated with patient and
physician dissatisfaction. We believe there is a large market
opportunity for analgesics that address the shortcomings of
current therapies, which include:
•
insufficient efficacy;
•
lack of site specificity;
•
occurrence of side effects;
•
need for frequent dosing;
•
slow onset of action; and
•
potential to cause physical dependence.
1
Our Product Candidates
ALGRX 4975 (capsaicin for injection and
    capsaicin gel for intraoperative use)
ALGRX 4975 is our product candidate for the
treatment of site-specific severe or intractable pain. These
types of pain are poorly treated by existing drugs such as
opioids. We are developing ALGRX 4975 to treat patients in
three broad areas:
•
severe postsurgical pain following a variety of
    surgical procedures, including bunion removal surgery, total
    knee replacement and abdominal surgery (such as hernia repair,
    hysterectomy and gall bladder removal);
•
post-trauma neuropathic pain; and
•
pain resulting from musculoskeletal diseases,
    such as osteoarthritis and tendonitis.
During a surgical procedure, ALGRX 4975 is
applied directly onto the cut surfaces of skin, muscle and bone.
For post-trauma neuropathic pain and musculoskeletal pain,
ALGRX 4975 is delivered to the site of pain using a needle
and syringe. Although the active ingredient in ALGRX 4975,
capsaicin, has been available for many years in over-the-counter
products, we believe we are the first to evaluate capsaicin as
an injectable formulation for use inside the body. We believe
that by harnessing capsaicin's ability to cause changes in
nerve endings for periods of up to 16 weeks,
ALGRX 4975, if approved, may represent a novel method of
providing long lasting, site-specific analgesia without many of
the significant side effects associated with opioids and other
methods of treating pain.
ALGRX 4975 has been studied in three
AlgoRx-sponsored clinical trials that have enrolled a total of
68 patients. An additional six ongoing phase II
clinical trials involving a total of 422 patients are
designed to study the safety and efficacy of a variety of doses
in a broad range of pain conditions. In addition, we believe
that ALGRX 4975 may provide long lasting pain relief with
infrequent dosing, potentially only four times per year, for
patients with certain chronic pain conditions.
ALGRX 3268 (PowderJect® Dermal
    Lidocaine)
ALGRX 3268 is our product candidate that
delivers lidocaine powder into the skin using our proprietary
needle-free dispenser. It is intended to provide rapid,
easy-to-administer local analgesia to reduce the pain associated
with needle-sticks from venipuncture (blood draws) or the
insertion of intravenous lines in patients. Existing products
for this use are characterized by a lengthy onset of action from
at least 10 minutes to over an hour. This delay makes the
use of these products inconvenient for both health care
providers and patients. Current topical anesthetic products also
tend to be messy and bulky since they are often formulated as
creams and may require patches to be applied over the treatment
area. By comparison, ALGRX 3268 has shown efficacy in one
minute following application and is administered using a
convenient, disposable needle-free dispenser.
The primary target market for ALGRX 3268
would be the estimated 42 million needle-stick procedures
that are performed in children in the United States each year.
We believe that this market is highly under-served by existing
products. Based on our company estimates of unit sales,
EMLA® and L.M.X.4®, two leading products, are used in
fewer than 15% of pediatric needle-stick procedures. We believe
that, if approved, ALGRX 3268's rapid onset of action,
convenience of use and efficacy in reducing pain would be
welcomed by health care professionals and would be important
factors for increasing physician use of analgesia prior to
needle-stick procedures.
We have completed our clinical program through
phase II involving 1,139 adults and children to
evaluate the ability of ALGRX 3268 to reduce pain when used
prior to needle-stick procedures. In clinical studies designed
to assess efficacy, ALGRX 3268 achieved statistically
significant reductions in pain associated with needle-sticks
when compared to placebo, with no serious side effects. We have
initiated a phase III clinical program to confirm the
safety and efficacy of ALGRX 3268. If this phase III
clinical program is successful, we believe that we will submit a
new drug application (NDA) to the FDA for ALGRX 3268 by the
end of 2005.
2
Preclinical Product Candidate
ALGRX 1207, our preclinical product
candidate, is a new molecular entity that we are developing as a
topical local anesthetic to potentially treat patients with
certain types of neuropathic pain and for pre-procedural
administration to reduce the pain associated with procedures on
the skin. Certain types of neuropathic pain, including pain
associated with postherpetic neuralgia, painful
HIV polyneuropathy and painful diabetic polyneuropathy
affect almost two million patients in the United States and are
not well-treated by current therapies. We believe that a
simple-to-use, topical, local anesthetic with a long duration of
action and deep penetration into the skin would represent an
improvement over existing therapies. Based on studies in
animals, ALGRX 1207 has been shown to provide analgesia
more rapidly and with a longer-lasting effect than currently
available topical anesthetics following direct administration to
the skin. In addition, we believe that ALGRX 1207, if
approved, could address a wide variety of procedures involving
the skin, including dermatological surgery, cosmetic skin
treatments and catheter placement, as well as pain arising from
surgical incisions that does not subside after surgery has taken
place.
Our Strategy
Our goal is to become a leading pharmaceutical
company focused on the commercialization of drugs to treat
various types of pain. The key elements of our strategy for
achieving this goal are to:
•
Continue to build, through acquisition or
    in-licensing, a balanced portfolio of product candidates that
    leverages our understanding of the mechanisms of pain and the
    pain management market;
•
Complete clinical development and obtain
    regulatory approval for our product candidates utilizing our
    management team's extensive experience in developing and
    commercializing drugs for pain management;
•
Develop a specialized sales and marketing team to
    commercialize our product candidates, if approved, in the United
    States; and
•
Establish corporate partnerships to assist in the
    clinical development, regulatory approval process and
    commercialization of our products in the United States and major
    foreign markets.
Risks
Our business is subject to a number of risks,
which you should be aware of before making an investment
decision. These risks are discussed more fully in "Risk
Factors." All of our product candidates are in clinical or
preclinical stages of development. Accordingly, we have not
received regulatory approval for, or commercial revenues from,
any of our product candidates. It is possible that we may never
successfully commercialize any of our product candidates. As of
September 30, 2004, we had incurred $50.3 million in
net losses since inception. We expect to continue to incur
increasing losses over the next several years, and we may never
become profitable.
Company Information
We were incorporated in Delaware in March 2001.
Our principal executive offices are located at 500 Plaza
Drive, 2nd Floor, Secaucus, New Jersey 07094-3619, and our
telephone number is (201) 325-6900.
"AlgoRx" is our registered trademark.
Other service marks, trademarks and trade names referred to in
this prospectus are the property of their respective owners.
3
THE OFFERING
Common stock offered by AlgoRx:
shares
    (      shares if the
    underwriters' over-allotment option is fully exercised)
Common stock to be outstanding
after this offering:
shares
    (      shares if the
    underwriters' over-allotment option is fully exercised)
Proposed Nasdaq National Market
symbol:
AGRX
Use of proceeds:
For general corporate purposes, including
    conducting clinical trials, research and development expenses,
    general and administrative expenses, manufacturing expenses and
    potential acquisitions of companies, products and technologies
    that complement our business. See "Use of Proceeds."
The number of shares of common stock to be
outstanding after this offering is based on
152,782,728 shares of common stock outstanding as of
September 30, 2004, and excludes:
•
22,575,140 shares of common stock issuable
    upon exercise of outstanding options at a weighted average
    exercise price of $0.12 per share; and
•
982,397 shares of common stock reserved for
    future grants under our 2001 Equity Incentive Plan.
Except as otherwise indicated, all information in
this prospectus:
•
gives effect to our amended and restated
    certificate of incorporation, which we will file immediately
    prior to the closing of this offering;
•
gives effect to a
    1-for-       reverse stock
    split of our common stock to be effected prior to the closing of
    this offering;
•
gives effect to the automatic conversion of all
    outstanding shares of our preferred stock into
    142,757,557 shares of common stock upon the closing of this
    offering;
•
gives effect to the issuance of
    692,658 shares of common stock issuable upon the expected
    exercise of an outstanding warrant at an exercise price of
    $0.5925 per share that, by its terms, terminates upon
    completion of this offering; and
•
assumes no exercise by the underwriters of their
    option to purchase up
    to                      shares
    of our common stock in this offering to cover over-allotments.
4
SUMMARY FINANCIAL DATA
The following table summarizes our financial data
for the period from March 6, 2001 (inception) to
December 31, 2001 and for the years ended December 31,
2002 and 2003, and is derived from our audited financial
statements included in this prospectus. We have also included
data from our unaudited financial statements for the nine months
ended September 30, 2003 and 2004 and for the period from
March 6, 2001 (inception) to September 30, 2004. You
should read this data together with our financial statements and
related notes and the information under "Selected Financial
Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Period from
Period from
March 6, 2001
March 6, 2001
(Inception) to
Nine Months Ended
(Inception) to
December 31,
Years Ended December 31,
September 30,
September 30,
2001
2002
2003
2003
2004
2004
(Unaudited)
(Unaudited)
(Unaudited)
(In thousands, except share and per share data)
Statement Of Operations Data:
Contract revenues
$
—
$
149
$
100
$
100
$
—
$
249
Operating expenses:
Research and development
365
11,745
12,191
10,939
10,682
34,983
General and administrative
1,096
3,076
3,477
2,320
2,914
10,564
Acquired in-process research and development
—
5,716
—
—
—
5,716
Total operating expenses
1,461
20,537
15,668
13,259
13,596
51,263
Income (loss) from operations
(1,461
)
(20,388
)
(15,568
)
(13,159
)
(13,596
)
(51,014
)
Gain (loss) on sale of assets
—
(36
)
103
102
—
67
Interest expense
(2
)
(4
)
(107
)
(72
)
(24
)
(137
)
Interest income
47
237
86
70
429
799
Net income (loss)
$
(1,416
)
$
(20,191
)
$
(15,486
)
$
(13,059
)
$
(13,191
)
$
(50,285
)
Basic and diluted net loss per share
$
(7.93
)
$
(11.04
)
$
(5.98
)
$
(5.10
)
$
(1.71
)
Shares used to compute basic and diluted net loss
    per share
178,663
1,829,494
2,591,820
2,559,089
7,695,820
Pro forma basic and diluted net loss per share
    (unaudited)
$
(0.52
)
$
(0.10
)
Shares used to compute pro forma basic and
    diluted net loss per share (unaudited)
29,600,282
130,032,565
5
As of September 30, 2004
Pro Forma
Actual
Pro Forma
As Adjusted
(Unaudited, in thousands, except shares
and per share data)
Balance Sheet Data:
Cash, cash equivalents and short-term investments
$
47,573
$
47,983
$
Total assets
49,929
50,340
Convertible preferred stock
87,484
—
Deficit accumulated during the development stage
(50,285
)
(50,285
)
Total stockholders' equity (net capital
    deficiency)
(41,072
)
46,823
Pro forma basic and diluted net loss per common
share is calculated assuming, and the pro forma balance sheet
data as of September 30, 2004 gives effect to:
•
the conversion of all outstanding shares of our
    preferred stock into 142,757,557 shares of common stock
    upon completion of this offering as if such conversion had
    occurred at the date of original issuance; and
•
the issuance of 692,658 shares of common
    stock upon the expected exercise in full for cash of an
    outstanding warrant at $0.5925 per share, or $410 in aggregate,
    that, by its terms, terminates upon completion of this offering
    as if such exercise had occurred at the date of original
    issuance.
The pro forma as adjusted balance sheet data as
of September 30, 2004 also gives effect to the sale
of                      shares
of common stock offered by this prospectus at an assumed initial
public offering price of
$           per
share, after deducting underwriting discounts and commissions
and estimated offering expenses.
6
RISK FACTORS
Before you invest in our common stock, you
should understand the high degree of risk involved. You should
consider carefully the following risks and other information in
this prospectus, including our historical financial statements
and related notes, before you decide to purchase shares of our
common stock. If any of the following risks actually occurs, our
business, financial condition and operating results could be
adversely affected. As a result, the trading price of our common
stock could decline and you could lose part or all of your
investment.
Risks Related to Our Company
Clinical trials may fail to adequately
    demonstrate the safety or efficacy of ALGRX 3268, ALGRX 4975 or
    any future product candidates, preventing or significantly
    delaying their regulatory approval.
Before obtaining regulatory approval to
commercialize any of our product candidates, we must subject
them to extensive preclinical and clinical testing. We have
recently commenced one of two phase III clinical trials for
ALGRX 3268 (PowderJect® Dermal Lidocaine), and we are
currently conducting phase II clinical trials for ALGRX
4975 (capsaicin for injection and capsaicin gel for
intraoperative use). These clinical trials are designed to
provide both efficacy and safety data, which will help determine
the steps we need to take to continue development of these
product candidates.
Clinical trial programs are expensive,
time-consuming and typically take years to complete. In
particular, we do not expect to receive approval from the FDA to
market ALGRX 3268 until 2007 at the earliest, if at all. We
believe that ALGRX 4975 will not receive approval for marketing
for any indication until 2009 at the earliest, if at all. We are
developing an injectable formulation of ALGRX 4975 to
potentially treat patients with pain resulting from
musculoskeletal diseases, such as osteoarthritis and tendonitis.
No drug has ever been approved by the FDA for the treatment of
tendonitis or many other musculoskeletal diseases. Thus, it is
difficult to estimate the types of clinical trials that the FDA
might require and the time it will take to complete such trials.
We are developing ALGRX 4975 in both a gel and an
injectable formulation. In our clinical trials to date, we have
used only a liquid form of ALGRX 4975, though we plan to use the
gel formulation in some of our later trials. To date, no
clinical trials have been completed using the gel formulation.
We may encounter unexpected difficulties in developing the gel
formulation, which may delay the development of ALGRX 4975 to
treat severe postsurgical pain. This may occur for various
reasons, including efficacy or safety issues arising from the
use of the gel formulation in our later clinical trials and
concerns that may be raised by the FDA about the gel
formulation. Such difficulties may delay or prevent our efforts
to develop a gel formulation of ALGRX 4975.
In connection with clinical trials, we face the
risks that:
•
a product candidate may not prove to be
    efficacious;
•
we may discover that a product candidate causes
    harmful side effects;
•
patients may die or suffer other adverse medical
    effects for reasons that may or may not be related to the
    product candidate being tested;
•
the results may not meet the level of statistical
    significance required by the FDA or other regulatory agencies;
•
the results may not confirm positive results of
    earlier trials; and
•
the FDA may place a clinical hold on studies of
    our product candidates.
Both ALGRX 4975 and ALGRX 3268 were placed on
clinical hold by the FDA at separate times during 2003. The FDA
lifted each clinical hold after we responded to questions that
it raised. Imposition of additional clinical holds could
substantially delay our current product development efforts. The
FDA may place our clinical trials on clinical hold due to a
variety of factors, including safety concerns, or results
7
obtained from other trials of the same product
candidate. If a clinical trial of ours is placed on hold, we
would have to suspend enrollment or cancel the trial, and would
be unable to enroll any patients unless and until the FDA
allowed us to continue.
The results from the phase II clinical
trials for ALGRX 3268 may not be predictive of results that may
be obtained in our phase III clinical trials. The results
from the phase I and II clinical trials for ALGRX 4975 for
injection may not be predictive of results obtained in
additional phase II and phase III clinical trials.
Future clinical trials may indicate previously undetected side
effects or fail to demonstrate efficacy in a statistically
significant manner. If our ALGRX 4975 or ALGRX 3268 clinical
trials are not completed, significantly delayed or fail to
demonstrate that the product candidates are safe and
efficacious, our business and reputation would be harmed and our
stock price would be negatively affected.
To obtain regulatory approval to market our
    product candidate ALGRX 1207, we will need to conduct
    preclinical studies, and the results of these studies are highly
    uncertain.
As part of the regulatory approval process, we
must conduct, at our own expense, preclinical studies in
laboratory animals and clinical trials in humans. Preclinical
studies for ALGRX 1207 were commenced by Bridge Pharma, Inc.
prior to our in-license of this product candidate in October
2004, and we will be required to continue preclinical studies
for this product candidate. The number of preclinical trials
that the regulatory authorities will require varies depending on
the product candidate, the disease or condition the product
candidate is being developed to address and regulations
applicable to the particular product candidate. We may need to
perform multiple preclinical studies using various doses and
formulations of ALGRX 1207 before we can begin clinical trials,
which could result in delays in our ability to develop ALGRX
1207. Furthermore, preclinical results in animal studies are not
necessarily predictive of outcomes in human clinical trials.
After we have conducted preclinical studies in animals for ALGRX
1207, we must demonstrate in clinical trials that ALGRX 1207 is
safe and efficacious for use on humans in order to receive
regulatory approval for commercial sale. Even if initial results
of preclinical studies for ALGRX 1207 are positive, we may
obtain different results in later stages of drug development,
including failure to show desired safety and efficacy.
Failure to enroll patients for clinical
    trials may cause delays in developing our product candidates,
    and delays in the commencement of clinical testing of our
    current product candidates could result in increased cost to us
    and delay our ability to generate revenues.
We are currently enrolling or seeking to enroll
patients in six clinical trials for our phase II studies of
ALGRX 4975 and in one phase III clinical trial for ALGRX
3268. We will encounter delays or possibly regulatory rejections
if we are unable to enroll enough patients to complete clinical
trials. Patient enrollment depends on many factors, including
the size of the patient population, the nature of the protocol,
the proximity of patients to clinical sites and the eligibility
criteria for the trial. While we have not experienced
significant delays in patient enrollment in our completed or
ongoing clinical trials, any delays in planned patient
enrollment in the future may result in increased costs and
delays, which could harm our ability to develop product
candidates.
Delays in the commencement of clinical testing
could significantly increase our product development costs and
delay product commercialization. In addition, many of the
factors that may cause, or lead to, a delay in the commencement
of clinical trials may also ultimately lead to denial of
regulatory approval of a product candidate. The commencement of
clinical trials can be delayed for a variety of reasons,
including delays in:
•
demonstrating sufficient safety and efficacy to
    obtain regulatory approval to commence a clinical trial;
•
reaching agreement on acceptable terms with
    prospective contract research organizations and trial sites;
•
manufacturing sufficient quantities of a product
    candidate;
8
•
obtaining approval of an IND application from the
    FDA; and
•
obtaining institutional review board approval to
    conduct a clinical trial at a prospective site.
There may be delays in developing ALGRX
    4975 because we need to conduct carcinogenicity and drug
    interaction studies.
In addition to our clinical trials, we are
required to conduct carcinogenicity studies in laboratory
rodents in support of our planned NDA to market ALGRX 4975 for
the treatment of post-trauma neuropathic pain and for pain
resulting from musculoskeletal diseases. Such carcinogenicity
studies require about three years to complete and report. The
time frame of our development program for these indications is
also affected by the International Conference on Harmonisation
(ICH) guidelines that dictate that at least 1,500 patients
must be exposed to the drug prior to submission of a
registration application and at least 500 patients be
exposed to a new drug for one year. Thus, the length of the
development program for ALGRX 4975 for post-trauma neuropathic
pain and for pain resulting from musculoskeletal diseases is
expected to be longer than our development program seeking
approval of ALGRX 4975 for severe postsurgical pain. In addition
to the time required to conduct such carcinogenicity studies,
the results of such studies may demonstrate harmful side effects
of ALGRX 4975 which would impair or prevent our ability to
develop this product candidate. Assuming there are no delays
with our development program for ALGRX 4975 for post-trauma
neuropathic pain, we could submit an NDA to the FDA by the end
of 2008 at the earliest. We cannot assure you that these studies
will not be delayed or that these studies and tests will produce
results that support our planned NDA.
Further, if we are unsuccessful for any reason in
developing a gel formulation of ALGRX 4975 for intraoperative
use to treat severe postsurgical pain, and instead rely on the
liquid formulation to address this indication, the FDA may raise
concerns of significant off-label use of ALGRX 4975 and may
require that we complete a carcinogenicity program prior to
submission of the NDA for this indication. If such a program is
required, then submission of the NDA for ALGRX 4975 for
intraoperative use to treat severe postsurgical pain will be
delayed considerably.
Osteoarthritis is a chronic disease that mostly
afflicts elderly patients. Since these patients often take many
drugs for a variety of ailments, clinical development of new
products for osteoarthritis tends to require many drug
interaction studies and studies of elderly patients with other
disease conditions, such as liver failure or kidney failure.
Consequently, the development of a new drug for osteoarthritis
requires exposure of far more patients to the drug than for many
other indications. We expect that a submission of an NDA for
treatment of osteoarthritis would require several years and
expect that an NDA submission may not occur before 2010, if at
all. In addition to the time required to conduct such drug
interaction studies and the carcinogenicity studies described
above, the results of such studies may demonstrate adverse side
effects of ALGRX 4975, which would harm our ability to develop
this product candidate to treat osteoarthritis.
The independent clinical investigators and
    contract research organizations that we rely on to conduct
    clinical trials may not be diligent, careful or timely, and may
    make mistakes in conducting our trials.
We depend on several independent clinical
investigators and contract research organizations (CROs) to
conduct our clinical trials under their agreements with us. We
are not employing these investigators, and we cannot control the
amount of time or resources that they devote to our programs.
Our contracts with these investigators may involve fixed fees.
If the costs of performing the clinical trials exceed estimates,
these investigators may fail to devote sufficient time and
resources to our drug development programs, fail to enroll
patients as rapidly as expected, or otherwise fail to perform in
a satisfactory manner, and therefore potential regulatory
approval and introduction of new products would be delayed. We
contract with CROs for execution of our clinical trials for our
product candidates. Failure of the CROs to meet their
obligations could adversely affect clinical development of our
product candidates. Moreover, these independent investigators
and CROs may also have relationships with other commercial
entities, some of which may compete with us.
9
If we fail to obtain U.S. regulatory
    approvals for product candidates under development, we will not
    be able to generate revenue in the
    U.S. market.
We must receive FDA approval for ALGRX 3268,
ALGRX 4975 and ALGRX 1207 for each indication at a particular
dose before we can commercialize or sell these product
candidates in the United States. The FDA can limit or deny its
approval for many reasons, including:
•
a product candidate may be found to be unsafe or
    ineffective;
•
regulators may interpret data from preclinical
    testing and clinical trials differently and less favorably than
    we do;
•
regulators may not approve the manufacturing
    processes or facilities that we use; and
•
regulators may change their approval policies or
    adopt new regulations.
Failure to obtain FDA approval or any delay or
setback in obtaining such approval would:
•
adversely affect our ability to market any drugs
    that we develop and generate product revenues; and
•
impose additional costs and diminish any
    competitive advantages that we may attain.
Even if we obtain FDA approval, our product
candidates may not be approved for all indications that we
request, which could limit the uses of our products and
adversely impact our potential product sales and royalties. If
FDA approval of a product is granted, such approval will be
subject to limitations on the indicated uses for which the
product may be marketed or require costly, post-marketing
follow-up studies. As to any product for which marketing
approval is obtained, the labeling, packaging, adverse event
reporting, storage, advertising, promotion and record keeping
related to the product will be subject to extensive regulatory
requirements. The subsequent discovery of previously unknown
problems with the product, such as an adverse side effect, may
result in restrictions on the product, including withdrawal of
the product from the market. We may be slow to adapt, or we may
never adapt, to changes in existing requirements or adoption of
new requirements or policies.
If we fail to comply with applicable
U.S. regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions and
criminal prosecution.
If we fail to obtain regulatory approvals
    in other countries for our product candidates under development,
    we will not be able to generate revenue in such
    countries.
In order to market our products outside of the
United States, we must establish and comply with numerous and
varying regulatory requirements of other countries. Approval
procedures vary among countries and can involve additional
product testing and additional administrative review periods.
The time required to obtain approval in other countries might
differ from that required to obtain FDA approval in the United
States. The regulatory approval process in other countries may
include all of the risks detailed above regarding FDA approval.
Regulatory approval in one country does not ensure regulatory
approval in another, but a failure or delay in obtaining
regulatory approval in one country may negatively impact the
regulatory process in others. Failure to obtain regulatory
approval in other countries or any delay or setback in obtaining
such approval could have the same adverse effects detailed above
regarding FDA approval in the United States, including the risk
that our product candidate may not be approved for all
indications that we request, which could limit the uses of our
product and adversely impact our potential royalties and product
sales, and such approval may be subject to limitations on the
indicated uses for which the product may be marketed or require
costly, post-marketing follow-up studies.
If we fail to comply with applicable foreign
regulatory requirements, we may be subject to fines, suspension
or withdrawal of regulatory approvals, product recalls, seizure
of products, operating restrictions and criminal prosecution.
10
Competition in the biotechnology and
    pharmaceutical industries is intense, and even if our product
    candidates are approved and commercialized, competitive products
    may impede market acceptance of our products.
Our business is characterized by extensive
research and development efforts, rapid developments and intense
competition. Our competitors may have or may develop superior
technologies or approaches, which may provide them with
competitive advantages. Our potential products may not compete
successfully. If our competitors get to the marketplace before
we do with better or less expensive drugs, our product
candidates, if approved for commercialization, may not be
profitable to sell or worthwhile to continue to develop.
Technology in the pharmaceutical industry has undergone rapid
and significant change, and we expect that it will continue to
do so. Any compounds, products or processes that we develop may
become obsolete or uneconomical before we recover any expenses
incurred in connection with their development. The success of
our product candidates will depend upon factors such as product
efficacy, safety, reliability, availability, timing, scope of
regulatory approval, acceptance and price, among other things.
Other important factors to our success include speed in
developing product candidates, completing clinical development
and laboratory testing, obtaining regulatory approvals and
manufacturing and selling commercial quantities of potential
products to the market.
Our product candidates are intended to compete
directly or indirectly with existing drugs. Even if approved and
commercialized, our products may fail to achieve market
acceptance with hospitals, physicians or patients. Hospitals,
physicians or patients may conclude that our potential products
are less safe or effective or otherwise less attractive than
these existing drugs. If our product candidates do not receive
market acceptance for any reason, our revenue potential would be
diminished, which would materially adversely affect our ability
to become profitable.
ALGRX 4975, if approved and commercialized, will
face significant competition. For severe postsurgical pain,
morphine administered by infusion pump is a common treatment
method. Several other oral, injectable and patch opioids are
also used, including Vicodin® (Abbott Labs),
OxyContin® (Purdue Pharma), and Duragesic®
(Johnson & Johnson). For localized neuropathic pain,
Neurontin® (Pfizer) and tricyclic antidepressants (several
manufacturers) are used to treat neuropathic pain. For
later-stage osteoarthritis, hyaluronic acid products, including
Synvisc® (Genzyme), a market leader in 2003, are injected
locally and several oral opioids, most prominently
OxyContin® (Purdue Pharma) and Duragesic®
(Johnson & Johnson) are used. For the treatment of
tendonitis, glucocorticosteroids are used. VR1, which is the ion
channel on the surface of nerves that ALGRX 4975 affects,
has become a popular target for the pharmaceutical industry.
There are several high-dose topical capsaicins in development by
NeurogesX and Winston Labs, which may be approved prior to ALGRX
4975. VR1 inhibitors that may also compete with ALGRX 4975 are
being developed by several companies, including Merck-Neurogen,
Amgen, Schwarz Pharma-Amore Pacific, Purdue Pharma, and
PainCeptor. These VR1 inhibitors are expected to advance to
clinical evaluation shortly. We believe there are other products
that are in development that may compete with our current
product candidates.
ALGRX 3268, if approved and commercialized, will
face significant competition. During 2003, two leading products
for local anesthesia prior to needle-stick procedures were
L.M.X.4®, a cream-based product (formerly ELA-MAX, Ferndale
Labs), and EMLA®, a cream-based product sold by
AstraZeneca. EMLA® has historically been the market leader,
and in 2003, several generic versions of EMLA® that are
manufactured by Fougera, Atrix, Geneva, and Hi-Tech
Pharmaceuticals were approved by the FDA. These products already
have established distribution channels and are well known to
physicians and hospitals. There are additional products
including Numby Stuff® (Iomed) and LidoSite®
(Braun-Vyteris) with more rapid onset than the cream-based
products above, and two other products, including S-Caine®
Patch (ZARS), for which an NDA has been submitted that may also
compete with ALGRX 3268. If ALGRX 3268 is unable to deliver
lidocaine to patients without pain, the product will not be
readily adopted by hospitals, physicians or patients, if at all.
ALGRX 1207, if approved and commercialized, will
face competition from existing products, including
LidoDerm® (Endo), which is a lidocaine patch, and a variety
of local anesthetic creams and
11
products with alternative means of delivering
lidocaine, including EMLA® cream (AstraZeneca) and its
generic equivalents, L.M.X.4® (Ferndale Labs),
S-Caine® Patch (ZARS) and LidoSite®
(Braun-Vyteris). If approved, ALGRX 1207, which will also likely
be formulated as a cream or patch, will compete with existing
products based on factors such as efficacy, convenience and
onset time of pain relief.
Most of our competitors, including many of those
listed above, have substantially greater capital resources,
research and development staffs, facilities and experience in
conducting clinical trials and obtaining regulatory approvals,
as well as in manufacturing and marketing pharmaceutical
products. As a result, they may achieve product
commercialization or patent protection earlier than we can.
We have no experience selling, marketing or
    distributing products and have minimal capabilities to do
    so.
If we receive regulatory approval to commence
commercial sales of any of our product candidates, we will have
to establish a sales and marketing organization with appropriate
technical expertise and distribution capability. At present, we
have no sales and only one marketing employee. Factors that may
inhibit our efforts to commercialize our products without
strategic partners or licensees include:
•
difficulty recruiting and retaining adequate
    numbers of effective sales and marketing personnel;
•
the inability of sales personnel to obtain access
    to, or persuade adequate numbers of, physicians to prescribe our
    products;
•
the lack of complementary products to be offered
    by sales personnel, which may put us at a competitive
    disadvantage against companies with broader product
    lines; and
•
unforeseen costs associated with creating an
    independent sales and marketing organization.
As an alternative to establishing our own sales
and marketing organization, we may engage other pharmaceutical
or health care companies with an existing distribution system
and direct sales organization to assist us. We may not be able
to negotiate favorable distribution partnering arrangements, if
at all. To the extent we enter co-promotion or other licensing
arrangements, any revenues we receive will depend on the efforts
of third parties and will not be under our control.
If third party manufacturers of our
    products fail to devote sufficient time and resources to our
    concerns, or if their performance is substandard, our clinical
    trials and product introductions may be delayed and our costs
    may rise.
We have no manufacturing facilities, and we have
no experience in the commercial manufacturing of drugs or in
designing drug manufacturing processes. We have contracted with
third party manufacturers to produce, in collaboration with us,
our product candidates for clinical trials. We intend to rely on
third party contract manufacturers to manufacture, supply, store
and distribute any resulting products. While we have not
experienced any significant problems with our third party
manufacturers to date, our reliance on these third party
manufacturers, particularly the third party manufacturer who
acts as the sole manufacturer of microcylinders used in our
ALGRX 3268 product candidate, exposes us to the following risks,
any of which could delay or prevent the completion of our
clinical trials, the approval of our product candidates by the
FDA or other regulatory agencies, or the commercialization of
our products, result in higher costs, or deprive us of potential
product revenues:
•
Contract manufacturers are obliged to operate in
    accordance with FDA-mandated current good manufacturing
    practices, or cGMPs. A failure of any of our contract
    manufacturers to establish and follow cGMPs or to document their
    adherence to such practices may lead to significant delays in
    the availability of material for clinical trials and may delay
    or prevent filing or approval of marketing applications for our
    products.
•
Changing contract manufacturers may be difficult,
    and the number of potential manufacturers is limited. Changing
    manufacturers may require re-validation of the manufacturing
    processes and procedures in accordance with FDA-mandated cGMPs.
    Such re-validation may be costly and time-
12
consuming. It may be difficult or impossible for
    us to find replacement manufacturers on acceptable terms
    quickly, if at all.
Drug manufacturers are subject to ongoing,
periodic unannounced inspections by the FDA and corresponding
state and foreign agencies to ensure strict compliance with
cGMPs, other government regulations and corresponding foreign
standards. We are not aware of any violations by our third party
manufacturers of any of these regulations or standards. While we
are obligated to audit the performance of third party
contractors, we do not have control over our third party
manufacturers' compliance with these regulations and
standards. Failure by our third party manufacturers or us to
comply with applicable regulations could result in sanctions
being imposed on us, including fines, injunctions, civil
penalties, failure of the government to grant approval of
product candidates, delays, suspension or withdrawal of
approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions.
Our third party manufacturers may not be
    able to manufacture our product candidates in commercial
    quantities, which would prevent us from commercializing our
    product candidates.
To date, our product candidates have been
manufactured in small quantities by third party manufacturers
for preclinical and clinical trials. If any of these product
candidates are approved by the FDA or other regulatory agencies
for commercial sale, we will need to manufacture them in larger
quantities. Our third party manufacturers may not be able to
successfully increase their manufacturing capacity for any of
our product candidates in a timely or economic manner, or at
all. Significant scale-up of manufacturing may require
additional validation studies, which the FDA must review and
approve. If we are unable to successfully increase the
manufacturing capacity for a product candidate, the regulatory
approval or commercial launch of that product candidate may be
delayed or there may be a shortage in the supply of the product
candidate. Our product candidates require precise, high quality
manufacturing. The failure of our third party manufacturers to
achieve and maintain these 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 harm our business.
Materials necessary to make ALGRX 3268 may
    not be available on commercially reasonable terms, or at all,
    which may delay our development and commercialization of the
    drug.
There are a small number of suppliers of the
materials which are necessary to manufacture ALGRX 3268 and, in
the case of the microcylinder used in ALGRX 3268, we rely on a
sole supplier. We acquire the microcylinders for our ALGRX 3268
product candidate from PowderJect Technologies Limited under a
long-term supply agreement. PowderJect Technologies Limited is
currently our sole supplier and source of microcylinders, which
are manufactured for PowderJect Technologies Limited by a third
party manufacturer, and to date we have not identified an
alternative source. If we are required to seek an alternative
source for the microcylinders, we might not be successful in
establishing an alternative commercial arrangement with a
supplier, or, if we were successful in finding an alternate
supplier, it could be on terms which are less favorable than our
current supply agreement with PowderJect Technologies Limited.
Our contract manufacturers for ALGRX 3268 need to
purchase the materials required for ALGRX 3268 for our clinical
trials and they or we will need to purchase these materials for
commercial distribution if we obtain regulatory approval for
ALGRX 3268. Suppliers may not sell us these materials at the
time we need them or on commercially reasonable terms. If our
manufacturers are unable to obtain these materials for our
clinical trials, product testing and potential regulatory
approval of ALGRX 3268 would be delayed, significantly impacting
our ability to develop the product candidate and potentially
increasing our costs. If we obtain regulatory approval for ALGRX
3268 and our manufacturers or we are unable to purchase these
materials, the commercial launch of ALGRX 3268 would be delayed
or there would be a shortage in supply of ALGRX 3268, which
would harm our ability to generate revenues from the sale of
ALGRX 3268. If suppliers increase the price of these materials,
the price for ALGRX 3268 may increase which may make ALGRX 3268
a less competitive product for the relief of needle-stick pain.
If we change
13
suppliers for any of these materials or any of
our suppliers experiences a shutdown or disruption in the
facilities used to produce these materials, due to technical,
regulatory or other problems, it could harm our ability to
manufacture our products. While we have not suffered any
shortages to date of any of the materials required for ALGRX
3268, our inability to obtain these materials for any reason
could substantially impair our development activities or the
production, marketing and distribution of ALGRX 3268.
If we are unable to retain and recruit
    qualified personnel or if any of our key executives, Ronald M.
    Burch, M.D., Ph.D, Paul R. Hamelin, R.Ph., or Jeffrey D.
    Lazar, M.D., Ph.D, discontinues his employment with us, it
    may delay our development efforts.
One of our key strategies for successfully
building our company is utilizing the extensive expertise and
experience of our senior management and scientific staff,
especially of our Chief Executive Officer, Ronald M.
Burch, M.D., Ph.D., our President and Chief Operating
Officer, Paul R. Hamelin, R.Ph. and our Executive Vice President
of Clinical and Regulatory Affairs, Jeffrey D.
Lazar, M.D., Ph.D. Therefore, we consider our business
to be highly dependent on these individuals. The loss of any of
our key employees could impede the achievement of our
development objectives. We have no key-man insurance on any
members of our management team. Furthermore, recruiting and
retaining qualified personnel to perform research and
development work in the future is critical to our success. We
may be unable to attract and retain personnel on acceptable
terms given the competition among biotechnology and
pharmaceutical companies, universities and non-profit research
institutions for experienced scientists.
We have a history of losses, and we may
    never achieve sustained profitability.
Since our inception, we have incurred significant
net losses, including net losses of $13.2 million and
$15.5 million for the nine months ended September 30,
2004 and the year ended December 31, 2003, respectively. As
of September 30, 2004, our cumulative net loss was
$50.3 million. We have not yet completed the development,
including obtaining regulatory approvals, of any of our product
candidates and, consequently, have not generated revenues from
the sale of products. Even if we succeed in developing and
commercializing one or more of our product candidates, we expect
to incur substantial losses for the foreseeable future. We also
expect to continue to incur significant operating and capital
expenditures and anticipate that our expenses will increase
substantially in the foreseeable future as we:
•
continue the development and the preparation for
    possible commercialization of ALGRX 4975 and ALGRX 3268,
    including establishing sales and marketing capabilities;
•
continue the preclinical development and commence
    the clinical development of ALGRX 1207 which we recently
    in-licensed in October 2004;
•
expand our development programs; and
•
increase our administrative functions.
We also expect to experience negative cash flow
for the foreseeable future as we fund our operating losses and
capital expenditures. We will need to generate significant
revenues to achieve profitability. We may not be able to
generate these revenues, and we may never achieve profitability.
Our failure to achieve profitability could negatively impact the
market price of our common stock. Even if we do become
profitable, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
If we cannot raise additional capital on
    acceptable terms, we may be unable to complete planned clinical
    trials, obtain regulatory approvals or commercialize our product
    candidates.
We believe that existing cash reserves, together
with proceeds from this offering, will fund our planned
activities through at least 2006. However, we will require
substantial future capital in order to continue to conduct the
research and development, preclinical and clinical programs and
regulatory activities necessary to bring our product candidates
to market and to establish commercial manufacturing, sales and
marketing capabilities. During the nine months ended
September 30, 2004, our net cash used in
14
operating activities was $10.7 million and
we had capital expenditures of $48,000 for the same period. Our
future capital requirements depend on many factors, including:
•
the progress of preclinical development 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 product candidates we pursue;
•
the costs involved in filing and prosecuting
    patent applications and enforcing or defending patent claims;
•
our plans to establish sales and/or marketing
    capabilities;
•
our ability to establish and maintain selected
    strategic alliances required for product commercialization;
•
the acquisition of technologies or products and
    other business opportunities that require financial
    commitments; and
•
our revenues, if any, from successful development
    and commercialization of our products.
We may seek additional funding through strategic
collaborations and may seek funding through private or public
sales of our securities or by licensing all or a portion of our
technology. This funding may significantly dilute existing
stockholders or may limit our rights to our technology. We may
not be able to obtain additional funding on favorable terms, or
at all. If we cannot obtain adequate funds, we may:
•
terminate or delay preclinical development or
    clinical trials for one or more of our product candidates;
•
delay establishment, or fail to establish,
    manufacturing, sales, and/or marketing capabilities;
•
curtail significant product development programs
    that are designed to identify new product candidates;
•
not be in a position to acquire technologies or
    pursue other business opportunities that require financial
    commitments; and/or
•
relinquish rights to our product candidates.
If we lose our licenses from PowderMed
    Limited for ALGRX 3268, certain individuals for ALGRX 4975 or
    Bridge Pharma, Inc. for ALGRX 1207, we will not be able to
    continue development of our current products.
We are party to three significant license
agreements relating to patents, patent applications and know-how
covering the technology relating to ALGRX 4975, ALGRX 3268 and
ALGRX 1207, our three product candidates. These license
agreements impose various diligence, commercialization, royalty
and other obligations on us. If we fail to comply with the
obligations in the license agreements, the licensor may have the
right to terminate the license and we may not be able to market
products that were covered by the license. Our license agreement
with James N. Campbell, M.D., Richard A. Meyer, M.S. and
Marco Pappagallo, M.D. relates to the steps of
administering capsaicin for pain reduction that we use in our
product candidate, ALGRX 4975, and our rights under this
agreement can be terminated on 10 days' written notice
if we fail to make a payment or fulfill any material obligation
under the agreement and the failure is not cured by us within
180 days of receiving notice of such failure. Our license
agreement with PowderMed Limited (formerly with PowderJect
Research Ltd.) relates to technology underlying our product
candidate, ALGRX 3268. Our agreement with PowderMed Limited can
be terminated immediately by either party if the other party
ceases to do business in the ordinary course, or assigns all or
substantially all of its assets for the benefit of creditors.
Either party can also terminate for material breach if not cured
within 60 days of notice or if not cured within
30 days of notice if the breach relates to
15
payment provisions. Our agreement with Bridge
Pharma, Inc. relates to proprietary analgesic and local
anesthetic pharmaceutical agents and technology underlying our
product candidate ALGRX 1207, and our rights under this
agreement can be terminated for cause by Bridge Pharma, Inc. if
we breach any material provision of the agreement and fail to
cure the breach within 60 days of the receipt of the notice
of breach. Either party may terminate the agreement immediately
in the event the other party suffers certain insolvency events.
To date, we believe we have met all our obligations under all of
these agreements.
If we fail to enter into additional
    in-licensing agreements or if these arrangements are
    unsuccessful, our business and operations might be adversely
    affected, and if we engage in any acquisition or in-licensing,
    we will incur a variety of costs, and we may never realize the
    anticipated benefits of the transaction.
Since our inception, we have acquired three
product candidates, ALGRX 4975, ALGRX 3268 and ALGRX 1207,
through in-licensing. One of our strategies for expanding our
business is the acquisition of products and additional product
candidates. The success of this strategy depends upon our
ability to identify, select and acquire the right pharmaceutical
product candidates and products. We may be unable to enter into
any additional in-licensing agreements because suitable product
candidates that are within our expertise may not be available to
us on terms that are acceptable to us or because competitors
with greater resources seek to in-license the same product
candidates. Product candidates that we would like to develop may
not be available to us because they are controlled by
competitors who are unwilling to license the rights to the drug
compound or candidate to us. We may also need to in-license drug
delivery or other technology in order to develop future drug
candidates. If we are unable to enter into additional agreements
to license drug candidates, drug delivery technology or other
technology or if these arrangements are unsuccessful, our
development efforts could be adversely affected.
We may attempt to acquire product candidates, or
other potentially beneficial technologies, through in-licensing
or the acquisition of businesses, services, products or programs
that we believe are a strategic fit with our business. Although
we currently have no commitments or agreements with respect to
any acquisitions, if we undertake an acquisition, the process of
integrating the acquired business, technology, services, product
or programs may result in unforeseen operating difficulties and
expenditures and may divert significant management attention
from our ongoing business operations. Moreover, we may fail to
realize the anticipated benefits of any acquisition for a
variety of reasons, such as an acquired product candidate
proving to not be safe or effective in later clinical trials. We
may fund any future acquisition by issuing equity or
equity-linked securities, which could dilute the ownership
percentage of our equity holders. We may also incur debt to pay
for an acquisition. The holders of the debt may have priority in
the event of a subsequent liquidation or bankruptcy, which would
impair value for our equity holders. Acquisition efforts can
require substantial expenditures, which could detract from our
other programs. In addition, we may devote resources to
potential acquisitions that are never completed.
We may not be able to succeed in our
    business model of seeking to enter into collaborations with
    partners at the early stages of developing our product
    candidates, and even if we do our collaborations would be
    subject to many risks that could prevent us from developing and
    commercializing our product candidates.
Our business strategy includes entering into
collaborations or marketing and distribution arrangements with
corporate partners, primarily pharmaceutical companies, for the
development (including clinical development), commercialization,
marketing and distribution of certain of our product candidates.
No such arrangements presently exist. We may enter into a
significant corporate collaboration, or we may not be able to
enter into any. If we are able to enter into a collaboration,
the terms may be onerous and we may be compelled to give up a
large portion of our interest in our products. We do not know at
this time what the extent of such interest may be. We may be
dependent on a corporate collaboration to fund clinical testing,
to make certain regulatory filings and to manufacture and market
products resulting from the collaboration. There can be no
assurance that the arrangements with a corporate collaboration
will be
16
scientifically, clinically or commercially
successful. Risks that we face in connection with entering
collaborations include the following:
•
collaborators may underfund or not commit
    sufficient resources to the testing, marketing, distribution or
    development of our products;
•
collaborators may not properly maintain or defend
    our intellectual property rights, or they may utilize our
    proprietary information in such a way as to invite litigation
    that could jeopardize or potentially invalidate our proprietary
    information or expose us to potential liability;
•
collaborators may pursue alternative technologies
    or develop alternative products either on their own or in
    collaboration with others;
•
collaborators may encounter conflicts of
    interest, changes in business strategy or other business issues,
    which could adversely affect their willingness or ability to
    fulfill their obligations to us (for example, pharmaceutical and
    biotechnology companies historically have re-evaluated their
    priorities following mergers and consolidations, which have been
    common in recent years in these industries); and
•
disputes may arise between us and our
    collaborators delaying or terminating the research, development
    or commercialization of our product candidates, resulting in
    significant litigation or arbitration that could be
    time-consuming and expensive, or causing collaborators to act in
    their own self-interest and not in the interest of our
    stockholders.
A reduction in sales efforts or a discontinuance
of sales of any developed products by any collaborative partner
could result in reduced revenues and have a material adverse
effect on our business, financial position and results of
operations.
Our current strategy for developing and
commercializing our product candidates includes securing
collaborations with pharmaceutical and biotechnology companies
relatively early in the drug development process and for these
collaborators to undertake the advanced clinical development and
commercialization of our product candidates. It may be difficult
for us to find third parties that are willing to enter into
collaborations for our other product candidates at an early
stage of development or on favorable economic terms. If we are
not able to enter into collaborations for our product candidates
at relatively early stages, we could be required to undertake
and fund further development, clinical trials, manufacturing and
marketing activities solely at our own expense. Alternatively,
we would have to substantially reduce our development efforts
which would delay the commercialization of our product
candidates.
Because we have operated as a private
    company, we have no experience attempting to comply with public
    company obligations, including recently enacted changes in
    securities laws and regulations; attempting to comply with these
    requirements will increase our costs and require additional
    management resources and we still may fail to
    comply.
As directed by Section 404 of the
Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring
public companies to include a report of management on the
company's internal controls over financial reporting in
their annual reports on Form 10-K. In addition, the public
accounting firm auditing the company's financial statements
must attest to and report on management's assessment of the
effectiveness of the company's internal controls over
financial reporting. This requirement will first apply to our
annual report on Form 10-K for our fiscal year ending
December 31, 2005. If we are unable to conclude that we
have effective internal controls over financial reporting or, if
our independent auditors are unable to provide us with an
unqualified report as to the effectiveness of our internal
controls over financial reporting as of December 31, 2005
and future year ends as required by Section 404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in
the reliability of our financial statements, which could result
in a decrease in the value of our securities.
We are a small company with limited resources. We
have operated as a private company, not subject to many of the
requirements applicable to public companies. The number and
qualifications of our finance
17
and accounting staff are consistent with those of
a private company. While we plan to expand our staff if we
become public, we may encounter substantial difficulty
attracting qualified staff with requisite experience due to the
high level of competition for experienced financial
professionals. Furthermore, we have not begun a formal process
to evaluate our internal controls over financial reporting.
Given the status of our efforts, coupled with the fact that
guidance from regulatory authorities in the area of internal
controls continues to evolve, substantial uncertainty exists
regarding our ability to comply by applicable deadlines.
Risks Related to Our Industry
Claims that we infringe a third
    party's intellectual property may give rise to burdensome
    litigation, result in potential liability for damages or stop
    our development and commercialization efforts.
Third parties may assert patent or other
intellectual property infringement claims against us with
respect to technologies used in our potential products. While we
have conducted patent searches to determine whether our products
infringe patents held by third parties, we expect that numerous
patent applications are currently pending and may be filed in
the future for technologies generally related to our
technologies, including many patent applications that remain
confidential after filing. Due to these factors and the inherent
uncertainty in conducting patent searches, we may violate third
party patent rights.
There may also be patent applications filed by
these or other parties in the United States and various foreign
jurisdictions that are in the same fields as some of our product
candidates. These patent applications, if issued, could subject
us to infringement actions. The owners or licensees of these and
other patents may file one or more infringement actions against
us. Patent litigation can involve complex factual and legal
questions, and its outcome is uncertain. Any claim relating to
infringement of patents that is successfully asserted against us
may require us to pay substantial damages. Even if we were to
prevail, any litigation could be costly and time-consuming and
would divert the attention of our management and key personnel
from our business operations. Furthermore, as a result of a
patent infringement suit brought against us, we may be forced to
stop or delay developing, manufacturing or selling potential
products that are claimed to infringe a third party's
intellectual property unless that party grants us rights to use
its intellectual property. In such cases, we may be required to
obtain licenses to patents or proprietary rights of others in
order to continue to commercialize our products. However, we may
not be able to obtain any required licenses on acceptable terms,
or at all. Even if we were able to obtain rights to the third
party's intellectual property, these rights may be
non-exclusive, thereby giving our competitors access to the same
intellectual property. Ultimately, we may be unable to
commercialize some of our potential products or may have to
discontinue development of a product candidate or cease some of
our business operations as a result of patent infringement
claims, which could severely diminish our commercial prospects.
Third parties may also challenge the validity of
our issued patents on various grounds. In fact, one of our
issued European patents covering capsaicin for injection has
been challenged by Grunenthal, a German pharmaceutical company,
in the European Patent Court. In response, we submitted proposed
modifications to the patent, which we expect the patent court to
approve and publish in late 2004. Any party, including
Grunenthal, can object to the amended patent within the two
month period after the amended patent is published by the court.
If any future challenge by Grunenthal or any other party is
ultimately successful in invalidating the patent, then the
ability of third parties to market competing technologies to
ALGRX 4975 in Europe could be enhanced. Also, because the
Grunenthal opposition resulted in our amending the claims of one
of our patents in Europe, a competitor could seek to exploit
that result by using arguments similar to Grunenthal's to
challenge claims in issued patents, including U.S. patents,
licensed by us and in the same patent family as the amended
European patent.
We may be subject to damages resulting from
    claims that we or our employees 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
18
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. Even if we are successful in defending
against these claims, litigation could result in substantial
costs and be a distraction to management. If we fail in
defending such claims, in addition to paying money claims, we
may lose valuable intellectual property rights or personnel. A
loss of key personnel or their work product could hamper or
prevent our ability to commercialize certain product candidates,
which would adversely affect our commercial development efforts.
If we are unable to protect our
    intellectual property rights, our competitors may develop and
    market products with similar features that may reduce demand for
    our potential products.
The following factors are important to our
success:
•
receiving patent protection for our product
    candidates;
•
preventing others from infringing our
    intellectual property rights; and
•
maintaining our patent rights and trade secrets.
We will be able to protect our intellectual
property rights in patents and trade secrets from unauthorized
use by third parties only to the extent that such intellectual
property rights are covered by valid and enforceable patents or
are effectively maintained as trade secrets.
We try to protect our proprietary position by
filing U.S. and foreign patent applications related to our
important proprietary technology, inventions and improvements.
Because the patent position of pharmaceutical companies involves
complex legal and factual questions, the issuance, scope and
enforceability of patents cannot be predicted with certainty.
For instance, the issued patent underlying ALGRX 4975
covers "injection" of capsaicin. If that patent were
determined (such as during a patent litigation in a U.S. Federal
Court against a third party infringer) not to cover application
of ALGRX 4975 intraoperatively in circumstances where the
capsaicin is applied by means other than through a syringe, we
may not have an exclusive right to that application of capsaicin
unless and until, for instance, we were issued a valid claim
covering non-injection internal use of capsaicin or covering the
gel formulation that we are developing for intraoperative
procedures. Patents, if issued, may be challenged, invalidated
or circumvented. U.S. patents and patent applications may
also be subject to interference proceedings, and
U.S. patents may be subject to reexamination proceedings in
the U.S. Patent and Trademark Office (and foreign patents
may be subject to opposition or comparable proceedings in
corresponding foreign patent offices), which proceedings could
result in either loss of the patent or denial of the patent
application or loss or reduction in the scope of one or more of
the claims of the patent or patent application. In addition,
such interference, reexamination and opposition proceedings may
be costly. Thus, any patents that we own or license from others
may not provide any protection against competitors. Furthermore,
an adverse decision in an interference proceeding can result in
a third party receiving the patent rights sought by us, which in
turn could affect our ability to market a potential product to
which that patent filing was directed. Our pending patent
applications, those we may file in the future, or those we may
license from third parties may not result in patents being
issued. If issued, they may not provide us with proprietary
protection or competitive advantages against competitors with
similar technology. Furthermore, others may independently
develop similar technologies or duplicate any technology that we
have developed. We rely on third party payment services for the
payment of foreign patent annuities and other fees. Non-payment
or delay in payment of such fees, whether intentional or
unintentional, may result in loss of patents or patent rights
important to our business. Many countries, including certain
countries in Europe, have compulsory licensing laws under which
a patent owner may be compelled to grant licenses to third
parties (for example, the patent owner has failed to
"work" the invention in that country, or the third
party has patented improvements). In addition, many countries
limit the enforceability of patents against government agencies
or government contractors. In these countries, the patent owner
may have limited remedies, which could materially diminish the
value of the patent. Moreover, the legal systems of certain
countries, particularly certain developing countries, do not
favor the aggressive enforcement of patent and other
intellectual property protection which makes it difficult to
stop infringement.
19
In addition, our ability to enforce our patent
rights depends on our ability to detect infringement. It is
difficult to detect infringers who do not advertise the
compounds that are used in their products. Also, in the case of
ALGRX 4975, it is not the composition of the capsaicin that
is covered by the issued patent, but rather its method of use.
This means that a manufacturer of an injectable form of
capsaicin may not infringe the patent except indirectly, which
is more difficult to prove, and any claim for direct
infringement might be against only a clinician injecting the
product. Any litigation to enforce or defend our patent rights,
even if we were to prevail, could be costly and time-consuming
and would divert the attention of our management and key
personnel from our business operations.
We also rely on trade secrets, know-how and
technology, which are not protected by patents, to maintain our
competitive position. We try to protect this information by
entering into confidentiality agreements with parties that have
access to it, such as our strategic partners, collaborators,
employees and consultants. Any of these parties may breach these
agreements and disclose our confidential information or our
competitors might learn of the information in some other way. If
any trade secret, know-how or other technology not protected by
a patent was to be disclosed to or independently developed by a
competitor, our business, financial condition and results of
operations could be materially adversely affected.
Governmental and third party payors may
    impose sales and pharmaceutical pricing restrictions or controls
    on our potential products that could limit our future product
    revenues and adversely affect profitability.
The commercial success of our potential products
is substantially dependent on whether third party reimbursement
is available for the ordering of our products by the medical
profession for use by their patients. Medicare, Medicaid, health
maintenance organizations and other third party payors may not
cover or provide adequate payment for our potential products.
They may not view our potential products as cost-effective and
reimbursement may not be available to consumers or may not be
sufficient to allow our potential products to be marketed on a
competitive basis. Reimbursement will most likely not be
available for ALGRX 3268. Hospitals are currently reimbursed a
fixed amount of money for the needle-stick procedures in which
ALGRX 3268 would be used. The cost of ALGRX 3268 would be an
expense associated with that procedure and therefore would
reduce the hospital's profit. Hospitals may determine that
the cost of ALGRX 3268 is not worth the benefit and decline to
use it. Likewise, legislative or regulatory efforts to control
or reduce health care costs or reform government health care
programs could result in lower prices or rejection of our
potential products that we may commercialize. Changes in
reimbursement policies or health care cost containment
initiatives that limit or restrict reimbursement for our
products may cause our revenue to decline.
Another development that may affect the pricing
of drugs is Congressional action regarding drug reimportation
into the United States. The Medicare Prescription Drug Plan
legislation, which became law in December 2003, requires the
Secretary of Health and Human Services to promulgate regulations
for drug reimportation from Canada into the United States under
some circumstances, including when the drugs are sold at a lower
price than in the United States. The Secretary retains the
discretion not to implement a drug reimportation plan if he
finds that the benefits do not outweigh the cost. Proponents of
drug reimportation may attempt to pass legislation that would
directly allow reimportation under certain circumstances. If
legislation or regulations were passed allowing the
reimportation of drugs, they could decrease the price we receive
for any products that we may commercialize, negatively affecting
our anticipated revenues and prospects for profitability.
We face potential product liability
    exposure far in excess of our limited insurance
    coverage.
The use of any of our product candidates in
clinical trials, and the sale of any approved products, may
expose us to product liability claims. These claims might be
made directly by consumers, health care providers,
pharmaceutical companies or others selling our products. We have
obtained limited product liability insurance coverage for our
clinical trials in the amount of $5 million per occurrence
and $5 million in the aggregate. However, our insurance may
not reimburse us or may not be sufficient to reimburse us for
expenses or losses we may suffer. Moreover, insurance coverage
is becoming increasingly expensive, and we
20
may not be able to maintain insurance coverage at
a reasonable cost or in sufficient amounts to protect us against
losses due to liability. If we obtain marketing approval for any
of our product candidates in development, we intend to expand
our insurance coverage to include the sale of commercial
products, but we may be unable to obtain commercially reasonable
product liability insurance for any products approved for
marketing. On occasion, juries have awarded large judgments in
class action lawsuits based on drugs that had unanticipated side
effects. In addition, the pharmaceutical and biotechnology
industries, in general, have been subject to significant product
liability litigation. A successful product liability claim or
series of claims brought against us would decrease our cash
reserves and could cause our stock price to fall.
Risks Related to Our Common Stock
We expect that our stock price will
    fluctuate significantly.
Prior to this offering, you could not buy or sell
our common stock publicly. An active public market for our
common stock may not develop or be sustained after this
offering. We will negotiate and determine the initial public
offering price with the underwriters based on several factors.
This price may vary from the market price of our common stock
after this offering. You may be unable to sell your shares of
common stock at or above the initial offering price. The stock
market, particularly in recent years, has experienced
significant volatility particularly with respect to
pharmaceutical and biotechnology stocks. The volatility of
pharmaceutical and biotechnology 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:
•
the timing and the results from our clinical
    trial programs, including the initiation and completion of
    phase II clinical trials for ALGRX 4975 and phase III
    clinical trials for ALGRX 3268;
•
the timing and results from our preclinical and
    future clinical studies relating to ALGRX 1207;
•
the in-licensing or acquisition of additional
    product candidates;
•
FDA or international regulatory actions;
•
failure of any of our product candidates, if
    approved, to achieve commercial success;
•
announcements of new products by our competitors;
•
market conditions in the pharmaceutical and
    biotechnology sectors;
•
developments concerning intellectual property
    rights;
•
litigation or public concern about the safety of
    our potential products;
•
comments by securities analysts;
•
actual and anticipated fluctuations in our
    quarterly operating results;
•
deviations in our operating results from the
    estimates of securities analysts;
•
rumors relating to us or our competitors;
•
additions or departures of key personnel;
•
third party reimbursement policies; and
•
developments concerning current or future
    strategic alliances.
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
21
us, we could incur substantial costs defending
the lawsuit. Such a lawsuit could also divert the time and
attention of our management.
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 of
shares of common stock 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
delivered by our executive officers and directors
and                     of
our stockholders and optionholders provide that Credit Suisse
First Boston LLC and Citigroup Global Markets Inc., in their
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
(which period could be extended by those underwriters for up to
an additional 34 days under certain circumstances) after
the date of this prospectus. Credit Suisse First Boston LLC and
Citigroup Global Markets Inc. have no pre-established conditions
to waiving the terms of the lock-up agreements, and any decision
by them 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. After this offering, approximately
145,050,215 shares of our common stock will be subject to
registration rights. Please see "Shares Eligible for Future
Sale."
Our directors and management will exercise
    significant control over our company.
After this offering, our directors and executive
officers and their affiliates will collectively control
approximately      % of our outstanding
common stock, assuming that the underwriters'
over-allotment option is not exercised. These stockholders, if
they act together, will be able to influence our management and
affairs and all matters requiring stockholder approval,
including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have
the effect of delaying or preventing a change in control of our
company and might affect the market price of our common stock.
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 of this offering for 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. We may use the net proceeds for
corporate purposes that do not yield a significant return or any
return at all for our stockholders.
Provisions of Delaware law or our charter
    documents 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 which we plan to adopt immediately prior to this
offering 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 or
members of our board of directors.
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 Chairman of the board of
    directors, the Chief Executive Officer, or the board of
    directors pursuant to a resolution adopted by a majority of the
    total number of authorized directors;
•
advance notice requirements for stockholder
    proposals and nominations;
22
•
a requirement that 66 2/3% of stockholders
    approve certain amendments to our certificate of incorporation
    and amendments to our by-laws; and
•
the authority of the board of directors to issue
    preferred stock with such terms as the board of directors may
    determine.
As a result, these provisions and others
available under Delaware law could limit the price that
investors are willing to pay in the future for shares of our
common stock.
We have never paid dividends on our capital
    stock, and we do not anticipate paying any cash dividends in the
    foreseeable future.
We have paid no 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. 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
$           per
share. In the past, we issued options and warrants to acquire
common stock at prices significantly below the assumed initial
public offering price. To the extent these outstanding options
or warrants are ultimately exercised, you will sustain further
dilution.
23
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled
"Prospectus 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:
•
our ability to in-license or acquire new
    technology or product candidates;
•
the progress, timing and completion of our
    research, development and clinical trials for product candidates;
•
our ability to receive regulatory approvals to
    develop and commercialize our product candidates;
•
our ability to build an internal sales and
    marketing infrastructure;
•
our ability to contract for and maintain third
    party manufacturing services;
•
our ability to achieve market acceptance for our
    product candidates and successfully compete in the market;
•
our ability to enter into collaborative or
    strategic relationships to assist in the clinical development
    and commercialization of our product candidates;
•
our ability to protect our intellectual property
    and operate our business without infringing upon the
    intellectual property rights of others;
•
our estimates for future performance; and
•
our estimates regarding anticipated operating
    losses, use of proceeds from this offering, future revenues,
    capital requirements and our needs for additional financing.
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 of 1933 provides
any protection for statements made in this prospectus.
24
USE OF PROCEEDS
We estimate that we will receive net proceeds
from the sale of shares of our common stock in this offering of
approximately
$           million
($           million
if the underwriters fully exercise their over-allotment option),
based upon an assumed initial public offering price of
$           per
share and after deducting underwriting discounts and commissions
and estimated offering expenses payable by us.
We estimate that we will use approximately
$13 million of the net proceeds of this offering to
continue the development of our product candidate ALGRX 3268,
including the continuation of our clinical trial program. We
expect, with these proceeds, to file our NDA with the FDA and
initiate our pre-commercialization activities.
We estimate that we will use approximately
$12 million of the net proceeds of this offering to
continue the development of our product candidate ALGRX 4975,
including the continuation of our clinical trial program and
toxicology program. We expect, with these proceeds, to complete
multiple phase II clinical trials and begin our
phase III program.
We estimate that we will use approximately
$9 million of the net proceeds of this offering to develop
our most recently in-licensed candidate, ALGRX 1207. We expect,
with these proceeds, to complete multiple phase I and
phase II clinical trials.
We intend to use the balance of the net proceeds
of this offering to fund operations, to provide working capital
and for other general corporate purposes, which may include
in-licensing or acquiring additional product candidates. We have
no current agreements or commitments with respect to any future
acquisitions or in-licensing, and we are not currently engaged
in any negotiations with respect to any transactions of that
nature.
As of the date of this prospectus, we cannot
specify with certainty all of the particular uses for the net
proceeds to be received upon the completion of this offering.
The amounts and timing of our actual expenditures may vary
significantly from our expectations depending upon numerous
factors, including the progress of our development and
commercialization efforts, the progress of our clinical trials,
and our operating costs and capital expenditures. Accordingly,
our management will have broad discretion in the application of
the net proceeds, and investors will be relying on the judgment
of our management regarding the application of the proceeds of
this offering. Pending these uses, we plan to invest the net
proceeds in short-term, interest-bearing obligations,
investment-grade instruments, certificates of deposit or direct
or guaranteed obligations of the United States. The goal with
respect to the investment of these net proceeds is capital
preservation and liquidity so that funds are readily available
to fund our research and development operations. In March 2004,
our board of directors adopted our written investment policy.
The investment policy imposes restrictions on our investments
designed to ensure that we preserve our principal and maintain
our liquidity. Any investment of the net proceeds from this
offering will be made in accordance with the terms of our
investment policy.
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.
25
CAPITALIZATION
The following table sets forth our capitalization
as of September 30, 2004:
•
on an actual basis;
•
on a pro forma basis, reflecting the conversion
    of all of our preferred stock into an aggregate of
    142,757,557 shares of common stock immediately prior to the
    closing of this offering; reflecting the issuance of
    692,658 shares of common stock issuable upon the expected
    exercise for cash of an outstanding warrant at $0.5925 per
    share, or $410,000 in the aggregate, that, by its terms,
    terminates upon completion of this offering; and
•
on a pro forma as adjusted basis giving effect to
    the sale
    of                      shares
    of common stock in this offering at an assumed initial public
    offering price of
    $           per
    share, after deducting underwriting discounts and commissions
    and estimated offering expenses payable by us.
You should read this table in conjunction with
the sections of this prospectus entitled "Selected
Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
and with our financial statements and related notes.
As of September 30, 2004
Pro Forma
Actual
Pro Forma
As Adjusted
(Unaudited)
(In thousands, except shares)
Convertible preferred stock, $0.001 par
    value; actual, 137,405,754 shares authorized and
    130,546,942 shares issued and outstanding; pro forma, no
    shares authorized, issued or outstanding
$
87,483
$
—
Preferred stock, $0.001 par value; actual,
    no shares authorized, issued or outstanding; pro forma,
    25,000,000 shares authorized and no shares issued or
    outstanding
—
—
Common stock, $0.001 par value; actual,
    173,840,266 shares authorized, 9,603,346 shares issued
    and 9,332,513 shares outstanding; pro forma,
    173,840,266 shares authorized, 153,053,561 shares
    issued and 152,782,728 shares outstanding
10
153
Additional paid-in capital
17,782
105,533
Accumulated other comprehensive income
(26
)
(26
)
Deferred compensation
(8,552
)
(8,552
)
Treasury stock, at cost, 270,833 shares
—
—
Deficit accumulated during the development stage
(50,285
)
(50,285
)
Total stockholders' equity
(41,072
)
46,823
Total capitalization
$
46,412
$
46,823
The actual number of shares of common stock shown
as issued and outstanding in the table above excludes:
•
22,575,140 shares of common stock issuable
    upon the exercise of options outstanding as of
    September 30, 2004, with exercise prices ranging from $0.10
    to $1.00 per share and a weighted average exercise price of
    $0.12 per share; and
•
982,397 additional shares of common stock
    reserved for future grants under our 2001 Equity Incentive Plan
    as of September 30, 2004.
26
DILUTION
Our historical net tangible book value as of
September 30, 2004 was approximately
$           million,
or
$           per
share, based
on                      shares
of common stock outstanding as of September 30, 2004.
Historical net tangible book value per share is determined by
dividing our total tangible assets less total liabilities and
convertible preferred stock by the actual number of outstanding
shares of our common stock. Our pro forma net tangible book
value as of September 30, 2004 was approximately
$           million,
or approximately
$           per
share, based
on                      shares
of common stock outstanding after giving effect to the
conversion of all outstanding shares of our convertible
preferred stock into common stock upon the closing of this
offering. Pro forma net tangible book value per share represents
the amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock
outstanding before giving effect to this offering.
After giving effect to our sale
of                      shares
of common stock in this offering based on an assumed initial
public offering price of
$           per
share, less underwriting discounts and commissions and offering
expenses payable by us, our pro forma net tangible book value as
of September 30, 2004 would have been
$           per
share. This represents an immediate increase in pro forma net
tangible book value per share of
$          to
existing stockholders and immediate dilution in pro forma net
tangible book value of
$           per
share to new investors purchasing our common stock in the
offering at the initial public offering price. Dilution per
share to new investors is determined by subtracting pro forma
net tangible book value per share after this offering from the
assumed initial public offering price per share paid by a new
investor. The following table illustrates the per share dilution
without giving effect to the over-allotment option granted to
the underwriters:
Assumed initial public offering price per share
Historical net tangible book value per share as
    of September 30, 2004
Increase per share due to the conversion of all
    shares of preferred stock
Pro forma net tangible book value per share as of
    September 30, 2004
Increase per share attributable to new investors
Pro forma net tangible book value per share after
    the offering
Dilution per share to new investors
The following table summarizes as of
September 30, 2004 the number of shares of our common stock
purchased from us, the total cash consideration paid to us and
the average price per share paid to us by existing stockholders,
to be paid by new investors purchasing shares of our common
stock in this offering, before deducting 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
The above discussion and tables are based on
9,332,513 shares of common stock issued and outstanding as
of September 30, 2004 and also reflects the automatic
conversion of all of our preferred stock into an aggregate of
142,757,557 shares of common stock and the issuance of
692,658 shares of common stock issuable upon the expected
exercise of an outstanding warrant that, by its terms,
terminates upon completion of this offering and excludes:
•
22,575,140 shares of common stock issuable
    upon the exercise of options outstanding as of
    September 30, 2004, with exercise prices ranging from $0.10
    to $1.00 per share and a weighted average exercise price of
    $0.12 per share; and
27
•
982,397 additional shares of common stock
    reserved for future grants under our 2001 Equity Incentive Plan,
    as of September 30, 2004.
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.
28
SELECTED FINANCIAL DATA
The following selected financial data should be
read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
following this section and our financial statements and related
notes included in the back of this prospectus. The selected
financial data for the period from March 6, 2001
(inception) to December 31, 2001 and for the years ended
December 31, 2002 and 2003 and as of December 31, 2002
and 2003 are derived from our audited financial statements
included in the back of this prospectus. The selected financial
data for the nine months ended September 30, 2003 and 2004
and for the period from March 6, 2001 (inception) to
September 30, 2004 are derived from our unaudited financial
statements included in the back of this prospectus. The
unaudited financial statements include, in the opinion of
management, all adjustments, consisting only of normal,
recurring adjustments, that management considers necessary for a
fair statement of the results for those aforementioned periods.
The historical results are not necessarily indicative of results
to be expected in any future period, and the results for the
nine months ended September 30, 2004 should not be
considered indicative of results expected for the full fiscal
year.
The pro forma net loss per share information is
computed using the weighted average number of common shares
outstanding, after giving pro forma effect to the conversion of
all outstanding shares of our convertible preferred stock into,
and the exercise in full of all outstanding warrants for, shares
of our common stock effective upon the completion of this
offering, as if such conversion had occurred at the date of
original issuance.
Period from
Period from
March 6, 2001
Nine Months Ended
March 6, 2001
(Inception) to
Years Ended December 31,
September 30,
(Inception) to
December 31,
September 30,
2001
2002
2003
2003
2004
2004
(Unaudited)
(Unaudited)
(Unaudited)
(In thousands, except shares and per share data)
Contract revenues
$
—
$
149
$
100
$
100
$
—
$
249
Operating expenses:
Research and development
365
11,745
12,191
10,939
10,682
34,983
General and administrative
1,096
3,076
3,477
2,320
2,914
10,564
Acquired in-process research and development
—
5,716
—
—
—
5,716
Total operating expenses
1,461
20,537
15,668
13,259
13,596
51,263
Income (loss) from operations
(1,461
)
(20,388
)
(15,568
)
(13,159
)
(13,596
)
(51,014
)
Gain (loss) on sale of assets
—
(36
)
103
102
—
67
Interest expense
(2
)
(4
)
(107
)
(72
)
(24
)
(137
)
Interest income
47
237
86
70
429
799
Net income (loss)
$
(1,416
)
$
(20,191
)
$
(15,486
)
$
(13,059
)
$
(13,191
)
$
(50,285
)
Basic and diluted net loss per share
$
(7.93
)
$
(11.04
)
$
(5.98
)
$
(5.10
)
$
(1.71
)
Shares used to compute basic and diluted net loss
    per share
178,663
1,829,494
2,591,820
2,559,089
7,695,820
Pro forma basic and diluted net loss per share
    (unaudited)
$
(0.52
)
$
(0.10
)
Shares used to compute pro forma basic and
    diluted net loss per share (unaudited)
29,600,282
130,032,565
29
As of
As of December 31,
September 30,
2001
2002
2003
2004
(Unaudited)
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments
$
7,914
$
8,873
$
4,546
$
47,573
Total assets
8,053
12,681
7,401
49,929
Convertible preferred stock
9,099
32,194
32,194
87,484
Deficit accumulated during the development stage
(1,416
)
(21,607
)
(37,093
)
(50,285
)
Total stockholders' equity (net capital
    deficiency)
(1,391
)
(21,277
)
(36,562
)
(41,072
)
30
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 the financial statements and the notes to those statements
included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties.
As a result of many factors, such as 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 an emerging pharmaceutical company focused
on developing and commercializing drugs to treat pain. We have
three product candidates that we are developing in four clinical
programs and one preclinical program. Two product candidates,
ALGRX 4975 and ALGRX 3268, are in clinical
development, and one product candidate, ALGRX 1207, is in
preclinical development. We commenced operations in March 2001.
Since our inception, we have generated significant losses. As of
September 30, 2004, we had an accumulated deficit of
$50.3 million. We expect to incur substantial and
increasing losses for the next several years as we:
•
continue the development and the preparation for
    commercialization of ALGRX 4975 and ALGRX 3268,
    including establishing sales and marketing capabilities;
•
continue the preclinical, and commence the
    clinical development of ALGRX 1207, which we in-licensed in
    October 2004;
•
expand our research and development
    programs; and
•
advance new product candidates into clinical
    development from our existing research programs.
We have a limited history of operations. To date,
we have funded our operations primarily through the private
placement of equity securities. As of September 30, 2004,
our only revenue since inception has been $0.2 million
derived from a collaborative research program and the one-time
upfront payment from an out-license of technology that we do not
plan to develop ourselves. We have had no other income since
inception other than interest income from short-term investments.
We hold exclusive worldwide rights to
commercialize ALGRX 4975, ALGRX 3268 and ALGRX 1207,
and, if approved, we intend to market these product candidates
ourselves or with a partner in the United States and through
strategic collaborations outside of the United States. We
currently contract with outside firms to manufacture our product
candidates and have no plans to establish internal manufacturing
capabilities.
In August 2001, we licensed the intellectual
property underlying ALGRX 4975 from James N.
Campbell, M.D., Richard A. Meyer, M.S. and Marco
Pappagallo, M.D. In consideration for the license, we paid
Drs. Campbell and Pappagallo and Mr. Meyer an up-front fee
and are obligated to pay additional fees upon achieving certain
milestones with respect to ALGRX 4975. We also granted them
options which vest based on AlgoRx achieving predetermined
milestones. If ALGRX 4975 is commercialized, we will owe
Drs. Campbell and Pappagallo and Mr. Meyer royalties on any
future sales of ALGRX 4975.
In March 2002, we acquired the powder injection
delivery business and a license to certain intellectual property
for our product candidate ALGRX 3268 from subsidiaries of
PowderJect Pharmaceuticals plc, in a transaction accounted for
as an acquisition of assets. The purchase price for this
acquisition was approximately $9.9 million. In October
2004, we in-licensed the intellectual property underlying
ALGRX 1207 from Bridge Pharma, Inc. In consideration for
the license, we paid Bridge Pharma, Inc. an up-front license fee
consisting of a cash payment and shares of our common stock. We
are also obligated to make additional payments and royalties to
Bridge Pharma, Inc. if we achieve certain clinical, regulatory
and commercial milestones.
31
Revenue
We do not expect to generate revenue from product
sales or royalties until at least 2007, if at all. We intend to
seek to generate revenue from a combination of product sales,
up-front fees and milestone payments in connection with
collaborative or strategic relationships, and royalties
resulting from the license of our intellectual property. We
expect that any revenue we generate will fluctuate from quarter
to quarter as a result of the nature, timing and amount of
milestone payments we may receive from our collaborative or
strategic relationships, as well as revenue we may receive upon
the sale of our products, to the extent any are successfully
commercialized.
Research and Development Expenses
Our research and development expenses consist
primarily of:
•
salaries and related expenses for personnel;
•
costs of facilities and equipment;
•
fees paid to consultants and clinical research
    organizations in conjunction with independently monitoring our
    clinical trials and acquiring and evaluating data in conjunction
    with our clinical trials;
•
fees paid to research organizations in
    conjunction with preclinical animal studies;
•
costs of materials used in research and
    development;
•
upfront and milestone payments under in-licensing
    agreements;
•
consulting fees paid to third parties; and
•
depreciation of capital resources used to develop
    our products.
We expense both internal and external research
and development costs as incurred. We expect our research and
development expense to increase as we continue to develop our
product candidates.
We use our employee and infrastructure resources
across several projects, and some of our costs are not
attributable to an individually-named project but rather are
directed across these research projects. Accordingly, we make
certain allocations for these internal research and development
costs on a project-by-project basis. As a result, we cannot
state precisely the total costs incurred for each of our
clinical and preclinical projects on a project-by-project basis.
The following table shows, from inception through
September 30, 2004, the total costs associated with
ALGRX 4975 and ALGRX 3268:
Period from
Period from
March 6, 2001
Year Ended
Nine Months Ended
March 6, 2001
(Inception) to
December 31,
September 30,
(Inception)
December 31,
September 30,
2001
2002
2003
2003
2004
2004
(In thousands)
ALGRX 4975
$
365
$
4,047
$
4,697
$
4,268
$
5,446
$
14,555
ALGRX 3268
—
6,877
7,129
6,308
5,008
19,014
Other R&D
—
821
365
363
228
1,414
Total
$
365
$
11,745
$
12,191
$
10,939
$
10,682
$
34,983
We expect that a large percentage of our research
and development expenses in the future will be incurred in
support of our current and future preclinical and clinical
development programs. These expenditures are subject to numerous
uncertainties in timing and cost to completion. We test our
product candidates in numerous preclinical studies for
toxicology, safety and efficacy. We then conduct early stage
clinical trials for each drug candidate. If we are not able to
engage a collaboration partner prior to the commencement of
later stage clinical trials, we may fund these trials ourselves.
As we obtain results from clinical trials, we may elect to
discontinue or delay clinical trials for certain product
candidates or
32
programs in order to focus our resources on more
promising product candidates or programs. Completion of clinical
trials by us or our future collaborators may take several years
or more, but the length of time generally varies according to
the type, complexity, novelty and intended use of a drug
candidate. The cost of clinical trials may vary significantly
over the life of a project as a result of differences arising
during clinical development, including, among others:
•
the number of sites included in the trials;
•
the length of time required to enroll suitable
    patient subjects;
•
the number of patients that participate in the
    trials;
•
the number of doses that patients receive;
•
the duration of patient follow-up;
•
the phase of development the product is
    in; and
•
the efficacy and safety profile of the product.
Our expenses related to clinical trials are based
on estimates of the services received and efforts expended
pursuant to contracts with multiple research institutions and
clinical research organizations that conduct and manage clinical
trials on our behalf. The financial terms of these agreements
are subject to negotiation and vary from contract to contract
and may result in uneven payment flows. Generally, these
agreements set forth the scope of work to be performed at a
fixed fee or unit price. Payments under the contracts depend on
factors such as the successful enrollment of patients or the
completion of clinical trial milestones. Expenses related to
clinical trials generally are accrued based on contracted
amounts applied to the level of patient enrollment and activity
according to the protocol. If timelines or contracts are
modified based upon changes in the clinical trial protocol or
scope of work to be performed, we modify our estimates of
accrued expenses accordingly on a prospective basis.
None of our drug candidates has received FDA or
foreign regulatory marketing approval. In order to grant
marketing approval, the FDA or foreign regulatory agencies must
conclude that our and our collaborators' clinical data
establishes the safety and efficacy of our drug candidates.
Furthermore, our strategy includes entering into collaborations
with third parties to participate in the development and
commercialization of our products. In the event that third
parties have control over the preclinical development or
clinical trial process for a product candidate, the estimated
completion date would largely be under control of that third
party rather than under our control. We cannot forecast with any
degree of certainty which of our drug candidates will be subject
to future collaborations or how such arrangements would affect
our development plan or capital requirements.
As a result of the uncertainties discussed above,
we are unable to determine the duration and completion costs of
our research and development projects or when and to what extent
we will receive cash inflows from the commercialization and sale
of a product.
General and Administrative Expenses
General and administrative expenses consist
primarily of compensation for employees in executive and
operational functions, including finance, business development
and corporate development. Other significant costs include
facilities costs and professional fees for accounting and legal
services, including legal services associated with obtaining and
maintaining patents. After completion of the offering made by
this prospectus, we anticipate incurring increases in general
and administrative expenses, such as increased costs for
insurance and investor relations associated with operating as a
public company. These increases will also likely include the
hiring of additional personnel and payment to outside
consultants, lawyers and accountants. We also expect to incur
significant costs to comply with the requirements set forth
under the new regulations for corporate governance and internal
controls.
33
Critical Accounting Policies
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
U.S. generally accepted accounting principles. 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.
Stock-Based Compensation
Stock-based compensation represents the
difference between the exercise price of options granted to
employees and directors and the fair value of our common stock
on the date of grant for financial statement purposes in
accordance with Accounting Principles Board Opinion No. 25
and its related interpretations. We recognize this compensation
charge over the vesting periods of the shares purchasable upon
exercise of options. Should our assumptions of fair value
change, the amount recorded as intrinsic value will increase or
decrease in the future.
We recorded deferred stock-based compensation
related to stock options granted to employees and directors of
$0.2 million and related amortization of $13,000 during
2003, and deferred stock-based compensation of $8.8 million
and related amortization of $0.4 million during the
nine-month period September 30, 2004. We expect to amortize
approximately $8.6 million of deferred stock-based
compensation with respect to stock options granted through
September 30, 2004 in future periods, including
$0.6 million during the fourth quarter of 2004,
$2.2 million during 2005, $2.2 million during 2006,
$2.2 million during 2007 and $1.4 million during 2008.
Acquired In-Process Research and
    Development
Acquired in-process research and development
relates primarily to in-licensed technology, intellectual
property and know-how. We evaluate the stage of development of
acquired projects, taking into account the level of effort, time
and estimated cost associated with further developing the
in-process technology and producing a commercial product. The
nature of the remaining efforts for completion of acquired
in-process research and development projects generally include
completion of clinical trials, completion of manufacturing
validation, interpretation of clinical and preclinical data and
obtaining marketing approval from the FDA and other regulatory
bodies, the cost, length and success of which are extremely
difficult to determine. Numerous risks and uncertainties exist
with timely completion of development projects, including
clinical trial results, manufacturing process development
results, and ongoing feedback from regulatory authorities,
including obtaining marketing approval. In addition, acquired
products under development may never be successfully
commercialized due to the uncertainties associated with the
pricing of new pharmaceuticals, the cost to produce these
products in a commercial setting, changes in the reimbursement
environment, or the introduction of new competitive products. As
a result of the uncertainties noted above, we expense such
acquired in-process research and development projects when
incurred.
Revenue Recognition
Our revenue recognition policies are in
accordance with Securities and Exchange Commission
(SEC) Staff Accounting Bulletins No. 101 and
No. 104, or SAB 101 and 104, and EITF 00-21,
Revenue Recognition in Financial Statements
, which
provides guidance on revenue recognition in financial statements
and is based on the interpretations and practices developed by
the SEC. SAB 101 requires that four basic criteria be met
before revenue can be recognized: (1) persuasive evidence
exists of an
34
arrangement; (2) delivery has occurred or
services have been rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on our
management's judgments regarding the fixed nature of the
fees charged for services rendered and products delivered and
the collectibility of those fees. Should changes in conditions
cause our management to determine that these criteria are not
met for certain future transactions, revenue recognition for
those transactions will be delayed and our revenues could be
adversely affected.
Results of Operations
Comparison of the Nine Months Ended
    September 30, 2004 and 2003
Revenue.
For the
nine months ended September 30, 2004, we did not recognize
any revenues. We recognized $100,000 of revenue during the nine
months ended September 30, 2003. This revenue was derived
from the licensing of technology acquired as part of the
PowderJect acquisition that we did not intend to develop
ourselves. Under the terms of the agreement, the licensee paid
us a one-time fee of $100,000 upon the execution of the
agreement, and the licensee is obligated to pay royalties to us
equal to a percentage of sales. To date, no royalty payments
have been paid nor do we expect to receive any in the near
future. We do not expect any future royalty payments under the
agreement to be material.
Research and Development
Expenses.
Research and development
expenses were $10.7 million for the nine months ended
September 30, 2004, compared with $10.9 million for
the nine months ended September 30, 2003. The
$0.2 million decrease in our research and development
expenses reflects an increase of $1.2 million for
ALGRX 4975 offset by a decrease of $1.3 million for
the ALGRX 3268 program, a decrease of $0.3 million in
other program expenses, and an increase of $0.2 million for
amortization of deferred compensation. The $1.2 million
increase in costs for the ALGRX 4975 program for the first
nine months of 2004 was primarily attributable to an increase of
$1.4 million in clinical costs, salary and other costs
necessary to support the increased clinical activity as we
completed two phase II clinical trials begun in 2003,
offset by a decrease of $0.2 million in drug safety costs
that were incurred through 2003 and early 2004 to support the
IND for ALGRX 4975 and the initiation and planning of
five other clinical trials for ALGRX 4975. The
$1.3 million decrease in costs for the ALGRX 3268
program for the first nine months of 2004 was primarily
attributable to decreased personnel costs of $1.7 million
and decreased clinical costs of $0.6 million, offset by an
increase of $1.0 million in manufacturing, quality
assurance and other costs. The decreased personnel costs were
due to the company's reduction of force of
28 employees in March 2003, all of whom were involved with
the ALGRX 3268 program. The increase in manufacturing, quality
assurance and other costs of $1.0 million was due to a
variety of projects necessary to prepare for phase III
clinical trials and potential commercialization of the product
candidate.
In March 2003, we announced a reorganization plan
intended to reduce operating costs at our Fremont facility in
response to a clinical hold placed on ALGRX 3268 by the
FDA. The primary focus of the workforce at the Fremont facility
was ALGRX 3268. We reduced our staff by 28 employees
(approximately 82% of total employees at the Fremont facility
and 61% of total AlgoRx employees overall as of the date of
reorganization) though no research projects were discontinued.
During the clinical hold period, which lasted three months,
we began an outsourcing program that has since replaced all of
the necessary functions with outside vendors and consultants.
The total restructuring cost of $1.1 million was expensed
during 2003. Severance and related costs were $0.8 million.
The vesting of certain options held by the terminated employees
was accelerated in connection with this reorganization, and we
recorded a charge of $66,240 related to this acceleration of
vesting. The reorganization resulted in an impairment of the
assembled workforce intangible asset that had been recorded as a
result of the March 2002 acquisition from PowderJect
Pharmaceuticals plc. This impairment of $0.2 million was
recorded as accelerated amortization expense during 2003 and was
classified under research and development expenses for the nine
months ended September 30, 2003.
General and Administrative
Expenses.
General and administrative
expenses were $2.9 million for the nine months ended
September 30, 2004, compared with $2.3 million for the
nine months ended September 30,
35
2003. The $0.6 million increase was
primarily attributable to the increase in administration, salary
and facility costs.
Interest Expense.
Interest expense was $24,000 for the nine months ended
September 30, 2004, compared with $72,000 for the nine
months ended September 30, 2003. The $48,000 decrease was
due to the shorter period of time in 2004 during which the
$9.8 million of convertible notes were outstanding.
Interest Income.
Interest income was $0.4 million for the nine months ended
September 30, 2004, compared with $70,000 for the nine
months ended September 30, 2003. The increase was due to
higher average cash and investment balances.
Comparison of the Years Ended
    December 31, 2003 and 2002 and the Period From
    March 6, 2001 (Inception) Through December 31,
    2001
Research and Development
Expenses.
Research and development
expenses were $12.2 million in 2003, $11.7 million in
2002 and $0.4 million in 2001 (representing the period from
inception on March 6, 2001 through December 31, 2001).
The expenses are associated with research and development
programs that we conducted during these periods in the areas of
pain management.
The $0.5 million increase in our research
and development expenses from 2002 to 2003 reflects an increase
of $0.7 million for ALGRX 4975 and an increase of
$0.3 million for ALGRX 3268, offset by a decrease of
$0.5 million in other program expenses. The increase in
costs associated with ALGRX 4975 was primarily attributable
to an increase in clinical activity in which we completed a
phase I safety trial and initiated two phase II
clinical trials. In 2002, we initiated our first clinical trial
in the second half of the year and only incurred a small amount
of costs. The increase of costs associated with ALGRX 3268
in 2003 was primarily attributable to higher salary costs,
severance costs for 28 employees at our California facility in
March 2003, increased clinical activity, and an increase in
facility operating costs, together totaling $0.9 million,
offset by a decrease of $0.6 million in drug safety studies.
The $11.3 million increase in our research
and development expenses from 2001 to 2002 was primarily
attributable to a significant increase in personnel and external
spending following the in-licensing of ALGRX 4975 in the
third quarter of 2001 and the purchase and licensing of
technology relating to ALGRX 3268 in the first quarter of
2002. This $11.3 million increase in 2002 resulted from an
increase of $3.6 million in the costs of our
ALGRX 4975 program related to the preparation of the IND
application and the start of our first clinical trial, an
increase of $6.9 million due to the initiation of our
efforts in the ALGRX 3268 program which we acquired at the
end of the first quarter of 2002, and additional increases of
$0.8 million related to other uses of our in-licensed
PowderJect device. The ALGRX 3268 program costs of
$6.9 million in 2002 were primarily attributable to
$2.4 million in salary costs and related expenses,
$1.5 million related to drug safety studies,
$1.0 million in clinical studies and $1.9 million in
facility and other operating costs. The other costs of $0.8
million were $0.4 for salary and related expenses and $0.4 for
drug safety costs.
General and Administrative
Expenses.
General and administrative
expenses were $3.5 million in 2003, $3.1 million in
2002 and $1.1 million in 2001. The $0.4 million
increase in expenses from 2002 to 2003 was primarily
attributable to termination costs and business development costs
partially offset by lower personnel costs. The $2.0 million
increase in expenses from 2001 to 2002 was primarily
attributable to increased staffing and other personnel costs
associated with supporting our programs, particularly due to the
purchase and license of ALGRX 3268 in the first quarter of
2002.
Acquired In-Process Research and
Development.
Generally, we determine
the amount of any in-process research and development expense
based on an analysis using risk-adjusted cash flows expected to
be generated by products that may result from the in-process
technologies acquired. We review the acquired project rights to
determine the stage of their development, the probability of
demonstrating in clinical trials sufficient safety and efficacy
for FDA approval and product risk factors inherent in the drug
development process. The product-specific risk factors include
the type of drug under development, likelihood of regulatory
approval, manufacturing process capability, scientific
rationale, preclinical safety
36
and efficacy data, target product profile and
development plans. The valuation used to estimate in-process
research and development expense requires us to use significant
estimates and assumptions that, if changed, may result in a
different valuation for in-process technology.
In connection with our license agreement and
acquisition of assets from subsidiaries of PowderJect
Pharmaceuticals plc, we reviewed the rights and assets that we
acquired to determine the stage of development, the probability
of demonstrating in our clinical trials sufficient safety and
efficacy for FDA approval and the technical milestones needed to
be reached before commercialization would be possible. We
determined, as of the acquisition date, there was significant
risk that our clinical trials may not demonstrate the levels of
safety and efficacy needed for FDA approval and that the project
had significant milestones to reach before commercialization. We
also determined that all of the projects had no alternative
future uses if they were not successful. Accordingly, we
classified a portion of the ALGRX 3268 and associated
projects as in-process research and development and expensed
$5.7 million immediately. The remaining purchase price was
allocated to tangible net assets of $3.7 million and
acquired workforce of $0.5 million. We valued the assets
acquired based on the value of the consideration that PowderJect
Pharmaceuticals plc and three individuals received in this
transaction, which included 6,166,154 shares of
Series B convertible preferred stock and
1,526,154 shares of common stock. The Series B
preferred stock was valued at $8.0 million based on the
arm's length Series B preferred stock financing
completed concurrently with the acquisition. The common stock
issued in the acquisition was valued at $0.2 million using
the estimated fair value used for option grants to our
employees. The purchase price for the acquisition also included
cash consideration of $0.8 million for a minority
interest's share in the acquired company and assumed
liabilities of $0.2 million. The total purchase price for
this acquisition was $9.9 million, including transaction
costs of $0.7 million.
Interest Expense.
Interest expense was $0.1 million in 2003, $4,000 in 2002
and $2,000 in 2001. The increase in interest expense from 2002
to 2003 was due to non-cash accrued interest expense for the
$9.8 million of convertible notes.
Interest Income.
Interest income was $86,000 in 2003, $0.2 million in 2002
and $47,000 in 2001. The decrease in interest income from 2002
to 2003 was primarily attributable to lower average cash
balances and the lower interest rate environment. The increase
in interest income from 2001 to 2002 was primarily attributable
to the higher level of cash available during 2002 as proceeds
from the sale of our Series B preferred stock were received
in March 2002.
Liquidity and Capital Resources
To date, we have funded our operations primarily
through the sale of equity securities. As of September 30,
2004, we had received approximately $87.8 million of cash
proceeds from the sale of equity securities (including the notes
that were converted into preferred stock), net of offering
expenses.
As of September 30, 2004, we had
$47.6 million in cash, cash equivalents and marketable
securities as compared to $4.5 million as of
December 31, 2003, an increase of $43.1 million. This
increase resulted primarily from the issuance of
$65 million of Series C preferred stock for
$53.8 million of cash proceeds (net of $1.4 million of
related transaction costs and conversion into Series C
preferred stock of $9.8 million of convertible promissory
notes that were issued in April 2003).
Net cash used in operating activities amounted to
$10.7 million for the nine months ended September 30,
2004 and $11.4 million for the nine months ended
September 30, 2003. The primary use of cash was to fund our
net losses for these periods, adjusted for non-cash expenses,
including depreciation and amortization of $0.8 million for
the nine months ended September 30, 2004 and
$1.1 million for the nine months ended September 30,
2003, non-cash stock based compensation of $0.5 million for
the nine months ended September 30, 2004 and $82,000 for
the nine months ended September 30, 2003 and an increase in
net operating assets and liabilities of $1.2 million for
the nine months ended September 30, 2004 and
$0.6 million for the nine months ended September 30,
2003.
37
Net cash used in investing activities (excluding
net proceeds from purchases, sales and maturities of short-term
investments) for the nine months ended September 30, 2004
amounted to $47,000 and $0.3 million for the nine months
ended September 30, 2003. We paid approximately $47,000
during the nine months ended September 30, 2004 for
leasehold improvements and capital equipment necessary to
support our anticipated future growth, net of proceeds from the
disposal of equipment.
Net cash provided by financing activities
amounted to $53.8 million for the nine months ended
September 30, 2004, and $9.8 million for the nine
months ended September 30, 2003. These activities consisted
primarily of private sales of our Series C preferred stock
and convertible promissory notes convertible into our
Series C preferred stock, which were offset in part by
stock issuance costs.
Net cash used in operating activities was
$14.0 million in 2003. The primary use of cash was to fund
our net loss, adjusted for non-cash expenses including
depreciation and amortization of $1.3 million in 2003,
non-cash stock-based compensation of $88,000 in 2003 and
non-cash interest expense of $0.1 million in 2003.
Net cash used in investing activities was
$0.2 million in 2003. These activities consisted primarily
of purchases, offset by sales, of property and equipment.
Net cash provided by financing activities was
$9.8 million in 2003. This amount was from the sale of
convertible promissory notes, the proceeds from which were
offset by issuance costs.
We had a deferred tax asset of $14.4 million
as of December 31, 2003 offset by a valuation allowance of
$14.4 million. The valuation allowance is based on the high
level of uncertainty regarding our ability to generate net
income in the future and utilize the deferred tax asset.
The following table summarizes our long-term
contractual obligations as of September 30, 2004:
Remainder of 2004
2005
2006
2007
2008
Thereafter
(In thousands)
Operating leases
$
222
$
299
$
246
$
246
$
246
$
123
We have three cancelable license agreements, two
of which relate to ALGRX 4975 and ALGRX 3268, our two
product candidates in clinical trials, and the other of which
relates to our preclinical product candidate, ALGRX 1207.
Under these license agreements, we could be required to pay up
to a total of $6.2 million in milestone payments through
product approval, in addition to sales milestones and royalties
on commercial sales if any occur. Under our license with
PowderMed Limited we are obligated and have spent
$1.0 million on research and development associated with
the licensed technology during the period July 7, 2003 to
July 7, 2005. We are also obligated to spend an additional
$1.0 million on research and development for every
12 month period from July 7, 2005 to July 7,
2008. We have no material commitments for capital expenditures.
Our future capital uses and requirements depend
on numerous forward-looking factors. These factors include, but
are not limited to, the following:
•
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 product candidates we pursue;
•
the costs involved in filing and prosecuting
    patent applications and enforcing or defending patent claims;
•
our plans to establish sales, marketing and/or
    manufacturing capabilities;
•
our ability to establish, enforce and maintain
    selected strategic alliances and activities required for product
    commercialization;
38
•
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 products.
We believe that our existing cash and cash
equivalents, together with proceeds from this offering, will be
sufficient to meet our projected operating requirements for at
least the next 24 months.
Until we can generate significant cash from our
operations, we expect to continue to fund our operations with
existing cash resources. If we need to raise funds in the
future, we may be required to raise those funds through public
or private financings, strategic relationships or other
arrangements.
As of September 30, 2003 and 2004 and
December 31, 2001, 2002 and 2003, we did not have any
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
In addition, we do not engage in trading activities involving
non-exchange traded contracts. Therefore, we are not materially
exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in these relationships.
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities
. This
interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks
among parties involved. It explains how to identify variable
interest entities and how an enterprise assesses its interest in
a variable interest entity to decide whether to consolidate that
entity. As amended, this interpretation applies in the first
fiscal year or interim period beginning after December 15,
2003, to variable interest entities in which an enterprise holds
a variable interest that it acquired before February 1,
2003. The adoption of FIN No. 46 did not have a material
impact on our financial position, results of operations or cash
flows.
In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150,
Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity
("SFAS 150"). This
statement establishes standards for classifying and measuring as
liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. The scope of this pronouncement includes
mandatorily redeemable equity instruments. Application to
pre-existing instruments should be recognized as the cumulative
effect of a change in accounting principle (application by
retroactive restatement is precluded). Exceptions to the
transition requirements were provided for mandatorily redeemable
instruments of non-public companies. Subsequent to the issuance
of SFAS 150, the FASB issued FSP 150-3, which further
deferred the transition requirements for nonpublic companies
that also are not SEC registrants for instruments that are
mandatorily redeemable on fixed dates that are for fixed
amounts. The classification, measurement, and disclosure
provisions of SFAS 150 are effective for fiscal periods
beginning after December 15, 2004. The adoption of this
statement is not expected to impact the classification of the
Company's convertible preferred stock, which will convert
into common stock on the completion of this offering.
Quantitative and Qualitative Disclosure About
Market Risk
Our primary exposure to market risk is interest
income sensitivity, which is affected by changes in the general
level of U.S. interest rates, particularly because the
majority of our investments are in short-term marketable
securities. Due to the nature of our short-term investments, we
believe that we are not subject to any material market risk
exposure. We do not have any foreign currency or other
derivative financial instruments.
39
BUSINESS
Overview
We are an emerging pharmaceutical company focused
on developing and commercializing a diversified portfolio of
pharmaceutical product candidates to address pain, a large and
under-served market. Our pipeline consists of two clinical
product candidates, ALGRX 4975 and ALGRX 3268, and one
preclinical product candidate, ALGRX 1207. ALGRX 4975
(capsaicin for injection and capsaicin gel for intraoperative
use) is being developed as a long lasting, site-specific
treatment for severe or intractable pain in three programs and
is currently being evaluated in six phase II clinical
trials. ALGRX 3268 (PowderJect® Dermal Lidocaine) is a
lidocaine powder delivered into the skin by means of our
proprietary needle-free dispenser. We initiated a phase III
clinical trial for ALGRX 3268 in November 2004. We are
also developing ALGRX 1207, a new molecular entity, in
preclinical trials as a topical local anesthetic for use in a
variety of pain conditions.
We are developing ALGRX 4975 in three
programs, which address site-specific, severe or intractable
pain in acute or chronic settings:
•
for intraoperative use to treat patients with
    severe postsurgical pain;
•
to treat patients with post-trauma neuropathic
    pain; and
•
to treat patients with chronic pain associated
    with musculoskeletal diseases.
To date, we have tested ALGRX 4975, of which
the active ingredient is capsaicin, using an injectable liquid.
We will continue using this liquid formulation in the latter two
programs, but for the postsurgical pain program, we plan to
transition to a gel formulation, which would provide greater
ease of use in intraoperative applications.
We have evaluated ALGRX 4975 in one
phase I clinical trial and two phase II clinical
trials that have yielded favorable safety and efficacy data. We
have six phase II clinical trials underway to further
evaluate ALGRX 4975, including a 168-patient phase II
clinical trial for severe postsurgical pain. We plan to begin
additional clinical trials in several indications in early 2005.
Our most advanced product candidate,
ALGRX 3268, is a powder formulation of the local anesthetic
lidocaine delivered into the skin using our proprietary
needle-free dispenser. We are evaluating the use of
ALGRX 3268 to reduce the pain experienced by patients from
needle-sticks in procedures where blood is drawn or intravenous
lines are inserted. We recently commenced one of two
phase III clinical trials for ALGRX 3268 with a goal
of submitting a new drug application (NDA) with the FDA for
ALGRX 3268 by the end of 2005.
ALGRX 1207 is a new molecular entity that we
in-licensed in October 2004 and are developing in preclinical
trials as a topical local anesthetic. We intend to develop
ALGRX 1207 as a therapy for chronic pain stemming from skin
diseases and to reduce the pain associated with surgical
procedures on the skin. We plan to file an investigational new
drug (IND) application covering ALGRX 1207 with the FDA in
the second half of 2005.
Our goal is to commercialize drugs for the
treatment of acute and chronic pain, which we believe are poorly
served by existing therapies. We believe that our understanding
of the mechanisms of pain combined with our management's
clinical development expertise in pain therapeutics will
continue to enable us to identify, in-license or acquire, and
develop promising potential products for treating painful
conditions that are not adequately treated with existing drugs
or other therapies.
Pain Description and Classification
Pain is an unpleasant sensation that occurs as a
result of injury to the body or as a manifestation of a diseased
state. Pain can be classified in many ways. For example, pain
can be classified based on its
40
duration (acute or chronic), its underlying cause
(nociceptive or neuropathic) or its severity (mild, moderate or
severe).
Duration.
Pain can
be classified as either acute or chronic depending on how long
the pain lasts. Acute pain is brief in nature. Key features of
acute pain are that it is generally experienced in proportion to
the degree of injury or damage to the body and that it resolves
or subsides as the injury heals. Examples of acute pain include
pain resulting from a broken bone, a surgical procedure, or
accidental trauma. Acute pain may serve a protective function by
alerting an individual to tissue damage and by causing the
individual to alter activity to prevent additional injury. By
contrast, chronic pain is pain extending 3 to 6 months
beyond onset or beyond the expected period of healing and may
have undetermined causes or may persist inexplicably after acute
pain should have subsided. Importantly, chronic pain can be
accompanied by irritability, social withdrawal, a depressed
mood, disruption of work and social relationships and symptoms
such as changes in sleep and appetite. Examples of chronic pain
include pain associated with cancer or arthritis.
Underlying cause.
Pain can be classified as either pain that results directly from
local tissue injury (nociceptive) or pain that follows nerve
injury (neuropathic). Nociceptive pain results from direct
tissue damage. Key features of nociceptive pain are that it can
be experienced as a sharp, dull or aching pain. Examples of
nociceptive pain include pain from surgical incisions, bone pain
from fractures or metastatic cancer and pain from joint diseases
such as osteoarthritis and rheumatoid arthritis.
Neuropathic pain occurs as a result of damage to,
or dysfunction of, the nervous system. Neuropathic pain is
frequently described as burning, tingling or having an
electrical shock-like feeling. Another key feature of this type
of pain is its occurrence upon stimulation that otherwise would
not be expected to cause pain. For example, a condition called
trigeminal neuralgia may cause patients to feel extreme pain
upon a light touch on the cheek. Examples of neuropathic pain
include the pain resulting from diabetes and HIV infection, and
postherpetic neuralgia, which is a painful skin condition caused
by the chicken pox virus long after the initial infection has
healed, in many cases years later. Neuropathic pain frequently
coexists with or follows nociceptive pain, as for example when a
patient that has had a surgical procedure continues to
experience pain long after the wound has healed.
Severity.
Pain can
be classified into three categories of severity: mild, moderate
and severe. It is important to determine a patient's
particular level of pain since doing so will influence the type
of drugs or other treatments prescribed by physicians and other
health care providers. Because there are no clear
differentiating factors among the three categories of pain
severity, health care providers frequently determine severity by
gauging the extent to which pain interferes with a
patient's daily function or by relying on a patient's
own opinion of the severity of his or her pain. In clinical
trials, for example, the severity of pain in patients is
sometimes measured by patients on a numerical scale with ratings
of 1 to 4 corresponding to mild pain, 4 to 6 corresponding to
moderate pain, and 6 to 10 corresponding to severe pain.
Examples of mild pain include headaches or joint pain, and
examples of moderate pain include the types of pain often
associated with minor surgery or some forms of arthritis.
Patients experiencing severe pain often suffer from a serious
underlying illness, such as AIDS or cancer. Severe pain can also
result from major surgery, nerve damage, advanced arthritis or
cancer.
Pain Management Market
Pain is a worldwide problem with serious health
and economic consequences. The medical effort to treat pain,
known as pain management, addresses a large and under-served
market. Global Industry Analysts, Inc. estimates that the
worldwide prescription market for pain drugs totaled over
$28 billion in 2003. IMS Health estimates that nearly
$18 billion was spent in 2003 on prescription pain drugs in
the United States. In the United States:
•
medical economists estimate that pain results in
    approximately $100 billion of costs annually, as reported
    by the National Institutes of Health (NIH). Pain in the hospital
    is associated with increased length of stay, longer recovery
    times and poorer patient outcomes, all of which have health care
    quality and cost implications;
41
•
approximately 25 million Americans
    experience acute pain each year due to injury or surgery,
    according to the American Pain Society; and
•
approximately 48 million Americans suffer
    chronic pain, according to the National Pain Survey published in
    1999 by Ortho-McNeil Pharmaceutical, Inc.
According to a Global Strategic Business Report
published in 2004 by Global Industry Analysts, Inc., the
prescription pain management market is anticipated to grow at a
compounded annual growth rate of 9% through 2010 due to a number
of factors, including:
•
a rapidly aging population with an increasing
    need and desire to address pain-related ailments;
•
longer survival times for patients with painful
    chronic conditions, such as cancer and AIDS;
•
patients' increased demand for effective
    pain relief; and
•
increasing recognition of the therapeutic and
    economic benefits of effective pain management by physicians,
    other health care providers and payors.
Analgesic Drugs
Drugs that treat pain are referred to as
analgesics, and the type of analgesic selected for treatment
depends principally upon the severity of the pain. For mild
pain, weak analgesics such as acetaminophen or nonsteroidal
anti-inflammatory drugs (NSAIDs) such as ibuprofen are used. For
moderate pain, NSAIDs, weak opioids such as codeine or
short-acting formulations of strong opioids may be used. Severe
pain requires strong opioids such as morphine, oxycodone,
hydrocodone or fentanyl.
The table below sets forth selected major classes
of analgesics, examples of product brands within each class and
the corresponding prescription revenues in 2003 for each class
as prescribed to treat pain, as reported by IMS Health:
Class
Example
2003 US Revenues
(millions)
NSAIDs (including COX-2)
Celebrex®, Bextra®, diclofenac
$
6,271
Opioids (all delivery methods)
OxyContin®, Percocet®, Duragesic®,
    injectable morphine, Ultram®
$
5,037
Antiepileptics (prescribed for pain)
Neurontin®
$
928
Local anesthetics (injectable and topical)
lidocaine
$
503
Source: IMS Health, IMS National Sales
Perspectives™, fourth quarter 2004.
Shortcomings of Current Pain
Management
Despite widespread clinical use of drugs for
pain, pain management remains less than optimal due to a variety
of factors, including:
•
Insufficient
    efficacy.
Opioids, the current
    standard of care for severe nociceptive pain, reduce pain less
    than 50% in a majority of situations. Neuropathic pain is
    difficult to treat with existing analgesics because of the
    differing types of nerves and organs involved in, and types of
    injuries causing, this kind of pain. Neuropathic pain does not
    respond to treatment with NSAIDs and responds poorly to
    treatment with opioids at doses that do not impair the ability
    of patients to live reasonably active lifestyles.
•
Lack of site
    specificity.
Most analgesics,
    including opioids and NSAIDs, are given orally or by intravenous
    infusion and thereby subject the patient to high circulating
    concentrations of drug, even though most types of pain are
    experienced in discrete parts of the body. Opioids must be given
    by mouth or infusion because they provide pain relief by acting
    on nerves all over the body: in the spinal cord, in the brain
    and at the site of injury. As a consequence, opioids do not
    provide site-
42
specific pain relief because their action is not
    targeted specifically to the area of the body that is
    experiencing pain. Moreover, circulating drugs cause side
    effects at parts of the body unrelated to the perception of
    pain. Although there are currently means of delivering
    site-specific analgesia, such as by injection of short-acting
    anesthetics into joints such as the ankle or knee, these
    techniques are reserved to provide relatively short-term
    anesthesia prior to surgery and are not appropriate for
    long-term pain relief.
•
Occurrence of side
    effects.
NSAIDs may cause
    gastrointestinal ulcers, and between 10,000 and 20,000 patients
    die each year from gastrointestinal bleeding believed to be
    related to the use of NSAIDs. Use of opioids is associated with
    nausea and vomiting in many patients. High-dose opioids cause
    sedation and may also cause respiratory depression, or a
    decrease in the ability to breathe spontaneously. Opioids used
    chronically can cause severe constipation that leads many
    patients to stop using them, and opioids may sometimes cause
    severe itching. All of the drugs used to treat neuropathic pain
    frequently cause problems with coordination and sedation.
•
Need for frequent
    dosing.
Drugs used to treat
    neuropathic pain require frequent dosing that makes their use
    inconvenient, often leading to reduced patient compliance.
•
Slow onset of
    action.
Local anesthetics that are
    used prior to procedures involving manipulation of the skin
    (such as needle-sticks or skin surgery) are typically formulated
    as patches or creams and have a slow onset of pain relief. This
    slow onset (as well as poor efficacy) is due to the poor
    penetration of skin by the anesthetics used in these products.
•
Potential to cause physical
    dependence.
Opioids, when used
    chronically, can cause physical dependence. Fear of physical
    dependence often influences clinicians to prescribe less than
    adequate doses of opioid analgesics. Similar fears lead many
    patients to refuse opioid analgesics.
Given doctors' and patients' desire to
achieve adequate control of pain, and the significant
shortcomings associated with existing treatments, doctors and
patients often struggle to find an appropriate balance between
pain relief and adverse side effects. With both over- and
under-treatment of pain, patients may be suffering
unnecessarily, have poor quality of life and have difficulty
meeting their social, familial and work-related commitments.
Our Solution
Based on our preclinical and clinical trials to
date, we believe our three product candidates, if approved, will
be able to offer patients tangible benefits over existing
treatments for the indications targeted by each of our product
candidates.
ALGRX 4975:
ALGRX 4975 is our product candidate for the treatment of
site-specific, severe or intractable pain. We believe
ALGRX 4975 represents a novel approach to the treatment of
pain because it provides long-lasting analgesia with a single
administration to a discrete part of the body and because it
acts via a different mechanism than any current prescription
analgesic. As a result, ALGRX 4975 avoids many of the side
effects of existing pain therapies. In addition, whereas many
existing opioids are not particularly effective for certain
types of severe pain or require frequent dosing,
ALGRX 4975, by harnessing capsaicin's ability to cause
changes in nerve endings lasting up to 16 weeks, has been
shown in clinical trials to provide meaningful, long-lasting
pain relief following a single administration. We expect that if
ALGRX 4975 does provide more meaningful pain relief with
fewer side effects than opioid analgesics, treatment with
ALGRX 4975 can result in improved quality of life for many
patients.
ALGRX 3268:
ALGRX 3268 is intended to provide
rapid, easy-to-administer local analgesia to reduce the pain
associated with needle-stick procedures in children and in
adults who have fear of needle insertion. Existing therapeutic
products have an onset of analgesia of at least 10 minutes,
although the most frequently used products must be applied 30 to
60 minutes prior to a needle-stick procedure. This delay
creates logistical difficulties in administering needle-stick
procedures and creates a significant barrier to use in busy
emergency rooms, oncology suites and pediatric offices.
Furthermore, existing products are formulated as creams and
patches, which may be perceived by health care staff and
patients as messy and
43
cumbersome to utilize. By contrast, ALGRX 3268
uses a convenient application procedure, and our clinical trials
to date have shown that it is effective in one minute of
application. We believe these are important factors for
increasing physician use of analgesia prior to needle-stick
procedures.
ALGRX 1207:
ALGRX 1207, our preclinical product candidate, is the first
new molecular entity from a new class of local anesthetics that
will potentially treat patients with certain types of
neuropathic pain and be used for pre-procedural administration
to reduce the pain associated with surgical procedures on the
skin. These types of pain are not well-treated by current
analgesic therapy. The most common existing treatments for these
conditions consist of patches or creams containing a local
anesthetic. These patches and creams have a slow onset of pain
relief, and the desired efficacy may not be achieved due to the
poor penetration into the skin by the anesthetics used in these
products. In addition, these treatments are often inconvenient
to use. Based on preclinical studies in animals, ALGRX 1207 has
been shown to provide analgesia more rapidly following direct
administration to skin and with a longer-lasting effect than
currently available topical anesthetics. In addition, we believe
that ALGRX 1207, if approved, could address the pain
associated with a wide variety of procedures involving the skin,
including dermatological surgery, cosmetic skin treatments and
catheter placement, as well as the pain arising from surgical
incisions that does not subside after the surgery has taken
place.
Strategy
Given the shortcomings of current therapies and
the economic impact of pain on society, our goal is to become a
leading pharmaceutical company focused on the commercialization
of drugs to treat acute and chronic pain. The key elements of
our strategy for achieving this goal are as follows:
Continue to build, through acquisition or
    in-licensing, a balanced portfolio of product candidates that
    leverages our understanding of the mechanisms of pain and the
    pain management market.
We currently have five distinct programs in
various stages of research and development in the areas of acute
and chronic pain management. Each of our product candidates is
in a different stage of development, has a different mechanism
of action and seeks to treat different types of pain conditions.
In building our product pipeline, we intend to leverage our
management's experience and understanding of the unmet
medical needs in treating pain, the mechanisms of action of
existing therapies and the mechanisms of pain. We intend to
acquire or in-license additional products or product candidates
from a wide range of sources, including academic centers and
biotechnology and pharmaceutical companies, in both domestic and
international markets.
Complete clinical development and obtain
    regulatory approval for our product candidates utilizing our
    management team's extensive experience in developing and
    commercializing drugs for pain management.
We believe that our scientific expertise is
broadly applicable across a wide range of drugs. Our management
team has over 100 years of cumulative experience in the
pharmaceutical industry, including having previously led the
research and development, approval and commercialization of
numerous products for pain. Our Chief Executive Officer, Ronald
M. Burch, M.D., Ph.D., has spent over 16 years
developing drugs for pain management, and our President and
Chief Operating Officer, Paul R. Hamelin, R.Ph., has spent over
seven years marketing, developing and commercializing pain
drugs, including participating in the development and launch of
Celebrex® in several countries. We believe that our
management team's experience in the planning and management
of clinical trials will help us maximize the relevance and
utility of our clinical trial programs. We plan to rely on this
experience in seeking to obtain regulatory approval for our
current product candidates in the United States and, where
appropriate, the rest of the world.
Develop a specialized sales and marketing
    team to commercialize our product candidates, if approved, in
    the United States.
We currently retain all global commercialization
rights to our product candidates. We intend to build a
specialized sales and marketing organization to market our
products to physicians and health care
44
professionals who are prescribers of pain
medications within the United States. We will focus our
marketing efforts on concentrated market segments for our
products. For example, in the management of severe postsurgical
pain with ALGRX 4975, we believe that our target market
will be hospital pain clinics, general surgeons and orthopedic
surgeons that are primarily hospital-based and concentrated in
major metropolitan areas. We believe that with such a
specialized sales and marketing organization we will be able to
market ALGRX 4975 effectively, if approved.
Establish corporate partnerships to assist
    in the clinical development, regulatory approval process and
    commercialization of our products in the United States and major
    foreign markets.
We intend to form collaborations and partnerships
with leading pharmaceutical, biotechnology or specialty
pharmaceutical companies, both domestically and internationally,
to augment our internal clinical and regulatory resources and to
accelerate the implementation of our strategies. We believe
these selective partnerships will extend and ensure our ability
to market products in a resource-efficient manner in certain
markets in the United States and in large foreign markets such
as Europe and Japan.
Our Product Pipeline
Our product pipeline consists of two clinical
product candidates, ALGRX 4975 and ALGRX 3268, and one
preclinical product candidate, ALGRX 1207. ALGRX 4975
is currently in several phase II clinical trials and is
being developed as two formulations in three clinical
development programs. We have recently commenced one of two
phase III clinical trials for ALGRX 3268, and we
expect to file an IND application for ALGRX 1207 with the
FDA in the second half of 2005. The following table summarizes
the current status of our product candidates in clinical and
preclinical development and of our research program:
ALGRX 4975 (capsaicin for injection
    and capsaicin gel for intraoperative use)
ALGRX 4975 is our product candidate for the
treatment of site-specific severe or intractable pain. These
types of pain are poorly treated with existing drugs, many of
which have well-documented and severe side effects. We are
developing two formulations of ALGRX 4975 to potentially
treat patients with severe pain: a gel formulation for
intraoperative use in a variety of surgical procedures,
including bunion removal surgery, total knee replacement and
abdominal surgeries, such as hernia repair or hysterectomy;
45
and an injectable formulation for post-trauma
neuropathic pain and pain resulting from musculoskeletal
diseases, such as osteoarthritis and tendonitis. During a
surgical procedure, ALGRX 4975 is delivered directly onto
the cut surfaces of skin, muscle and bone. For post-trauma
neuropathic pain and pain resulting from musculosketal diseases,
it is delivered to the site of pain using a needle and syringe.
Prior to injection with ALGRX 4975, these patients receive
an injection of a local anesthetic to alleviate the transient
pain experienced upon injection of ALGRX 4975. We are
currently evaluating ALGRX 4975 in a variety of
phase II clinical trials.
Capsaicin
The active ingredient in ALGRX 4975 is
capsaicin. Capsaicin is currently marketed over-the-counter for
topical administration in the form of low dose, non-sterile
creams and patches, which tend to be poorly absorbed into the
skin. There are many brands of capsaicin creams and patches,
including Capzasin-P® (Chattem) and Zostrix® (Rodlen
Laboratories). These formulations are generally crude
preparations of capsaicin that may contain other chemical
entities. Over-the-counter capsaicin creams and patches are used
topically by consumers to relieve pain in conditions such as
osteoarthritis, postherpetic neuralgias, psoriasis and diabetic
neuropathy.
ALGRX 4975, if approved, would be used in
different clinical settings than current over-the-counter
products. Currently, there are no FDA-approved uses of capsaicin
for analgesia or other indications inside the body. Results of
our clinical trials suggest that capsaicin, when used in the
manner and doses we are investigating, may have analgesic
properties previously unknown to clinical investigators. We
currently own or license three patents and 12 patent
applications related to our capsaicin technology, compounds and
their applications in pharmaceutical development or their use as
pharmaceuticals. We believe these issued patents and pending
patents, if and when issued, will provide us with intellectual
property protection in the methods of purification, manufacture,
medical usage and formulation of capsaicin.
Mechanism of Action
Three major classes of nerves, or neurons (Ad, Ab
and C), transmit sensory information through the body's
nervous system. Pain signals are transmitted by two of those
classes: Ad and C neurons. Ad neurons transmit signals
rapidly (giving rise to sharp pain sensations), whereas
C neurons transmit signals slowly (giving rise to severe
dull, aching or throbbing pain sensations). For example, if a
person hits his thumb with a hammer, there is an immediate,
sharp pain that lasts only for an instant, which is transmitted
by Ad neurons, followed by a dull, aching, throbbing pain
that may last for a considerable time, which is transmitted by C
neurons.
Capsaicin works to relieve pain by causing a
localized degradation of the C neuron endings and is the
only analgesic known to relieve pain by this mechanism.
Capsaicin's activity results from its ability to bind to
and activate a type of ion channel on the surface of neurons
called vanilloid receptor 1, or VR1. Under normal
circumstances, when the VR1 ion channel is activated, usually by
changes in extracelluar pH levels, it opens for a short time,
causing the C neurons to transmit a pain signal toward the
brain. When capsaicin binds to and activates VR1, it causes a
series of events within the cell that degrade the pain-sensing
endings of the C neuron, thereby preventing the neuron from
transmitting pain signals. Our animal and human studies have
demonstrated that following capsaicin treatment, the
C neuron terminals usually regenerate over a period of 12
to 16 weeks. This unique action is the basis for what we
believe will be ALGRX 4975's ability, if approved, to
provide meaningful, long-lasting pain relief following a single
administration. Because VR1 is found only on C neurons,
capsaicin reduces only the long-term noxious pain associated
with transmission by these neurons. Capsaicin does not affect
the short-lasting, sharp adaptive pain carried by Ad neurons, or
the fine touch, temperature and place perception (involved in
coordination) carried by Ab neurons. As a consequence,
ALGRX 4975 may be a highly specific pain therapeutic that
provides long-lasting analgesia.
We believe the effects of capsaicin are confined
exclusively to the region of application because of low
distribution to other areas of the body after ALGRX 4975 is
administered. After injection into a joint
46
space or after application in a surgical
procedure to the cut surfaces of skin, muscle and bone,
capsaicin enters the blood slowly by diffusion from its site of
initial application. Thereafter, capsaicin is highly
metabolized, or broken down, by the liver into various inactive
compounds, none of which retains any of capsaicin's
analgesic properties. As a consequence, capsaicin does not
usually act at sites in the body distant from its initial
application, nor is the body exposed to any derivatives of
capsaicin that could act in a similar manner. By contrast,
opioids and many other analgesics must be given orally or by
intravenous injection, thereby subjecting the patient to
circulation of high concentrations of drug. These high
circulating concentrations may exert undesirable side effects by
acting on parts of the body unrelated to pain perception. For
example, opioids may cause constipation when used chronically.
Opioids also may cause alteration of mood or alertness, and may
cause patients to feel drowsy, euphoric, or sleepy. These
effects, when experienced by patients in the hospital, tend to
increase rehabilitation time because patients are often sedated
and therefore unable to begin the recovery process.
Based on our clinical trial results to date, we
believe that ALGRX 4975 may provide significant pain relief to
patients in postsurgical situations by acting only at the site
of application and without causing sedation or other side
effects, thereby potentially reducing rehabilitation time
following some procedures. We also believe ALGRX 4975 may
provide significant pain relief to patients with post-trauma
neuropathic pain or who suffer from severe musculoskeletal pain.
We expect that if ALGRX 4975 provides more meaningful pain
relief with fewer side effects than opioid analgesics, it may
result in improved quality of life for many patients.
ALGRX 4975 — Capsaicin for the
Treatment of Severe Postsurgical Pain
Overview
We are developing ALGRX 4975 for
intraoperative use to treat severe postsurgical pain in a
variety of procedures. Opioid analgesics are commonly used for
the treatment of severe postsurgical pain. The common delivery
method for in-hospital pain relief is a patient controlled
morphine pump that provides opioid analgesic infusions directly
into the spinal fluid. The process is expensive, may cause
infections, and since the pain relief from opioid analgesics is
relatively brief, the patient goes through cycles of pain relief
followed by increased pain. We believe that ALGRX 4975, by
providing long-lasting analgesia without sedation, may mitigate
the cyclical nature of patient-controlled morphine and also
alleviate the increase in pain suffered by many patients
following discharge from the hospital, as they transition from
opioid analgesic infusions to oral opioids.
Use of opioids following certain types of surgery
such as total knee replacement may also extend rehabilitation
time. For such patients, walking as soon as possible after
surgery is an important factor for both preventing blood clots
from forming in the veins of the legs and for maintaining range
of motion of the knee. Patients taking opioid analgesics
immediately after surgery may be too sedated or drowsy to walk,
thereby diminishing the ability to get out of bed. We believe
that ALGRX 4975, if approved, will provide strong analgesia
that could reduce the amount of opioids taken by patients and
therefore decrease rehabilitation time.
Clinical Trials
The following table describes the status of our
clinical trials for ALGRX 4975 to treat severe postsurgical pain:
Number of
Phase of Clinical Trial
Status
Protocol
Subjects
Phase II
Completed
Bunion removal surgery
40
Phase II
Ongoing
Bunion removal surgery
168
Phase II
Ongoing
Hernia repair
48
In our trials to date, we have only used a liquid
form of ALGRX 4975, but we plan to use the gel formulation
in later trials because we believe that a gel formulation will
offer improvements over the liquid
47
form in surgical procedures. For instance, we
expect that a gel formula will be easier to apply, and will bind
more effectively to cut surfaces of skin, muscle and bone.
Phase II Clinical Trial —
    Bunion Removal Surgery
In November 2003, we completed a randomized,
double-blind, placebo-controlled phase II clinical trial of
ALGRX 4975 in 40 patients evaluating postsurgical pain
following bunion removal surgery at a single center in the
United Kingdom. Just prior to closure of the surgical wound,
either 1,000 ug of ALGRX 4975 or placebo was instilled
into the wound. The primary endpoint of this trial was to record
the use of rescue medication (opioids given to a patient in the
absence of adequate pain relief from the placebo or
ALGRX 4975) during the first 24 hours following
surgery. Secondary endpoints included the use of rescue
medication during the first 72 hours following surgery, the
quantity of rescue medication used, and the patient pain scores
measured on a visual analog scale (VAS), a commonly used chart
that patients are given to rate the severity of their pain, from
zero (no pain) to 10 (extreme pain). Several safety endpoints
were also evaluated, including pain on administration and wound
healing.
This trial demonstrated a statistically
significant reduction in the use of rescue medication during the
first 72 hours following surgery in patients receiving
ALGRX 4975 as compared to patients receiving placebo.
During the first 72 hours, 45% of patients who received
ALGRX 4975 requested rescue medication compared to 90% in
patients who received placebo. Further, this trial indicated
that VAS pain scores were reduced in patients who received
ALGRX 4975 as compared to patients who received placebo. No
safety concerns were identified in this study.
Phase II Clinical Trial —
    Bunion Removal Surgery
We are currently conducting a second randomized,
double-blind, placebo-controlled phase II clinical trial of
ALGRX 4975 in 168 patients undergoing bunion removal
surgery at two centers in the United States. In this trial,
three dose levels of ALGRX 4975, 100 ug, 500 ug,
and 1,000 ug, are being compared to placebo. The primary
endpoint of this clinical trial will be the magnitude and
duration of pain relief in those patients receiving ALGRX 4975
compared to those receiving placebo. Several safety endpoints of
this trial include pain on administration and wound healing.
Pharmacokinetics, the process by which a drug is absorbed,
distributed, metabolized and eliminated by the body, will also
be assessed.
Phase II Clinical Trial —
    Hernia Repair
We are currently conducting a randomized,
double-blind, placebo-controlled phase II clinical trial in
48 patients to evaluate the safety and efficacy of
ALGRX 4975 in the treatment of postsurgical pain following
hernia repair at multiple centers in Denmark. In this trial,
1,000 ug of ALGRX 4975 or placebo will be applied to
the cut surfaces of connective tissue, muscle and skin prior to
closing the surgical wound. The primary endpoint will be the use
of rescue medications following surgery. Secondary endpoints
will include the amount of rescue medication used and VAS pain
scores. A variety of safety endpoints will be evaluated in this
trial, including pain on administration and wound healing.
Regulatory Pathway
We filed a clinical trial exemption
(CTX) for ALGRX 4975 with the Medicine and Healthcare
Products Regulatory Agency in the United Kingdom in
June 2003 and commenced our first clinical trial in severe
postsurgical pain in August 2003. This study was completed
in January 2004. We submitted an IND application for
ALGRX 4975 with the FDA in May 2004 and initiated our first
U.S.-based phase II clinical trial to study pain following
bunion removal surgery in July 2004. Our clinical program will
consist of phase II clinical trials in a variety of
surgical procedures, followed by several intended pivotal
clinical trials in several surgical procedures. We are
developing this program with the intention that it will satisfy
the requirements for an NDA.
48
ALGRX 4975 — Capsaicin for
Injection for Post-Trauma Neuropathic Pain
Overview
We are developing an injectable formulation of
ALGRX 4975 to potentially treat patients with post-trauma
neuropathic pain. Post-trauma neuropathic pain is a form of
neuropathic pain that remains long after traumatic injuries such
as limb amputations, accidents or injuries caused by repeated
physical stresses applied to the same area of the body.
Post-trauma neuropathic pain is not well-treated with currently
available drugs, which include tricyclic antidepressants and
antiepileptic agents that are prescribed "off-label"
for this type of pain. These drugs demonstrate meaningful
efficacy in only a minority of patients. When drugs are
unsuccessful in providing meaningful pain relief, patients
suffering from post-trauma neuropathic pain sometimes consider
other procedures that may alleviate pain. One option is surgery
to remove the offending nerve, although this procedure results
in side effects such as the lack of sensation and compromised
motor function. A second option involves killing nerves by
injecting them with alcohol or formaldehyde, which also has side
effects similar to surgical removal. We believe that
ALGRX 4975 may provide long-lasting, effective pain relief
in these patients without the side effects caused by damaging or
killing nearby nerves.
Clinical Trials
The following table describes the status of our
clinical trial for the injectable formulation of ALGRX 4975
for post-trauma neuropathic pain:
Number of
Phase of Clinical Trial
Status
Protocol
Subjects
Phase II
Ongoing
Morton's neuroma
60
Phase II Clinical Trial —
    Morton's Neuroma
We are currently enrolling patients in a
randomized, double-blind, placebo-controlled phase II
clinical trial of ALGRX 4975 in patients with Morton's
neuroma or related neuromas at two centers in the United States.
Morton's neuroma is an abnormal enlargement of two nerves
that are located between the bones of the feet. This enlargement
is typically seen in women who wear high-heeled shoes and in
long-distance runners, all of whom subject their feet to
repetitive stresses. The primary endpoint of this trial will be
to evaluate the magnitude of pain relief for 1,000 ug of
ALGRX 4975 compared to placebo, measured for each of the
four weeks following administration. Safety endpoints to be
evaluated in this trial will include pain on administration.
Pharmacokinetics will also be assessed.
Regulatory Pathway
Our clinical trial program for post-trauma
neuropathic pain is being conducted under the IND application
that we submitted to the FDA in May 2004. Our first clinical
trial under the IND application is a phase II clinical
trial studying Morton's neuroma. In addition to our
phase II clinical trial studying Morton's neuroma, we
expect to initiate phase II clinical trials to study other
types of post-trauma neuropathic pain. Based on the results of
those studies, we will develop a phase III program.
ALGRX 4975 — Capsaicin for Injection
for Musculoskeletal Diseases
Overview
We are developing an injectable formulation of
ALGRX 4975 to potentially treat patients with pain
resulting from musculoskeletal diseases such as osteoarthritis
and tendonitis. Early-stage osteoarthritis is usually treated
using acetaminophen and, as pain increases, COX-2 inhibitors. As
the disease progresses and joint damage increases, most patients
reach a point at which they do not experience sufficient pain
relief from COX-2 inhibitors. At this point, patients have
several options. Some patients opt for hyaluronic acid
injections directly into the joint space. The injected
hyaluronic acid acts as a lubricant to enhance joint mobility,
thereby reducing pain. Other patients may begin using opioid
analgesics, which provide
49
better pain relief than the COX-2 inhibitors, but
still may not provide adequate pain relief. We believe that by
administering ALGRX 4975 directly into the joint space,
approximately once every three to four months, patients may
experience meaningful pain relief with few side effects. Because
joint replacement is usually the only remaining option for
patients whose pain from osteoarthritis becomes intolerable, the
potential ability to delay these procedures through more
adequate pain relief could represent a substantial advance over
the current range of therapeutic options.
Clinical Trials
The following table describes the status of our
clinical trials for the injectable formulation of ALGRX 4975 for
musculoskeletal diseases:
Number of
Phase of Clinical Trial
Status
Protocol
Subjects
Phase I
Completed
End-stage osteoarthritis
16
Phase II
Completed
End-stage osteoarthritis
12
Phase II
Ongoing
Osteoarthritis of the knee
52
Phase II
Ongoing
Osteoarthritis of the knee
54
Phase II
Ongoing
Tendonitis
40
Phase I Clinical Trial —
    End-stage Osteoarthritis
In April 2003, we completed a randomized,
double-blind, placebo-controlled phase I clinical trial of
ALGRX 4975 in 16 patients in one center in the United
Kingdom, the first study of ALGRX 4975 in humans. In this
study, ALGRX 4975 was injected directly into the knee joint
space of patients with end-stage osteoarthritis who were
scheduled for knee replacement surgery. Patients were allocated
to one of four treatment groups based on the time between the
administration of ALGRX 4975 or placebo and the date
scheduled for the patient's surgery (two days, four days,
10 days or 14 days). Patients received either a
10 ug, 100 ug, or 300 ug dose of ALGRX 4975
or placebo. Each patient received an injection of a local
anesthetic (lidocaine) directly into the joint space ten
minutes prior to injection of ALGRX 4975 in order to
alleviate the transient pain experienced by patients upon
injection of capsaicin. Since this was a phase I clinical
trial, the primary endpoints evaluated safety of
ALGRX 4975. Secondary endpoints included pharmacokinetics
and pain relief assessed using a VAS pain scale. Furthermore,
because all patients in this trial subsequently underwent
surgery, this study allowed for the direct examination of the
knee to evaluate side effects caused by the drug.
This phase I clinical trial demonstrated
that ALGRX 4975 was well-tolerated. Although dose-related pain
on administration was found despite pretreatment with lidocaine,
pain was adequately managed in all patients with placement of an
icepack on the knee. Pain reduction was also observed in this
trial following the administration of ALGRX 4975. When
assessed on the scheduled day of surgery, pain was found to be
reduced on average by 64% when compared to patients'
baseline scores. The pain reduction data from this trial was not
statistically significant because this trial was designed to
demonstrate safety rather than efficacy.
Phase II Clinical Trial —
    End-stage Osteoarthritis
In December 2003, we completed a randomized,
double-blind, placebo-controlled phase II clinical trial of
ALGRX 4975 in 12 patients with end-stage osteoarthritis of
the knee at one center in the United Kingdom. In this study,
patients received treatment with either a single dose of
1,000 ug of ALGRX 4975 or placebo. Knee replacement
surgery was scheduled between three and six weeks following the
administration of ALGRX 4975. As in the previous study,
injection of ALGRX 4975 was preceded by injection of
lidocaine into the joint space. The primary endpoint of this
trial was to evaluate the magnitude of pain and duration of
reduction in pain at week three following administration of
ALGRX 4975 (since no patient had undergone surgery at that
time).
50
In this study, ALGRX 4975 was shown to reduce
pain at each of the assessed time points (weeks one, two, three,
four, five and six) compared to the pain experienced by patients
prior to the administration of ALGRX 4975. This trial
demonstrated a statistically significant reduction in pain at
week three. At all time points, pain was found to have been
reduced by approximately 50% to 60% in the patients treated with
ALGRX 4975. Pain was not meaningfully reduced in patients
who received placebo. Most patients who received injections of
ALGRX 4975 experienced transient burning pain (the median
lasting 20 minutes) upon administration of ALGRX 4975.
In most of these patients, ice packs were used to manage the
transient pain.
Phase II Clinical Trials —
    Osteoarthritis of the Knee
Two clinical trials are ongoing in osteoarthritis
of the knee. In the first, a randomized, double-blind,
placebo-controlled trial in 52 patients at one center in
the United States, either 300 ug of ALGRX 4975 or
placebo is injected into the knee joint space, following
lidocaine, in patients who no longer receive adequate pain
relief from nonsteroidal antiinflammatory drugs. The primary
efficacy endpoint is the magnitude and length of time that
arthritis pain is reduced in the treated knee following a single
administration, which will be evaluated at one and two weeks
following administration, then monthly until treatment failure,
or the point in time at which patients cease to experience
analgesia. A variety of safety endpoints will be evaluated,
including pain on administration.
We are conducting a second, open-label,
phase II clinical trial in 54 patients at two centers
in Poland. Lidocaine will be injected into the joint and, at
various times thereafter, either a single dose of ALGRX 4975 or
placebo will be injected. In other subjects, a set dose of
lidocaine will be injected, followed by a daily dose of
ALGRX 4975 at three weekly intervals. The primary endpoint
of this trial will be the efficacy of lidocaine administration
to reduce pain after administration of ALGRX 4975.
Phase II Clinical Trial —
    Tendonitis
We are currently conducting a randomized,
double-blind, placebo-controlled phase II trial of
ALGRX 4975 in 40 patients with tennis elbow (lateral
epicondylitis) at two centers in Slovakia. In this trial,
100 ug of ALGRX 4975 is being compared to placebo. The
primary endpoint of this trial will be magnitude and duration of
pain relief compared to placebo. There will be several safety
endpoints of this trial including pain on administration.
Regulatory Pathway
We initiated our first clinical trial, a
phase I clinical trial in end stage osteoarthritis, in
November 2002 under approval from the Institutional Review Board
of Charing Cross Hospital in London, England. The trial was
designed to provide safety data on ALGRX 4975. We then
filed a CTX in the United Kingdom and initiated a phase II
clinical trial in end-stage osteoarthritis. In September 2003,
we submitted an IND application to the FDA. In August 2004, we
initiated a phase II clinical trial in osteoarthritis in
the United States. We also initiated a phase II clinical
trial in tendonitis in November 2004 in Slovakia, also under the
IND. Because osteoarthritis is a long term chronic condition,
often suffered by the elderly, the FDA typically requires longer
trials with a larger amount of patients for osteoarthritis
drugs. We expect that the next phase II clinical trial for
osteoarthritis will include multiple administrations over a
period of at least a year per patient. We will develop our
phase III plan based on the results of that trial.
Commercialization Plan
Currently, we retain worldwide marketing rights
to ALGRX 4975, and if we receive regulatory approval to
market this product, we intend to create a sales and marketing
team to launch the product in the United States. Because we
expect that ALGRX 4975, if approved, would have two
formulations, address multiple indications and be utilized
across different physician specialties, we plan to pursue
multiple sales and marketing strategies tailoring our efforts to
specific market segments. We expect that
51
our own sales and marketing infrastructure would
target certain markets for ALGRX 4975 in the United States,
and we may also seek a development and marketing partner to
maximize the opportunity for this product candidate in other
market segments in the United States. In major markets abroad,
we intend to collaborate with or create co-development or
co-marketing partnerships with pharmaceutical companies who have
greater sales and marketing capabilities than we do. We expect
that these partners would help fund the development costs of
ALGRX 4975 and the costs associated with the launch of
ALGRX 4975 outside the United States.
ALGRX 3268
(PowderJect®
Dermal
Lidocaine)
ALGRX 3268 (PowderJect® Dermal Lidocaine) is
our product candidate that delivers a powder formulation of the
local anesthetic lidocaine into the skin using our proprietary
needle-free dispenser. ALGRX 3268 is intended to provide
rapid, easy-to-administer local analgesia to reduce the pain
associated with needle-stick procedures in children and also in
adults who have fear of needle insertion. The primary market for
ALGRX 3268 is the estimated 42 million needle-stick
procedures that are performed on children in the United States
each year. We believe that this market is highly under-served by
existing products, and we believe that the medical community is
interested in reducing the pain associated with needle-stick
procedures. In fact, a joint recommendation from the American
Academy of Pediatrics and American Pain Society has urged
consideration of local anesthetics and strategies to soothe and
minimize distress even for simple procedures such as blood
draws. We also believe that there is also an opportunity to
serve the adult market, which consists of an estimated
315 million procedures annually where blood is drawn or
intravenous lines are inserted.
Existing therapeutic products have an onset of
analgesia of at least 10 minutes, although the most frequently
used products direct the health care provider to apply the
products at least 30 to 60 minutes prior to a needle-stick
procedure. This delay requires that a patient first be seen by a
nurse or other caregiver in order to have the analgesic product
applied; the patient must then wait until appropriate analgesia
ensues, after which the needle-stick procedure can be done. In
practice, this creates logistical difficulties and other
inconveniences as patients and health care providers must wait
for analgesia to set in. These inconveniences are a significant
barrier to use in busy emergency rooms, oncology suites and
pediatric offices. Furthermore, existing products are formulated
as creams and patches, which may be perceived by health care
providers and patients as messy and cumbersome to use. By
contrast, ALGRX 3268 uses a convenient application procedure,
and our clinical trials to date have shown that it is effective
in one minute following administration. We believe these are
important factors for increasing physician use of analgesia
prior to needle-stick procedures.
Method of Application
ALGRX 3268 contains lidocaine, a currently used,
commercially approved drug, in powder form. ALGRX 3268 is
designed to deliver lidocaine powder exclusively into the skin
with a sterile, single-use, needle-free disposable dispenser.
Pressing a button on the dispenser releases compressed helium
gas from an enclosed microcylinder, which ruptures the cassette
that contains the lidocaine powder. The lidocaine powder is
accelerated in the gas stream and penetrates the skin, where it
provides analgesia to the skin at the site of application. Based
on the results of our clinical trials to date, ALGRX 3268 is
effective in one minute following administration. We believe
this rapid onset will allow the health care provider to prepare
and sterilize the injection site, administer ALGRX 3268, and
prepare the needle set and insert it, all without having to wait
between steps. We believe that ALGRX 3268, if approved, would
eliminate much of the inconvenience that is currently associated
with the administration of cream- and patch-based formulations
and provide a more efficient and satisfactory experience to
health care providers and patients.
Clinical Trials
Development of ALGRX 3268 was initiated by
Chiroscience Group plc and PowderJect Pharmaceuticals plc. Our
license to this technology was acquired by us in connection with
our acquisition of certain of PowderJect's assets in 2002.
In a series of clinical trials conducted by Chiroscience and
PowderJect, nearly
52
2,000 administrations of this product were
given to adults and children using various doses of lidocaine
powder and various helium pressures (measured in units called
bars). These trials were intended to help refine the powder
injection device. Since in-licensing this product candidate, we
have completed our clinical program for ALGRX 3268 through
phase II in approximately 1,100 adults and children
using various doses of lidocaine powder and various helium
pressures. We had an end of phase II meeting with the FDA
in November 2004, and we recently commenced one of two
phase III clinical trials for ALGRX 3268 and
anticipate an NDA filing at the end of 2005.
The following table describes the status of our
clinical trials for ALGRX 3268:
Number of
Phase of Clinical Trial
Status
Age Group
Subjects
Phase I
Completed
Adult
272
Phase I
Completed
Adult
38
Phase I
Completed
Adult
183
Phase II
Completed
Children
195
Phase II
Completed
Children
145
Phase II
Completed
Children
306
Phase III
Ongoing
Children
500
The clinical development program for ALGRX 3268
consisted of evaluation of safety and efficacy in adults and
children following application at either the antecubital fossa
(inside of the elbow) or back of the hand, after which pain was
elicited by means of inserting a needle into a vein and drawing
blood. The studies in adults were phase I clinical trials
performed in normal volunteers, whereas the studies in children
were phase II clinical trials performed in children
visiting clinics for scheduled blood draws.
Phase I Clinical Trial — Adult
    Antecubital Fossa
In October 2002, we completed a randomized,
double-blind, placebo-controlled phase I clinical trial
that studied the safety and efficacy of ALGRX 3268 in
adults at one center in the United States. For three
configurations of the device (0.25 mg of lidocaine and
20 bar helium pressure; 0.50 mg and 20 bar;
0.50 mg and 40 bar), we evaluated skin irritation caused by
the lidocaine particle injection. We examined the patients'
skin for the appearance of redness, swelling, and pinpoint blood
spots. Each of these effects was measured using a five-point
scale, on which scores of three or higher are considered
clinically significant. Neither of the configurations with
20 bar helium pressure caused clinically significant
redness, swelling or pinpoint blood spots, whereas the
configuration with 40 bar helium pressure caused scores of
three or greater in several subjects. Thus, we concluded that a
device using 40 bar pressure was not acceptable.
Following administration of ALGRX 3268 at
the antecubital fossa, it was found that each of the three
configurations of ALGRX 3268 used in this trial reduced
pain on needle insertion in a statistically significant manner
compared with placebo when administered 1, 3, or
5 minutes prior to needle insertion. With all
configurations, efficacy was not apparent when ALGRX 3268 was
administered 10 minutes or more prior to needle insertion.
From the study, we concluded that a dose of 0.25 mg lidocaine
was suboptimal and that the configuration with 0.50 mg
lidocaine delivered at 20 bar pressure was the most
suitable for further development to provide procedural analgesia
at the antecubital fossa.
Phase I Clinical Trial — Adult
    Back of Hand
In July 2003, we completed a randomized,
double-blind, placebo-controlled phase I clinical trial
that studied the safety and efficacy of ALGRX 3268 in adults at
one center in the United States. Skin irritation caused by
lidocaine particle injection was evaluated for two
configurations (0.50 mg at 20 bar; 0.50 mg at
40 bar). We examined patients' skin for the appearance
of redness, swelling, and pinpoint blood spots. Each of these
was measured using a five-point scale, on which scores of three
or higher are considered clinically significant. The
configuration with 20 bar helium pressure caused no
clinically
53
significant redness, swelling or pinpoint blood
spots, whereas the configuration with 40 bar helium
pressure caused scores of three or greater in several subjects.
Thus, we concluded that a device using 40 bar pressure was
not acceptable.
Following administration at the back of the hand,
it was found that both of the configurations of ALGRX 3268
used in this trial reduced pain on needle insertion in a
statistically significant manner compared with placebo when
administered 1, 3, or 5 minutes prior to needle
insertion. With each configuration, efficacy was not apparent
when ALGRX 3268 was administered 10 minutes or more
prior to needle insertion. We were also able to conclude from
this study that the configuration with 0.50 mg of lidocaine
delivered at 20 bar pressure was the most suitable for
further development to provide procedural analgesia at the back
of the hand.
Phase I Clinical Trial —
    Pharmacokinetics Following Administration to the Antecubital
    Fossa in Adults
In December 2002, we completed a randomized,
double-blind, placebo-controlled phase I clinical trial at
one center in the United States that studied the circulation of
ALGRX 3268 in the blood of adult subjects after
administration. Lidocaine circulating in the blood at
concentrations of approximately 100 ng/ml or more may be
associated with heart rhythm abnormalities and seizures. Thus,
we investigated the amount of lidocaine circulating in the blood
following administration of ALGRX 3268 in the antecubital
fossa in adults. We found that following administration of a
dose of 0.50 mg of ALGRX 3268 at 20 bar helium
pressure, the concentration of lidocaine in each subject's
blood plasma was below 5 ng/ml at every time point of the
study. Thus, this trial demonstrated that, following
administration of ALGRX 3268, the concentration of lidocaine in
the blood was at a level unlikely to cause adverse side effects.
The low blood concentrations of lidocaine in this trial resulted
from the very small dose necessary to achieve local anesthesia
with this highly-targeted method.
Phase II Clinical Trial — Child
    Antecubital Fossa
In July 2003, we completed a randomized,
double-blind, placebo-controlled phase II clinical trial
that studied the safety and efficacy of ALGRX 3268 in
children at one center in Poland. Skin irritation caused by
particle injection was evaluated in this trial. We examined
patients' skin for the appearance of redness, swelling, and
pinpoint blood spots. Each of these was measured using a
five-point scale, on which scores of three or higher are
considered clinically significant. Neither of the device
configurations used in this trial (0.25 mg at 20 bar;
0.50 mg at 20 bar) caused clinically significant
redness, swelling or the appearance of pinpoint blood spots.
Following administration at the antecubital
fossa, it was found that a dose of 0.25 mg of ALGRX 3268 at
20 bar helium pressure did not reduce pain on needle insertion
in a statistically significant manner when administered 1 to
3 minutes prior to needle insertion. In contrast, a dose of
0.50 mg of ALGRX 3268 at 20 bar helium pressure was found
to reduce pain on needle insertion in a statistically
significant manner in children aged 3 to 12 years and in
children 13 to 18 years of age when compared to placebo.
Therefore, we determined that the configuration of
ALGRX 3268 most suitable for further development, when
assessed at the antecubital fossa in children, was 0.50 mg
at 20 bar helium pressure, the same configuration as in adults.
Phase II Clinical Trial — Child
    Back of Hand
In January 2004, we completed a randomized,
double-blind, placebo-controlled phase II clinical trial
that studied the safety and efficacy of ALGRX 3268 in
children at one center in Poland. Skin irritation caused by
lidocaine particle injection was evaluated in this study. We
examined the patients' skin for the appearance of redness,
swelling and pinpoint blood spots. Each of these was measured
using a five-point scale, on which scores of three or higher are
considered clinically significant. In this study,
ALGRX 3268 did not cause clinically significant redness,
swelling or pinpoint blood spots.
Following administration at the antecubital
fossa, it was found that a dose of 0.25 mg of ALGRX 3268 at
20 bar helium pressure did not reduce pain on needle insertion
in a statistically significant manner
54
when administered 1 to 3 minutes prior to
needle insertion. In contrast, a dose of 0.5 mg of
ALGRX 3268 at 20 bar helium pressure was shown to
reduce pain on needle insertion in a statistically significant
manner in children aged 3 to 7 when compared to placebo.
Children aged 8 to 18 years of age reported only mild pain
on needle insertion, and ALGRX 3268 did not further reduce pain
in a statistically significant manner. Given the lack of reports
of pain in the older age groups, we decided to conduct an
additional clinical study.
Phase II Clinical Trial — Child
    Back of Hand
In August 2004, we completed a randomized,
double-blind, placebo-controlled phase II clinical trial
that studied the safety and efficacy of ALGRX 3268 in children
at one center in the United States. Skin irritation caused by
lidocaine particle injection was evaluated in this study. We
examined the patients' skin for the appearance of redness,
swelling and pinpoint blood spots. Each of these was measured
using a five-point scale, on which scores of three or higher are
considered clinically significant. In this study, ALGRX 3268 did
not cause clinically significant redness, swelling or pinpoint
blood spots.
In this trial, a dose of 0.5 mg of ALGRX
3268 at 20 bar helium pressure administered 1 to 3 minutes prior
to needle insertion, was shown to reduce pain in a statistically
significant manner in children aged 3 to 12 and in children aged
13 to 18 when compared to placebo.
Phase III Clinical Trial —
    Child Antecubital Fossa and Back of Hand
In November 2004, we initiated a randomized,
double-blind, placebo-controlled phase III clinical trial
to study the safety and efficacy of ALGRX 3268 in up to six
centers in the United States. We will study the reduction in
needle-stick pain caused by 0.50 mg of lidocaine at 20 bar
helium pressure in 500 children aged 3 to 18, when applied
3 minutes prior to needle-stick procedures at the
antecubital fossa or back of hand. The safety indices to be
measured in this study include redness, swelling and the
appearance of pinpoint blood spots.
Regulatory Pathway
In March 2002, the IND application for ALGRX 3268
was transferred to us by PowderJect Technologies Inc. All of our
clinical trials to date have been conducted under this IND
application. In November 2004, we had an end of phase II
meeting with the FDA to discuss our results to date and to
discuss our proposed phase III clinical program and
manufacturing plan. Based on the results of this meeting, we
initiated a phase III clinical trial. If our phase III
clinical trial program is successful, we expect to submit an NDA
with the FDA at the end of 2005 seeking marketing approval for
ALGRX 3268.
Commercialization Plan
In preparation for the potential approval and
launch of ALGRX 3268, our most advanced product candidate, we
plan to build a sales and marketing team to target the most
highly concentrated U.S. market segments for this product
candidate. We believe such a sales team will be able to market
ALGRX 3268 to hospital- and medical center-based pediatric
centers, emergency rooms, urgent care centers and pediatric and
adult oncology centers within the top 50 to 100 major
metropolitan areas in the United States. In addition to building
our own sales and marketing team within the United States, we
will also evaluate partnering with one or more pharmaceutical
companies to help penetrate primary care markets and other
specialty health care audiences not highly concentrated in
hospitals or major medical centers within the United States. We
expect that such partners would also have marketing
responsibility for ALGRX 3268 in key regions outside the United
States, including Europe and Japan.
55
ALGRX 1207 — Topical local
anesthetic for painful conditions of the skin
Overview
ALGRX 1207, our preclinical product candidate, is
a new molecular entity we are developing as a topical local
anesthetic to potentially treat patients with certain types of
neuropathic pain and for pre-procedural administration to reduce
the pain associated with surgical procedures on the skin. Nearly
two million patients in the United States suffer from the types
of neuropathic pain that are readily treatable by topical
application of drugs. Among the various types of neuropathic
pain, the most severe is postherpetic neuralgia, which has a
prevalence of approximately 200,000 patients in the United
States. The most common neuropathic pain condition results from
diabetic polyneuropathy, which is caused by nerve damage in
patients with diabetes as a result of high circulating levels of
blood sugar. Symptoms of diabetic polyneuropathy include
numbness, pain, tingling or burning in the hands, lower legs and
feet, and of the more than 3.5 million patients in the
United States who suffer from diabetic polyneuropathy,
approximately 14% of these patients experience pain as one of
the symptoms. Neuropathic pain is also experienced in patients
with HIV. Nearly one million people in the United States
are infected with HIV, and, among those people, approximately
20% experience pain as a result of nerve damage caused by HIV
infection.
Postherpetic neuralgia and diabetic
polyneuropathy are not well-treated by current analgesic
therapy. In the United States, the most common treatment
involves application of patches containing a local anesthetic to
the painful area. Lidoderm® (Endo) is the most commonly
used treatment for postherpetic neuralgia. As with other
existing topical treatments, Lidoderm® is inconvenient to
use and requires that large patches be worn for 12 hours
and then removed for 12 hours in order to avoid harmful
side effects. For some neuropathic pain diseases, such as
painful HIV polyneuropathy and painful diabetic polyneuropathy,
application of patches is difficult. To treat the pain
associated with such diseases, creams containing local
anesthetics must first be applied, followed by application of a
dressing. Both patches and creams containing local anesthetics
have a slow onset of pain relief, and efficacy may be poor due
to the poor penetration of skin by the local anesthetics that
are currently available. We believe that a simple-to-use local
anesthetic with a long duration of action and deep penetration
into the skin would provide significant analgesia and would
therefore represent an improvement over existing patches and
creams. Based on preclinical studies in animals, ALGRX 1207 has
been shown to provide analgesia following direct administration
to skin more rapidly and with a longer-lasting effect than
currently available topical anesthetics. In addition, we believe
that ALGRX 1207, if approved, could address the pain associated
with a wide variety of procedures involving the skin, including
dermatological surgery, cosmetic skin treatments, and catheter
placement, as well as the pain arising from surgical incisions
that does not subside after the surgery has taken place.
Preclinical Results
To date, ALGRX 1207 has been studied in
preclinical trials. In these animal studies, analgesia following
the administration of ALGRX 1207 was demonstrated within ten
minutes of application, compared to more than 30 minutes
following lidocaine. These studies also demonstrated that ALGRX
1207 provides analgesia lasting about five hours compared to
less than one-half hour for lidocaine.
Regulatory Pathway
ALGRX 1207 is currently undergoing drug safety
evaluation and formulation development in preclinical trials. We
plan to file an IND covering ALGRX 1207 with the FDA in the
second half of 2005 and, thereafter, evaluate the safety and
effectiveness of ALGRX 1207 in humans in phase I clinical
trials.
Intellectual Property
The following factors are important to our
success:
•
receiving patent protection for our product
    candidates;
56
•
not infringing on the intellectual property
    rights of others;
•
preventing others from infringing our
    intellectual property rights; and
•
maintaining our patent rights and trade secrets.
We actively seek, when appropriate, protection
for our products, technologies and proprietary information
through U.S. and foreign patents. In addition, we rely upon
trade secrets and contractual arrangements to protect our
proprietary information.
As of September 30, 2004, we own or license
approximately 10 U.S. patents, 30 U.S. patent
applications, 90 foreign patents and 140 foreign patent
applications related to our technologies, compounds and their
applications in pharmaceutical development or their use as
pharmaceuticals. We face the risk that one or more of the above
patent applications may be denied. We also face the risk that
our issued patents may be challenged or circumvented or may
otherwise not provide protection for any commercially viable
products we develop. We also note that U.S. patents and
patent applications may be subject to interference proceedings,
and U.S. patents may be subject to reexamination
proceedings in the U.S. Patent and Trademark Office (and
foreign patents may be subject to opposition or comparable
proceedings in the corresponding foreign patent office), which
could result in either loss of the patent or denial of the
patent application or loss or reduction in the scope of one or
more of the claims of the patent or patent application. In
addition, such interference, reexamination and opposition
proceedings may be costly. Furthermore, an adverse decision in
an interference proceeding can result in a third party receiving
the very patent rights sought by us, which in turn could affect
our ability to market a potential product to which that patent
filing was directed. In the event that we seek to enforce any of
our owned or exclusively licensed patents against an infringing
party, it is likely that the party defending the claim will seek
to invalidate the patents we assert, which, if successful, would
result in the entire loss of our patent or the relevant portion
of our patent and not just with respect to that particular
infringer. Any litigation to enforce or defend our patent
rights, even if we were to prevail, could be costly and
time-consuming and would divert the attention of our management
and key personnel from our business operations.
In addition, our ability to assert our patents
against a potential infringer depends on our ability to detect
the infringement in the first instance. Many countries,
including certain European countries, have compulsory licensing
laws under which a patent owner may be compelled to grant
licenses to third parties in some circumstances (for example,
when the patent owner has failed to "work" the
invention in that country, or the third party has patented
improvements). In addition, many countries limit the
enforceability of patents against government agencies or
government contractors. In these countries, the patent owner may
have limited remedies, which could materially diminish the value
of the patent. Compulsory licensing of life saving drugs is also
becoming increasingly popular in developing countries either
through direct legislation or international initiatives. Such
compulsory licenses could be extended to include some of our
product candidates, which could limit our potential revenue
opportunities. Moreover, the legal systems of certain countries,
particularly certain developing countries, do not favor the
aggressive enforcement of patent and other intellectual property
protection.
Our success will also depend in part upon our not
infringing patents issued to others. If our product candidates
are found to infringe the patents of others, our development,
manufacture and sale of such potential products could be
severely restricted or prohibited. In fact, one of our issued
European patents covering capsaicin for injection has been
challenged by Grunenthal, a German pharmaceutical company, in
the European Patent Court. In response to this challenge, we
submitted proposed modifications to the patent which we expect
the patent court to approve and publish in late 2004. The
amended patent can be objected to by Grunenthal or any other
third party within two months following publication of the
amended patent by the court. If any future challenge by
Grunenthal or any other party is ultimately successful in
invalidating the patent, the ability of third parties to market
competing technologies to ALGRX 4975 in Europe could be enhanced.
Patent litigation can involve complex factual and
legal questions and its outcome is uncertain. Any claim relating
to infringement of patents that is successfully asserted against
us may require us to pay
57
substantial damages. Even if we were to prevail,
any litigation could be costly and time-consuming and would
divert the attention of our management and key personnel from
our business operations. Furthermore, if a patent infringement
suit were brought against us or our future strategic partners or
licensees, if any, we or they may be forced to stop or delay
developing, manufacturing or selling potential products that are
claimed to infringe a third party's intellectual property
unless that party grants us or our strategic partners or
licensees rights to use its intellectual property. In such
cases, we may be required to obtain licenses to patents or
proprietary rights of others in order to continue to
commercialize our products. However, we may not be able to
obtain any licenses required under any patents or proprietary
rights of third parties on acceptable terms, or at all. Even if
our strategic partners, licensees or we were able to obtain
rights to the third party's intellectual property, these
rights may be non-exclusive, thereby giving our competitors
access to the same intellectual property. Ultimately, we may be
unable to commercialize some of our potential products or may
have to cease some of our business operations as a result of
patent infringement claims, which could severely harm our
business.
Much of our technology and many of our processes
depend upon the knowledge, experience and skills of our
scientific and technical personnel. To protect rights to our
proprietary know-how and technology, we generally require all
employees, contractors, consultants, advisors, visiting
scientists and collaborators as well as potential collaborators
to enter into confidentiality agreements that prohibit the
disclosure of confidential information. The agreements with
employees and consultants also require disclosure and assignment
to us of ideas, developments, discoveries and inventions. These
agreements may not effectively prevent disclosure of our
confidential information or provide meaningful protection for
our confidential information.
Many of our employees were previously employed by
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. Even if we are successful in defending
against these claims, litigation could result in substantial
costs and be a distraction to management. If we fail in
defending such claims, in addition to paying money claims, we
may lose valuable intellectual property rights or personnel.
License Agreements
License Agreement with James N.
    Campbell, M.D., Richard A. Meyer, M.S. and Marco
    Pappagallo, M.D.
In August 2001, we entered into an agreement with
James N. Campbell, M.D., Richard A. Meyer, M.S. and Marco
Pappagallo, M.D. to acquire the exclusive, worldwide
license to U.S. Patent Application No. 09/041294
(U.S. Patent No. 5,962,532) and all applications and
products relating thereto directed to methods and kits for
relieving pain using capsaicin and an anesthetic. The technology
licensed under the agreement relates to the steps of
administering capsaicin for pain reduction that we use in our
product ALGRX 4975. This license excludes topical applications
of capsaicin and analogues to the skin. Upon execution of the
agreement, we paid to the licensees an aggregate license fee of
approximately $42,000, granted options to the licensees for an
aggregate of 361,110 shares of our common stock and
reimbursed the licensees for expenses associated with filing,
prosecution and maintenance of the patent. We are obligated to
pay Drs. Campbell and Pappagallo and Mr. Meyer
royalties on any future sales of ALGRX 4975 by us and any of our
sublicensees. We are also obligated to pay up to $775,000 in
milestone payments under the agreement, of which, as of
September 30, 2004, we have paid an aggregate of $200,000.
The license terminates on March 12, 2018, the date of
expiration of the patent (U.S. Patent No. 5,962,532),
or earlier upon the date of the invalidation of the patent. Our
rights under this agreement can be terminated on
10 days' written notice if we fail to fulfill any
material obligation under the agreement and the failure is not
cured by us within 180 days of receiving notice of such
failure. We can terminate the agreement upon 30 days'
prior notice for any reason or upon 10 days prior notice
for the failure of any counterparty to fulfill a material
obligation not cured within 90 days of our giving notice of
the failure. The license is subject to a license granted by
Drs. Campbell and Pappagallo and Mr. Meyer to
58
Johns Hopkins University for non-profit purposes.
The license is subject to a sublicense to the inventors for
research and development, with no right to commercialization.
License Agreement with Marco
    Pappagallo, M.D.
In August 2001, we entered into a non-exclusive,
worldwide license agreement with Marco Pappagallo, M.D. for
U.S. Provisional Patent Application No. 60/006,385 and
U.S. Utility Patent Application No. 08/746,207
(U.S. Patent No. 6,248,788) directed to methods of
treating neuropathic pain using capsaicin anesthetic, and all
applications and patents relating thereto. The licensed
technology relates to the use of capsaicin for pain relief. The
primary patent underlying the license expires on
November 6, 2016. This license agreement makes reference to
the August 2001 license agreement between us and
Drs. Campbell and Pappagallo and Mr. Meyer and
provides that if Dr. Pappagallo develops or has any right
to any technology under U.S. Patent No. 6,248,788
relating to an injectable product or service using capsaicin and
its analogues for pain relief, the technology will be licensed
to us pursuant to the terms of the August 2001 license agreement
with Drs. Campbell and Pappagallo and Mr. Meyer. We
are also obligated to pay up to $222,000 in milestone payments,
and we have made no milestone payments to date. With respect to
the licensed technology, we are obligated to pay
Dr. Pappagallo royalties on any future sales by us or our
sublicensees of transdermal or topical products or services
developed from the licensed technology. If at any time
Dr. Pappagallo becomes the exclusive owner of the licensed
technology, the royalty payments that we are obligated to pay
will increase and we will be obligated to make milestone
payments of up to $666,000. Our rights under the agreement can
be terminated on 10 days' written notice if we fail to
fulfill any material obligation under the agreement and the
failure is not cured by us within 180 days of receiving
notice of such failure. We can terminate the agreement upon
30 days' prior notice for any reason or upon
10 days' prior notice for the failure of any
counterparty to fulfill a material obligation not cured within
90 days of our giving notice of the failure. The license is
subject to a sublicense to the inventors for research and
development, with no right to commercialization.
License with PowderMed Limited (formerly
    with PowderJect Research Limited)
In March 2002, we acquired from PowderJect
Research Limited the exclusive, worldwide license to
intellectual property consisting of over 150 patents and
applications relating to the methods and apparatus for the
delivery of powder forms of medications. The technology licensed
under this agreement with PowderJect includes the technology
underlying our product ALGRX 3268. PowderJect Research Limited
is part of the Chiron group of companies operating under the
Chiron Corporation. In May 2004, PowderJect Research Limited
assigned its rights and obligations under the license agreement
to PowderMed Limited, except that any royalties under the
license for any future sales by us or sublicencees of ALGRX 3268
or other products derived from, or produced with the licensed
technology will be payable by us to Chiron Vaccines Holdings
Limited. With respect to ALGRX 3268, we are required to pay
royalties to Chiron Vaccines Holdings Limited on any future
direct sales and any future sales effected by any sublicensee.
For products other than ALGRX 3268 resulting from the licensed
technology, we are also obligated to pay Chiron royalties on any
future direct sales. We must also pay royalties on licensing
fees, milestone payments and other consideration that we receive
from any sublicensees. Under the agreement from July 7,
2003 to July 7, 2005, we are obligated to spend $1,000,000
researching and developing products associated with the licensed
technology, plus an additional $1,000,000 for every 12 month
period from July 7, 2005 to July 7, 2008.
The term of the license commenced on
March 22, 2002 and continues until the expiration of the
last patent to expire licensed under the agreement unless the
agreement is otherwise terminated. The primary patents licensed
under the agreement and used by us in connection with ALGRX 3268
expire in 2014. The agreement can be terminated by either party
if the other party ceases to do business in the ordinary course,
or assigns all or substantially all of its assets for the
benefit of creditors. Either party can also terminate for
material breach if not cured within 60 days of notice or if
not cured within 30 days of notice if the breach relates to
payment provisions. The license agreement also implemented an
intellectual property sharing arrangement pursuant to which we
and PowderMed Limited are obligated to share with
59
one another any improvements and modifications to
the licensed technology. The sharing arrangement expires on
March 22, 2007.
Collaboration, Development and License
    Agreement with Bridge Pharma, Inc.
In October 2004, we entered into an agreement
with Bridge Pharma, Inc. under which we acquired the exclusive
worldwide license to proprietary technology relating to certain
analgesic and local anesthetic pharmaceutical agents and
compounds. The licensed technology relates to our product
candidate, ALGRX 1207. The agreement also grants us the right to
research, develop, sell, import or otherwise commercialize
products based on such compounds, provided such products are an
analgesic and/or local anesthetic for human or animals in any
route of administration, including without limitation, dermal,
mucosal, dental, ophthalmic or injection. Upon execution of the
agreement, we paid Bridge Pharma, Inc. an up-front license fee
consisting of a cash payment and shares of our common stock. We
are obligated to pay Bridge Pharma, Inc. royalties on any future
sales by us or our sublicensees and additional payments if we
achieve certain clinical, regulatory and commercial milestones.
To date, we have paid no milestone payments. We are responsible
for our costs, and those costs of Bridge Pharma, Inc. that we
approve, associated with the research, development and
commercialization of products using the underlying technology.
The term of the agreement commenced on October 28, 2004 and
continues until our obligation to pay royalties to Bridge
Pharma, Inc. expires, or earlier if terminated by either party.
Either party may terminate the agreement for material breach if
not cured within 60 days of notice, or with immediate
effect if the other party makes an assignment to benefit
creditors, files an insolvency petition in bankruptcy or
commences any similar action such as a liquidation or
reorganization.
Government Regulation
The FDA and comparable regulatory agencies in
foreign countries, as well as local and state or other regional
governmental agencies, impose substantial requirements upon the
clinical development, manufacture and marketing of
pharmaceutical products. 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 products.
The process required by the FDA before product
candidates may be marketed in the United States generally
involves the following:
•
preclinical laboratory and animal tests;
•
submission of an investigational new drug
    application, or IND application, which must become effective
    before clinical trials may begin;
•
adequate and well-controlled human clinical
    trials to establish the safety and efficacy of the proposed drug
    for its intended use;
•
pre-approval inspection of manufacturing
    facilities, company regulatory files, and selected clinical
    investigators; and
•
FDA approval of a new drug application, or NDA,
    or NDA supplement, for an approval of a new indication if the
    product is already approved for another indication.
The testing and approval process requires
substantial time, effort and financial resources, and we cannot
be certain that any new approvals for our product candidates
will be granted on a timely basis, if at all.
Prior to commencing the first human clinical
trial, we must submit an IND application to the FDA. The IND
application 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 preclinical drug
testing or nonclinical safety evaluation in animals, or the
design or conduct of the first proposed clinical trial and
places the study on clinical hold. In such a case, the IND
sponsor and the FDA must resolve any outstanding concerns before
the clinical trial may begin. Our submission of an IND
application may not result in FDA
60
authorization to commence a clinical trial. In
fact, with respect to our first IND application for ALGRX 4975
and our IND application for ALGRX 3268, the FDA placed our
clinical trials on hold, subsequently lifting each hold to allow
us to initiate or continue the trials after we submitted more
information to address FDA concerns. A separate submission to
the existing IND application must be made for each successive
clinical trial conducted during product development, and the FDA
must not object to the submission before each clinical trial may
start and continue. Further, an independent institutional review
board for investigation in human subjects within each medical
center in which an investigator wishes to participate in the
clinical trial must review and approve the preclinical drug
testing and nonclinical safety evaluation and efficacy in
animals or prior human trials as well as the design and goals of
the proposed clinical trial before the clinical trial commences
at that center. Regulatory authorities or an institutional
review board 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.
For purposes of NDA approval, human clinical
trials are typically conducted in three sequential phases that
may overlap.
•
Phase I:
Phase I clinical studies are initially conducted in a
    limited patient population to evaluate the product candidate for
    safety, dosage tolerance, absorption, metabolism, distribution
    and excretion in healthy humans or patients.
•
Phase II:
Phase II clinical studies are conducted in a limited
    patient population to further identify and measure possible
    adverse effects or other safety risks, to determine the efficacy
    of the product for specific targeted diseases and to determine
    dosage 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. The first, limited phase II
    clinical trials may be termed "phase IIa" trials
    to denote that only a few patients are enrolled in order to
    obtain preliminary safety and efficacy data. Later, larger
    phase II clinical trials may be termed
    "phase IIb" trials to denote that preliminary
    evidence of safety and efficacy has already been obtained, and
    the current trial is intended to confirm the finding of the
    earlier trial, as well as to enroll additional subjects in order
    to further refine the estimate of the optimal dose and to detect
    less common side effects. In some instances, a phase IIb
    trial may be declared acceptable by a regulatory agency, such as
    the FDA, as a "pivotal" trial necessary for purposes
    of obtaining marketing authorization for a drug.
•
Phase III:
When
    phase II clinical evaluations demonstrate that a dosage
    range of the product appears to be effective and has an
    acceptable safety profile, phase III clinical trials are
    undertaken in large patient populations to further evaluate
    dosage, to confirm clinical efficacy and to evaluate safety in
    yet larger and more diverse patient populations at multiple
    clinical trial sites.
The FDA may require, or companies may pursue,
additional clinical trials after a product is approved. These
so-called phase IV clinical studies may be made a condition
to be satisfied after a drug receives approval. The results of
phase IV clinical studies may confirm the effectiveness of
a product and may provide important safety information to
augment the FDA's voluntary adverse drug reaction reporting
system.
The results of product development, preclinical
studies and clinical trials are submitted to the FDA as part of
an NDA, or as part of an NDA supplement. The FDA may deny
approval of an NDA or NDA supplement 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 are submitted, the FDA may
ultimately decide that the NDA or NDA supplement does not
satisfy the criteria for approval. The FDA may withdraw product
approval, once issued, if ongoing regulatory standards are not
met or if safety problems occur after the product reaches the
market. In addition, the FDA may require testing and
surveillance programs to monitor the effect of approved products
which have been commercialized, and the FDA has the power to
prevent or limit further marketing of a product based on the
results of these post-marketing programs.
Satisfaction of FDA 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
61
type, complexity and novelty of the product or
disease. Typically, if a drug product is intended to treat a
chronic disease, as is the case with some of the product
candidates we are developing, safety and efficacy data must be
gathered over an extended period of time, which can range from
one to three years or more. Government regulation may delay or
prevent marketing of product candidates for new indications 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 product candidates
on a timely basis, if at all. Success in early stage clinical
trials does not ensure success in later stage clinical trials.
Data obtained from clinical activities is not always conclusive
and may be susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. Even if a product
candidate receives regulatory approval, the approval may be
significantly limited to specific disease states, patient
populations and dosages. Further, even after regulatory approval
is obtained, later discovery of previously unknown problems with
a product may result in restrictions on the product or even
complete withdrawal of the product from the market. Delays in
obtaining, or failures to obtain, additional regulatory
approvals for our products would harm our business. In addition,
we cannot predict what adverse governmental regulations may
arise from future U.S. or foreign governmental action.
Any products manufactured or distributed by us
pursuant to FDA approvals are subject to continuing regulation
by the FDA, including record-keeping requirements and reporting
of adverse experiences 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 good manufacturing
practices, which impose certain procedural and documentation
requirements upon us and our third party manufacturers. We
cannot be certain that we or our present or future suppliers
will be able to comply with the good manufacturing practices
regulations and other FDA regulatory requirements. If our
present or future 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 marketing and
promotion of drugs. A company is permitted to 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 criminal penalties. Physicians may prescribe
legally available drugs for uses that are not described in the
product'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,
restrict manufacturers' communications on the subject of
off-label use.
The FDA's policies may change, and
additional government regulations may be enacted which could
prevent or delay regulatory approval of our product candidates
or approval of new diseases for our product candidates. We
cannot predict the likelihood, nature or extent of adverse
governmental regulation that might arise from future legislative
or administrative action, either in the United States or abroad.
Supply Agreement
In March 2002, we entered into a supply agreement
with PowderJect Technologies Limited to supply us with the
microcylinders for ALGRX 3268. PowderJect Technologies Limited
is part of the Chiron group of companies operating under the
Chiron Corporation. PowderJect Technologies Limited is currently
our sole supplier of microcylinders, and we currently have no
alternate supplier or source of microcylinders. The
microcylinders are exclusively manufactured for PowderJect
Technologies Limited by a third party manufacturer pursuant to
supply and manufacturing agreements by and between PowderJect
Technologies Limited and the third party manufacturer. We are
not a party to any agreements with that third party
manufacturer. If the third party manufacturer breaches its
obligations to PowderJect Technologies Limited and the breach
results in PowderJect Technologies Limited's inability to
supply us with microcylinders, PowderJect Technologies Limited,
under the terms of its supply agreement with us, must take all
reasonable steps to enforce its rights under its agreements with
the third party manufacturer and seek remedies that are in the
best
62
interest of AlgoRx and PowderJect Technologies
Limited, including without limitation, seeking specific
performance or injunctive relief. Although we have not
experienced any shortages of microcylinders to date, our
inability to obtain the microcylinders for any reason could
substantially impair our development activities or the
production, marketing and distribution of ALGRX 3268.
The term of our supply agreement with PowderJect
Technologies Limited commenced on March 22, 2002 and
continues until the later of March 22, 2012 and the
termination of the agreement with the third party manufacturer,
unless terminated earlier. We have an option to extend the term
of the agreement until March 2014, if the agreement with the
third party manufacturer terminates on mutually agreeable terms
before March 2010. We can terminate our supply agreement with
PowderJect Technologies Limited on account of a material uncured
breach. If we materially breach our payment obligations under
the supply agreement with PowderJect Technologies Limited,
PowderJect Technologies Limited can suspend its supply
obligations to us if we fail to cure the breach within
60 days of the date of notice of such breach. Our cost per
microcylinder are based on a number of factors including,
PowderJect Technologies Limited's direct cost of materials
and labor and fixed costs, such as utilities and rent, allocated
to us by PowderJect Technologies Limited.
Manufacturing
We have no manufacturing facilities. We have
entered into arrangements with various third parties for the
formulation and manufacture of our clinical supplies. These
supplies and the manufacturing facilities must comply with
regulations and current good laboratory practices or cGLPs, and
current good manufacturing practices or cGMPs, enforced by the
FDA. We plan to continue to outsource formulation and
manufacturing for our clinical trials and potential
commercialization. Other than the microcylinder used in ALGRX
3268 described above, we believe that there are alternate
manufacturers available to produce our clinical supplies and, if
our product candidates are approved by the FDA, commercial
supplies of our product components.
Competition
We compete in the segment of the pharmaceutical
market that treats pain, which is highly competitive. We face
significant competition from most pharmaceutical companies as
well as biotechnology companies that are also researching and
selling products designed to treat pain. Many of our competitors
have significantly greater financial, manufacturing, marketing
and product development resources than we do. Large
pharmaceutical companies in particular have extensive experience
in clinical testing and in obtaining regulatory approvals for
drugs. These companies also have significantly greater research
capabilities than we do. In addition, many universities and
private and public research institutes are active in
neurological research, some in direct competition with us. We
also must compete with these organizations to recruit scientists
and clinical development personnel.
We believe that our ability to successfully
compete will depend on, among other things:
•
the efficacy, safety and reliability of our
    product candidates;
•
the timing and scope of regulatory approval;
•
the speed at which we develop product candidates;
•
our ability to manufacture and sell commercial
    quantities of a product to the market;
•
product acceptance by physicians and other health
    care providers;
•
the quality and breadth of our technology;
•
the skills of our employees and our ability to
    recruit and retain skilled employees;
•
the protection of our intellectual
    property; and
•
the availability of substantial capital resources
    to fund development and commercialization activities.
63
ALGRX 4975.
If ALGRX
4975 is approved and commercialized, it will face significant
competition. For treatment of severe postsurgical pain, morphine
(several manufacturers) administered by infusion pump is a
leading product. Several other oral, injectable and patch opioid
formulations are also used, including Vicodin® (Abbott
Labs), OxyContin® (Purdue Pharma) and Duragesic®
(Johnson & Johnson). For treatment of localized
neuropathic pain, Neurontin® (Pfizer) and tricyclic
antidepressants (several manufacturers) are used. For treatment
of later-stage osteoarthritis, Synvisc® (Genzyme) and other
hyaluronic acid products are injected locally into the knee, and
several opioids, most prominently OxyContin® (Purdue
Pharma) and Duragesic® (Johnson & Johnson) are
also used. There are several high-dose topical capsaicins in
development by NeurogesX and Winston Labs, which may be approved
prior to ALGRX 4975. Another VR1 agonist, resiniferatoxin, which
is currently in phase II clinical trials, has similar
attributes as capsaicin, is being developed for topical delivery
by ICOS and may compete with ALGRX 4975. VR1 inhibitors are
being developed by several companies. Among these, products
being developed by Merck-Neurogen, Amgen, Schwarz Pharma-Amore
Pacific, Purdue Pharma and PainCeptor are expected to advance to
clinical evaluation in late 2004 through 2005.
ALGRX 3268.
If ALGRX
3268 is approved and commercialized, it will face significant
competition. During 2003, the leading products for local
anesthesia prior to needle-stick procedures were L.M.X.4®,
a cream-based product (formerly ELA-MAX®, Ferndale Labs),
and EMLA®, a cream-based product sold by AstraZeneca.
EMLA® has historically been the market leader.
Additionally, beginning in 2003, several generic versions of
EMLA® manufactured by companies including Fougera, QLT,
Geneva, and Hi-Tech Pharmacal were approved by the FDA. Products
with more rapid onset than the cream-based products listed above
include Numby Stuff® (Iomed) and two products for which
NDAs have been submitted, LidoSite® (Braun-Vyteris) and
S-Caine® Patch (ZARS).
ALGRX 1207.
If ALGRX
1207 is approved and commercialized, it will face significant
competition from existing products, including LidoDerm®
(Endo), which is a lidocaine patch, and a variety of local
anesthetic creams and products with alternative means of
delivering lidocaine, including EMLA® cream (AstraZeneca)
and its generic equivalents, L.M.X.4® (Ferndale Labs),
S-Caine® Patch (ZARS) and LidoSite® (Braun-Vyteris).
If approved, ALGRX 1207, which will also likely be formulated as
a cream or patch, will compete with existing products based on
factors such as efficacy, convenience and onset time of pain
relief.
Legal Proceedings
We are not involved in any material legal
proceedings.
Facilities
We currently lease and occupy 10,693 square
feet of office space in Secaucus, New Jersey. The lease expires
on July 6, 2009, although we have an option to extend the
lease for an additional five years at the then market rate. We
also lease 24,800 square feet of office and laboratory
space in Fremont, California, but have since scaled back
operations in California. The Fremont, California lease expires
on January 31, 2005, and we are currently seeking to lease
approximately 2,300 square feet of new office space near
our current Fremont, California facility to occupy upon the
expiration of our current Fremont lease. We believe our
facilities are adequate for our present operations.
Employees
As of September 30, 2004, we had
23 full-time employees. We believe our relations with our
employees are good.
64
MANAGEMENT
Executive Officers, Directors and Key
Employees
Our executive officers, directors and key
employees, as of November 1, 2004, are as follows:
Name
Age
Positions
Ronald M.
    Burch, M.D., Ph.D.
49
Chief Executive Officer and Director
Paul R. Hamelin, R.Ph.
49
President and Chief Operating Officer
Jeffrey D.
    Lazar, M.D., Ph.D.
58
Senior Vice President, Clinical Research and
    Regulatory Affairs
Jeffrey A. Rona
36
Vice President, Finance and Chief Financial
    Officer
Badri N. Dasu
41
Vice President, Manufacturing and Process
    Development
Diana Davidson
49
Vice President, Marketing
Charles M. Cohen, Ph.D.(1)
54
Director
Rodney A. Ferguson, J.D., Ph.D.(1)
48
Director
Arnold L. Oronsky, Ph.D.
63
Director
Michael F. Powell, Ph.D.(1)
50
Director
(1)
Member of the audit and compensation committees.
Ronald M.
Burch, M.D., Ph.D.
co-founded AlgoRx Pharmaceuticals, Inc. in March 2001, and
served as our President until September 2004 and as Chief
Executive Officer since inception. Prior to joining AlgoRx,
Dr. Burch was employed at Purdue Pharma, a privately held
pharmaceutical company, from 1995 until 2001, serving in a
number of managerial positions, including Vice President,
Scientific Evaluations and Immunotherapeutics and Project
Manager and Medical Safety Officer for several pain development
programs. From 1993 to 1995, Dr. Burch served as Director,
Pharmacology at Zeneca Pharmaceuticals, a pharmaceutical
company. In 1992, Dr. Burch served as Director, Immunology
and Bone Metabolism at Rhone Poulenc-Rorer, a global
pharmaceutical company, and as Director, Pain and Inflammation
at Nova Pharmaceutical Corp., a pharmaceutical company. From
1987 to 1991, Dr. Burch served in various capacities at
Nova Pharmaceutical, including as Director, Pain and
Inflammation, Research Technology. Dr. Burch obtained a
Ph.D. in Pharmacology and M.D. from the Medical University of
South Carolina, and served as a Medical Staff Fellow at the
National Institute of Health.
Paul R. Hamelin, R.Ph.
has served as our President and Chief
Operating Officer since September 2004. Prior to joining us,
Mr. Hamelin served as President and Chief Executive Officer
of Elitra Pharmaceuticals, a biotechnology company with a focus
on antimicrobial drugs, from 2002 to 2004. From 2000 to 2002, he
served as Senior Vice President of Global Commercial Operations
at Millennium Pharmaceuticals, a biopharmaceutical company.
Prior to joining Millennium Pharmaceuticals, Mr. Hamelin
served as Senior Vice President at Pharmacia/ Searle, a
pharmaceutical company, from 1995 to 2000. Prior to Pharmacia/
Searle, Mr. Hamelin spent 6 years at Abbott
Laboratories, a pharmaceutical company, and 10 years at Eli
Lilly and Company, a pharmaceutical company. At these
pharmaceutical companies, Mr. Hamelin had many different
sales and marketing roles, including the responsibility of
launching several products. Mr. Hamelin obtained a
Bachelor's Degree in Pharmacy — Clinical
Pharmacist from Ferris State University in 1980 and a B.S. in
Zoology from Michigan State University in 1976.
Jeffrey D. Lazar, M.D., Ph.D.
has served as our Senior Vice
President, Clinical Research and Regulatory Affairs since 2002.
From 1999 to 2002, he served as President, Lazar Associates,
LLC, a consulting firm to pharmaceutical companies. Prior to his
work with Lazar Associates, Dr. Lazar served as Senior
Medical Director at Purdue Pharma from 1997 to 1999. From 1996
to 1997, he served as Director of the Clinical Trials Management
Office for the Greenville Hospital System. From 1992 to 1995, he
served as Executive Vice President of Pharmaco Dynamics
Research, Inc. From 1985 to 1992, he served
65
as Director in Clinical Pharmacology at Pfizer.
Dr. Lazar received his M.D. from the University of Michigan
in 1974 and his Ph.D. from the University of Heidelberg in 1973.
He was also a fellow at Vanderbilt University.
Jeffrey A. Rona
has
served as our Chief Financial Officer since February 2004. Prior
to becoming our Chief Financial Officer, he served as our Vice
President of Finance from September of 2002 to February of 2004.
Prior to joining us, Mr. Rona was in the Investment Banking
Department at UBS Warburg, a global securities and investment
banking firm, from 2000 to 2002. From 1998 to 2000,
Mr. Rona served as the Director of Finance and Corporate
Development at Antigenics Inc., a biotechnology firm developing
products to treat cancer, infectious diseases and autoimmune
disorders. In 1998, Mr. Rona was employed by
Carr & Company, a private equity firm. From 1990 to
1997, Mr. Rona was with Coopers and Lybrand and its
wholly-owned subsidiary Coopers & Lybrand Securities,
serving in a variety of capacities. Mr. Rona received a
B.S. in Accounting from Case Western Reserve University in 1990.
Badri N. Dasu
has
served as our Vice President, Manufacturing and Process
Development since 2002. Prior to joining us, he was employed at
PowderJect Technologies Inc., a pharmaceutical company, from
2000 until 2002, serving in a number of positions including Vice
President, Manufacturing, Process Development and Device
Development. From 1996 to 2002, Mr. Dasu served in a
variety of engineering positions including Director, Process
Development and Product Transfer at Metrika Inc., a maker of
micro optical, disposable medical diagnostics. From 1992 to
1996, Mr. Dasu was an Engineer at Cygnus Inc., a maker of
drug delivery systems. Mr. Dasu has a M.S. in Chemical
Engineering from the University of Tulsa.
Diana Davidson
has
served as our Vice President, Marketing since July 2003. Prior
to joining us, she served in a variety of positions at Elan
Corporation, a pharmaceutical company developing products for
neurological and autoimmune diseases, from 1994 to 2003,
including Vice President of Marketing for Elan Drug Delivery
from 1994 to 2003. From 1986 to 1994, she worked at Pharmacia
Deltec and held a number of positions including Director of
Marketing and Director of Strategic Planning. Ms. Davidson
received a B.S. in Laboratory Technology from the University of
Oklahoma in 1977.
Charles M. Cohen, Ph.D.
has served as a member of our board of
directors since February 2004. Since May 2003, Dr. Cohen
has been a partner at Advent International, a global venture
capital firm. Currently Dr. Cohen is the Chairman,
Supervisory Board of Cellzome AG, a post-genomics
biopharmaceutical company. From 2000 to 2002, Dr. Cohen was
the Chief Executive Officer of Cellzome AG. Before this,
Dr. Cohen co-founded Creative BioMolecules, Inc., a
biotechnology company, in 1982 and was a director and its
President and Chief Executive Officer from 1985 to 1995.
Dr. Cohen serves on the board of directors of several
companies including Exelixis, Inc. and Anadys Pharmaceuticals,
Inc. He has been the Chief Executive Officer of several
companies. He received his Ph.D. from New York University School
of Medicine.
Rodney A.
Ferguson, J.D., Ph.D.
has
served as a member of our board of directors since March 2001.
Dr. Ferguson is a Partner on the Life Sciences venture
capital team at JPMorgan Partners, a global private equity firm.
Prior to joining JPMorgan Partners in January 2001,
Dr. Ferguson was a Partner at InterWest Partners, a venture
capital firm, focusing on investments in medical technology,
from July 1999 to December 2000. Prior to joining InterWest,
Dr. Ferguson was Senior Director of Business and Corporate
Development at Genentech, Inc., a biotechnology company. Prior
to joining the business and corporate development department at
Genentech in 1993, Dr. Ferguson was Senior Corporate
Counsel in Genentech's legal department. Prior to joining
Genentech in 1988, Dr. Ferguson was an associate at
McCutchen, Doyle, Brown & Enersen in
San Francisco. Dr. Ferguson is also a director and
chairman of Corgentech Inc. and a director of Santarus, Inc.
Dr. Ferguson holds a Ph.D. in Biochemistry from the State
University of New York at Buffalo and a J.D. from Northwestern
University.
Arnold L.
Oronsky, Ph.D.
has served as a
member of our board of directors since March 2001.
Dr. Oronsky is General Partner with InterWest Partners, a
venture capital firm focusing on investments in medical
technology. Dr. Oronsky joined InterWest in a full-time
capacity in 1994 after serving as a special limited partner
since 1989. In addition to the position of General Partner at
InterWest, he also serves as a
66
senior lecturer in the Department of Medicine at
Johns Hopkins Medical School. From 1980 to 1993,
Dr. Oronsky was the Vice President for Discovery Research
at the Lederle Laboratories division of American Cyanamid
Company, a pharmaceutical company. From 1970 to 1972,
Dr. Oronsky was assistant professor at Harvard Medical
School, where he also served as a research fellow from 1968 to
1970. From 1973 to 1976, Dr. Oronsky was the head of the
Inflammation, Allergy, and Immunology Research program for
Ciba-Geigy Pharmaceutical Company. Dr. Oronsky is also a
director of Myogen Inc., Corixa Corporation, Metabasis
Therapeutics, Inc. and Dynavax Technologies Corp.
Dr. Oronsky holds a Ph.D. from Columbia University's
College of Physicians and Surgeons.
Michael F.
Powell, Ph.D.
has served as a
member of our board of directors since March 2001. He has served
as Managing Director of Sofinnova Ventures, a venture capital
firm, since 1998. Previously, he was a Group Leader at Genentech
from December 1990 to June 1997 and Director of Product
Development for Cytel Corporation, a biotechnology company, from
September 1987 to December 1990. In 1993, Dr. Powell was
honored as a Fellow by the American Association of
Pharmaceutical Scientists. Dr. Powell is the author of
nearly 100 publications and books, including a treatise on
vaccine design. Dr. Powell is also a director of Seattle
Genetics, Inc. Dr. Powell received a Ph.D. in Chemistry
from the University of Toronto in 1981 and was a postdoctoral
fellow in Bio-Organic Chemistry at the University of California,
Berkeley.
Scientific and Clinical Advisory
Board
The following individuals are members of our
Scientific and Clinical Advisory Board:
Name
Current Positions
James N. Campbell, M.D.
Professor of Neurosurgery and Vice Chairman,
    Department of Neurosurgery, The Johns Hopkins University School
    of Medicine and Director of the Blaustein Pain Treatment
    Program, The Johns Hopkins Hospital; President and Chairman,
    American Pain Foundation
Richard B. Carter, Ph.D.
Executive Director, Neuroscience, Global
    Pharmaceutical Development, Novartis
Ronald Dubner, D.D.S., Ph.D.
Professor and Chair, Department of Bio-Medical
    Sciences, University of Maryland Dental School; Director,
    University of Maryland Pain Center
Michael G. Ehrlich, M.D.
Vincent Zecchino Professor and Chairman,
    Surgeon-in- Chief, Department of Orthopedics, Brown Medical
    School
Henrik Kehlit, M.D., Ph.D.
Professor of Surgery, University of Copenhagen
    School of Medicine; Department of Surgical Gastroenterology,
    Hvidovre Hospital, Hvidovre, Denmark
Kenneth A. Selzer, M.D.
General Partner, Neuropractice; Founder and
    Director, INC Research, Inc.
Davis L. Temple, Jr., Ph.D.
President, Temple Consulting; Director, Cortex
    Pharmaceutical; Director, Arcaris Genetics; Director,
    InternetSound.com
Composition of our Board of
Directors
Immediately prior to this offering, our board of
directors will be divided into three staggered classes of
directors of the same or nearly the same number and each of our
directors will be assigned to one of the three classes. At each
annual meeting of stockholders, a class of directors will be
elected for a three-year term to succeed the directors of the
same class whose terms are then expiring. The terms of the
directors will expire upon election and qualification of
successor directors at the annual meeting of stockholders to
67
be held during the years 2005 for the
Class I directors, 2006 for the Class II directors and
2007 for the Class III directors.
Our certificate of incorporation and bylaws
provide that the number of our directors shall be fixed from
time to time by a resolution of the majority of our board of
directors. Any additional directorships resulting from an
increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class
shall consist of one third of the directors. There are no family
relationships among any of our directors or executive officers.
The division of our board of directors into three
classes with staggered three-year terms may delay or prevent
stockholder efforts to effect a change of our management or a
change in control.
Committees of our Board of Directors
Our board of directors has established an audit
committee and a compensation committee and intends, in
conjunction with this offering, to establish a nominating and
corporate governance committee.
Audit Committee.
Our
audit committee is a standing committee of our board of
directors and operates under a written charter adopted by our
board. Our audit committee consists of Dr. Charles M. Cohen
(Chairman), Dr. Rodney A. Ferguson and Dr. Michael F.
Powell. The audit committee reviews and monitors our accounting
practices and financial statements; appoints, determines funding
for, and oversees our independent auditors; reviews the results
and scope of audits; approves the retention of the independent
auditors to perform any proposed permissible non-audit services;
and reviews and evaluates our audit and control functions.
Dr. Cohen is an audit committee financial expert under the
rules and regulations of the Securities and Exchange Commission.
Compensation
Committee.
Our compensation committee
is a standing committee of, and will operate under a written
charter to be adopted by, our board of directors. Our
compensation committee consists of Dr. Charles M. Cohen,
Dr. Rodney A. Ferguson and Dr. Michael F. Powell. The
compensation committee makes decisions and recommendations
regarding salaries, benefits and incentive compensation for our
directors and executive officers, and administers our incentive
compensation and benefit plans, including our 2001 Equity
Incentive Plan.
Nominating and Corporate Governance
Committee.
In conjunction with this
offering, we intend to establish a nominating and corporate
governance committee of our board of directors and adopt a
written charter for the committee. The nominating and corporate
governance committee will be authorized to identify and approve
individuals qualified to serve as members of our board of
directors, select director nominees for our annual meetings of
stockholders, evaluate our board's performance and develop
and recommend to our board corporate governance guidelines and
provide oversight with respect to corporate governance and
ethical conduct.
Other Committees.
Our board of directors may establish other committees as it
deems necessary or appropriate from time to time.
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.
Director Compensation
We reimburse our directors who are not employees
for their reasonable expenses incurred in attending meetings of
the board of directors. Our directors are eligible to
participate in our 2001 Equity Incentive Plan.
68
Limitation of Liability and Indemnification of
Officers and Directors
Our certificate of incorporation limits the
liability of directors to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except
liability for:
•
any breach of their duty of loyalty to the
    corporation or its stockholders;
•
acts or omissions not in good faith or which
    involve intentional misconduct or a knowing violation of law;
•
unlawful payments of dividends or unlawful stock
    repurchases or redemptions; or
•
any transaction from which the director derived
    an improper personal benefit.
Our bylaws provide that we will indemnify our
directors and officers to the fullest extent permitted by law,
including if he or she is serving as a director, officer,
employee or agent of another company at our request. We believe
that indemnification under our bylaws covers at least negligence
and gross negligence on the part of indemnified parties. Our
bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability
arising out of his or her actions in connection with their
services to us.
In conjunction with this offering, we intend to
enter into separate indemnification agreements with our
directors and executive officers, in addition to the
indemnification provided for in our bylaws. These agreements,
among other things, will provide that we will indemnify our
directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts
incurred by a director or executive officer in any action or
proceeding arising out of such person's services as one of
our directors or executive officers, or any of our subsidiaries
or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons
as directors and executive officers.
There is no pending litigation or proceeding
involving any of our directors or executive officers as to which
indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a
claim for indemnification.
Executive Compensation
The following table sets forth information
regarding the compensation that we paid to our Chief Executive
Officer and each of our other most highly compensated executive
officers during the year ended December 31, 2003. We refer
to these officers in this prospectus as the "named
executive officers."
Summary Compensation Table
2003 Annual Compensation
Other Annual
All Other
Name and Principal Position
Salary($)
Bonus($)
Compensation(1)
Compensation($)
Ronald M.
    Burch, M.D., Ph.D.
278,000
—
—
2,940
(2)
Chief Executive Officer
Jeffrey D. Lazar, M.D., Ph.D.
255,000
—
—
3,236
(2)
Senior Vice President, Clinical Research and
    Regulatory Affairs
Jeffrey A. Rona
177,000
13,000
—
2,246
(2)
Vice President, Finance and
Chief Financial Officer
(1)
In accordance with the rules of the SEC, the
    compensation described in this table does not include medical,
    group life insurance or other benefits which are available
    generally to all of our salaried
69
employees and certain perquisites and other
    personal benefits received which do not exceed the lesser of
    $50,000 or 10% of any named executive officer's salary and
    bonus disclosed in this table.
(2)
Represents 401(k) matching contributions.
Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values
The following table sets forth the number and
value of securities underlying options held as of
December 31, 2003 by each of our named executive officers.
Options shown as exercisable in the table below are immediately
exercisable.
Number of Shares
Value of Unexercised
Underlying Unexercised
In-the-Money Options at
Number of
Options at Fiscal Year-End
Fiscal Year-End(1)
Shares
Value
Name
Acquired
Realized
Exercisable
Unexercisable
Exercisable
Unexercisable
Ronald M. Burch, M.D., Ph.D.
—
—
1,760,578
—
Jeffrey D. Lazar, M.D., Ph.D.
—
—
950,041
—
Jeffrey A. Rona
—
—
134,000
—
(1)
These values have been calculated based on an
    assumed initial public offering price of
    $           per
    share, less the applicable exercise price per share, multiplied
    by the underlying shares, without taking into account any taxes
    that may be payable in connection with the transaction.
Benefit Plans
2001 Equity Incentive Plan
We maintain a stock incentive plan which allows
for the grant of incentive stock options, nonqualified stock
options, stock bonuses and rights to acquire restricted stock to
our employees, directors and consultants. The plan has a ten
year term that commenced on March 30, 2001 and terminates
on March 30, 2011 and may be administered by our board of
directors or any committee of one or more directors appointed by
the board. Currently, the plan is administered by our board of
directors. We have reserved 23,365,159 shares of our common
stock for issuance pursuant to awards under this plan. As of
September 30, 2004, options to purchase a total of
22,575,140 shares of common stock, with a weighted average
price of $0.12 per share, were outstanding under this plan.
The administrative committee selects the
individuals to receive awards under the stock incentive plan and
sets the terms and conditions of each award. The administrative
committee has plenary authority to interpret the stock incentive
plan and to make all determinations relating to the plan. After
the date that awards under this plan are no longer exempt from
the provisions of Section 162(m) of the Code, the maximum
number of shares of our common stock that may be subject to
awards of options or stock appreciation rights for any single
individual in any year cannot exceed 125,000 shares.
Options granted under our stock incentive plan
may be incentive stock options or nonqualified stock options.
The exercise price and vesting schedules for options will be set
by the administrative committee at the time of grant, provided
that the per share exercise price for incentive stock options
and nonqualified stock options intended to be exempt from the
provisions of Section 162(m) of the Code cannot be less
than the fair market value of a share of our common stock on the
date of grant. Fair market value is defined in the stock
incentive plan as the closing price of our common stock on the
Nasdaq National Market, or such national securities exchange
upon which our common stock is listed, on the trading date
immediately prior to the date of grant. The exercise price for
nonqualified stock options cannot be less than the par value of
our common stock. The term of each option will be set by the
administrative committee, provided no term can exceed ten years
from the date of grant. Options may expire earlier upon an
optionee's termination of employment. Upon exercise, the
exercise price for an option may be paid in cash or by bank
check or, in the discretion of the administrative committee,
through delivery of shares of our common stock or other property
having an aggregate value equal to the aggregate exercise price,
or
70
through a brokered exercise procedure not in
violation of any law. The administrative committee may allow for
the voluntary surrender of options in exchange for the grant of
new options with similar or different terms.
Shares of restricted stock granted under the
stock incentive plan will be non-transferable and subject to
forfeiture upon the termination of employment. The holder of a
restricted stock award will generally have the rights and
privileges of a stockholder, including the right to vote such
shares. Cash and stock dividends on such shares, if any, may be
distributed to the holder of a restricted stock award or held
for the account of the holder, as determined by the
administrative committee.
The administrative committee may grant other
cash, stock or stock-related awards under the stock incentive
plan, including stock appreciation rights, limited stock
appreciation rights, phantom stock awards, the bargain purchase
of our common stock and stock bonuses. The terms and conditions
of any such other stock-based awards will be determined by the
administrative committee, in its sole discretion.
All outstanding awards under the stock incentive
plan, the maximum number of shares available under the stock
incentive plan and the maximum number of shares of our common
stock available pursuant to the grant of options and stock
appreciation rights to any single person in any year, if
applicable, are subject to adjustment or substitution, as
determined by the administrative committee in the event of
certain corporate transactions.
The stock incentive plan may be terminated or
amended at any time by our board of directors, provided that
without stockholder approval no such amendment may:
•
materially increase the number of shares of our
    common stock available or the formula for automatic increase of
    shares under the stock incentive plan;
•
extend the maximum term of any option beyond ten
    years;
•
extend the expiration date of the plan; or
•
change the class of persons eligible to receive
    awards under the plan without stockholder approval.
Except for adjustments subject to certain
corporate transactions, alterations to outstanding awards under
the stock incentive plan may be made only with the consent of
the award recipient.
401(k) Plan
We have established a tax-qualified employee
savings and retirement plan for all employees who satisfy
certain eligibility requirements, including requirements
relating to age and length of service. Under our 401(k) plan,
employees may elect to reduce their current compensation by up
to 15% or the statutory limit, $13,000 in 2004, whichever is
less, and have us contribute the amount of this reduction to the
401(k) plan. In addition, we match a percentage of an
employee's contribution that we establish from time to
time. As of September 30, 2004, we had 23 employees
eligible for participation in our 401(k) plan. We made matching
contributions of $52,843 in 2003 and $34,825 in the nine month
period ended September 30, 2004.
We intend for the 401(k) plan to qualify under
Section 401 of the Internal Revenue Code of 1986, as
amended, so that contributions by employees or by us to the
401(k) plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) plan. Our
contributions, if any, will be deducted by us when made.
71
CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS
Since March 6, 2001, there has not been, nor
is there currently planned, any transaction or series of similar
transactions to which we were or are a party in which the amount
involved exceeds $60,000 and in which any director, executive
officer or holder of more than 5% of our capital stock or any
member of such person's immediate family had or will have a
direct or indirect material interest other than agreements which
are described under the caption "Management" and the
transactions described below.
Purchases of Securities
Since March 6, 2001, the following executive
officers, directors, holders of more than 5% of our capital
stock and members of such person's immediate family
purchased securities in the amounts and as of the dates shown
below.
Number of
Number of Shares
Number of Shares
Number of Shares
Shares of
of Series A
of Series B
of Series C
Name of Purchaser
Common Stock
Preferred Stock
Preferred Stock
Preferred Stock
Entities Affiliated with Directors:
Entities affiliated with InterWest Partners(1)
—
3,000,000
4,676,923
16,877,637
Entities affiliated with J.P. Morgan
    Partners(2)
—
3,000,000
4,676,923
16,877,637
Entities affiliated with Sofinnova Ventures(3)
—
3,000,000
2,338,462
6,683,544
Other 5% Stockholders:
Entities affiliated with Advent International
    Corporation(4)
—
—
—
11,814,345
Entities affiliated with Index Ventures(5)
—
—
—
9,282,700
Entities affiliated with Pacific Rim(6)
—
—
—
9,282,700
S.R. One, Limited
—
—
—
9,282,700
Directors and Executive Officers:
Ronald M.
    Burch, M.D., Ph.D.
1,000,000
100,000
—
—
Jeffrey D.
    Lazar, M.D., Ph.D.
—
—
—
—
Jeffrey A. Rona
—
—
—
—
Charles M. Cohen, Ph.D.
—
—
—
—
Rodney A.
    Ferguson, J.D., Ph.D.
—
—
—
—
Arnold L. Oronsky, Ph.D.
—
—
—
—
Michael F. Powell, Ph.D.
—
—
—
—
Price Per Share:
$
0.0010
$
1.0000
$
1.3000
$
0.5925
Date(s) of Purchases:
03/2001
04-09/2001
03/2002
02/2004
(1)
Represents shares held by InterWest Partners
    VIII, L.P., InterWest Investors Q VIII, L.P., and InterWest
    Investors VIII, L.P. Includes the conversion of convertible
    promissory notes, issued to the InterWest Funds in April 2003,
    in the aggregate principal amount of $3,920,000. The convertible
    promissory notes were converted into Series C preferred
    stock in February 2004 at a rate of $0.5925 per share.
    Dr. Arnold L. Oronsky, one of our directors, is a Managing
    Director of InterWest Management Partners VIII, LLC, the general
    partner of InterWest Partners VIII, L.P., InterWest Investors Q
    VIII, L.P., and InterWest Investors VIII, L.P.
(2)
Represents shares held by J.P. Morgan
    Partners (SBIC), LLC, J.P. Morgan Partners Global
    Investors, L.P., J.P. Morgan Partners Global Investors A,
    L.P., J.P. Morgan Partners Global Investors
72
(Cayman), L.P., and J.P. Morgan Partners
    Global Investors (Cayman) II, L.P. Includes the conversion of
    convertible promissory note, issued to J.P. Morgan Partners
    (SBIC), LLC in April 2003, in the aggregate principal amount of
    $3,920,000. The convertible promissory note was converted into
    Series C preferred stock in February 2004 at a rate of
    $0.5925 per share. Dr. Rodney A. Ferguson, one of our
    directors, is a Managing Director of J.P. Morgan Partners
    (SBIC), LLC, and JPMP Capital Corp.
(3)
Represents shares held by Sofinnova Partners V,
    LP, Sofinnova Affiliates V, LP. and Sofinnova Venture Principals
    V, LP. Includes the conversion of convertible promissory notes,
    issued to Sofinnova Partners V, LP, Sofinnova Affiliates V, LP.
    and Sofinnova Venture Principals V, LP. in April 2003, in the
    aggregate principal amount of $3,920,000. The convertible
    promissory notes were converted into Series C preferred
    stock in February 2004 at a rate of $0.5925 per share.
    Dr. Michael F. Powell, one of our directors, is a
    Managing Director of each of these partnerships.
(4)
Represents shares held by Advent Healthcare and
    Life Science III LP, Advent Healthcare and Life Sciences III-A,
    LP, Advent Partners HLS III LP and Advent
    Partners II LP.
(5)
Represents shares held by Index Ventures II
    (Jersey) II LP, Index Ventures II (Delaware) LP, Index Ventures
    II GmbH Co. KG, Index Ventures II Parallel Entrepreneur Fund
    (Jersey-A) LP, Index Ventures II Parallel Entrepreneur Fund
    (Jersey-A) LP and Index Ventures Management SA on behalf of
    Index Employee Investment Plan.
(6)
Represents shares held by Pacific Rim AQUA Life
    Science No. 1 Investment Partnership, Pacific Rim AQUA Life
    Science No. 2 Investment Partnership, Pacific Rim AQUA Life
    Science No. 3 Investment Partnership, Pacific Rim AQUA Life
    Science No. 4 Investment Partnership and Pacific Rim AQUA
    Life Science No. 5 Investment Partnership.
Indemnification Agreements
As permitted by the Delaware General Corporation
Law, we have adopted provisions in our certificate of
incorporation and bylaws that authorize and require us to
indemnify our officers and directors to the full extent
permitted under Delaware law, subject to limited exceptions. See
"Management — Limitation of Liability and
Indemnification of Officers and Directors."
Stock Option Grants
We have granted options to purchase shares of our
common stock to our executive officers and directors. See
"Principal Stockholders."
Amended and Restated Investor Rights
Agreement
We and our preferred stockholders have entered
into an agreement under which our preferred stockholders have
registration rights with respect to their shares of common stock
following this offering. Upon closing of this offering, all our
currently outstanding shares of preferred stock will be
converted into shares of our common stock. See "Description
of Capital Stock — Registration Rights" for a
further description of the terms of this agreement.
73
PRINCIPAL STOCKHOLDERS
The following table presents information
concerning the beneficial ownership of the shares of our common
stock as of November 22, 2004 by:
•
each person we know to be the beneficial owner of
    5% or more of our outstanding shares of our capital stock;
•
each of our named executive officers listed on
    the Summary Compensation Table;
•
each of our directors; and
•
all of our executive officers and directors as a
    group.
The information set forth in the table gives
effect to the conversion of all of our preferred stock and the
exercise of an outstanding warrant that, by its terms,
terminates upon completion of this offering.
Beneficial ownership is determined under the
rules of the SEC and generally includes voting or investment
power over securities. Except in cases where community property
laws apply or as indicated in the footnotes to this table, we
believe that each stockholder identified in the table possesses
sole voting and investment power over all shares of common stock
shown as beneficially owned by the stockholder. Percentage of
beneficial ownership is based on 154,382,728 shares of
common stock outstanding as of November 22, 2004,
and            shares
of common stock outstanding after the completion of this
offering. Shares of common stock subject to options that are
currently exercisable or exercisable within 60 days of
November 22, 2004, are considered outstanding and
beneficially owned by the person holding the options for the
purpose of computing the percentage ownership of that person but
are not treated as outstanding for the purpose of computing the
percentage ownership of any other person. Unless indicated
below, the address of each individual listed below is
c/o AlgoRx Pharmaceuticals, Inc., 500 Plaza Drive,
2nd floor, Secaucus, New Jersey 07094-3619.
Percentage of Shares
Number of
Outstanding
Shares
Beneficially
Prior to the
After the
Name and Address of Beneficial Owner
Owned(1)
Offering
Offering
Stockholders owning approximately 5% or
    more
Entities affiliated with InterWest Partners(2)
29,148,406
18.9
%
Entities affiliated with JPMorgan Partners(3)
29,148,406
18.9
Entities affiliated with Sofinnova Ventures(4)
14,978,929
9.7
Entities affiliated with Advent International(5)
11,814,345
7.7
Entities affiliated with Index Ventures(6)
9,282,700
6.0
Entities affiliated with Pacific Rim(7)
9,282,700
6.0
S.R. One, Limited(8)
9,282,700
6.0
Directors and Executive Officers
Ronald M. Burch, M.D., Ph.D.(9)
2,902,278
1.9
Jeffrey D. Lazar, M.D., Ph.D.(10)
978,727
*
Jeffrey A. Rona(11)
159,000
*
Charles M. Cohen, Ph.D.(5)
11,814,345
7.7
Rodney A. Ferguson, J.D., Ph.D.(3)
29,148,406
18.9
Arnold L. Oronsky, Ph.D.(2)
29,148,406
18.9
Michael F. Powell, Ph.D.(4)
14,978,929
9.7
All directors and executive officers as a group
    (8 persons)(12)
89,130,091
56.7
%
74
*
Less than 1%.
(1)
Includes shares of common stock issuable pursuant
    to options exercisable within 60 days of November 22,
    2004.
(2)
Includes 28,715,249 shares held by InterWest
    Partners VIII, L.P., 338,673 shares held by InterWest
    Investors Q VIII, L.P., and 94,484 shares held by InterWest
    Investors VIII, L.P., collectively, the InterWest Funds.
    Dr. Arnold L. Oronsky, one of our directors, is a Managing
    Director of InterWest Management Partners VIII, LLC, the general
    partner of the InterWest Funds. Dr. Oronsky has shared
    voting and dispositive powers over the shares held by the
    InterWest Funds. He disclaims beneficial ownership of the shares
    held by the InterWest Funds, except to the extent of his
    pecuniary interest therein. The address for InterWest Partners
    is 2710 Sand Hill Road, Second Floor, Menlo Park, CA 94025.
(3)
Includes 26,773,816 shares held by
    J.P. Morgan Partners (SBIC), LLC, or JPMP SBIC,
    1,387,154 shares held by J.P. Morgan Partners Global
    Investors, LLC, 213,141 shares held by J.P. Morgan
    Partners Global Investors A, L.P., 696,414 shares held by
    J.P. Morgan Partners Global Investors (Cayman), L.P., and
    77,881 shares held by J.P. Morgan Partners Global
    Investors (Cayman) II, L.P. JPMP SBIC is a wholly owned
    subsidiary of J.P. Morgan Partners (BHCA), L.P., the
    general partner of which is JPMP Master Fund Manager, L.P. or
    "MF Manager". JPMP Global Investors, L.P. is the
    general partner of each of J.P. Morgan Partners Global
    Investors, L.P., J.P. Morgan Partners Global
    Investors A, L.P., J.P. Morgan Partners Global
    Investors (Cayman), L.P. and J.P. Morgan Partners Global
    Investors (Cayman) II, L.P. JPMP Capital Corp., or
    "JPMP Capital", a wholly owned subsidiary of
    J.P. Morgan Chase & Co., or "JPM Chase",
    is the general partner of each of MF Manager and Global
    Investors. As a result thereof, each of MF Manager, JPMP Capital
    and JPM Chase may be deemed to beneficially own the shares held
    by JPMP SBIC, and each of JPMP Global Investors L.P., JPMP
    Capital and JPM Chase may be deemed to beneficially own the
    share held by each of J.P. Morgan Partners Global
    Investors, L.P., J.P. Morgan Partners Global
    Investors A, L.P., J.P. Morgan Partners Global
    Investors (Cayman), L.P. and J.P. Morgan Partners Global
    Investors (Cayman) II, L.P. Rodney A. Ferguson, one of our
    directors, is a Managing Director of JPMP SBIC, JPMP Capital and
    each of J.P. Morgan Partners Global Investors, L.P.,
    J.P. Morgan Partners Global Investors A, L.P.,
    J.P. Morgan Partners Global Investors (Cayman), L.P. and
    J.P. Morgan Partners Global Investors (Cayman) II,
    L.P., and as a result, Dr. Ferguson may be deemed to be the
    beneficial owner of the shares held by JPMP SBIC and each of
    J.P. Morgan Partners Global Investors, L.P.,
    J.P. Morgan Partners Global Investors A, L.P.,
    J.P. Morgan Partners Global Investors (Cayman), L.P. and
    J.P. Morgan Partners Global Investors (Cayman) II,
    L.P. Additionally, Jeffrey C. Walker as President of JPMP
    Capital, may be deemed to have beneficial ownership of the
    shares held by JPMP SBIC and each of J.P. Morgan Partners
    Global Investors, L.P., J.P. Morgan Partners Global
    Investors A, L.P., J.P. Morgan Partners Global
    Investors (Cayman), L.P. and J.P. Morgan Partners Global
    Investors (Cayman) II, L.P. since pursuant to policies and
    procedures adopted by JPMP Capital, Mr. Walker has
    dispositive power of such shares. The foregoing, however, shall
    not be an admission that Dr. Ferguson, MF Manager,
    JPMP Global Investors L.P., JPMP Capital or JPM Chase are the
    beneficial owners of such shares and each disclaims beneficial
    ownership except to the extent of their pecuniary interest in
    each of the applicable entities. The address for
    J.P. Morgan is 1221 Avenue of the Americas, New York,
    NY 10020.
(4)
Includes 14,289,685 shares held by Sofinnova
    Partners V, LP, 470,132 shares held by Sofinnova
    Affiliates V, LP. and 219,112 shares held by Sofinnova
    Venture Principals V, LP. Dr. Michael F. Powell
    is a Managing Director of each of these partnerships, shares
    voting and dispositive power with respect to the shares held by
    each of Sofinnova Partners V, LP, Sofinnova
    Affiliates V, LP. and Sofinnova Venture Principals V,
    LP and disclaims beneficial ownership of such shares in which he
    has no pecuniary interest. The address for Sofinnova Venture
    Partners is 140 Geary Street, 10th Floor, San Francisco, CA
    94106.
75
(5)
Includes the ownership by the following venture
    capital funds managed by Advent International Corporation:
    4,047,257 shares held by Advent Healthcare and Life
    Science III LP, 7,589,873 shares held by Advent
    Healthcare and Life Sciences III-A, LP, 143,460 shares
    held by Advent Partners HLS III LP and 33,755 shares held
    by Advent Partners II LP. In its capacity as manager or general
    partner of these funds, Advent International Corporation
    exercises sole voting and investment power with respect to all
    shares held by these funds. Dr. Charles M. Cohen, a
    partner at Advent International, may be deemed to be a
    beneficial owner of the shares held by these Advent funds.
    Dr. Cohen disclaims beneficial ownership of these shares
    held by Advent except to the extent of his pecuniary interest
    therein. The address for Advent International Corporation is
    75 State Street, 29th Floor, Boston, Massachusetts, 02109.
(6)
Includes 2,840,692 shares held by Index
    Ventures (Jersey) II LP, 5,222,911 shares held by Index
    Ventures II (Delaware) LP, 835,072 shares held by
    Index Ventures II GmbH & Co. KG,
    95,333 shares held by Index Ventures II Parallel
    Entrepreneur Fund (Jersey-A) LP, 149,451 shares held by
    Index Ventures II Parallel Entrepreneur Fund (Jersey-B) LP
    and 139,241 shares held by Index Ventures Management SA on
    behalf of Index Employee Investment Plan. Index Venture
    Associates II Limited is the general partner for each of
    Index Ventures II (Jersey) II LP, Index
    Ventures II (Delaware) LP, Index Ventures II Parallel
    Entrepreneur Fund (Jersey-A) LP, Index Ventures II Parallel
    Entrepreneur Fund (Jersey-B) LP. Index Ventures II (SLP)
    Limited is the special limited partner of Index Ventures II
    Gmbh KG. The address for the Index funds is No. 1 Seaton
    Place, St. Helier, Jersey, Channel Islands JE4 8YJ.
(7)
Includes 1,614,800 shares held by Pacific
    Rim AQUA Life Science No. 1 Investment Partnership,
    1,906,600 shares held by Pacific Rim AQUA Life Science
    No. 2 Investment Partnership, 1,092,800 shares held by
    Pacific Rim AQUA Life Science No. 3 Investment Partnership,
    2,136,900 shares held by Pacific Rim AQUA Life Science
    No. 4 Investment Partnership and 2,531,600 shares held
    by Pacific Rim AQUA Life Science No. 5 Investment
    Partnership. Pacific Rim Ventures Co., Ltd is the general
    partner of each of the above referenced Pacific Rim entities and
    exercises sole voting and investment power with respect to all
    shares held by these funds. The address for Pacific Rim Ventures
    Co. Ltd is Green Plaza, 2nd flr., 3-7- Komazawa,
    Setagaya-ku, Tokyo 154-0012 Japan.
(8)
The address for S.R. One, Limited is Four
    Tower Bridge, 200 Barr Harbor Drive, Suite 250,
    W. Conshohocken, PA 19428.
(9)
Includes 1,802,278 shares of common stock
    issuable upon the exercise of stock options exercisable within
    60 days of November 22, 2004.
(10)
Includes 978,727 shares of common stock
    issuable upon the exercise of stock options exercisable within
    60 days of November 22, 2004.
(11)
Includes 159,000 shares of common stock
    issuable upon the exercise of stock options exercisable within
    60 days of November 22, 2004.
(12)
Our executive officers included in the table
    consist of our named executive officers and Paul R.
    Hamelin. This total includes 2,940,005 shares of common
    stock issuable upon exercise of stock options exercisable within
    60 days of November 22, 2004. This total also includes
    the shares described in notes (2) through (5) above.
76
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized
capital stock will consist of 150,000,000 shares of common
stock, par value $0.001 per share, and
25,000,000 shares of preferred stock, par value
$0.001 per share. As of September 30, 2004, there were
152,782,728 shares of common stock outstanding (after
giving effect to the automatic conversion of all outstanding
shares of preferred stock into shares of common stock, and the
expected exercise of an outstanding warrant that, by its terms,
terminates upon completion of this offering and the
1-for-          reverse
stock split). As of September 30, 2004, we had
approximately 62 record holders of our capital stock. All of our
outstanding shares of preferred stock will automatically convert
into shares of common stock immediately prior to the closing of
this offering. After the closing of this offering and after
giving effect to the conversion of our preferred stock, the
expected exercise of an outstanding warrant that, by its term,
terminates upon completion of this offering and the
1-for- reverse stock split, we will
have                      shares
of common stock and no shares of preferred stock outstanding. In
addition, as of September 30, 2004, 982,397 shares of
our common stock were reserved for future grants under our 2001
Equity Incentive Plan and options to
purchase 22,575,140 shares of our common stock were
outstanding. Also, as of September 30, 2004,
692,658 shares of our common stock were issuable under an
outstanding warrant that, by its terms, terminates upon
completion of this offering.
The following description of our capital stock
and provisions of our certificate of incorporation and bylaws
are summaries of material terms and provisions and are qualified
by reference to our certificate of incorporation and bylaws,
copies of which have been filed with the SEC as exhibits to the
registration statement of which this prospectus is a part. The
descriptions of the common stock and preferred stock reflect
amendments to our certificate of incorporation and bylaws that
will become effective upon closing of this offering.
Common Stock
Upon the closing of this offering, we will be
authorized to issue one class of common stock. Stockholders will
be entitled to one vote for each share of our common stock held
of record on all matters on which stockholders are entitled or
permitted to vote. Our common stock will not have cumulative
voting rights in the election of directors. As a result, holders
of a majority of the shares of our common stock voting for the
election of directors can elect all the directors standing for
election. Holders of our common stock will be entitled to
receive dividends out of legally available funds when and if
declared from time to time by our board of directors. See
"Dividend Policy." In the event of our liquidation,
dissolution or winding up, the holders of our common stock will
be entitled to share ratably in all assets remaining after
payment of liabilities, subject to the rights of any then
outstanding preferred stock. The rights, preferences and
privileges of holders of our common stock will be subject to,
and may be adversely affected by, the rights of holders of
shares of any series of preferred stock that we may designate
and issue in the future. All outstanding shares of our common
stock are fully paid and nonassessable, and the shares of common
stock offered hereby will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, all
outstanding shares of our preferred stock will be converted into
an aggregate of 142,757,557 shares of common stock. Under
our certificate of incorporation, upon the closing of this
offering, we will be authorized, subject to the limits imposed
by the Delaware General Corporation Law, to issue
25,000,000 shares of preferred stock in one or more series,
to establish from time to time the number of shares to be
included in each series, to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any
of its qualifications, limitations, restrictions. Our board of
directors can also increase or decrease the number of shares of
any series of our preferred stock, but not below the number of
shares of that series then outstanding, without any further vote
or action by our stockholders.
77
Our board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of our common
stockholders. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying or
preventing our change in control and may cause the market price
of our common stock to decline or impair the voting and other
rights of the holders of our common stock. We have no current
plans to issue any shares of preferred stock.
Warrant
In February 2004, in connection with our
Series C preferred stock financing transaction, we issued a
warrant to purchase an aggregate of 692,658 shares of our
Series C preferred stock at an exercise price of
$0.5925 per share to an investment adviser. The termination
date of this warrant is the earlier of February 19, 2009
and the closing of this offering. 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 any
stock dividend or stock split. After giving effect to the
pre-offering reverse stock split and automatic conversion of the
outstanding shares of preferred stock into common stock upon the
completion of this offering, the warrant will become exercisable
for an aggregate
of                      shares
of common stock at an exercise price of
$               per
share.
Registration Rights
Upon completion of this offering, assuming the
expected exercise of an outstanding warrant that, by its terms,
terminates upon completion of this offering, the holders of
approximately 145,050,216 shares of common stock will be
entitled to rights with respect to the registration of these
shares under the Securities Act as described below. We have
delivered notice to the holders of registration rights informing
them of the exercise of the underwriters' right to exclude
all sales by such holders from this offering. In addition, all
holders with registration rights have agreed not to exercise
their registration rights without the prior written consent of
Credit Suisse First Boston LLC and Citigroup Global Markets Inc.
for a period of 180 days after the date of this prospectus
(which period could be extended by those underwriters for up to
an additional 34 days under certain circumstances).
Demand Registration Rights
At any time 180 days after the closing of
this offering, the holders of a majority of the shares having
demand registration rights can demand that we file a
registration statement for those shares so long as the demand
covers at least a majority of the shares subject to these
registration rights or the aggregate offering price of the
shares is greater than $10.0 million. We will effect the
registration as requested, unless the underwriters decide to
limit the number of shares that may be included in the
registration due to marketing factors. We are only obligated to
satisfy two demand registrations, and we may defer a
registration for up to 120 days under specified
circumstances not more than twice in any 12-month period. We are
not obligated to satisfy a demand registration if the
registrable shares may be immediately registered pursuant to a
registration statement on Form S-3, as described below.
Piggyback Registration Rights
If we register any securities for public sale,
the holders of the shares having piggyback registration rights
may include their shares in the registration statement. If the
registration relates to an underwritten offering, the
underwriters have the right to limit the number of shares having
registration rights that may be included in the registration
statement, subject to certain limitations.
Form S-3 Registration
    Rights
If we are eligible to file a registration
statement on Form S-3, any holders of the shares having
Form S-3 registration rights can demand that we file a
registration statement on Form S-3 or any similar
short-form registration statement, so long as (i) the
aggregate amount of securities to be sold under the
78
registration statement on Form S-3 or any
similar short-form registration statement is at least
$5.0 million and (ii) we have not already effected two
registrations on Form S-3. We may defer a Form S-3
registration by up to 90 days under specified circumstances
once per 12-month period.
Expenses of Registration
We will pay for all registration expenses,
including in specified situations the reasonable legal expenses
of a single counsel for the holders not to exceed $25,000,
relating to any demand, piggyback or Form S-3 registration,
other than the underwriting discount and selling commissions
applicable to the sale. However, we are generally not required
to pay for the expenses of any demand or Form S-3
registration if the request is subsequently withdrawn by the
holders of a majority of the shares having registration rights.
Expiration of Registration Rights
The registration rights described above will
expire five years after the date of the closing of this
offering. The registration rights will terminate earlier for a
particular stockholder if (i) we have completed our initial
public offering and are subject to the Securities Exchange Act
of 1934, as amended, (ii) such holder (together with its
affiliates, partners and former partners) holds less than 1% of
our outstanding common stock (assuming the conversion of any
outstanding preferred stock into common stock) and
(iii) such holder can resell all of its securities in a
90-day period under Rule 144 of the Securities Act.
Antitakeover Effects of Delaware Law and
Provisions of our Certificate of Incorporation and
Bylaws
Delaware Takeover Statute
We are subject to Section 203 of the
Delaware General Corporation Law. This statute regulating
corporate takeovers prohibits a Delaware corporation from
engaging in any business combination with any interested
stockholder for three years following the date that the
stockholder 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;
•
upon completion of the transaction that resulted
    in the interested stockholder becoming an interested
    stockholder, the interested 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 2/3% of the outstanding voting stock which is not owned
    by the interested stockholder.
Generally, a business combination includes a
merger, asset or stock sale, or other transaction resulting in a
financial benefit to the interested stockholder. An interested
stockholder is a person who, together with affiliates and
associates, owns or, within three years prior to the
determination of interested stockholder status, did own 15% or
more of a corporation's 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 discourage takeover attempts that might result in a premium
over the market price for the shares of common stock held by
stockholders.
79
Certificate of Incorporation and Bylaw
    Provisions
Provisions of our certificate of incorporation
and bylaws, which will become effective upon the closing of this
offering, may have the effect of making it more difficult for a
third party to acquire, or discourage a third party from
attempting to acquire, control of our company by means of a
tender offer, a proxy contest or otherwise. These provisions may
also make the removal of incumbent officers and directors more
difficult. These provisions are intended to discourage certain
types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of
AlgoRx to first negotiate with us. These provisions could also
limit the price that investors might be willing to pay in the
future for shares of our common stock. These provisions may make
it more difficult for stockholders to take specific corporate
actions and could have the effect of delaying or preventing a
change in control.
In particular, our certificate of incorporation
and bylaws, which will become effective upon the closing of this
offering, will provide for the following:
Staggered Board of Directors.
Our board of directors is divided into
three classes of the same or nearly the same number of
directors, each serving staggered three-year terms, which means
that only one class of directors may be elected at each annual
meeting or special meeting in lieu of such annual meeting. These
provisions may make the removal of incumbent directors difficult
and may discourage third parties from attempting to circumvent
the anti-takeover effects of our certificate of incorporation
and bylaws by removing our incumbent directors.
No Written Consent of
Stockholders.
Any action to be taken
by our stockholders must be effected at a duly called annual or
special meeting and may not be effected by written consent.
Special Meetings of
Stockholders.
Special meetings of our
stockholders may be called only by (i) the Chairman of the
board of directors, (ii) the Chief Executive Officer, or
(iii) the board of directors pursuant to a resolution
adopted by a majority of the total number of authorized
directors.
Advance Notice
Requirement.
Stockholder proposals to
be brought before an annual meeting of our stockholders must
comply with advance notice procedures. These advance notice
procedures require timely notice and apply in several
situations, including stockholder proposals relating to the
nominations of persons for election to the board of directors.
Generally, to be timely, notice must be received at our
principal executive offices not less than 90 days nor more
than 120 days prior to the first anniversary date of the
annual meeting for the preceding year.
Issuance of Undesignated Preferred
Stock.
Our board of directors is
authorized to issue, without further action by the stockholders,
up to 25,000,000 shares of undesignated preferred stock
with rights and preferences, including voting rights, designated
from time to time by the board of directors. The existence of
authorized but unissued shares of preferred stock enables our
board of directors to render more difficult or to discourage an
attempt to obtain control of us by means of a merger, tender
offer, proxy contest or otherwise.
Transfer Agent and Registrar
The transfer agent and registrar for our common
stock is American Stock Transfer & Trust Company.
Listing
We have applied for our common stock to be quoted
on the Nasdaq National Market under the trading symbol
"AGRX."
80
UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of the
material United States federal income tax consequences of the
ownership and disposition of our common stock to a non-United
States holder. For the purpose of this discussion, a non-United
States holder is any beneficial holder of our common stock that
for United States federal income tax purposes is not a United
States person. For purposes of this discussion, the term United
States person means:
•
an individual citizen or resident of the United
    States;
•
a corporation or other entity taxable as a
    corporation or a partnership or entity taxable as a partnership
    created or organized in the United States or under the laws of
    the United States or any political subdivision thereof;
•
an estate whose income is subject to United
    States federal income tax regardless of its source; or
•
a trust (i) whose administration is subject
    to the primary supervision of a United States court and which
    has one or more United States persons who have the authority to
    control all substantial decisions of the trust or
    (ii) which has made an election to be treated as a United
    States person.
If a partnership holds common stock, the tax
treatment of a partner will generally depend on the status of
the partner and upon the activities of the partnership.
Accordingly, we urge partnerships which hold our common stock
and partners in such partnerships to consult their tax advisors.
This discussion assumes that non-United States
holders will hold our common stock issued pursuant to the
offering as a capital asset (generally, property held for
investment). This discussion does not address all aspects of
United States federal income taxation that may be relevant in
light of a non-United States holder's special tax status or
special tax situations. United States expatriates, life
insurance companies, tax-exempt organizations, dealers in
securities or currency, banks or other financial institutions,
holders whose functional currency is other than the United
States dollar, and investors that hold common stock as part of a
hedge, straddle or conversion transaction are among those
categories of potential investors that are subject to special
rules not covered in this discussion. This discussion does not
address any tax consequences arising under the laws of any
state, local or non-United States taxing jurisdiction.
Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended,
legislative history and Treasury Regulations and administrative
and judicial interpretations thereof, all as in effect on the
date hereof, and all of which are subject to change, possibly
with retroactive effect. Accordingly, we urge each non-United
States Holder to consult a tax advisor regarding the United
States federal, state, local and non-United States income and
other tax consequences of acquiring, holding and disposing of
shares of our common stock.
Dividends
We have not paid any dividends on our common
stock, and we do not plan to pay any dividends for the
foreseeable future. However, if we do pay dividends on our
common stock, those payments will constitute dividends for
United States tax purposes to the extent paid from our current
and accumulated earnings and profits, as determined under United
States federal income tax principles. To the extent those
dividends exceed our current and accumulated earnings and
profits, the dividends will constitute a return of capital and
will first reduce a holder's basis, but not below zero, and
then will be treated as gain from the sale of stock.
Any dividend (out of earnings and profits) paid
to a non-United States holder of common stock generally will be
subject to United States withholding tax either at a rate of 30%
of the gross amount of the dividend or such lower rate as may be
specified by an applicable tax treaty. In order to receive a
reduced treaty rate, a non-United States holder must provide us
with an IRS Form W-8BEN certifying, under penalty of
perjury, the holder's status as a non-United States person
and qualification for the reduced rate.
81
Dividends received by a non-United States holder
that are effectively connected with a United States trade or
business conducted by the non-United States holder are exempt
from such withholding tax. In order to obtain this exemption, a
non-United States holder must provide us with an IRS
Form W-8ECI properly certifying such exemption. Such
effectively connected dividends, although not subject to
withholding tax, are taxed at the same graduated rates
applicable to United States persons, net of certain deductions
and credits. In addition to the graduated tax described above,
dividends received by a corporate non-United States holder that
are effectively connected with a United States trade or business
of the corporate non-United States holder may also be subject to
a branch profits tax at a rate of 30% or such lower rate as may
be specified by an applicable tax treaty.
A non-United States holder of common stock that
is eligible for a reduced rate of withholding tax pursuant to a
tax treaty may obtain a refund of any excess amounts currently
withheld if an appropriate claim for refund is filed with the
Internal Revenue Service, or IRS.
Gain on Disposition of Common Stock
A non-United States holder generally will not be
subject to United States federal income tax on any gain realized
upon the sale or other disposition of our common stock unless:
•
the gain is effectively connected with a United
    States trade or business of the non-United States holder (which
    gain, in the case of a corporate non-United States holder, must
    also be taken into account for branch profits tax purposes);
•
the non-United States holder is an individual who
    holds his or her common stock as a capital asset (generally, an
    asset held for investment purposes) and who is present in the
    United States for a period or periods aggregating 183 days
    or more during the calendar year in which the sale or
    disposition occurs and certain other conditions are met; or
•
our common stock constitutes a United States real
    property interest by reason of our status as a "United
    States real property holding corporation" for United States
    federal income tax purposes at any time within the shorter of
    the five-year period preceding the disposition or the
    holder's holding period for our common stock. We believe
    that we are not currently, and that we will not become, a
    "United States real property holding corporation" for
    United States federal income tax purposes.
Backup Withholding and Information
Reporting
Generally, we must report annually to the IRS the
amount of dividends paid, the name and address of the recipient,
and the amount, if any, of tax withheld. Subject to certain
exceptions, a similar report is sent to the holder. Pursuant to
tax treaties or other agreements, the IRS may make its reports
available to tax authorities in the recipient's country of
residence.
Payments of dividends or of proceeds on the
disposition of stock made to a non-United States holder may be
subject to backup withholding unless the non-United States
holder establishes an exemption, for example, by properly
certifying its non-United States status on a Form W-8BEN or
another appropriate version of Form W-8. Notwithstanding
the foregoing, backup withholding may apply if either we or our
paying agent has actual knowledge, or reason to know, that the
holder is a United States person.
Backup withholding is not an additional tax.
Rather, the United States income tax liability of persons
subject to backup withholding will be reduced by the amount of
tax withheld. If withholding results in an overpayment of taxes,
a refund may be obtained, provided that the required information
is furnished to the IRS.
82
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public
market for our common stock, and there can be no assurance that
a significant public market for the common stock will develop or
be sustained after this offering. Future sales of substantial
amounts of our common stock, including shares issued upon
exercise of outstanding options, in the public market following
this offering could adversely affect market prices prevailing
from time to time and could impair our ability to raise capital
through the sale of our equity securities.
Upon completion of this offering and based on
shares outstanding at September 30, 2004, we will have
outstanding                      shares
of common stock. All the shares sold in this offering, plus any
shares issued upon exercise of the underwriters' option to
purchase additional shares from us, will be freely tradable
without restriction under the Securities Act, unless purchased
by our "affiliates" as that term is defined in
Rule 144 under the Securities Act.
The
remaining                      shares
of common stock outstanding are "restricted
securities" within the meaning of Rule 144 under the
Securities Act. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption
from registration under Rule 701 or meet the safe harbor
qualifications under Rule 144 under the Securities Act as
summarized below.
Our directors, officers
and                               of
our stockholders, who combined hold
approximately      % of our stock, have
entered into lock-up agreements with the underwriters of this
offering generally providing that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise
dispose of our shares of common stock or any securities
exercisable for or convertible into our common stock owned by
them prior to this offering for a period of 180 days after
the date of this prospectus (which period could be extended by
those underwriters for up to an additional 34 days under
certain circumstances) without the prior written consent of
Credit Suisse First Boston LLC and Citigroup Global Markets Inc.
on behalf of our underwriters. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for
sale under the provisions of Rules 144, 144(k) and 701,
shares subject to lock-up agreements may not be sold until such
agreements expire or are waived by Credit Suisse First Boston
LLC and Citigroup Global Markets Inc. on behalf of our
underwriters. Credit Suisse First Boston LLC and Citigroup
Global Markets Inc. have advised us that it has no current
intention to shorten or release any of the shares subject to the
lock-up agreements prior to the expiration of the lock-up
period. Based on shares outstanding as of September 30,
2004, taking into account the lock-up agreements, and assuming
Credit Suisse First Boston LLC and Citigroup Global Markets Inc.
do not release stockholders from these agreements prior to the
expiration of the 180-day lock-up period, the following shares
will be eligible for sale in the public market at the following
times:
•
beginning on the date of this prospectus,
    the                      shares
    sold in this offering will be immediately available for sale in
    the public market;
•
beginning 180 days after the date of this
    prospectus (which period could be extended by those underwriters
    for up to an additional 34 days under certain
    circumstances),
    approximately                     additional
    shares will become eligible for sale under Rule 144 or 701,
    subject to volume restrictions as described below; and
•
the remainder of the restricted securities will
    be eligible for sale from time to time thereafter, subject in
    some cases to compliance with Rule 144.
In general, under Rule 144 as currently in
effect, a person who has beneficially owned restricted shares
for at least one year, including the holding period of any prior
owner except an affiliate, would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of:
•
1% of the number of shares of common stock then
    outstanding, which will equal
    approximately                      shares
    immediately after this offering; or
•
the average weekly trading volume of our common
    stock during the four calendar weeks preceding the date on which
    notice of the sale is filed.
83
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. Under
Rule 144(k), a person who is not deemed to have been an
affiliate of us at any time during the three months preceding a
sale, and who has beneficially owned the shares proposed to be
sold for at least two years, including the holding period of any
prior owner except an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Any of our employees, officers, directors or
consultants who purchased shares under a written compensatory
plan or contract may be entitled to rely on the resale
provisions of Rule 701. Rule 701 permits affiliates to
sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such
shares in reliance join on Rule 144 without having to
comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until
90 days after the effective date of this offering before
selling such shares.
However,                Rule 701 shares
are subject to lock-up agreements and will only become eligible
for sale upon the expiration of the 180-day lock-up (or of any
extension of up to 34 additional days of that lock-up period)
agreements unless Credit Suisse First Boston LLC and Citigroup
Global Markets Inc. waive the lock-up on behalf of the
underwriters. Credit Suisse First Boston LLC and Citigroup
Global Markets Inc. have advised us that they have no current
intention to shorten or release any of the shares subject to the
lock-up agreements prior to the expiration of the lock-up period.
84
UNDERWRITING
Under the terms and subject to the conditions
contained in an underwriting agreement
dated                     ,
2005, we have agreed to sell to the underwriters named below,
for whom Credit Suisse First Boston LLC, Citigroup Global
Markets Inc., Piper Jaffray & Co. and Lazard
Frères & Co. LLC are acting as representatives,
the following respective numbers of shares of common stock:
Number
of Shares
Underwriter
Credit Suisse First Boston LLC
Citigroup Global Markets Inc.
Piper Jaffray & Co.
Lazard Frères & Co. LLC
Total
Credit Suisse First Boston LLC and Citigroup
Global Markets Inc. are acting as joint book-running managers
for this offering.
The underwriting agreement provides that the
underwriters are obligated to purchase all the shares of common
stock in the offering if any are purchased, other than those
shares covered by the over-allotment option described below. The
underwriting agreement also provides that if an underwriter
defaults the purchase commitments of non-defaulting underwriters
may be increased or the offering may be terminated.
We have granted to the underwriters a 30-day
option to purchase on a pro rata basis up
to                     additional
shares at the initial public offering price less the
underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of
common stock initially at the public offering price on the cover
page of this prospectus and to selling group members at that
price less a selling concession of
$           per
share. The underwriters and selling group members may allow a
discount of
$           per
share on sales to other broker/ dealers. After the initial
public offering, the representatives may change the public
offering price and concession and discount to broker/ dealers.
The following table summarizes the compensation
and estimated expenses we will pay:
Per Share
Total
Without Over-
With Over-
Without Over-
With Over-
allotment
allotment
allotment
allotment
Underwriting Discounts and Commissions paid by us
$
$
$
$
Expenses payable by us
$
$
$
$
The underwriters have informed us that they do
not expect sales to accounts over which the underwriters have
discretionary authority to exceed 5% of the shares of common
stock being offered.
We have agreed that we will not offer, sell,
contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Securities and Exchange Commission
a registration statement under the Securities Act of 1933 (the
"Securities Act") relating to, any shares of our
common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, pledge,
disposition or filing, without the prior written consent of
Credit Suisse First Boston LLC and Citigroup Global Markets Inc.
for a period of 180 days after the date of this prospectus.
However, in the event that either (1) during the last
17 days of the "lock-up" period, we release
earnings results or material news or a material event relating
to us occurs or (2) prior to the expiration of the
"lock-up" period, we announce that we will release
earnings results during the 16-day period beginning on the last
day of the "lock-up" period, then in either case the
expiration of the "lock-up" will be extended until the
expiration of the 18-day period beginning on the date of the
release of the
85
earnings results or the occurrence of the
material news or event, as applicable, unless Credit Suisse
First Boston LLC and Citigroup Global Markets Inc. waive, in
writing, such an extension.
Our officers, directors and security holders, who
combined hold        of our
stock, have agreed that they will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock,
enter into a transaction that would have the same effect, or
enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of
ownership of our common stock, whether any of these transactions
are to be settled by delivery of our common stock or other
securities, in cash or otherwise, or publicly disclose the
intention to make any offer, sale, pledge or disposition, or to
enter into any transaction, swap, hedge or other arrangement,
without, in each case, the prior written consent of Credit
Suisse First Boston LLC and Citigroup Global Markets Inc. for a
period of 180 days after the date of this prospectus.
However, in the event that either (1) during the last
17 days of the "lock-up" period, we release
earnings results or material news or a material event relating
to us occurs or (2) prior to the expiration of the
"lock-up" period, we announce that we will release
earnings results during the 16-day period beginning on the last
day of the "lock-up" period, then in either case the
expiration of the "lock-up" will be extended until the
expiration of the 18-day period beginning on the date of the
release of the earnings results or the occurrence of the
material news or event, as applicable, unless Credit Suisse
First Boston LLC and Citigroup Global Markets Inc. waive, in
writing, such an extension.
The underwriters have reserved for sale at the
initial public offering price up
to                      shares
of the common stock for employees, directors and other persons
associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for
sale to the general public in the offering will be reduced to
the extent these persons purchase the reserved shares. Any
reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to
payments that the underwriters may be required to make in that
respect.
We have applied for quotation of our common stock
on the Nasdaq National Market under the symbol "AGRX."
Piper Jaffray & Co., an underwriter of
this offering, is affiliated with Piper Jaffray Healthcare
Fund IV, L.P., which holds 4,050,632 shares of our
Series C preferred stock purchased from us in February 2004
for an aggregate purchase price of $2.4 million and with
respect to which underlying common shares it has the
registration rights described under the section of this
prospectus entitled "Description of Capital
Stock — Registration Rights."
Prior to the offering, there has been no public
market for the shares. The initial public offering price has
been negotiated among the company and the underwriters. Among
the factors to be considered in determining the initial public
offering price of the shares, in addition to prevailing market
conditions, will be the company's historical performance,
estimates of the business potential and earnings prospects of
the company, an assessment of the company's management and
the consideration of the above factors in relation to market
valuation of companies in related businesses. We cannot be sure
that the initial public offering price will correspond to the
price at which the common stock will trade in the public market
following this offering or that an active trading market for the
common stock will develop and continue after this offering.
In connection with the offering, the underwriters
may engage in stabilizing transactions, over-allotment
transactions, syndicate covering transactions and penalty bids
in accordance with Regulation M under the Securities
Exchange Act of 1934.
•
Stabilizing transactions permit bids to purchase
    the underlying security so long as the stabilizing bids do not
    exceed a specified maximum.
86
•
Over-allotment involves sales by the underwriters
    of shares in excess of the number of shares the underwriters are
    obligated to purchase, which creates a syndicate short position.
    The short position may be either a covered short position or a
    naked short position. In a covered short position, the number of
    shares over-allotted by the underwriters is not greater than the
    number of shares that they may purchase in the over-allotment
    option. In a naked short position, the number of shares involved
    is greater than the number of shares in the over-allotment
    option. The underwriters may close out any covered short
    position by either exercising their over-allotment option and/or
    purchasing shares in the open market.
•
Syndicate covering transactions involve purchases
    of the common stock in the open market after the distribution
    has been completed in order to cover syndicate short positions.
    In determining the source of shares to close out the short
    position, the underwriters will consider, among other things,
    the price of shares available for purchase in the open market as
    compared to the price at which they may purchase shares through
    the over-allotment option. If the underwriters sell more shares
    than could be covered by the over- allotment option, a naked
    short position, the position can only be closed out by buying
    shares in the open market. A naked short position is more likely
    to be created if the underwriters are concerned that there could
    be downward pressure on the price of the shares in the open
    market after pricing that could adversely affect investors who
    purchase in the offering.
•
Penalty bids permit the representatives to
    reclaim a selling concession from a syndicate member when the
    common stock originally sold by the syndicate member is
    purchased in a stabilizing or syndicate covering transaction to
    cover syndicate short positions.
These stabilizing transactions, syndicate
covering transactions and penalty bids may have the effect of
raising or maintaining the market price of our common stock or
preventing or retarding a decline in the market price of the
common stock. As a result, the price of our common stock may be
higher than the price that might otherwise exist in the open
market. These transactions may be effected on the Nasdaq
National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format will be made
available on the web sites maintained by one or more of the
underwriters, or selling group members, if any, participating in
this offering and one or more of the underwriters participating
in this offering may distribute prospectuses electronically. The
representatives may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make internet distributions on the same basis as other
allocations.
Each underwriter has represented, warranted and
agreed that: (i) it has not offered or sold and, prior to
the expiry of a period of six months from the closing of the
offering, will not offer or sell any shares to persons in the
United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted
and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities
Regulations 1995; (ii) it has only communicated or caused
to be communicated and will not communicate or cause to be
communicated any invitation or inducement to engage in
investment and will only communicate or cause to be communicated
any invitation or inducement to engage in investment activity
(within the meaning of section 21 of the Financial Services
and Markets Act 2000 ("FSMA")) received by it in
connection with the issue or sale of any shares in circumstances
in which section 21(1) of the FSMA does not apply to
Foundation Coal Holdings, Inc.; and (iii) it has complied
and will comply with all applicable provisions of the FSMA with
respect to anything done by it in relation to the shares in,
from or otherwise involving the United Kingdom.
87
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of our common stock in Canada is
being made only on a private placement basis exempt from the
requirement that we prepare and file a prospectus with the
securities regulatory authorities in each province where trades
of common stock are made. Any resale of our common stock in
Canada must be made under applicable securities laws which will
vary depending on the relevant jurisdiction, and which may
require resales to be made under available statutory exemptions
or under a discretionary exemption granted by the applicable
Canadian securities regulatory authority. Purchasers are advised
to seek legal advice prior to any resale of shares of common
stock.
Representations of Purchasers
By purchasing our common stock in Canada and
accepting a purchase confirmation, a purchaser is representing
to us and the dealer from whom the purchase confirmation is
received that:
•
the purchaser is entitled under applicable
    provincial securities laws to purchase the shares of common
    stock without the benefit of a prospectus qualified under those
    securities laws,
•
where required by law, that the purchaser is
    purchasing as principal and not as agent, and
•
the purchaser has reviewed the text above under
    Resale Restrictions.
Rights of Action — Ontario
Purchasers Only
Under Ontario securities legislation, a purchaser
who purchases a security offered by this prospectus during the
period of distribution will have a statutory right of action for
damages, or while still the owner of the shares of common stock,
for rescission against us in the event that this prospectus
contains a misrepresentation. A purchaser will be deemed to have
relied on the misrepresentation. The right of action for damages
is exercisable not later than the earlier of 180 days from
the date the purchaser first had knowledge of the facts giving
rise to the cause of action and three years from the date on
which payment is made for the shares. The right of action for
rescission is exercisable not later than 180 days from the
date on which payment is made for the shares. If a purchaser
elects to exercise the right of action for rescission, the
purchaser will have no right of action for damages against us.
In no case will the amount recoverable in any action exceed the
price at which the shares of common stock were offered to the
purchaser and if the purchaser is shown to have purchased the
securities with knowledge of the misrepresentation, we will have
no liability. In the case of an action for damages, we will not
be liable for all or any portion of the damages that are proven
to not represent the depreciation in value of the shares of
common stock as a result of the misrepresentation relied upon.
These rights are in addition to, and without derogation from,
any other rights or remedies available at law to an Ontario
purchaser. The foregoing is a summary of the rights available to
an Ontario purchaser. Ontario purchasers should refer to the
complete text of the relevant statutory provisions.
Enforcement of Legal Rights
All of our directors and officers as well as the
experts named herein may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect
service of process within Canada upon us or those persons. All
or a substantial portion of our assets and the assets of those
persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against us or those
persons in Canada or to enforce a judgment obtained in Canadian
courts against us or those persons outside of Canada.
Taxation and Eligibility for
Investment
Canadian purchasers of our common stock should
consult their own legal and tax advisors with respect to the tax
consequences of an investment in our common stock in their
particular circumstances
88
and about the eligibility of the shares of common
stock for investment by the purchaser under relevant Canadian
legislation.
VALIDITY OF SECURITIES
The validity of the common stock offered hereby
will be passed upon for us by Heller Ehrman White &
McAuliffe LLP and for the underwriters by Ropes & Gray
LLP. As of September 30, 2004, persons and entities
affiliated with Heller Ehrman White & McAuliffe LLP
beneficially owned 84,388 shares of our common stock
immediately prior to the closing of this offering.
EXPERTS
Ernst & Young LLP, independent auditors,
have audited our financial statements at December 31, 2001,
2002 and 2003, for the period from March 6, 2001
(inception) to December 31, 2001, for the years ended
December 31, 2002 and 2003 and for the period March 6,
2001 (inception) to December 31, 2003, as set forth in
their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in
reliance of Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration
statement on Form S-1 under the Securities Act that
registers the shares of our common stock to be sold in this
offering. This prospectus does not contain all of the
information set forth in the registration statement and the
exhibits and schedules filed as part of the registration
statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the
exhibits and schedules filed as a part of the registration
statement. Statements contained in this prospectus concerning
the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed
as an exhibit to the registration statement, we refer you to the
copy of the contract or document that has been filed. Each
statement in this prospectus relating to a contract or document
filed as an exhibit is qualified in all respects by the filed
exhibit. The reports and other information we file with the SEC
can be read and copied at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington D.C. 20549. Copies of
these materials can be obtained at prescribed rates from the
Public Reference Section of the SEC at the principal offices of
the SEC, 450 Fifth Street, N.W., Washington D.C. 20549. You
may obtain information regarding the operation of the public
reference room by calling 1(800) SEC-0330. The SEC also
maintains a web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding
issuers that file electronically with the SEC.
Upon completion of this offering, we will become
subject to the reporting and information requirements of the
Exchange Act and, as a result, will file periodic reports, proxy
statements and other information with the SEC. These periodic
reports, proxy statements and other information will be
available for inspection and copying at the SEC's public
reference room and the web site of the SEC referred to above.
89
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
CONTENTS
Report of Independent Registered Public
    Accounting Firm
F-2
Consolidated Balance Sheets as of
    December 31, 2002 and 2003
F-3
Consolidated Statements of Operations for the
    period from March 6, 2001 (inception) to December 31,
    2001, the years ended December 31, 2002 and 2003 and the
    period from March 6, 2001 (inception) to December 31,
    2003
F-4
Consolidated Statements of Stockholders'
    Deficiency for the period from March 6, 2001 (inception) to
    December 31, 2001, the years ended December 31, 2002
    and 2003 and the period from March 6, 2001 (inception) to
    December 31, 2003
F-5
Consolidated Statements of Cash Flows for the
    period from March 6, 2001 (inception) to December 31,
    2001, the years ended December 31, 2002 and 2003 and the
    period from March 6, 2001 (inception) to December 31,
    2003
F-6
Notes to Audited Consolidated Financial Statements
F-7
Consolidated Balance Sheets as of
    December 31, 2003 and September 30, 2004 (unaudited)
F-21
Consolidated Statements of Operations for the
    nine months ended September 30, 2003 and 2004 and the
    period from March 6, 2001 (inception) to September 30,
    2004 (unaudited)
F-22
Consolidated Statements of Cash Flows for the
    nine months ended September 30, 2003 and 2004 and the
    period from March 6, 2001 (inception) to September 30,
    2004 (unaudited)
F-23
Notes to Unaudited Consolidated Financial
    Statements
F-24
All other schedules for which provision is made
in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Stockholders
AlgoRx Pharmaceuticals, Inc.
We have audited the accompanying consolidated
balance sheets of AlgoRx Pharmaceuticals, Inc. (a development
stage company) as of December 31, 2002 and 2003, and the
related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for
the period from March 6, 2001 (inception) to
December 31, 2001, and for the years ended
December 31, 2002 and 2003, and for the period from
March 6, 2001 (inception) to December 31, 2003.
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 the
standards of the Public Company 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, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of AlgoRx Pharmaceuticals, Inc.
at December 31, 2002 and 2003, and the consolidated results
of their operations and their cash flows for the period from
March 6, 2001 (inception) to December 31, 2001 and for
the years ended December 31, 2002 and 2003, and for the
period from March 6, 2001 (inception) to
December 31, 2003, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
November 23, 2004
F-2
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
December 31,
2002
2003
ASSETS
Current assets:
Cash and cash equivalents
$
8,873,270
$
4,545,976
Prepaid expenses and other current assets
162,709
183,961
Total current assets
9,035,979
4,729,937
Property and equipment, net
3,155,598
2,373,840
Acquired workforce, net
274,161
—
Deferred financing costs
—
82,377
Other assets
214,993
214,993
Total assets
$
12,680,731
$
7,401,147
LIABILITIES AND STOCKHOLDERS' EQUITY
    (DEFICIENCY)
Current liabilities:
Accounts payable
$
274,476
$
493,530
Accrued compensation
128,533
273,399
Other accrued liabilities
1,360,848
1,202,453
Convertible notes
—
9,800,000
Total current liabilities
1,763,857
11,769,382
Series A convertible preferred stock,
    $0.001 par value; 9,150,000 shares authorized, issued
    and outstanding at December 31, 2002 and 2003, respectively
    (aggregate liquidation preference of $9,150,000 at
    December 31, 2002 and 2003)
9,099,428
9,099,428
Series B convertible preferred stock,
    $0.001 par value; 26,350,000 shares authorized at
    December 31, 2002 and 2003; 17,858,462 issued and
    outstanding at December 31, 2002 and 2003, respectively
    (aggregate liquidation preference of $23,216,000 at
    December 31, 2002 and 2003)
23,094,410
23,094,410
Stockholders' equity (deficiency):
Common stock, $0.001 par value,
    50,000,000 shares authorized at December 31, 2002 and
    2003; 3,365,654 and 3,412,904 shares issued at
    December 31, 2002 and 2003, respectively; 3,365,654 and
    3,142,071 shares outstanding at December 31, 2002 and
    2003, respectively
3,366
3,413
Additional paid-in capital
326,978
670,785
Deferred compensation
—
(142,564
)
Treasury stock, at cost; 0 and
    270,833 shares at December 31, 2002 and 2003,
    respectively
—
(271
)
Deficit accumulated during the development stage
(21,607,308
)
(37,093,436
)
Total stockholders' equity (deficiency)
(21,276,964
)
(36,562,073
)
Total liabilities and stockholders' equity
    (deficiency)
$
12,680,731
$
7,401,147
See accompanying notes.
F-3
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
CONSOLIDATED STATEMENTS OF
OPERATIONS
Period from
Period from
March 6, 2001
Year Ended December 31,
March 6, 2001
(inception) to
(inception) to
December 31, 2001
2002
2003
December 31, 2003
Contract revenues
$
—
$
149,216
$
100,000
$
249,216
Costs and expenses:
Research and development
365,303
11,745,089
12,190,813
24,301,205
General and administrative
1,096,671
3,075,615
3,477,329
7,649,615
Acquired in-process research and development and
    other
—
5,716,247
—
5,716,247
Total costs and expenses
1,461,974
20,536,951
15,668,142
37,667,067
Loss from operations
(1,461,974
)
(20,387,735
)
(15,568,142
)
(37,417,851
)
Gain (loss) on sale of assets
—
(36,101
)
103,324
67,223
Interest expense
(1,577
)
(4,353
)
(107,310
)
(113,240
)
Interest and other income, net
47,333
237,099
86,000
370,432
Net loss
$
(1,416,218
)
$
(20,191,090
)
$
(15,486,128
)
$
(37,093,436
)
Basic and diluted net loss per share
$
(7.93
)
$
(11.04
)
$
(5.98
)
Weighted average shares outstanding —
    basic and diluted
178,663
1,829,494
2,591,820
Unaudited pro forma basic and diluted net loss
    per share
$
(0.52
)
Unaudited pro forma weighted average shares
    outstanding — basic and diluted
29,600,282
See accompanying notes.
F-4
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
DEFICIENCY
Period from March 6, 2001
(inception) to December 31, 2003
Deficit
Accumulated
Total
Common Stock
Additional
Treasury Stock
During the
Stockholders'
Paid-In
Deferred
Development
Equity
Shares
Amount
Capital
Compensation
Shares
Amount
Stage
(Deficiency)
Balance at March 6, 2001 (inception)
—
$
—
$
—
$
—
—
$
—
$
—
$
—
Issuance of common stock to founders for $0.001
    per share in March 2001
1,500,000
1,500
—
—
—
—
—
1,500
Issuance of common stock upon exercise of stock
    options in April 2001
238,000
238
23,562
—
—
—
—
23,800
Net loss and comprehensive loss
—
—
—
—
—
—
(1,416,218
)
(1,416,218
)
Balance at December 31, 2001
1,738,000
1,738
23,562
—
—
—
(1,416,218
)
(1,390,918
)
Issuance of common stock upon exercise of stock
    options in March 2002
101,500
102
10,048
—
—
—
—
10,150
Issuance of common stock at $0.15 per share for
    acquisition of PowderJect Technologies, Inc. in March 2002
1,526,154
1,526
227,397
—
—
—
—
228,923
Stock-based compensation resulting from stock
    options granted to nonemployees
—
—
65,971
—
—
—
—
65,971
Net loss and comprehensive loss
—
—
—
—
—
—
(20,191,090
)
(20,191,090
)
Balance at December 31, 2002
3,365,654
3,366
326,978
—
—
—
(21,607,308
)
(21,276,964
)
Issuance of common stock upon exercise of stock
    options in 2003
47,250
47
5,540
—
—
—
—
5,587
Accrued interest costs
—
—
107,310
—
—
—
—
107,310
Deferred compensation related to stock options
—
—
155,856
(155,856
)
—
—
—
—
Noncash compensation
—
—
66,240
—
—
—
—
66,240
Repurchase of common stock
—
—
—
—
(270,833
)
(271
)
—
(271
)
Amortization of deferred compensation
—
—
—
13,292
—
—
—
13,292
Stock-based compensation resulting from stock
    options granted to nonemployees
—
—
8,861
—
—
—
—
8,861
Net loss and comprehensive loss
—
—
—
—
—
—
(15,486,128
)
(15,486,128
)
Balance at December 31, 2003
3,412,904
$
3,413
$
670,785
$
(142,564
)
(270,833
)
$
(271
)
$
(37,093,436
)
$
(36,562,073
)
See accompanying notes.
F-5
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Period from
Period from
March 6,
March 6,
2001
2001
(inception) to
Year Ended December 31,
(inception) to
December 31,
December 31,
2001
2002
2003
2003
Operating activities
Net loss
$
(1,416,218
)
$
(20,191,090
)
$
(15,486,128
)
$
(37,093,436
)
Adjustments to reconcile net loss to net cash
    used in operating activities:
Depreciation and amortization
9,920
956,200
1,059,889
2,026,009
Noncash stock-based compensation
—
65,971
88,393
154,364
Non-cash interest expense
—
—
107,310
107,310
Acquired in-process research and development
—
5,716,247
—
5,716,247
Amortization of intangible assets
—
174,138
274,161
448,299
Loss on disposal of equipment
—
36,101
—
36,101
Gain on disposal of equipment
—
—
(103,324
)
(103,324
)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
(41,169
)
(75,012
)
(21,252
)
(137,433
)
Other assets
(16,594
)
—
(82,377
)
(98,971
)
Accounts payable
203,742
53,358
219,053
476,153
Accrued compensation
103,814
(62,806
)
144,866
185,874
Other accrued liabilities
—
1,271,766
(161,775
)
1,109,991
Net cash used in operating activities
(1,156,505
)
(12,055,127
)
(13,961,184
)
(27,172,816
)
Investing activities
Purchases of property and equipment
(48,071
)
(529,889
)
(394,373
)
(972,333
)
Proceeds from disposal of equipment
—
30,000
222,947
252,947
Acquisition of PowderJect Technologies,
    Inc.
—
(1,442,029
)
—
(1,442,029
)
Other acquisition related expenditures
—
(96,613
)
—
(96,613
)
Net cash used in investing activities
(48,071
)
(2,038,531
)
(171,426
)
(2,258,028
)
Financing activities
Repayment of capital lease obligations
(5,998
)
(37,313
)
—
(43,311
)
Proceeds from issuance of convertible preferred
    stock, net of issuance costs
9,099,428
15,078,410
—
24,177,838
Proceeds from issuances of common stock
25,300
11,677
5,587
42,564
Funds used to repurchase common stock
—
—
(271
)
(271
)
Proceeds from debt
—
—
9,800,000
9,800,000
Net cash provided by financing activities
9,118,730
15,052,774
9,805,316
33,976,820
Net (decrease) increase in cash and cash
    equivalents
7,914,154
959,116
(4,327,294
)
4,545,976
Cash and cash equivalents, beginning of period
—
7,914,154
8,873,270
—
Cash and cash equivalents, end of period
$
7,914,154
$
8,873,270
$
4,545,976
$
4,545,976
Supplemental disclosure of cash flow
    information
Cash paid during the year for interest
$
1,577
$
4,353
$
—
$
5,930
Supplemental cash flow information
Issuance of $8,016,000 of convertible preferred
    stock and $228,923 of common stock in connection with
    acquisition of PowderJect Technologies, Inc.
$
—
$
8,244,923
$
—
$
8,244,923
Equipment acquired under capital leases
$
43,311
$
—
$
—
$
43,311
See accompanying notes.
F-6
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2003
1.
Summary of Significant Accounting
    Policies
Organization, Description of Business and
    Basis of Presentation
AlgoRx Pharmaceuticals, Inc. (the
"Company" or "AlgoRx") was incorporated on
March 6, 2001 in Delaware. During 2003, the Company was
headquartered in Cranbury, New Jersey, with facilities also in
Fremont, California. In July of 2004, the Company moved its
headquarters to Secaucus, New Jersey. AlgoRx is focused on
building a diversified portfolio of pharmaceutical products and
technologies to address the pain therapeutic market. The
Company's activities since inception have consisted
principally of acquiring product and technology rights, raising
capital, establishing facilities and performing research and
development. Accordingly, the Company is considered to be in the
development stage as defined by Statement of Financial
Accounting Standards No. 7,
Accounting and Reporting by
Development Stage Enterprises.
The Company operates in one
business segment.
The Company expects to continue to incur
substantial losses over the next several years during its
development phase. To fully execute its business plan, the
Company will need to complete certain research and development
activities and clinical trials. Further, the Company's
product candidates will require regulatory approval prior to
commercialization. These activities may span many years and
require substantial expenditures to complete and may ultimately
be unsuccessful. Any delays in completing these activities could
adversely impact the Company. The Company plans to meet its
capital requirements primarily through issuances of equity
securities, research and development contract revenue, and in
the longer term, revenue from product sales (see Note 13).
Use of Estimates
The preparation of financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation
The consolidated financial statements include the
accounts of AlgoRx and, beginning on March 22, 2002, its
wholly owned subsidiary, AlgoRx Technologies, Inc. (formerly
PowderJect Technologies, Inc.), located in Fremont, California.
Intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly
liquid instruments purchased with an original maturity of three
months or less.
Property and Equipment
Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is provided over the
estimated useful lives of the respective assets, which range
from three to five years, using the straight-line method.
Leasehold improvements are amortized over the
lives of the related leases or their estimated useful lives,
whichever is shorter, using the straight-line method.
F-7
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Intangible Asset
Intangible asset consists of the assembled
workforce acquired in the acquisition of PowderJect
Technologies, Inc. (see Note 2). The acquired workforce is
being amortized on a straight-line basis over two years, which
represents the estimated retention period for the related
employees. Acquired workforce amortization is recorded in
research and development expense.
Long-Lived Assets
Long-lived assets and certain identifiable
intangible assets to be held and used are reviewed for
impairment when events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. In the event that such cash
flows are not expected to be sufficient to recover the carrying
amount of the assets, the assets are written down to their
estimated fair values. Long-lived assets and certain
identifiable assets to be disposed of are reported at the lower
of carrying amount or fair value less cost to sell.
Fair Value of Financial
    Instruments
The carrying values of the Company's
financial instruments, which include cash and cash equivalents,
accounts payable and accrued expenses, approximates their fair
values.
Revenue Recognition
The Company's revenue recognition policies
are in accordance with Securities and Exchange Commission
(SEC) Staff Accounting Bulletins No. 101 and
No. 104, or SAB 101 and 104, and EITF 00-21,
Revenue Recognition in Financial Statements
, which
provides guidance on revenue recognition in financial statements
and is based on the interpretations and practices developed by
the SEC. SAB 101 requires that four basic criteria be met
before revenue can be recognized: (1) persuasive evidence
exists of an arrangement; (2) delivery has occurred or
services have been rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the
fees charged for services rendered and products delivered and
the collectibility of those fees.
Research and Development
    Costs
Research and development costs are expensed as
incurred. Research and development costs consist of salaries,
employee benefits, laboratory supplies, consulting services,
clinical services and facility costs.
Acquired in-process research and development
relates primarily to in-licensed technology, intellectual
property and know-how. The Company evaluates the stage of
development of acquired projects, taking into account the level
of effort, time and estimated cost associated with further
developing the in-process technology and producing a commercial
product. The nature of the remaining efforts for completion of
acquired in-process research and development projects generally
include completion of clinical trials, completion of
manufacturing validation, interpretation of clinical and
preclinical data and obtaining marketing approval from the FDA
and other regulatory bodies, the cost, length and success of
which are extremely difficult to determine. Numerous risks and
uncertainties exist with timely completion of development
projects, including clinical trial results, manufacturing
process development results, and ongoing feedback from
regulatory authorities, including obtaining marketing approval.
In addition, acquired products under development may never be
successfully commercialized due to the uncertainties associated
with the pricing of new pharmaceuticals, the cost to produce
these products in a commercial setting,
F-8
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
changes in the reimbursement environment, or the
introduction of new competitive products. As a result of the
uncertainties noted above, the Company expenses such acquired
in-process research and development projects when incurred.
Concentration of Credit Risk
The Company's financial instruments that are
exposed to credit risks consist primarily of cash and cash
equivalents. The Company maintains its cash and cash equivalents
in bank accounts, which, at times, exceed federally insured
limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to significant
credit risk related to cash and cash equivalents.
Income Taxes
The Company accounts for income taxes under
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Under this method, deferred tax
assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that
will be in effect when the differences are expected to reverse.
A valuation allowance is provided when it is more likely than
not that some portion or all of a deferred tax asset will not be
realized.
Comprehensive Loss
The Company's total comprehensive loss is
the same as its net loss for all periods presented.
Net Loss Per Share
The Company computes net loss per share in
accordance with Statement of Financial Accounting Standards
No. 128, "Earnings per Share"
("SFAS 128"). Under the provisions of
SFAS 128, basic net loss per common share ("Basic
EPS") is computed by dividing net loss by the
weighted-average number of common shares outstanding (excluding
unvested founders' shares subject to repurchase). Diluted
net loss per common share ("Diluted EPS") is computed
by dividing net loss by the weighted-average number of common
shares and dilutive common shares equivalents then outstanding.
Common equivalent shares consist of the incremental common
shares issuable upon the conversion of preferred stock,
convertible debt, shares issuable upon the exercise of stock
options, and unvested founders' shares subject to
repurchase. Diluted EPS is identical to Basic EPS since common
equivalent shares are excluded from the calculation, as their
effect is anti-dilutive.
Unaudited Pro Forma
    Information
The unaudited pro forma net loss per share is
computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic
conversion of all outstanding convertible preferred stock and
the exercise in full of all outstanding warrants 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 the date of original
issuance.
Stock-Based Compensation
As permitted by the Financial Accounting
Standards Board ("FASB") Statement No. 123,
Accounting for Stock-Based Compensation
("SFAS 123"), as amended, the Company accounts
for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and related
interpretations, in accounting for its
F-9
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
stock-based compensation plans. Under
APB 25, when the exercise price of the Company's
employee stock options equals or exceeds the estimated fair
value of the underlying stock on the date of grant, no
compensation expense is recorded.
Pro forma information regarding net loss and net
loss per share has been determined as if the Company had
accounted for its employee stock options under the fair value
method proscribed by SFAS 123. The resulting effect on pro
forma net loss disclosed is not likely to be representative of
the effects of loss on a pro forma basis in future years due to
additional grants and years of vesting in subsequent years. Pro
forma compensation related to stock option grants is expensed
over their respective vesting periods.
Had compensation cost for options granted under
the Company's stock option plan been determined based on
the fair value at the grant dates for the awards under a method
prescribed by SFAS 123, the Company's net loss would
have been adjusted to the following pro forma amounts:
Period from
March 6, 2001
(inception) to
Year Ended December 31,
December 31,
2001
2002
2003
Net loss, as reported
$
(1,416,218
)
$
(20,191,090
)
$
(15,486,128
)
Add: Noncash employee compensation as reported
—
—
13,292
Deduct: Stock-based employee compensation expense
    under the fair value based method for all awards, net of tax
(5,464
)
(140,391
)
(199,622
)
Net loss, pro forma
$
(1,421,682
)
$
(20,331,481
)
$
(15,672,458
)
Basic and diluted loss attributable to common
    stockholders per share, as reported
$
(7.93
)
$
(11.04
)
$
(5.98
)
Basic and diluted loss attributable to common
    stockholders per share, SFAS 123, pro forma
$
(7.96
)
$
(11.11
)
$
(6.05
)
Unaudited pro forma basic and diluted net loss
    per share (Note 1) SFAS 123, pro forma
$
(0.53
)
The fair values of stock options granted to
employees for the period from March 6, 2001
(inception) to December 31, 2001 and for the years
ended December 31, 2002 and 2003 were estimated on the
respective dates of grant using the minimum value option-pricing
model with the following weighted-average assumptions:
Period from
March 6, 2001
Year Ended
(inception) to
December 31,
December 31,
2001
2002
2003
Risk-free interest rate
4.50
%
4.61
%
4.02
%
Expected life (in years)
9.0
9.0
9.0
Dividend yield
—
—
—
Fair value
$
0.09
$
0.14
$
0.99
The Company has also granted stock options to
purchase stock to consultants, advisors, and other vendors. The
Company accounts for stock awards issued to such nonemployees in
accordance with the provisions of SFAS 123 and Emerging
Issues Task Force ("EITF") Issue No. 96-18,
Accounting for
F-10
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods
or Services ("Issue No. 96-18"). Under
SFAS 123 and Issue No. 96-18, stock awards to
nonemployees are accounted for at their respective fair values
using the Black-Scholes option-pricing model unless a more
readily determinable fair value is available. The fair value of
options granted to nonemployees is periodically remeasured as
the underlying options vest.
Recently Issued Accounting
    Standards
In January 2003, the FASB issued Interpretation
No. 46 ("FIN 46"),
Consolidation of
Variable Interest Entities
, which addresses consolidation of
variable interest entities ("VIEs"). FIN 46
requires a VIE to be consolidated by a parent company if that
company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or
both. A VIE is a corporation, partnership, trust or any other
legal structure used for business purposes that either does not
have equity investors with voting rights or has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. The consolidation requirements
of FIN 46 apply immediately to VIEs created after
January 31, 2003. For entities created prior to
February 1, 2003, the effective date of these requirements
has been deferred so as not to apply until the first period
ending after December 15, 2004. The adoption of the
provisions applicable to special purpose entities
("SPEs") and all other variable interests obtained
after January 31, 2003 had no impact on the Company's
financial statements. The Company is currently evaluating the
impact of adopting FIN 46-R applicable to non-SPEs created
prior to February 1, 2003, but does not expect a material
impact on its financial position, results of operations or cash
flows.
In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150,
Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity
("SFAS 150"). This
statement establishes standards for classifying and measuring as
liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. The scope of this pronouncement includes
mandatorily redeemable equity instruments. Application to
pre-existing instruments should be recognized as the cumulative
effect of a change in accounting principle (application by
retroactive restatement is precluded). Exceptions to the
transition requirements were provided for mandatorily redeemable
instruments of non-public companies. Subsequent to the issuance
of SFAS 150, the FASB issued FSP 150-3, which further
deferred the transition requirements for nonpublic companies
that also are not SEC registrants for instruments that are
mandatorily redeemable on fixed dates that are for fixed
amounts. The classification, measurement, and disclosure
provisions of SFAS 150 are effective for fiscal periods
beginning after December 15, 2004. The adoption of this
statement is not expected to impact the classification of the
Company's convertible preferred stock.
2.
Acquisition of PowderJect Technologies,
    Inc.
On March 22, 2002, the Company acquired all
of the outstanding shares of PowderJect Technologies, Inc.
("PowderJect"), a development stage company, for a
total purchase price of approximately $9.9 million. This
purchase price included 6,166,154 shares of the
Company's Series B convertible preferred stock,
1,526,154 shares of common stock, cash consideration of
$718,150 for a minority interest's share in the acquired
company, acquisition related costs of $723,879 and assumed
liabilities of $192,458. The Series B convertible preferred
stock was valued based on the arm's length Series B
financing completed during that year and the common stock
consideration was valued using the Company's estimated fair
value used for option grants made to employees. PowderJect was
in the business of developing drug applications for a patented,
needle-free, delivery system developed by its parent company,
PowderJect Pharmaceuticals plc. The Company also entered into a
supply agreement with PowderJect Technologies Limited
(subsequently purchased by Chiron Corporation) for
microcylinders. The micro-
F-11
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
cylinders are a key component of the product
candidate, ALGRX 3268, and PowderJect Technologies Limited
is the sole supplier. No other supplier has been identified by
the Company.
The acquisition was completed to provide the
Company with the ability to exploit the opportunities associated
with its in-process lidocaine technology, as well as gain access
to the patented drug delivery technology. The purchase price was
determined in accordance with Statement of Financial Accounting
Standards No. 141,
Business Combinations
("SFAS 141"), and Statement of Financial
Accounting Standards No. 142,
Goodwill and Other
Intangible Assets
("SFAS 142"). A summary of
the determination of the purchase price during 2002 was as
follows:
6,166,154 shares — Series B
    convertible preferred stock
$
8,016,000
1,526,154 shares — common stock
228,923
Cash for minority interest buyout
718,150
Acquisition related costs
723,879
Assumed liabilities
192,458
Total purchase price
$
9,879,410
The acquisition was accounted for as an
acquisition of assets rather than as a business combination as
PowderJect was a development stage company that had not
commenced its planned principal operations. PowderJect lacked
the necessary elements of a business because it did not have
completed products and, therefore, no ability to access
customers. The PowderJect operating results have been included
in the Company's consolidated results of operations since
March 23, 2002.
The Company allocated the purchase price in
accordance with the provisions of SFAS 142 related to the
purchase of a group of assets. SFAS 142 provides that the
cost of a group of assets acquired in a transaction other than a
business combination shall be allocated to the individual assets
acquired based on their relative fair values and shall not give
rise to goodwill.
In accordance with the provisions of
SFAS 142, all identifiable intangible assets and acquired
in-process research and development were assigned a portion of
the purchase price based on their relative fair values. To this
end, a third party valuation was used to assist management in
determining the fair value of the identifiable assets and
acquired in-process research and development. Based on this
valuation, the Company allocated the total consideration as
follows:
Acquired in-process research and development and
    other
$
5,716,247
Tangible net assets
3,714,864
Acquired workforce
448,299
Total purchase price
$
9,879,410
The income approach was used to estimate the fair
value of the acquired in-process research and development based
on projected cash flows, assuming a 30% discount rate. This
discount rate is a significant assumption and is based on the
Company's estimated weighted average cost of capital taking
into account the risks associated with the projects acquired.
The projected cash flows from such projects were based on
estimates of revenues and operating profits related to such
projects considering the stage of development of each potential
product acquired, the time and resources needed to complete each
product, the estimated life of each potential commercialized
product and associated risks which included the inherent
difficulties and uncertainties in developing a drug compound,
obtaining FDA and other regulatory approvals, and risks related
to the viability of, and potential alternative treatments in,
any future target markets. Approximately $4.5 million of
the purchase price was allocated to acquired in-process research
F-12
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
and development due to PowderJect's
incomplete research and development programs that had not yet
reached technological feasibility as of March 2002 and had no
alternative future use as of that date.
The relief from royalty approach was also used to
determine the estimated fair value of the patent license based
on its favorable royalty rate. In light of the number of years
required to achieve product commercialization, the associated
technology risk, and therefore the risk that the asset value
will not be realized, the Company has recorded, as an expense,
the value of the favorable patent license, which is
$1.2 million, similar to the treatment afforded the
acquired in-process research and development.
The cost approach was used to determine the value
of the acquired workforce. The value allocated to the acquired
workforce is attributable to 31 employees hired by the Company
from PowderJect following the asset acquisition, which
eliminated the need to hire replacement employees. The value of
the acquired workforce was determined by estimating the cost of
assembling a new workforce, including costs of salaries,
benefits, training, and recruiting.
As of December 31, 2002 and 2003, the
Company's intangible assets are as follows:
December 31,
2002
2003
Acquired workforce
$
448,299
$
448,299
Accumulated amortization
(174,138
)
(448,299
)
Net balance
$
274,161
$
—
Amortization expense was $174,138, $274,161 and
$448,299 for the years ended December 31, 2002 and 2003 and
from March 6, 2001 (inception) to December 31,
2003, respectively. Included in the 2003 amortization was
$227,461 related to the acquired workforce that was written off
in connection with the restructuring described in Note 3.
3.
Restructuring
In March 2003, the Company announced a
reorganization plan intended to reduce operating costs and
reduced its staff by 28 employees (approximately 61% of total
employees as of the date of reorganization); however, no
research projects were discontinued. The reorganization resulted
in an impairment of the assembled workforce intangible asset of
$227,461 recorded as accelerated amortization expense during
2003. This expense is classified under research and development
expenses for the year ended December 31, 2003. In addition,
the vesting of certain options held by such employees at the
time of termination was accelerated. The Company recorded a
charge of $66,240 related to this acceleration of vesting. The
total restructuring cost of $1,122,444 was charged to research
and development expense.
F-13
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
4.
Property and Equipment
Property and equipment consist of the following:
December 31,
2002
2003
Leasehold improvements
$
2,025,500
$
1,987,027
Computer and office equipment
234,426
127,048
Lab equipment
894,030
850,081
Construction-in-process
801,324
562,616
Furniture and fixtures
87,165
87,165
4,042,445
3,613,937
Less accumulated depreciation and amortization
(886,847
)
(1,240,097
)
Property and equipment, net
$
3,155,598
$
2,373,840
Depreciation and amortization expense was $9,920,
$956,200, $1,059,889 and $2,026,009 for the period from
March 6, 2001 (inception) to December 31, 2001,
for the years ended December 31, 2002 and 2003 and for the
period from March 6, 2001 (inception) to
December 31, 2003, respectively. During 2003, the Company
sold certain computer and lab equipment that was determined to
be unnecessary due to the reduction in force. The sale resulted
in a recognized gain on disposal of approximately $103,000.
5.
Other Accrued Liabilities
Other accrued liabilities consist of the
following:
December 31,
2002
2003
Accrued patent costs
$
150,000
$
294,000
Accrued research and development costs
684,558
341,158
Accrued legal
41,411
141,356
Accrued vacation
122,557
130,611
Other accrued liabilities
362,322
295,328
Total
$
1,360,848
$
1,202,453
6.
Commitments
Leases
The Company leased certain office facilities and
office equipment under operating and capital leases during the
year ended December 31, 2003. As of December 31, 2003,
the Company had satisfied its obligation under its capital
leases. The future minimum payments for all noncancelable
operating leases as of December 31, 2003 are as follows:
Years ending December 31,
2004
$
665,397
2005
51,530
Thereafter
—
Total
$
716,927
F-14
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
See Note 13 for information concerning
leases entered into after December 31, 2003.
Rent expense under operating leases was
approximately $184,000, $500,000, $660,000 and $1,344,000, for
the period from March 6, 2001 (inception) to
December 31, 2001, for the years ended December 31,
2002 and 2003 and for the period from March 6, 2001
(inception) to December 31, 2003, respectively.
Other Commitments
Under the Company's license agreements, the
Company could be required to pay up to a total of $1,366,000 in
milestone payments through product approval, in addition to
sales milestones and royalties on commercial sales if any occur.
The Company has no material commitments for capital expenditures.
Under our license with PowderMed Limited we are
obligated and have spent $1,000,000 on research and development
associated with the licensed technology during the period
July 7, 2003 to July 7, 2005. We are also obligated to
spend an additional $1,000,000 on research and development for
every 12 month period from July 7, 2005 to
July 7, 2008.
7.
Capital Structure
Common Stock
The Company is authorized to issue
50,000,000 shares of common stock.
Dividends on common stock will be paid when, and
if, declared by the Board of Directors. Each holder of common
stock is entitled to vote on all matters and is entitled to one
vote for each share held. The Company will, at all times,
reserve and keep available, out of its authorized but unissued
shares of common stock, sufficient shares to affect the
conversion of the shares of the convertible preferred stock and
stock options. As of December 31, 2003, the Company has
reserved 31,612,547 shares of common stock for future
issuance. Common shares issued to the founders of the Company
vest over a four-year period. Unvested shares are subject to
repurchase by the Company at the original issuance price. As of
December 31, 2003, there were 421,875 founders shares
subject to repurchase at an aggregate price of $422.
Convertible Preferred Stock
The Company is authorized to issue
35,500,000 shares of preferred stock. In April 2001, the
Company issued 9,150,000 shares of Series A
convertible preferred stock ("Series A"). In
March 2002, the Company issued 17,858,462 shares of
Series B convertible preferred stock
("Series B"). Such stock is subject to the
following rights and privileges:
Voting
Series A and B stockholders are entitled to
the number of votes equal to the number of shares of common
stock into which each share of preferred stock is convertible.
Dividends
The holders of Series A and B are entitled
to receive annual dividends at a rate of 8% of the original
purchase price in advance of any distributions to common
shareholders. Dividends are payable when, and as, declared by
the Board of Directors and are noncumulative. No dividends have
been declared through December 31, 2003.
Conversion
Series A and B stockholders are entitled, at
any time, to cause their shares to be converted into fully paid
and nonassessable shares of common stock. Shares of
Series A and B will be converted into common
F-15
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
stock based on a one-for-one basis, subject to
adjustment for antidilution. Additionally, the preferred stock
will convert automatically (i) upon the affirmative
election of the holders of at least a majority of the
outstanding shares of preferred stock, or (ii) immediately
upon the closing of a public offering pursuant to an effective
registration statement under the Securities Act of 1933 covering
the offer and sale of common stock, which results in aggregate
net proceeds to the Company of at least $25,000,000 and a per
share price of at least $5.00 (appropriately adjusted for any
stock dividend, stock split or recapitalization).
Liquidation
In the event of any liquidation, dissolution or
winding up of the Company, including a change of control, either
voluntary or involuntary, the holders of Series A and B are
entitled to receive, in preference to common stock, an amount
equal to the purchase price per share, plus all declared but
unpaid dividends (appropriately adjusted for any stock dividend,
stock split or recapitalization). After payment of these
preferential amounts, the remaining assets of the Company shall
be distributed among the holders of common and preferred stock
(assuming conversion of preferred stock).
Convertible Notes
In April 2003, the Company entered into several
loan agreements with various financial institutions, whereby the
financial institutions agreed to loan the Company an aggregate
principal amount of $9,800,000. The interest on these loans was
1.46% per annum and was payable on December 31, 2004
if the notes were held and not converted on such date. The loans
were converted into Series C stock in February 2004 (see
Note 13) and no interest was paid to the financial
institutions in accordance with the loan agreements. In
accordance with EITF 85-17:
Accrued Interest upon Conversion
of Convertible Debt
, the interest cost of $107,310 was
accrued through December 31, 2003 and the corresponding
credit was recorded as a component of additional paid-in capital.
8.
Stock Option Plan
On March 30, 2001, the Company's Board
of Directors and shareholders approved the Company's 2001
Equity Incentive Plan (the "2001 Plan"). The 2001 Plan
provides for the granting of options to purchase common stock in
the Company to employees and consultants at a price not less
than the estimated fair value at the date of grant, or 110% of
the estimated fair value at the date of grant if the optionee is
a 10% owner of the Company. Under the provisions of the 2001
Plan, no option will have a term in excess of ten years.
In connection with the granting of employee stock
options in 2003, the Company recorded deferred compensation of
approximately $156,000. Deferred compensation is being amortized
over the vesting period of the options resulting in non-cash
stock-based compensation expense of approximately $13,000 for
the year ended December 31, 2003.
The 2001 Plan is intended to encourage ownership
of stock by employees and consultants of the Company and to
provide additional incentives for them to promote the success of
the Company's business. The Board of Directors is
responsible for determining the individuals to receive option
grants, the number of options each individual will receive, the
option price per share and the exercise period of each option.
Options granted pursuant to the 2001 Plan generally vest over
four years and have been granted at the estimated fair value of
the Company's common stock, as determined by the Board of
Directors, as of each grant date. The 2001 Plan allows the
option holders to exercise their options early, which are then
subject to repurchase by the Company at the original exercise
price of such options.
F-16
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes stock option
activity for the Company:
Options Outstanding
Shares
Weighted-
Available for
Number of
Exercise Price
Average
Grant
Shares
Per Share
Exercise Price
Balance at March 6, 2001 (inception)
—
—
$
—
$
—
Shares authorized
2,716,666
—
—
—
Granted
(726,166
)
726,166
0.10 - 1.00
0.37
Exercised
—
(238,000
)
0.10
0.10
Balance at December 31, 2001
1,990,500
488,166
0.10 - 1.00
0.50
Shares authorized
5,200,308
—
—
—
Granted
(6,748,477
)
6,748,477
0.10 - 0.15
0.15
Exercised
—
(101,500
)
0.10
0.10
Forfeited
920,041
(920,041
)
0.15
0.15
Balance at December 31, 2002
1,362,372
6,215,102
0.10 - 1.00
0.18
Granted
(192,000
)
192,000
0.15
0.15
Exercised
—
(47,250
)
0.10 - 0.15
0.11
Forfeited
1,090,221
(1,090,221
)
0.15
0.15
Balance at December 31, 2003
2,260,593
5,269,631
0.10 - 1.00
0.18
The following table summarizes information about
vested stock options outstanding:
December 31,
2001
2002
2003
Vested Stock Options
95,000
181,667
2,038,728
Weighted average exercise price
$
0.38
$
0.25
$
0.15
The following table summarizes information about
stock options outstanding at December 31, 2003:
Weighted Average
Options
Options
Remaining
Exercise Price
Outstanding
Vested
Contractual Life
$0.10
305,000
212,187
7.8
$0.15
4,747,965
1,796,541
8.4
$1.00
216,666
30,000
7.7
5,269,631
2,038,728
8.3
The Company also grants options to purchase
common stock to consultants, advisors, and others (collectively,
the "nonemployees"). The Company has granted options
to purchase 474,918 shares of common stock to
nonemployees during the period from March 6, 2001
(inception) to December 31, 2003. Of these options,
288,252 vest over time periods ranging from immediate
vesting to 24 months and 186,666 have performance-based
vesting criteria. The Black-Scholes option-pricing model is used
to calculate the fair values of the stock options to
nonemployees as the vesting periods of respective awards lapse.
The Company recognized stock-based compensation expense of
approximately $66,000 and $9,000 during the years ended
December 31, 2002 and 2003, respectively, related to the
fair value of the vested portions of nonemployee stock option
awards. Stock-based compensation expense was insignificant for
the period from March 6, 2001 (inception) to
December 31, 2001. Additional stock-based compensation
expense will be recorded in future periods for the remaining
unvested portion of the stock option awards.
F-17
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
9.
Employee Benefit Plan
The Company maintains a defined contribution
401(k) plan available to employees. Employee contributions are
voluntary and are determined on an individual basis, limited by
the maximum amounts allowable under federal tax regulations.
Company contributions totaled $0, $27,738, $40,052 and $67,790,
for the period from March 6, 2001 (inception) to
December 31, 2001, for the years ended December 31,
2002 and 2003 and for the period from March 6, 2001
(inception) to December 31, 2003, respectively.
10.
Income Taxes
As of December 31, 2002 and 2003, the
Company had deferred tax assets of $6,566,000 and $14,425,000,
respectively. Realization of the deferred tax assets is
dependent upon the Company generating future taxable income, if
any, the amount and timing of which are uncertain. Accordingly,
the deferred tax assets have been fully offset by a valuation
allowance at December 31, 2002 and 2003. The net valuation
allowance increased by approximately $600,000, $5,966,000 and
$7,859,000 for the period from March 6, 2001
(inception) to December 31, 2001, and for the years
ended December 31, 2002 and 2003, respectively.
Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company's deferred tax
assets relate primarily to net operating loss carryforwards.
Significant components of the Company's deferred tax assets
are as follows:
December 31,
2002
2003
Deferred tax assets:
Net operating loss carryforwards
$
6,098,000
$
12,472,000
Research credits
100,000
657,000
Depreciation and amortization
221,000
1,232,000
Other temporary differences
147,000
64,000
Total gross deferred tax assets
6,566,000
14,425,000
Valuation allowance
(6,566,000
)
(14,425,000
)
Net deferred tax assets
$
—
$
—
A reconciliation of the statutory tax rates and
the effective tax rates for the period from March 6, 2001
(inception) to December 31, 2001, and for the years
ended December 31, 2002 and 2003, is as follows:
2001
2002
2003
Statutory rate
(34
)%
(34
)%
(34
)%
State and local income taxes (net of federal tax
    benefit)
(6
)
(6
)
(6
)
Change in valuation allowance
40
40
40
Effective tax rates
0
%
0
%
0
%
As of December 31, 2003, the Company had
federal net operating loss carryforwards of approximately
$31,000,000. The Company also had federal research and
development tax credit carryforwards of approximately $657,000.
The federal net operating loss and tax credit carryforwards will
expire at various dates beginning in 2021, if not utilized.
Utilization of the net operating loss
carryforwards and credits may be subject to a substantial annual
limitation due to the ownership change limitations provided by
the Internal Revenue Code of 1986, as
F-18
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amended, and similar state provisions. The
Company has not performed a detailed analysis to determine
whether an ownership change under Section 382 of the
Internal Revenue Code has occurred. The effect of an ownership
change would be the imposition of an annual limitation on the
use of net operating loss carryforwards attributable to periods
before the change.
11.
Loss Per Share
The following table sets forth the computation of
basic and diluted net loss attributable to common stockholders
per share.
Period from
March 6, 2001
(Inception) to
Year Ended December 31,
December 31,
2001
2002
2003
Numerator for basic and diluted net loss per
    share — net loss
$
(1,416,218
)
$
(20,191,090
)
$
(15,486,128
)
Denominator for basic and dilutive net loss per
    share — weighted average shares
178,663
1,829,494
2,591,820
Basic and diluted net loss per share
$
(7.93
)
$
(11.04
)
$
(5.98
)
The following table shows dilutive common share
equivalents outstanding, which are not included in the above
historical calculations, as the effect of their inclusion is
anti-dilutive during each period. Restricted stock that is not
yet vested is included as dilutive common share equivalents
because the Company considers such securities as the equivalent
of stock options.
Period from
March 6, 2001
(Inception) to
Year Ended December 31,
December 31,
2001
2002
2003
Preferred stock
9,150,000
27,008,462
27,008,462
Restricted stock
1,500,000
914,063
421,875
Convertible notes
—
—
16,540,084
Options
486,166
6,215,102
5,269,631
11,136,166
34,137,627
49,240,052
12.
Selected Quarterly Financial Data
    (Unaudited)
Quarter Ended
March 31
June 30
September 30
December 31
2002
Contract revenues
$
—
$
112,586
$
36,630
$
—
Net loss
(7,115,358
)
(3,202,117
)
(4,851,854
)
(5,021,761
)
Basic and diluted net loss per common share*
(24.86
)
(1.41
)
(2.08
)
(2.09
)
2003
Contract revenues
$
—
$
—
$
100,000
$
—
Net loss
(6,720,543
)
(3,418,805
)
(2,919,406
)
(2,427,374
)
Basic and diluted net loss per common share*
(2.72
)
(1.34
)
(1.10
)
(.90
)
F-19
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
*
Per common share amounts for the quarters and
    full years have been calculated separately. Accordingly,
    quarterly amounts do not add to the annual amount because of
    differences in the weighted average common shares outstanding
    during each period principally due to the effect of the
    Company's issuing shares of its common stock during the
    year.
Diluted EPS is identical to Basic EPS since
common equivalent shares are excluded from the calculation, as
their effect is anti-dilutive.
13.
Subsequent Events
Financing
In February 2004, the Company completed a
Series C convertible preferred stock financing. The Company
issued 109,704,634 shares of Series C preferred stock
at a price of $0.59 per share for gross consideration of
approximately $65 million. The Company also issued a
warrant to purchase 692,658 shares of Series C preferred
stock to the placement agent. The Company valued the warrant at
$285,000 utilizing the Black-Scholes model and reflected the
value as an addition to additional paid-in capital and a
deduction to Series C convertible preferred stock in the
balance sheet. This consideration included cash proceeds of
approximately $55 million which was offset by approximately
$1.4 million of issuance costs and the conversion of
$9.8 million of promissory notes, issued in April 2003,
into 16,540,084 shares of Series C preferred stock. In
addition, this financing required an adjustment to the
conversion prices for the Series A and B convertible
preferred stock as a result of antidilution provisions.
Certain holders of the Company's
Series B preferred shares did not participate in the
Series C financing. As a result, their holdings, totaling
6,166,154 shares of Series B preferred stock converted
to an equal number of shares of common stock.
Office Lease
In May 2004, the Company entered into a lease for
office space in Secaucus, New Jersey which will be the
Company's new headquarters. The lease commitment for 2004
is $81,980 and is $245,939 each year for 2005, 2006, 2007 and
2008 and $122,970 for 2009. The entire commitment is $1,188,706
for the five year lease.
License Agreement
In October 2004, the Company licensed the
intellectual property underlying ALGRX 1207 from Bridge
Pharma, Inc. In consideration for the license, the Company paid
Bridge Pharma, Inc. an up-front license fee consisting of a cash
payment and shares of its common stock. Such amounts were
expensed during the fourth quarter of 2004. The Company is also
obligated to pay additional fees to Bridge Pharma, Inc. if it
achieves certain clinical, regulatory and commercial milestones.
F-20
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
CONSOLIDATED BALANCE SHEETS
December 31,
September 30,
September 30, 2004
2003
2004
Pro forma (Note 1)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
4,545,976
$
14,875,314
$
15,285,714
Marketable securities
—
32,697,490
32,697,490
Prepaid expenses and other current assets
183,961
573,286
573,286
Total current assets
4,729,937
48,146,090
48,556,490
Property and equipment, net
2,373,840
1,582,329
1,582,329
Deferred financing costs
82,377
—
—
Other assets
214,993
201,046
201,046
Total assets
$
7,401,147
$
49,929,465
$
50,339,865
LIABILITIES AND STOCKHOLDERS' EQUITY
    (DEFICIENCY)
Current liabilities:
Accounts payable
$
493,530
$
126,659
$
126,659
Accrued compensation
273,399
78,078
78,078
Other accrued liabilities
1,202,453
3,312,258
3,312,258
Convertible notes
9,800,000
—
—
Total current liabilities
11,769,382
3,516,995
3,516,995
Series A convertible preferred stock,
    $0.001 par value; 9,150,000 shares authorized, issued
    and outstanding at December 31, 2003 and September 30,
    2004, respectively; and no shares issued and outstanding pro
    forma (aggregate liquidation preference of $9,150,000 at
    December 31, 2003 and September 30, 2004)
9,099,428
9,099,428
—
Series B convertible preferred stock,
    $0.001 par value; 26,350,000 and 17,858,462 shares
    authorized at December 31, 2003 and September 30,
    2004, respectively; 17,858,462 and 11,692,308 shares issued
    and outstanding at December 31, 2003 and September 30,
    2004, respectively; and no shares issued and outstanding pro
    forma (aggregate liquidation preference of $23,216,000 at
    December 31, 2003 and $15,200,000 at September 30,
    2004)
23,094,410
15,078,409
—
Series C convertible preferred stock,
    $0.001 par value; 0 and 110,397,292 shares authorized
    at December 31, 2003 and September 30, 2004,
    respectively; 0 and 109,704,634 issued and outstanding at
    December 31, 2003 and September 30, 2004,
    respectively; and no shares issued and outstanding pro forma
    (aggregate liquidation preference of $0 and $97,500,000 at
    December 31, 2003 and September 30, 2004, respectively)
—
63,306,585
—
Stockholders' equity (deficiency):
Common stock, $0.001 par value, 50,000,000,
    173,840,266 and 173,840,266 shares authorized at
    December 31, 2003, September 30, 2004 and pro forma,
    respectively; 3,412,904, 9,603,346 and 153,053,561 shares
    issued at December 31, 2003, September 30, 2004 and
    pro forma, respectively; 3,142,071, 9,332,513 and
    152,782,728 shares outstanding at December 31, 2003,
    September 30, 2004 and pro forma, respectively
3,413
9,604
152,783
Additional paid-in capital
670,785
17,781,520
105,533,163
Accumulated other comprehensive loss
—
(26,183
)
(26,183
)
Deferred compensation
(142,564
)
(8,552,086
)
(8,552,086
)
Treasury stock, at cost, 270,833 shares at
    December 31, 2003 and September 30, 2004
(271
)
(271
)
(271
)
Deficit accumulated during the development stage
(37,093,436
)
(50,284,536
)
(50,284,536
)
Total stockholders' equity (deficiency)
(36,562,073
)
(41,071,952
)
46,822,870
Total liabilities and stockholders' equity
    (deficiency)
$
7,401,147
$
49,929,465
$
50,339,865
See accompanying notes.
F-21
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
CONSOLIDATED STATEMENTS OF
OPERATIONS
Period from
Nine Months Ended
March 6, 2001
September 30,
(Inception) to
September 30,
2003
2004
2004
(Unaudited)
(Unaudited)
(Unaudited)
Contract revenues
$
100,000
$
—
$
249,216
Costs and expenses:
Research and development
10,939,257
10,681,730
34,982,935
General and administrative
2,319,821
2,914,695
10,564,310
Acquired in-process research and development and
    other
—
—
5,716,247
Total costs and expenses
13,259,078
13,596,425
51,263,492
Loss from operations
(13,159,078
)
(13,596,425
)
(51,014,276
)
Gain on sale of assets
102,150
261
67,484
Interest expense
(71,540
)
(23,847
)
(137,087
)
Interest and other income, net
69,714
428,911
799,343
Net loss
$
(13,058,754
)
$
(13,191,100
)
$
(50,284,536
)
Basic and diluted net loss per share
$
(5.10
)
$
(1.71
)
Weighted average shares outstanding —
    basic and diluted
2,559,089
7,695,820
Pro forma basic and diluted net loss per share
$
(0.10
)
Pro forma weighted average shares
    outstanding — basic and diluted
130,032,565
See accompanying notes.
F-22
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH
FLOWS
Period from
Nine Months Ended
March 6, 2001
September 30,
(Inception) to
September 30,
2003
2004
2004
(Unaudited)
(Unaudited)
(Unaudited)
Operating activities
Net loss
$
(13,058,754
)
$
(13,191,100
)
$
(50,284,536
)
Adjustments to reconcile net loss to net cash
    used in operating activities:
Depreciation and amortization
792,860
837,746
2,863,755
Noncash stock-based compensation
81,746
461,402
615,766
Non-cash interest expense
71,540
23,847
131,157
Acquired in-process research and development
—
—
5,716,247
Amortization of intangible assets
274,161
—
448,299
Loss on disposal of equipment
—
—
36,101
Gain on disposal of equipment
(102,150
)
(261
)
(103,585
)
Other non-cash expenses
—
3,631
3,631
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
(24,333
)
(389,325
)
(526,758
)
Other assets
—
13,947
(85,024
)
Accounts payable
(110,592
)
(366,871
)
109,282
Accrued compensation
(79,962
)
(195,321
)
(9,447
)
Other accrued liabilities
768,826
2,109,805
3,219,796
Net cash used in operating activities
(11,386,658
)
(10,692,500
)
(37,865,316
)
Investing activities
Purchases of property and equipment
(345,044
)
(47,696
)
(1,020,029
)
Proceeds from disposal of equipment
66,223
500
253,447
Purchases of marketable securities
—
(37,801,272
)
(37,801,272
)
Sales of marketable securities
—
5,077,600
5,077,600
Acquisition of PowderJect Technologies,
    Inc.
—
—
(1,442,029
)
Other acquisition related expenditures
—
—
(96,613
)
Net cash used in investing activities
(278,821
)
(32,770,868
)
(35,028,896
)
Financing activities
Repayment of capital lease obligations
—
—
(43,311
)
Proceeds from issuance of convertible preferred
    stock, net of issuance costs
—
53,791,581
77,969,419
Proceeds from issuances of common stock
5,587
1,125
43,689
Funds used to repurchase common stock
(271
)
—
(271
)
Proceeds from debt
9,800,000
—
9,800,000
Net cash provided by financing activities
9,805,316
53,792,706
87,769,526
Net increase (decrease) in cash and cash
    equivalents
(1,860,163
)
10,329,338
14,875,314
Cash and cash equivalents, beginning of period
8,873,270
4,545,976
—
Cash and cash equivalents, end of period
$
7,013,107
$
14,875,314
$
14,875,314
Supplemental disclosure of cash flow
    information
Cash paid during the year for interest
$
—
$
—
$
5,529
Supplemental cash flow information
Issuance of $8,016,000 of convertible preferred
    stock and $228,923 of common stock in connection with
    acquisition of PowderJect Technologies, Inc.
$
—
$
—
$
8,244,923
Conversion of convertible preferred stock to
    common stock
$
—
$
8,016,000
$
8,016,000
Conversion of convertible notes to preferred stock
$
—
$
9,800,000
$
9,800,000
Equipment acquired under capital leases
$
—
$
—
$
43,311
See accompanying notes.
F-23
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2004
1.
Summary of Significant Accounting
    Policies
Organization, Description of Business and
    Basis of Presentation
AlgoRx Pharmaceuticals, Inc. (the
"Company" or "AlgoRx") was incorporated on
March 6, 2001 in Delaware. During 2003, the Company's
headquarters were located in Cranbury, New Jersey, with
facilities also in Fremont, California. In July of 2004, the
Company moved its headquarters to Secaucus, New Jersey. AlgoRx
is focused on building a diversified portfolio of pharmaceutical
products and technologies to address the pain therapeutic
market. The Company's activities since inception have
consisted principally of acquiring product and technology
rights, raising capital, establishing facilities and performing
research and development. Accordingly, the Company is considered
to be in the development stage as defined by Statement of
Financial Accounting Standards No. 7,
Accounting and
Reporting Development Stage Enterprise.
The Company operates
in one business segment.
The Company expects to continue to incur
substantial losses over the next several years during its
development phase. To fully execute its business plan, the
Company will need to complete certain research and development
activities and clinical trials. Further, the Company's
future products may require regulatory approval prior to
commercialization. These activities may span many years and
require substantial expenditures to complete and may ultimately
be unsuccessful. Any delays in completing these activities could
adversely impact the Company. The Company plans to meet its
capital requirements primarily through issuances of equity
securities, research and development contract revenue, and in
the longer term, revenue from product sales.
In February 2004, the Company completed a
Series C convertible preferred stock financing. The Company
issued 109,704,634 shares of its Series C preferred
stock at a price of $0.59 per share for gross consideration
of approximately $65 million. The Company also issued a
warrant to purchase 692,658 shares of Series C
preferred stock to the placement agent. The Company valued the
warrant at $285,000 utilizing the Black-Scholes model and
reflected the value as an addition to additional paid-in capital
and a deduction to Series C convertible preferred stock in
the balance sheet. This consideration included cash proceeds of
approximately $55 million which was offset by approximately
$1.4 million of issuance costs and the conversion of
$9.8 million of promissory notes held by certain
Series C investors, issued to them in April 2003, into
16,540,084 shares of Series C convertible preferred
stock. In addition, this financing required an adjustment to the
conversion prices of the Series A convertible preferred
stock and the Series B convertible preferred stock as a
result of antidilution provisions.
Certain holders of the Company's
Series B preferred shares did not participate in the
Series C financing. As a result, their holdings, totaling
6,166,154 shares of Series B preferred stock,
converted to an equal number of shares of common stock.
Interim Financial Statements
The financial statements as of September 30,
2004 and for the nine months ended September 30, 2003 and
2004 have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the
financial position and the results of operations and cash flows
for the nine months ended September 30, 2003 and 2004 and
the period from March 6, 2001 (inception) to
September 30, 2004 have been made. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting
principles have been condensed or eliminated.
F-24
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Use of Estimates
The preparation of financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation
The consolidated financial statements include the
accounts of AlgoRx and, beginning on March 22, 2002, its
wholly owned subsidiary, AlgoRx Technologies, Inc. (formerly
PowderJect Technologies, Inc.), located in Fremont, California.
Intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly
liquid instruments purchased with an original maturity of three
months or less.
Marketable Securities
Investments classified as available for sale are
carried at estimated fair value with unrealized gains and losses
recorded as a component of accumulated other comprehensive
income. Management determines the appropriate classification of
its investment in debt and equity securities at the time of
purchase and reevaluates such determination at each balance
sheet date.
Property and Equipment
Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is provided over the
estimated useful lives of the respective assets, which range
from three to five years, using the straight-line method.
Leasehold improvements and assets under capital
leases are amortized over the lives of the related leases or
their estimated useful lives, whichever is shorter, using the
straight-line method.
Intangible Asset
Intangible asset consists of the acquired
workforce acquired in the acquisition of PowderJect
Technologies, Inc. (see Note 2). The acquired workforce is
being amortized on a straight-line basis over two years, which
represents the estimated retention period for the related
employees. Acquired workforce amortization is recorded in
research and development expense.
Long-Lived Assets
Long-lived assets and certain identifiable
intangible assets to be held and used are reviewed for
impairment when events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the
asset and its eventual disposition. In the event that such cash
flows are not expected to be sufficient to recover the carrying
amount of the assets, the assets are written down to their
estimated fair values. Long-lived assets and certain
identifiable assets to be disposed of are reported at the lower
of carrying amount or fair value less cost to sell.
F-25
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Fair Value of Financial
    Instruments
The carrying values of the Company's
financial instruments, which include cash and cash equivalents,
investments, accounts payable, accrued expenses and convertible
notes approximates their fair values.
Revenue Recognition
The Company's revenue recognition policies
are in accordance with Securities and Exchange Commission
(SEC) Staff Accounting Bulletins No. 101 and
No. 104, or SAB 101 and 104, and EITF 00-21,
Revenue Recognition in Financial Statements
, which
provides guidance on revenue recognition in financial statements
and is based on the interpretations and practices developed by
the SEC. SAB 101 requires that four basic criteria be met
before revenue can be recognized: (1) persuasive evidence
exists of an arrangement; (2) delivery has occurred or
services have been rendered; (3) the fee is fixed and
determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the
fees charged for services rendered and products delivered and
the collectibility of those fees.
Research and Development
    Costs
Research and development costs are expensed as
incurred. Research and development costs consist of salaries,
employee benefits, laboratory supplies, consulting services,
clinical services and facility costs.
Acquired in-process research and development
relates primarily to in-licensed technology, intellectual
property and know-how. The Company evaluates the stage of
development of acquired projects, taking into account the level
of effort, time and estimated cost associated with further
developing the in-process technology and producing a commercial
product. The nature of the remaining efforts for completion of
acquired in-process research and development projects generally
include completion of clinical trials, completion of
manufacturing validation, interpretation of clinical and
preclinical data and obtaining marketing approval from the FDA
and other regulatory bodies, the cost, length and success of
which are extremely difficult to determine. Numerous risks and
uncertainties exist with timely completion of development
projects, including clinical trial results, manufacturing
process development results, and ongoing feedback from
regulatory authorities, including obtaining marketing approval.
In addition, acquired products under development may never be
successfully commercialized due to the uncertainties associated
with the pricing of new pharmaceuticals, the cost to produce
these products in a commercial setting, changes in the
reimbursement environment, or the introduction of new
competitive products. As a result of the uncertainties noted
above, the Company expenses such acquired in-process research
and development projects when incurred.
Concentration of Credit Risk
The Company's financial instruments that are
exposed to credit risks consist primarily of cash and cash
equivalents. The Company maintains its cash and cash equivalents
in bank accounts, which, at times, exceed federally insured
limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to significant
credit risk related to cash and cash equivalents.
Income Taxes
The Company utilizes the asset and liability
method of accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates that will be in
F-26
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
effect when the differences are expected to
reverse. A valuation allowance is provided when it is more
likely than not that some portion or all of a deferred tax asset
will not be realized.
Comprehensive Loss
The Company reports comprehensive loss in
accordance with Statement of Financial Accounting Standards
No. 130,
Reporting Comprehensive Income
("SFAS 130"). SFAS 130 establishes rules
for the reporting and display of comprehensive loss and its
components. SFAS 130 requires unrealized loss on available
for sale securities to be included in other comprehensive loss.
Net Loss Per Share
The Company computes net loss per share in
accordance with Statement of Financial Accounting Standards
No. 128, "Earnings per Share"
("SFAS 128"). Under the provisions of
SFAS 128, basic net loss per common share
("Basic EPS") is computed by dividing net loss by
the weighted-average number of common shares outstanding
(excluding unvested founders' shares subject to
repurchase). Diluted net loss per common share
("Diluted EPS") is computed by dividing net loss
by the weighted-average number of common shares and dilutive
common shares equivalents then outstanding. Common equivalent
shares consist of the incremental common shares issuable upon
the conversion of preferred stock, shares issuable upon the
exercise of stock options, the conversion of preferred stock
upon the exercise of warrants and unvested founders' shares
subject to repurchase. Diluted EPS is identical to
Basic EPS since common shares equivalent are excluded from
the calculation, as their effect is anti-dilutive.
Unaudited Pro Forma
    Information
The unaudited pro forma balance sheet as of
September 30, 2004 reflects the automatic conversion of all
outstanding shares of the Company's convertible preferred
stock into an aggregate of 142,757,557 shares of common
stock upon completion of the Company's initial public
offering. The unaudited pro forma balance sheet as of
September 30, 2004 also includes the exercise for cash of
692,658 outstanding warrants exercisable for shares of the
Company's common stock at an exercise price of
$0.5925 per share, or $410,000 in aggregate, upon the
assumed closing of the Company's initial public offering.
Any of these warrants that are not exercised prior to the
completion of the assumed closing of the Company's initial
public offering will be cancelled.
Unaudited pro forma net loss per share is
computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic
conversion of all outstanding convertible preferred stock and
the exercise in full of all outstanding warrants 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 the date of the original
issuance.
Stock-Based Compensation
As permitted by the Financial Accounting
Standards Board ("FASB") Statement No. 123,
Accounting for Stock-Based Compensation
("SFAS 123"), as amended, the Company accounts
for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), and related
interpretations, in accounting for its stock-based compensation
plans. Under APB 25, when the exercise price of the
Company's employee stock options equals or exceeds the
estimated fair value of the underlying stock on the date of
grant, no compensation expense is recorded.
F-27
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In connection with the granting of employee stock
options in 2003 and for the nine months ended September 30,
2004, the Company recorded deferred compensation of
approximately $156,000 and $8,847,000, respectively. Deferred
compensation is being amortized over the vesting period of the
options resulting in non-cash stock-based compensation expense
of approximately $4,000 and $461,000 for the nine months ended
September 30, 2003 and 2004, respectively.
Pro forma information regarding net loss and net
loss per share has been determined as if the Company had
accounted for its employee stock options under the fair value
method proscribed by SFAS 123. The resulting effect on pro
forma net loss disclosed is not likely to be representative of
the effects of loss on a pro forma basis in future years due to
additional grants and years of vesting in subsequent years. Pro
forma compensation related to stock option grants is expensed
over their respective vesting periods.
Had compensation cost for options granted under
the Company's stock option plan been determined based on
the fair value at the grant dates for the awards under a method
prescribed by SFAS 123, the Company's net loss would
have been adjusted to the following pro forma amounts:
Nine Months Ended September 30,
2003
2004
(Unaudited)
Net loss, as reported
$
(13,058,754
)
$
(13,191,100
)
Add: Noncash employee compensation as reported
3,551
437,390
Deduct: Stock-based employee compensation expense
    under the fair value based method for all awards, net of tax
(144,765
)
(655,177
)
Net loss, pro forma
(13,199,968
)
(13,408,887
)
Basic and diluted loss per share, as reported
$
(5.10
)
$
(1.71
)
Basic and diluted loss per share, SFAS 123
    pro forma
$
(5.16
)
$
(1.74
)
Unaudited pro forma basic and diluted net loss
    per share (Note 1) SFAS 123, pro forma
$
(0.10
)
The fair values of stock options granted to
employees for the nine months ended September 30, 2003 and
2004 were estimated on the respective dates of grant using the
minimum value option-pricing model with the following
weighted-average assumptions:
Nine Months
Ended
September 30,
2003
2004
(Unaudited)
Risk-free interest rate
4
%
4
%
Expected life (in years)
9
9
Dividend yield
—
—
Fair value
$
0.99
$
0.59
The Company has also granted stock options to
purchase stock to consultants, advisors, and other vendors. The
Company accounts for stock awards issued to such nonemployees in
accordance with the provisions of SFAS 123 and Emerging
Issues Task Force ("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 ("Issue No. 96-18"). Under
SFAS 123 and Issue No. 96-18, stock awards to
F-28
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
nonemployees are accounted for at their
respective fair values using the Black-Scholes option-pricing
model unless a more readily determinable fair value is
available. The fair value of options granted to nonemployees is
periodically remeasured as the underlying options vest.
Recently Issued Accounting
    Standards
In January 2003, the FASB issued Interpretation
No. 46 ("FIN 46"),
Consolidation of
Variable Interest Entities
, which addresses consolidation of
variable interest entities ("VIEs"). FIN 46
requires a VIE to be consolidated by a parent company if that
company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or
both. A VIE is a corporation, partnership, trust or any other
legal structure used for business purposes that either does not
have equity investors with voting rights or has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. The consolidation requirements
of FIN 46 apply immediately to VIEs created after
January 31, 2003. For entities created prior to
February 1, 2003, the effective date of these requirements
has been deferred so as not to apply until the first period
ending after December 15, 2004. The adoption of the
provisions applicable to special purpose entities
("SPEs") and all other VIEs obtained after
January 31, 2003 had no impact on the Company's
financial statements. The Company is currently evaluating the
impact of adopting FIN 46-R applicable to non-SPEs created
prior to February 1, 2003, but does not expect a material
impact on its financial position, results of operations or cash
flows.
In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150,
Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity.
("SFAS 150") This
statement establishes standards for classifying and measuring as
liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity. The scope of this pronouncement includes
mandatorily redeemable equity instruments. Application to
pre-existing instruments should be recognized as the cumulative
effect of a change in accounting principle (application by
retroactive restatement is precluded). Exceptions to the
transition requirements were provided for mandatorily redeemable
instruments of non-public companies. Subsequent to the issuance
of SFAS 150, the FASB issued FSP 150-3, which further
deferred the transition requirements for nonpublic companies
that also are not SEC registrants for instruments that are
mandatorily redeemable on fixed dates that are for fixed
amounts. The classification, measurement, and disclosure
provisions of SFAS 150 are effective for fiscal periods
beginning after December 15, 2004. The adoption of this
statement is not expected to impact the classification of the
Company's convertible preferred stock.
2.     Acquisition of
PowderJect Technologies, Inc.
On March 22, 2002, the Company acquired all
of the outstanding shares of PowderJect Technologies, Inc.
("PowderJect"), a development stage company, for a
total purchase price of approximately $9.9 million. This
purchase price included 6,166,154 shares of the
Company's Series B convertible preferred stock,
1,526,154 shares of common stock, cash consideration of
$718,150 for a minority interest's share in the acquired
company, acquisition related costs of $723,879 and assumed
liabilities of $192,458. The Series B convertible preferred
stock was valued based on the arm's length Series B
financing completed during that year and the common stock
consideration was valued using the Company's estimated fair
value used for option grants made to employees. PowderJect was
in the business of developing drug applications for a patented,
needle-free delivery system developed by its parent company,
PowderJect Pharmaceuticals plc. The Company also entered into a
supply agreement with PowderJect Technologies Limited
(subsequently purchased by Chiron Corporation) for
microcylinders. The microcylinders are a key component of the
product candidate, ALGRX 3268, and PowderJect Technologies
Limited is the sole supplier. No other supplier has been
identified by the Company.
F-29
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The acquisition was completed to provide the
Company with the ability to exploit the opportunities associated
with its in-process lidocaine technology, as well as gain access
to the patented drug delivery technology. The purchase price was
determined in accordance with Statement of Financial Accounting
Standards No. 141,
Business Combinations
("SFAS 141"), and Statement of Financial
Accounting Standards No. 142,
Goodwill and Other
Intangible Assets
("SFAS 142"). A summary of
the determination of the purchase price during 2002 was as
follows:
6,166,154 shares — Series B
    convertible preferred stock
$
8,016,000
1,526,154 shares — common stock
228,923
Cash for minority interest buyout
718,150
Acquisition related costs
723,879
Assumed liabilities
192,458
Total purchase price
$
9,879,410
The acquisition was accounted for as an
acquisition of assets rather than as a business combination as
PowderJect was a development stage company that had not
commenced its planned principal operations. PowderJect lacked
the necessary elements of a business because it did not have
completed products and, therefore, no ability to access
customers. The PowderJect operating results have been included
in the Company's consolidated results of operations since
March 23, 2002.
The Company allocated the purchase price in
accordance with the provisions of SFAS 142 related to the
purchase of a group of assets. SFAS 142 provides that the
cost of a group of assets acquired in a transaction other than a
business combination shall be allocated to the individual assets
acquired based on their relative fair values and shall not give
rise to goodwill.
In accordance with the provisions of
SFAS 142, all identifiable intangible assets and acquired
in-process research and development were assigned a portion of
the purchase price based on their relative fair values. To this
end, a third party valuation was used to assist management in
determining the fair value of the identifiable assets and
acquired in-process research and development. Based on this
valuation, the Company allocated the total consideration as
follows:
Acquired in-process research and development and
    other
$
5,716,247
Tangible net assets
3,714,864
Acquired workforce
448,299
Total purchase price
$
9,879,410
The income approach was used to estimate the fair
value of the acquired in-process research and development based
on projected cash flows, assuming a 30% discount rate. This
discount rate is a significant assumption and is based on the
Company's estimated weighted average cost of capital taking
into account the risks associated with the projects acquired.
The projected cash flows from such projects were based on
estimates of revenues and operating profits related to such
projects considering the stage of development of each potential
product acquired, the time and resources needed to complete each
product, the estimated life of each potential commercialized
product and associated risks which included the inherent
difficulties and uncertainties in developing a drug compound,
obtaining FDA and other regulatory approvals, and risks related
to the viability of, and potential alternative treatments in,
any future target markets. Approximately $4.5 million of
the purchase price was allocated to acquired in-process research
and development due to PowderJect's incomplete research and
development programs that had not yet reached technological
feasibility as of March 2002 and had no alternative future use
as of that date.
F-30
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The relief from royalty approach was also used to
determine the estimated fair value of the patent license based
on its favorable royalty rate. In light of the number of years
required to achieve product commercialization, the associated
technology risk, and therefore the risk that the asset value
will not be realized, the Company has recorded, as an expense,
the value of the favorable patent license, which is
$1.2 million, similar to the treatment afforded the
acquired in-process research and development.
The cost approach was used to determine the value
of the acquired workforce. The value allocated to the acquired
workforce is attributable to 31 employees hired by the Company
from PowderJect following the asset acquisition, which
eliminated the need to hire replacement employees. The value of
the acquired workforce was determined by estimating the cost of
assembling a new workforce, including costs of salaries,
benefits, training, and recruiting.
Amortization expense was $46,700 and $0 for the
nine months ended September 30, 2003 and 2004,
respectively, and $448,299 from March 6, 2001
(inception) to September 30, 2004. Included in the
2003 amortization was $227,461 related to the acquired workforce
that was written off in connection with the restructuring
described in Note 3 during the first quarter of 2003 and,
accordingly, the net intangible assets as of December 31,
2003 and September 30, 2004 was $0.
3.
Restructuring
In March 2003, the Company announced a
reorganization plan intended to reduce operating costs and
reduced its staff by 28 employees (approximately 61% of total
employees as of the date of reorganization); however, no
research projects were discontinued. The reorganization resulted
in an impairment of the assembled workforce intangible asset of
$227,461 recorded as accelerated amortization expense during
2003. This expense is classified under research and development
expenses for the nine months ended September 30, 2003. In
addition, the vesting of certain options held by such employees
was accelerated. The Company recorded a charge of $66,240
related to this acceleration of vesting. The total restructuring
cost of $1,122,444 was charged to research and development
expense.
4.
Available for Sale Investments
The following is a summary of available for sale
investments as of September 30, 2004:
Gross
Gross
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
Maturities within one year:
Commercial paper
$
6,090,858
$
—
$
(2,062
)
$
6,088,796
U.S. Treasury Notes
13,977,481
—
(12,587
)
13,964,894
20,068,339
—
(14,649
)
20,053,690
Maturities between one to five years:
U.S. Treasury Notes
12,655,334
—
(11,534
)
12,643,800
Total
$
32,723,673
$
—
$
(26,183
)
$
32,697,490
F-31
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
5.
Other Accrued Liabilities
Other accrued liabilities consist of the
following:
December 31,
September 30,
2003
2004
(Unaudited)
Accrued patent costs
$
294,000
$
366,000
Accrued research and development costs
341,158
2,373,095
Accrued legal
141,356
—
Accrued vacation
130,611
165,159
Other accrued liabilities
295,328
408,004
Total
$
1,202,453
$
3,312,258
6.
Commitments
Leases
In May 2004, the Company entered into a lease for
office space in Secaucus, New Jersey which is the Company's
new headquarters. The entire commitment is $1,188,706 for the
five year lease. The future minimum payments for all
noncancelable operating leases as of September 30, 2004 are
as follows:
Remainder of 2004
$
222,300
2005
299,039
2006
245,939
2007
245,939
2008
245,939
Thereafter
122,970
Total
$
1,382,126
Rent expense under operating leases was $498,094,
$527,762 and $1,871,762, for the nine months ended
September 30, 2003 and 2004 and for the period from
March 6, 2001 (inception) to September 30, 2004,
respectively.
Other Commitments
Under the Company's license agreements, the
Company could be required to pay up to a total of
$6.2 million in milestone payments through product
approval, in addition to sales milestones and royalties on
commercial sales if any occur. The Company has no material
commitments for capital expenditures.
Under our license with PowderMed Limited we are
obligated and have spent $1,000,000 on research and development
associated with the licensed technology during the period
July 7, 2003 to July 7, 2005. We are also obligated to
spend an additional $1,000,000 on research and development for
every 12 month period from July 7, 2005 to
July 7, 2008.
7.
Stock Option Plan
On March 30, 2001, the Company's Board
of Directors and shareholders approved the Company's 2001
Equity Incentive Plan (the "2001 Plan"). The 2001 Plan
provides for the granting of options to purchase common stock in
the Company to employees and consultants at a price not less
than the
F-32
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
estimated fair value at the date of grant, or
110% of the estimated fair value at the date of grant if the
optionee is a 10% owner of the Company. Under the provisions of
the 2001 Plan, no option will have a term in excess of ten years.
In connection with the granting of employee stock
options in 2004, the Company recorded deferred compensation of
approximately $8,845,000. Deferred compensation is being
amortized over the vesting period of the options resulting in
non-cash compensation expense of approximately $4,000 and
$437,000 for the nine months ended September 30, 2003 and
2004, respectively.
The 2001 Plan is intended to encourage ownership
of stock by employees and consultants of the Company and to
provide additional incentives for them to promote the success of
the Company's business. The Board of Directors is
responsible for determining the individuals to receive option
grants, the number of options each individual will receive, the
option price per share and the exercise period of each option.
Options granted pursuant to the 2001 Plan generally vest over
four years and have been granted at the estimated fair value of
the Company's common stock, as determined by the Board of
Directors, as of each grant date. The 2001 Plan allows the
option holders to early exercise their options which are then
subject to repurchase by the Company at the original exercise
price.
The following table summarizes stock option
activity for the Company.
Options Outstanding
Shares
Weighted-
Available for
Number of
Exercise Price
Average
Grant
Shares
Per Share
Exercise Price
Balance at March 6, 2001 (inception)
—
—
$
—
$
—
Shares authorized
2,716,666
—
—
—
Granted
(726,166
)
726,166
0.10-1.00
0.37
Exercised
—
(238,000
)
0.10
0.10
Balance at December 31, 2001
1,990,500
488,166
0.10-1.00
0.50
Shares authorized
5,200,308
—
Granted
(6,748,477
)
6,748,477
0.10-0.15
0.15
Exercised
—
(101,500
)
0.10
0.10
Forfeited
920,041
(920,041
)
0.15
0.15
Balance at December 31, 2002
1,362,372
6,215,102
0.10-1.00
0.18
Granted
(192,000
)
192,000
0.15
0.15
Exercised
—
(47,250
)
0.10-0.15
0.11
Forfeited
1,090,221
(1,090,221
)
0.15
0.15
Balance at December 31, 2003
2,260,593
5,269,631
0.10-1.00
0.18
Shares authorized
16,051,601
—
Granted
(17,390,085
)
17,390,085
0.10-0.15
0.10
Exercised
—
(24,288
)
0.10-0.15
0.15
Forfeited
60,288
(60,288
)
0.10-0.15
0.13
Balance at September 30, 2004 (unaudited)
982,397
22,575,140
0.10-1.00
0.12
F-33
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about
vested stock options outstanding:
December 31, 2003
September 30, 2004
Vested Stock Options
2,038,728
4,354,560
Weighted average exercise price
$0.15
$0.15
The following table summarizes information about
stock options outstanding at September 30, 2004:
Weighted Average
Remaining
Exercise Price
Options Outstanding
Options Vested
Contractual Life
$0.10
17,479,023
1,378,963
9.1
$0.15
4,879,451
2,883,375
7.7
$1.00
216,666
92,222
7.0
22,575,140
4,354,560
8.8
The Company also grants options to purchase
common stock to consultants, advisors, and others (collectively,
the "nonemployees"). The Company has granted options
to purchase 474,918 shares of common stock to nonemployees
during the period from March 6, 2001 (inception) to
September 30, 2004. Of these options, 288,252 vest over
time periods ranging from immediate vesting to 24 months
and 186,666 have performance-based vesting criteria. The
Black-Scholes option-pricing model is used to calculate the fair
values of the stock options to nonemployees as the vesting
periods of respective awards lapse. The Company recognized
stock-based compensation expense of approximately $66,000 and
$9,000 and $65,971 during the nine months ended
September 30, 2003 and 2004, respectively, related to the
fair value of the vested portions of non-employee stock option
awards. Additional stock-based compensation expense will be
recorded in future periods for the remaining unvested portion of
the non-employee stock option awards.
8.
Income Taxes
As of December 31, 2003 and
September 30, 2004, the Company had deferred tax assets of
approximately $14,425,000 and $19,389,000, respectively.
Realization of the deferred tax assets is dependent upon the
Company generating future taxable income, if any, the amount and
timing of which are uncertain. Accordingly, the deferred tax
assets have been fully offset by valuation allowances at
December 31, 2003 and September 30, 2004. The net
valuation allowance increased by approximately $4,964,000 for
the nine months ended September 30, 2004. Deferred tax
assets primarily relate to net operating loss and tax credit
carryforwards.
Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. The
F-34
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company's deferred tax assets relate
primarily to net operating loss carryforwards. Significant
components of the Company's deferred tax assets are as
follows:
December 31,
September 30,
2003
2004
Deferred tax assets:
Net operating loss carryforwards
$
12,472,000
$
16,900,000
Research credits
657,000
470,000
Depreciation and amortization
1,232,000
777,000
Other temporary differences
64,000
1,242,000
Total gross deferred tax assets
14,425,000
19,389,000
Valuation allowance
(14,425,000
)
(19,389,000
)
Net deferred tax assets
$
—
$
—
A reconciliation of the statutory tax rates and
the effective tax rates for the nine months ended
September 30, 2002 and 2003 is as follows:
2003
2004
(Unaudited)
Statutory rate
(34
)%
(34
)%
State and local income taxes (net of federal tax
    benefit)
(6
)
(6
)
Change in valuation allowance
40
40
Effective tax rates
0
%
0
%
As of September 30, 2004, the Company had
federal net operating loss carryforwards of approximately
$42,000,000. The Company also had federal research and
development tax credit carryforwards of approximately $470,000.
The federal net operating loss and tax credit carryforwards will
expire at various dates beginning in 2022, if not utilized.
Utilization of the net operating loss
carryforwards and credits may be subject to a substantial annual
limitation due to the ownership change limitations provided by
the Internal Revenue Code of 1986, as amended, and similar state
provisions. The Company has not performed a detailed analysis to
determine whether an ownership change under Section 382 of
the Internal Revenue Code has occurred. The effect of an
ownership change would be the imposition of an annual limitation
on the use of net operating loss carryforwards attributable to
periods before the change.
F-35
AlgoRx Pharmaceuticals, Inc.
(a development stage company)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
9.
Loss Per Share
The following table sets forth the computation of
basic and diluted net loss attributable to common stockholders
per share.
Nine Months Ended September 30,
2003
2004
(Unaudited)
Numerator for basic and diluted net loss per
    share — net loss
$
(13,058,754
)
$
(13,191,100
)
Denominator:
Denominator for basic and dilutive net loss per
    share–weighted — average shares
2,559,089
7,695,820
Basic and diluted net loss per share
$
(5.10
)
$
(1.71
)
The following table shows dilutive common share
equivalents outstanding, which are not included in the above
historical calculations, as the effect of their inclusion is
anti-dilutive during each period. Restricted stock that is not
yet vested is included as a dilutive common share equivalent
because the Company considers such securities as the equivalent
of options.
Nine Months Ended
September 30,
2003
2004
(Unaudited)
Preferred stock
27,008,462
130,546,942
Restricted stock
468,750
281,250
Convertible notes
16,540,084
—
Warrants
—
692,658
Options
5,269,631
22,575,140
Total
49,286,927
154,095,990
10.
Subsequent Events
License Agreement
In October 2004, the Company licensed the
intellectual property underlying ALGRX 1207 from Bridge Pharma,
Inc. In consideration for the license, the Company paid Bridge
Pharma, Inc. an up-front license fee consisting of a cash
payment and shares of its common stock. Such amounts were
expensed during the fourth quarter of 2004. The Company is also
obligated to pay additional fees to Bridge Pharma, Inc. if it
achieves certain clinical, regulatory and commercial milestones.
F-36
PART II.
INFORMATION NOT REQUIRED IN
PROSPECTUS
Item 13.
Other Expenses of Issuance and
    Distribution
The following table sets forth all expenses,
other than the underwriting discounts and commissions, payable
by the registrant in connection with the sale of the common
stock being registered. All the amounts shown are estimates
except the registration fee and the NASD filing fee.
Total
SEC registration fee
$
9,503
NASD filing fee
8,000
Nasdaq National Market initial listing fee
*
Blue sky qualification fees and expenses
*
Printing and engraving expenses
*
Legal fees and expenses
*
Accounting fees and expenses
*
Transfer agent and registrar fees
*
Miscellaneous
*
Total
$
*
*
To be supplied by amendment.
Item 14.
Indemnification of Officers and
    Directors
Section 145 of the Delaware General
Corporation Law authorizes a court to award, or a
corporation's board of directors to grant, indemnity to
directors and officers in terms sufficiently broad to permit
such indemnification under certain circumstances for liabilities
(including reimbursement for expenses incurred) arising under
the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation
Law, our amended and restated certificate of incorporation
includes a provision that eliminates the personal liability of
our directors for monetary damages for breach of fiduciary duty
as a director, except for liability (1) for any breach of
the director's duty of loyalty to us or our stockholders,
(2) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law,
(3) under section 174 of the Delaware General
Corporation Law (regarding unlawful dividends and stock
purchases) or (4) for any transaction from which the
director derived an improper personal benefit.
As permitted by the Delaware General Corporation
Law, our amended and restated bylaws provide that (1) we
are required to indemnify our directors and officers to the
fullest extent permitted by the Delaware General Corporation
Law, subject to certain very limited exceptions, (2) we may
indemnify our other employees and agents as set forth in the
Delaware General Corporation Law, (3) we are required to
advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law,
subject to certain very limited exceptions and (4) the
rights conferred in the amended and restated bylaws are not
exclusive.
We also intend to enter into indemnification
agreements with each of our directors and executive officers to
give such directors and officers additional contractual
assurances regarding the scope of the indemnification set forth
in our amended and restated certificate of incorporation and to
provide additional procedural protections. We also intend to
enter into indemnification agreements with any new directors and
executive officers in the future.
II-1
The Underwriting Agreement to be filed as
Exhibit 1.1 to this Registration Statement will provide for
indemnification by the underwriters of our officers, directors
and controlling persons against certain liabilities, including
liabilities arising under the Securities Act, in connection with
matters specifically provided in writing by the underwriters for
inclusion in the Registration Statement.
The indemnification provisions in our restated
certificate of incorporation, restated bylaws and the
indemnification agreements to be entered into between us and
each of our directors and executive officers may be sufficiently
broad to permit indemnification of our directors and executive
officers for liabilities arising under the Securities Act.
We also intend to maintain director and officer
liability insurance, if available on reasonable terms, to insure
our directors and officers against the cost of defense,
settlement or payment of a judgment under certain circumstances.
Item 15.
Recent Sales of Unregistered
    Securities
Since March 6, 2001, the registrant has sold
and issued the following unregistered securities:
(1) Since March 6, 2001, the registrant
    granted stock options and stock awards to employees, directors
    and consultants under its 2001 Equity Incentive Plan covering an
    aggregate of 25,056,728 shares of common stock, at exercise
    prices ranging from $0.10 to $1.00 per share. Of these
    options, an aggregate of 2,070,550 were canceled without being
    exercised.
(2) Since March 6, 2001, the registrant
    sold an aggregate of 411,038 shares of its common stock to
    employees, directors and consultants for cash consideration in
    the aggregate amount of $43,180 upon the exercise of stock
    options under its 2001 Equity Incentive Plan.
(3) In April 2001 and September 2001, the
    registrant sold a total of 9,150,000 of Series A preferred
    stock to nine purchasers at $1.00 per share, for an
    aggregate purchase price of $9,150,000. Shares of Series A
    preferred stock were originally convertible into shares of
    common stock at the rate of one share of common stock for each
    share of Series A preferred stock owned. As a result of
    subsequent antidilution adjustments, the shares of Series A
    preferred stock are convertible at the rate of 1.44 shares
    of common stock for each share of Series A preferred stock.
(4) In March 2002, the registrant sold
    11,692,308 shares of Series B preferred stock to seven
    purchasers, at $1.30 per share, for an aggregate purchase
    price of $15,200,000. Shares of Series B preferred stock
    were originally convertible into shares of common stock at the
    rate of one share of common stock for each share of
    Series B preferred stock owned. As a result of subsequent
    anti-dilution adjustments, the shares of Series B preferred
    stock are convertible at the rate of 1.70 shares of common
    stock for each share of Series B preferred stock.
(5) In April 2003, the registrant issued
    convertible promissory notes in the aggregate principal amount
    of $9,800,000 convertible into Series C preferred stock to
    seven investors in connection with a bridge loan. The
    convertible promissory notes converted at the rate of
    $0.5925 per share.
(6) In February 2004, the registrant sold
    109,704,634 shares of Series C preferred stock to
    45 purchasers, at $0.5925 per share, for an aggregate
    purchase price of $64,999,996. Shares of Series C preferred
    stock are convertible into shares of common stock at the rate of
    one share of common stock for each share of Series C
    preferred stock owned.
(7) In February 2004, the registrant issued
    a warrant to purchase 692,658 shares of Series C
    preferred stock to an investor for financial services rendered
    total registrant in connection with its Series C Preferred
    Stock financing. The warrant has an exercise price of
    $0.5925 per share. The warrant is currently exercisable in
    whole or in part and shall terminate on the earlier of
    February 19, 2009 or the consummation of our initial public
    offering. The warrant shall terminate unless exercised prior to
    the closing of this offering.
II-2
(8) In October 2004, the registrant issued
    1,600,000 shares of common stock to one party in connection
    with a licensing transaction.
The registrant claimed exemption from
registration under the Securities Act for the sales and
issuances of securities in the transactions described in
paragraphs (1) and (2) above under
Section 4(2) under the Securities Act in that such sales
and issuances did not involve a public offering or under
Rule 701 promulgated under the Securities Act, in that they
were offered and sold either pursuant to written compensatory
plans or pursuant to a written contract relating to
compensation, as provided by Rule 701.
The registrant claimed exemption from
registration under the Securities Act for the sale and issuance
of securities in the transactions described in
paragraphs (3) through (7) by virtue of
Section 4(2) and/or Regulation D promulgated
thereunder as transactions not involving any public offering.
All of the purchasers of unregistered securities for which the
registrant relied on Regulation D and/or Section 4(2)
represented that they were accredited investors as defined under
the Securities Act. The registrant claimed such exemption on the
basis that (a) the purchasers in each case represented that
they intended to acquire the securities for investment only and
not with a view to the distribution thereof and that they either
received adequate information about the registrant or had
access, through employment or other relationships, to such
information and (b) appropriate legends were affixed to the
stock certificates issued in such transactions.
Item 16.
Exhibits and Financial Statement
    Schedules
Exhibit No.
Description
1.1*
Form of Underwriting Agreement
3.1
Third Amended and Restated Certificate of
    Incorporation, as currently in effect
3.2*
Form of Amended Restated Certificate of
    Incorporation (to be filed in connection with the closing of
    this offering)
3.3
Bylaws, as currently in effect
3.4*
Form of Amended and Restated Bylaws (to be
    effective upon the closing of this offering)
4.1
Second Amended and Restated Investor Rights
    Agreement, entered into as of February 17, 2004, by and
    among AlgoRx Pharmaceuticals, Inc. and certain investors named
    therein
4.2
Investor Rights Agreement entered into as of
    October 28, 2004, by and between AlgoRx Pharmaceuticals,
    Inc. and Bridge Pharma, Inc.
4.3*
Specimen Common Stock Certificate
5.1*
Opinion of Heller Ehrman White &
    McAuliffe LLP
10.1
2001 Equity Incentive Plan, as amended and
    restated
10.2
Form of Stock Option Grant Notice under AlgoRx
    Pharmaceuticals, Inc. 2001 Equity Incentive Plan
10.4
Form of Stock Option Agreement for Employee under
    AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan
10.5*
*
Form of Stock Option Agreement for Senior
    Management under AlgoRx Pharmaceuticals, Inc. 2001 Equity
    Incentive Plan
10.6*
*
Form of Stock Option Agreement for Senior
    Management under AlgoRx Pharmaceuticals, Inc. 2001 Equity
    Incentive Plan with acceleration provisions
10.7
Form of Early Exercise Stock Purchase Agreement
    under AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan
10.8
Lease Agreement dated August 27, 1997, by
    and between AlgoRx Technologies, Inc. (formerly PowderJect
    Technologies, Inc.) and John Arrillaga, or his Successor
    Trustee, UTA dated 07/20/77 (the John Arrillaga Survivor's
    Trust) as amended and Richard T. Peery, Trustee, or his
    Successor Trustee, UTA 7/20/77 (Richard T. Peery Separate
    Property Trust) as amended
II-3
Exhibit No.
Description
10.9
Lease dated May 10, 2004, between AlgoRx
    Pharmaceuticals, Inc. and 500 Plaza Drive Corp.
10.10
License Agreement entered into as of
    August 28, 2001, among AlgoRx Pharmaceuticals, Inc. and
    James N. Campbell, M.D., Richard Meyer, M.S. and Marco
    Pappagallo, M.D.
10.11
License Agreement entered into as of
    August 28, 2001, between AlgoRx Pharmaceuticals, Inc. and
    Marco Pappagallo, M.D.
10.12
†
License Agreement entered into as of
    March 22, 2002, by and between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
10.13
†
First Amendment to License Agreement entered into
    as of July 7, 2003, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
10.14
Assignment, Assumption and Consent Agreement made
    as of May 14, 2004 by and among PowderMed Limited,
    PowderJect Research Limited, PowderJect Technologies Limited,
    AlgoRx Pharmaceuticals, Inc. and AlgoRx Technologies, Inc.
10.15
Letter Agreement entered into as of
    September 30, 2004, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
10.16
†
Supply Agreement entered into as of
    March 22, 2002, between AlgoRx Pharmaceuticals, Inc. and
    PowderJect Research Ltd.
10.17
†
First Amendment to Supply Agreement entered into
    as of July 7, 2003, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Technologies Limited.
10.18
†
Collaboration, Development and License Agreement
    made as of October 28, 2004, between AlgoRx
    Pharmaceuticals, Inc. and Bridge Pharma, Inc.
21.1
List of subsidiaries
23.1
Consent of Ernst & Young LLP,
    independent auditors
23.2*
Consent of Heller Ehrman White &
    McAuliffe LLP (included in Exhibit 5.1)
24.1
Power of Attorney (included on signature page)
*
To be filed by Amendment.
**
Indicates a management contract or compensatory
    plan.
†
Application has been made to the Securities and
    Exchange Commission to seek confidential treatment of certain
    provisions of this exhibit under Rule 406 of the Securities
    Act of 1933. Omitted material for which confidential treatment
    has been requested has been filed separately with the Securities
    and Exchange Commission.
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 described in Item 14
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 of 1933 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 of 1933 and will be governed by
the final adjudication of such issue.
II-4
The undersigned registrant 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 the 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, and
(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 of 1933, the registrant has caused this Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Secaucus, State of New
Jersey, on the 24th day of November, 2004.
ALGORX PHARMACEUTICALS, INC.
By:
/s/ RONALD M. BURCH
Ronald M. Burch, M.D., Ph.D.
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of
AlgoRx Pharmaceuticals, Inc. (the "Registrant"),
hereby severally constitute and appoint Ronald M. Burch, Chief
Executive Officer, and Jeffery A. Rona, Vice President, Finance
and Chief Financial Officer, and each of them individually, with
full powers of substitution and resubstitution, our true and
lawful attorneys, with full powers to them and each of them to
sign for us, in our names and in the capacities indicated below,
the Registration Statement on Form S-1 filed with the
Securities and Exchange Commission, and any and all amendments
to said Registration Statement (including post-effective
amendments), and any registration statement filed pursuant to
Rule 462(b) under the Securities Act of 1933 in connection
with the registration under the Securities Act of 1933 of the
Registrant's equity securities, and to file or cause to be
filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys, and each of them, full
power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as each of them
might or could do in person, and hereby ratifying and confirming
all that said attorneys, and each of them, or their substitute
or substitutes, shall do or cause to be done by virtue of this
Power of Attorney.
Pursuant to the requirements of the Securities
Act of 1933, this Registration Statement has been signed below
by the following persons in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ RONALD M. BURCH
Ronald M.
    Burch, M.D., Ph.D.
Chief Executive Officer & Director
(Principal Executive Officer)
November 24, 2004
/s/ JEFFREY A. RONA
Jeffrey A. Rona
Vice President, Finance & Chief
    Financial Officer
(Principal Financial &
Accounting Officer)
November 24, 2004
/s/ CHARLES M. COHEN
Charles M. Cohen, Ph.D
Director
November 24, 2004
/s/ ARNOLD L. ORONSKY
Arnold L. Oronsky, Ph.D
Director
November 24, 2004
II-6
Signature
Title
Date
/s/ RODNEY A. FERGUSON
Rodney A. Ferguson, J.D.,
    Ph.D.
Director
November 24, 2004
/s/ MICHAEL F. POWELL
Michael F. Powell, Ph.D.
Director
November 24, 2004
II-7
EXHIBIT INDEX
Exhibit No.
Description
1.1*
Form of Underwriting Agreement
3.1
Third Amended and Restated Certificate of
    Incorporation, as currently in effect
3.2*
Form of Amended Restated Certificate of
    Incorporation (to be filed in connection with the closing of
    this offering)
3.3
Bylaws, as currently in effect
3.4*
Form of Amended and Restated Bylaws (to be
    effective upon the closing of this offering)
4.1
Second Amended and Restated Investor Rights
    Agreement, entered into as of February 17, 2004, by and
    among AlgoRx Pharmaceuticals, Inc. and certain investors named
    therein
4.2
Investor Rights Agreement entered into as of
    October 28, 2004, by and between AlgoRx Pharmaceuticals,
    Inc. and Bridge Pharma, Inc.
4.3*
Specimen Common Stock Certificate
5.1*
Opinion of Heller Ehrman White &
    McAuliffe LLP
10.1
2001 Equity Incentive Plan, as amended and
    restated
10.2
Form of Stock Option Grant Notice under AlgoRx
    Pharmaceuticals, Inc. 2001 Equity Incentive Plan
10.4
Form of Stock Option Agreement for Employee under
    AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan
10.5*
*
Form of Stock Option Agreement for Senior
    Management under AlgoRx Pharmaceuticals, Inc. 2001 Equity
    Incentive Plan
10.6*
*
Form of Stock Option Agreement for Senior
    Management under AlgoRx Pharmaceuticals, Inc. 2001 Equity
    Incentive Plan with acceleration provisions
10.7
Form of Early Exercise Stock Purchase Agreement
    under AlgoRx Pharmaceuticals, Inc. 2001 Equity Incentive Plan
10.8
Lease Agreement dated August 27, 1997, by
    and between AlgoRx Technologies, Inc. (formerly PowderJect
    Technologies, Inc.) and John Arrillaga, or his Successor
    Trustee, UTA dated 07/20/77 (the John Arrillaga Survivor's
    Trust) as amended and Richard T. Peery, Trustee, or his
    Successor Trustee, UTA 7/20/77 (Richard T. Peery Separate
    Property Trust) as amended
10.9
Lease dated May 10, 2004, between AlgoRx
    Pharmaceuticals, Inc. and 500 Plaza Drive Corp.
10.10
License Agreement entered into as of
    August 28, 2001, among AlgoRx Pharmaceuticals, Inc. and
    James N. Campbell, M.D., Richard Meyer, M.S. and Marco
    Pappagallo, M.D.
10.11
License Agreement entered into as of
    August 28, 2001, between AlgoRx Pharmaceuticals, Inc. and
    Marco Pappagallo, M.D.
10.12
†
License Agreement entered into as of
    March 22, 2002, by and between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
10.13
†
First Amendment to License Agreement entered into
    as of July 7, 2003, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
10.14
Assignment, Assumption and Consent Agreement made
    as of May 14, 2004, by and among PowderMed Limited,
    PowderJect Research Limited, PowderJect Technologies Limited,
    AlgoRx Pharmaceuticals, Inc. and AlgoRx Technologies, Inc.
10.15
Letter Agreement entered into as of
    September 30, 2004, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Research Limited
10.16
†
Supply Agreement entered into as of
    March 22, 2002, between AlgoRx Pharmaceuticals, Inc. and
    PowderJect Research Ltd.
10.17
†
First Amendment to Supply Agreement entered into
    as of July 7, 2003, between AlgoRx Pharmaceuticals, Inc.
    and PowderJect Technologies Limited.
10.18
†
Collaboration, Development and License Agreement
    made as of October 28, 2004, between AlgoRx
    Pharmaceuticals, Inc. and Bridge Pharma, Inc.
21.1
List of subsidiaries
Exhibit No.
Description
23.1
Consent of Ernst & Young LLP,
    independent auditors
23.2*
Consent of Heller Ehrman White &
    McAuliffe LLP (included in Exhibit 5.1)
24.1
Power of Attorney (included on signature page)
*
To be filed by Amendment.
**
Indicates a management contract or compensatory
    plan.
†
Application has been made to the Securities and
    Exchange Commission to seek confidential treatment of certain
    provisions of this exhibit under Rule 406 of the Securities
    Act of 1933. Omitted material for which confidential treatment
    has been requested has been filed separately with the Securities
    and Exchange Commission.