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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>As filed with the Securities and Exchange Commission on
December&nbsp;29, 2005.</B>
</DIV>

<DIV align="right" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>Registration
<FONT style="white-space: nowrap">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>
</DIV>

<DIV align="center" style="font-size: 6pt;color: #000000; background: #ffffff;">
<DIV style="width: 100%; border-top: 2.0pt solid solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

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

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

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>Washington,&nbsp;D.C. 20549</B>
</DIV>

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

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

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>REGISTRATION STATEMENT</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>UNDER</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>THE SECURITIES ACT OF 1933</B>
</DIV>

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

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

<DIV align="center" style="font-size: 8pt;color: #000000; background: #ffffff;">
<I>(Exact Name of Registrant as Specified in its Charter)</I>
</DIV>
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<TR style="font-size: 1pt;">
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="29%">&nbsp;</TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">Delaware</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">2834</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">03-0491827</FONT></B></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <I><FONT face="helvetica,arial">(State or Other Jurisdiction
    of</FONT></I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <I><FONT face="helvetica,arial">(Primary Standard
    Industrial</FONT></I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <I><FONT face="helvetica,arial">(I.R.S. Employer</FONT></I></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <I><FONT face="helvetica,arial">Incorporation or
    Organization)</FONT></I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <I><FONT face="helvetica,arial">Classification Code
    Number)</FONT></I></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <I><FONT face="helvetica,arial">Identification Number)</FONT></I></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>9620 Medical Center Drive</B>
</DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>Suite&nbsp;201</B>
</DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>Rockville, Maryland 20850</B>
</DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>(301)&nbsp;294-9300</B>
</DIV>

<DIV align="center" style="font-size: 8pt;color: #000000; background: #ffffff;">
<I>(Address, including zip code, and telephone number, including
area code, of registrant&#146;s principal executive offices)</I>
</DIV>

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

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

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>Chief Executive Officer</B>
</DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>9620 Medical Center Drive</B>
</DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>Suite&nbsp;201</B>
</DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>Rockville, Maryland 20850</B>
</DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">
<B>(301)&nbsp;294-9300</B>
</DIV>

<DIV align="center" style="font-size: 8pt;color: #000000; background: #ffffff;">
<I>(Name, address, including zip code, and telephone number,
including area code, of agent for service)</I>
</DIV>

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

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Copies to:</I></B>
</DIV>
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<TR style="font-size: 1pt;">
    <TD width="54%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="43%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">Jay K.
    Hachigian,&nbsp;Esq.</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">Richard D.
    Truesdell,&nbsp;Jr.,&nbsp;Esq.</FONT></B></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">Gregg A.
    Griner,&nbsp;Esq.</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">Davis Polk&nbsp;&#38;
    Wardwell</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">Gunderson Dettmer
    Stough</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">450 Lexington Avenue</FONT></B></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">Villeneuve Franklin&nbsp;&#38;
    Hachigian, LLP</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">New York, NY 10017</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">610 Lincoln Street</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">(212)&nbsp;450-4000</FONT></B></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <B><FONT face="helvetica,arial">Waltham, MA 02451<BR>
    (781)&nbsp;890-8800</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&nbsp;&nbsp;&nbsp;&nbsp;
<B>Approximate date of commencement of proposed sale to the
public:</B> As soon as practicable after the effective date of
this registration statement.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 2pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&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, as amended,
check the following box.&nbsp;<FONT face="wingdings">&#111;
</FONT>
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 1pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&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;<FONT face="wingdings">&#111;</FONT>&nbsp;<U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 1pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&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;<FONT face="wingdings">&#111;</FONT>&nbsp;<U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 1pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&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;<FONT face="wingdings">&#111;</FONT>&nbsp;<U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>
</DIV>

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

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 10pt; margin-top: 3pt; ">

<TR style="font-size: 1pt;">
    <TD width="56%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- Right VRule -->
    <TD width="2%">&nbsp;</TD>
    <TD width="16%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD><!-- Right VRule -->
    <TD width="2%">&nbsp;</TD>
    <TD width="20%">&nbsp;</TD>
</TR>


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

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

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

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Title of Each Class of</FONT></B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Aggregate Offering</FONT></B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Amount of</FONT></B></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Securities to be Registered</FONT></B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Price(1),(2)</FONT></B></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Registration Fee</FONT></B></TD>
</TR>


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

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Common Stock, $0.01&nbsp;par value
    </FONT></DIV>
    </TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <FONT face="helvetica,arial">$75,000,000
    </FONT></TD>
    <TD style="border-right:1.5pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">
    <FONT face="helvetica,arial">$8,025.00
    </FONT></TD>
</TR>

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

</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV style="margin-top: 2pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 8pt;color: #000000; background: #ffffff;">

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

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

<TR>
    <TD style="font-size: 2pt">&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>(2)&nbsp;</TD>
    <TD align="left">
    Includes offering price of shares that the underwriters have the
    option to purchase to cover over-allotments, if any.</TD>
</TR>

</TABLE>

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

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">&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 this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section&nbsp;8(a), may determine.</B>
</DIV>

<DIV align="center" style="font-size: 3pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 100%; border-top: 1.0pt solid solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="center" style="font-size: 4pt;color: #000000; background: #ffffff;">
<DIV style="width: 100%; border-top: 2.0pt solid solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

</FONT>

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

<FONT face="helvetica,arial">

<TABLE width="100%" cellpadding="5" style="border: 3pt double #000000; margin-bottom: 6pt; font-size: 10pt"><TR><TD>
<FONT color="#A32638">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 we are not soliciting an
offer to buy these securities in any state where the offer or
sale is not permitted. <BR>


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

<DIV align="left" style="font-size: 11pt;color: #000000; background: #ffffff; margin-top: 1pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><FONT color="#A32638">Subject to completion,
dated &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2006</FONT></B>
</DIV>

<DIV align="left" style="font-size: 11pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Prospectus</B>
</DIV>

<DIV align="left" style="font-size: 18pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<IMG src="w15453w1545300.gif" alt="(VANDA LOGO)">
</DIV>

<DIV align="left" style="font-size: 18pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Common shares</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
This is our initial public offering of common shares. We are
offering &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares.
The estimated initial public offering price is 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.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Currently, no public market exists for our common shares. We
will apply to list our common shares on the Nasdaq National
Market under the symbol VNDA.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="73%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Per share</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Total</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Initial public offering price
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="9">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Underwriting discounts and
    commissions
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="9">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Proceeds to us, before expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have granted the underwriters an option for a period of
30&nbsp;days to purchase up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
common shares.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Investing in our common shares involves a high degree of
risk. See &#147;Risk factors&#148; beginning on page&nbsp;8.</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.</B>
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 16pt;color: #000000; background: #ffffff;">

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

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

</TABLE>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Thomas Weisel Partners LLC</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2006
</DIV>

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">

</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<!-- TOC -->
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name="tocpage"></A>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Table of contents</B>
</DIV>
<FONT face="times new roman,times">

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

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

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Page</FONT></B></TD><TD></TD>
</TR>

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

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#102'>Risk
    factors</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#103'>Forward-looking
    statements</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">25</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#104'>Use of
    proceeds</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#105'>Dividend
    policy</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#106'>Capitalization</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">27</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#107'>Dilution</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">28</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#108'>Selected
    consolidated financial data</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">30</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#109'>Management&#146;s
    discussion and analysis of financial condition and results of
    operations</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">32</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#110'>Business</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">51</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#111'>Management</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">72</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#112'>Certain
    relationships and related party transactions</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">85</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#113'>Principal
    stockholders</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">86</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#114'>Description of
    capital stock</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">89</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#115'>Shares
    eligible for future sale</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">93</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#116'>Material
    United States federal income tax consequences</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">96</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#117'>Underwriters</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">99</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#118'>Legal
    matters</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">103</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#119'>Experts</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">103</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#120'>Where you can
    find more information</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">103</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">&nbsp;<A HREF='#121'>Index to
    consolidated financial statements</A>
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">F-1</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv3w1.txt">EX-3.1: SECOND RESTATED CERTIFICATE OF INCORPORATION</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv3w2.txt">EX-3.2: CERTIFICATE OF AMENDMENT OF THE SECOND RESTATED CERTIFICATE OF INCORPORATION</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv3w3.txt">EX-3.3: CERTIFICATE OF AMENDMENT OF THE SECOND RESTATED CERTIFICATE OF INCORPORATION</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv3w5.txt">EX-3.5: BYLAWS</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv4w1.txt">EX-4.1: 2004 SECURITYHOLDERS AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv4w2.txt">EX-4.2: CLASS A COMMON STOCK PURCHASE WARRANT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv4w3.txt">EX-4.3: CLASS A COMMON STOCK PURCHASE WARRANT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w1.txt">EX-10.1: SECOND AMENDED AND RESTATED MANAGEMENT EQUITY PLAN</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w7.txt">EX-10.7: LEASE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w8.txt">EX-10.8: AMENDMENT TO LEASE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w9.txt">EX-10.9: LEASE AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w10.txt">EX-10.10: SUMMARY PLAN DESCRIPTION PROVIDED FOR THE 401(K) PROFIT SHARING PLAN & TRUST</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w11.txt">EX-10.11: FORM OF INDEMNIFICATION AGREEMENT</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w12.txt">EX-10.12: EMPLOYMENT AGREEMENT FORM MIHAEL H. POLYMEROPOULOS</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w13.txt">EX-10.13: EMPLOYMENT AGREEMENT FOR WILLIAM D. CLARK</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w14.txt">EX-10.14: EMPLOYMENT AGREEMENT FOR STEVE SHALLCROSS</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w15.txt">EX-10.15: EMPLOYMENT AGREEMENT FOR DEEPAK PHADKE</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv10w16.txt">EX-10.16: EMPLOYMENT AGREEMENT FOR THOMAS COPMANN</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv21w1.txt">EX-21.1: LIST OF SUBSIDIARIES</A></FONT></TD></TR>
<TR><TD colspan="9"><FONT size="2">&nbsp;<A HREF="w15453exv23w2.htm">EX-23.2: CONSENT OF PRICEWATERHOUSECOOPERS LLP</A></FONT></TD></TR>
</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<!-- /TOC -->
</DIV>

<DIV align="center" style="font-size: 3pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 37%; border-top: 1.0pt solid solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell, and are seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of the
common stock.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
For investors outside the United States: Neither we nor any of
the underwriters have done anything that would permit this
offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the United States. You are required to inform yourselves
about and to observe any restrictions relating to this offering
and the distribution of this prospectus.
</DIV>

<DIV align="center" style="font-size: 3pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 37%; border-top: 1.0pt solid solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
&#147;Vanda&#148; is a trademark of Vanda Pharmaceuticals Inc.
This prospectus may also include other registered and
unregistered trademarks of Vanda Pharmaceuticals Inc. and other
persons.
</DIV>

<DIV align="center" style="font-size: 3pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 37%; border-top: 1.0pt solid solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Unless the context otherwise requires, we use the terms
&#147;Vanda,&#148; the &#147;company,&#148; &#147;we,&#148;
&#147;us&#148; and &#147;our&#148; in this prospectus to refer
to Vanda Pharmaceuticals Inc.
</DIV>

<DIV align="center" style="font-size: 3pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<DIV style="width: 37%; border-top: 1.0pt solid solid black; font-size: 1pt">&nbsp;</DIV>
</DIV>

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

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='101'></A>
</DIV>

<!-- link1 "Prospectus summary" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Prospectus summary</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>This summary highlights the most important features of this
offering and the information contained elsewhere in this
prospectus. This summary is not complete and does not contain
all of the information that you should consider before investing
in our common stock. You should read the entire prospectus
carefully, especially the risks of investing in our common stock
discussed under &#147;Risk Factors&#148; and our consolidated
financial statements and related notes included in this
prospectus.</I>
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are a biopharmaceutical company focused on the development
and commercialization of our portfolio of clinical-stage, small
molecule product candidates for central nervous system
disorders. We believe that each of these product candidates will
be a differentiated new therapy that addresses a large market
with significant unmet medical needs. Our product portfolio
includes:
</DIV>

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    iloperidone, an atypical antipsychotic for the treatment of
    schizophrenia and bipolar disorder, which we are currently
    evaluating in a pivotal Phase&nbsp;III trial for schizophrenia
    that we anticipate will be completed in the first half of 2007</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    VEC-162, a melatonin agonist for the treatment of insomnia and
    depression, which is entering a Phase&nbsp;III trial for
    insomnia and is also ready for Phase&nbsp;II trials for
    depression</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    VSF-173, a compound for the treatment of excessive daytime
    sleepiness, for which we expect to begin a Phase&nbsp;II trial
    in the second half of 2006</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We hold exclusive, worldwide rights to these molecules and plan
to develop a focused U.S.&nbsp;sales force for the
commercialization of iloperidone and VSF-173. Given the large
size of the prescribing physician base for insomnia and
depression, we plan to partner with a global pharmaceutical
company for the development and commercialization of
<FONT style="white-space: nowrap">VEC-162</FONT> worldwide.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our founder and Chief Executive Officer, Mihael H.
Polymeropoulos,&nbsp;M.D., commenced our operations early in
2003 after leading the Pharmacogenetics Department at Novartis
AG. In acquiring and developing our compounds we have relied
upon our deep expertise in pharmacogenetics and
pharmacogenomics, or collectively, PG. PG is the scientific
discipline that examines both genetic variations among people
that influence response to a particular drug, and the multiple
pathways through which drugs affect people. We believe that the
combination of our PG and drug development expertise will
provide us with preferential access to compounds discovered by
other pharmaceutical companies, and may allow us to identify new
uses for these compounds. These capabilities should also enable
us to shorten the time it takes to commercialize a drug when
compared to traditional approaches.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Iloperidone for Schizophrenia and Bipolar Disorder.</I> We
are developing iloperidone, an oral small molecule, for the
treatment of schizophrenia and bipolar disorder. Today,
schizophrenia patients are primarily treated with drugs known as
&#147;atypical&#148; antipsychotics. While these drugs offer
only modest and unpredictable efficacy and induce serious side
effects, resulting in poor patient compliance, they achieved
worldwide sales in excess of $13&nbsp;billion in 2004. There
remains a high degree of dissatisfaction with atypical
antipsychotics among patients and physicians. A recent study
conducted by the National Institute of Mental Health and
published in <I>The New England Journal of Medicine </I>found
that 74% of patients taking antipsychotics
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
discontinued treatment within 18&nbsp;months. Given the safety
and efficacy shortcomings of current drugs, we believe that
iloperidone may be an attractive and differentiated alternative.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In three short-term and three long-term trials comprising over
2,000&nbsp;patients, iloperidone differentiated itself from
currently available atypical antipsychotics by demonstrating a
number of reduced side effects. These reduced side effects
included low weight gain, no induction of diabetes, low
extrapyramidal symptoms (involuntary body movements), including
no akathisia (inability to sit still), no hyperprolactinemia (an
elevated secretion of the hormone prolactin which can lead to
sexual dysfunction, breast development and milk secretion in men
and women), low incidence of sleepiness and low negative effects
on cognition relative to placebo.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are also differentiating iloperidone through the development
of a <FONT style="white-space: nowrap">four-week</FONT>
injectable depot formulation. We believe this depot formulation
will help address the patient compliance and discontinuation
problems commonly associated with atypical antipsychotics and
will become a compelling complement to our oral formulation. The
depot formulation has successfully completed a Phase&nbsp;I/IIa
trial.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are further differentiating iloperidone through the
application of our PG&nbsp;expertise, by identifying genetic
markers that may enable physicians to tailor their prescribing
of iloperidone to certain patients. We have discovered that
patients with a common genetic mutation, estimated to occur in
approximately 70% of the population, may be more likely to
experience better treatment results with iloperidone than other
patients. We have also discovered that patients with an uncommon
genetic attribute are at an elevated risk of QTc interval
prolongation (a measurement of specific electrical activity in
the heart as captured on an electrocardiogram, corrected for
heart rate) while taking iloperidone. Our market research
indicates that physicians treating schizophrenia patients would
welcome a test that could provide this information and may
prescribe iloperidone more frequently as a result.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We initiated a pivotal Phase&nbsp;III trial in November 2005 to
evaluate iloperidone for the treatment of patients with
schizophrenia. The trial is a randomized, double-blind, placebo-
and active-controlled Phase&nbsp;III trial of approximately
600&nbsp;patients with schizophrenia. Based on discussions with
the United States Food and Drug Administration, or FDA, we
believe that if this trial is successful our data and
documentation on oral iloperidone will be sufficient to support
the filing of a New Drug Application, or NDA, with the FDA. We
expect the pivotal Phase&nbsp;III trial to be completed in the
first half of 2007.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition to schizophrenia, we believe iloperidone may be
effective in treating bipolar disorder. Most of the approved
atypical antipsychotics have received approval for bipolar
disorder subsequent to commercialization for the treatment of
schizophrenia. Iloperidone is ready for an initial Phase&nbsp;II
trial in bipolar disorder.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We expect to build our own sales force to market iloperidone
directly to psychiatrists and other target physicians in the
U.S.&nbsp;This medical community is relatively small and we
believe that we can cost-effectively develop such a sales force.
Outside of the U.S., we expect to find commercial partners for
iloperidone.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<FONT style="white-space: nowrap"><I>VEC-162</FONT> for Insomnia
and Depression.</I>
<FONT style="white-space: nowrap">VEC-162</FONT> is an oral
small molecule melatonin agonist entering Phase&nbsp;III trials
for the treatment of insomnia. The market for sleep disorder
drugs is large and growing, with over $3.5&nbsp;billion of
worldwide sales in 2004. Industry sources estimate that of the
73&nbsp;million U.S.&nbsp;adults who suffer from some form of
insomnia, only approximately 11&nbsp;million currently receive
treatment.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe <FONT style="white-space: nowrap">VEC-162</FONT> may
offer several benefits when compared to currently approved
insomnia therapies. Unlike many approved therapies,
<FONT style="white-space: nowrap">VEC-162</FONT> appears to
offer a benefit in both sleep onset, or time to fall asleep, and
sleep maintenance, or ability to stay asleep.
<FONT style="white-space: nowrap">VEC-162</FONT> appears to be
safe, with no significant side effects or effects on next-day
performance. We believe that
<FONT style="white-space: nowrap">VEC-162</FONT> is also
unlikely to be classified as a Schedule&nbsp;IV controlled
substance by the United States Drug Enforcement Agency
(DEA)&nbsp;because its mechanism of action has been shown not to
have potential for abuse. In addition, because it appears to
modulate the sleep/ wake cycle, we believe that
<FONT style="white-space: nowrap">VEC-162</FONT> may be the
first drug to address the underlying cause of sleeplessness in
circadian rhythm sleep disorders, or CRSD, which comprise
approximately 25% of the market for sleep disorders. These sleep
disorders are those, such as jet lag, where the circadian
rhythm, or the rhythmic output of the human biological clock
governed by melatonin and other hormones, is out of alignment
with a person&#146;s daily activities or lifestyle.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We recently completed a randomized, double-blind, multi-center,
placebo-controlled Phase&nbsp;II trial evaluating the effect of
<FONT style="white-space: nowrap">VEC-162</FONT> on sleep in
healthy volunteers with induced transient insomnia. The drug
demonstrated statistically significant improvement in several
parameters used to measure the efficacy of insomnia therapies,
including reduced duration of wake after sleep onset, or WASO,
improved sleep efficiency and shortened time to persistent
sleep. In addition,
<FONT style="white-space: nowrap">VEC-162</FONT> demonstrated a
statistically significant shift in patients&#146; circadian
rhythm and a placebo-like side effect profile.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition to insomnia, we believe that
<FONT style="white-space: nowrap">VEC-162</FONT> may be
effective in treating depression.
<FONT style="white-space: nowrap">VEC-162</FONT> has properties
similar to agomelatine, an off-patent melatonin agonist, which
in a Phase&nbsp;III trial demonstrated more rapid efficacy and
reduced side effects when compared to a market-leading
antidepressant. <FONT style="white-space: nowrap">VEC-162</FONT>
is ready for Phase&nbsp;II trials in depression, having
demonstrated an antidepressant effect in animal models and
having completed several Phase&nbsp;I trials.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<FONT style="white-space: nowrap"><I>VSF-173</FONT> for
Excessive Daytime Sleepiness.</I>
<FONT style="white-space: nowrap">VSF-173</FONT> is an oral
small molecule that has demonstrated effects on animal sleep/
wake patterns and gene expression suggestive of a stimulant
effect. As a result of these observations and safety data from
previous human trials, we are planning to initiate a
Phase&nbsp;II trial of
<FONT style="white-space: nowrap">VSF-173</FONT> in excessive
daytime sleepiness in late 2006. Excessive daytime sleepiness is
a rapidly growing market which is estimated to be approximately
$440&nbsp;million worldwide and is currently treated primarily
by stimulants.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our goal is to create a leading biopharmaceutical company
focused on developing and commercializing products that address
critical unmet medical needs through the application of our drug
development and PG&nbsp;expertise. The key elements of our
strategy to accomplish this goal are&nbsp;to:
</DIV>

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    <TD width="99%"></TD>
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<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    pursue the clinical development of our current product candidates</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    develop a focused commercialization capability in the United
    States</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    enter into strategic partnerships to extend our commercial reach</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    apply our PG expertise to differentiate our products</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    expand our product portfolio through the acquisition of
    additional clinical compounds</TD>
</TR>

</TABLE>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our business is subject to numerous risks, as more fully
described in the section entitled &#147;Risk factors&#148;
immediately following this prospectus summary. We may be unable,
for many reasons,
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
including those that are beyond our control, to implement our
current business strategy. Those reasons could include delays in
obtaining, or a failure to obtain, regulatory approval for our
product candidates and failure to maintain and to protect our
intellectual property. We have a limited operating history and
have incurred net losses from our inception. We expect to
continue to generate operating losses for the next several
years. We will need to obtain additional capital to fund our
continuing research and development activities. All of our
product candidates are in development and none have been
approved by the FDA for commercial sale. Even if we succeed in
developing and commercializing one or more of our product
candidates, we may never generate sufficient revenue to achieve
and then sustain profitability.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We were incorporated in Delaware in November 2002. Our principal
executive offices are located at 9620&nbsp;Medical Center Drive,
Rockville, Maryland, 20850 and our telephone number is
<FONT style="white-space: nowrap">(301)&nbsp;294-9300.</FONT>
Our website address is www.vandapharma.com. The information on,
or that can be accessed through, our website is not part of this
prospectus.
</DIV>

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<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>The offering</B>
</DIV>

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    <TD width="42%"></TD>
    <TD width="1%"></TD>
    <TD width="57%"></TD>
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<TR>
    <TD valign="top">
    Common stock we are offering:</TD>
    <TD></TD>
    <TD valign="top">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares</TD>
</TR>

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

</TABLE>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We expect to use the net proceeds of this offering for working
capital and for other general corporate purposes, including the
funding of our clinical development efforts. See &#147;Use of
Proceeds.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Proposed Nasdaq National Market symbol:&nbsp;VNDA
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The number of shares of common stock to be outstanding after the
offering is based on 150,739&nbsp;shares of common stock
outstanding as of September&nbsp;30, 2005, and the assumed
conversion of 40,081,308&nbsp;shares of Preferred Stock
outstanding on September&nbsp;30, 2005 into Common Stock in
connection with the closing of this offering. Except where we
state otherwise, the number of shares of common stock to be
outstanding after this offering does not take into account:
</DIV>

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    3,783,490&nbsp;shares of common stock issuable upon the exercise
    of stock options outstanding as of September&nbsp;30, 2005, each
    with an exercise price of $0.10&nbsp;per share</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    166,660&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants as of September&nbsp;30, 2005 with an
    exercise price of $0.40&nbsp;per share</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an additional 1,565,485&nbsp;shares reserved as of
    September&nbsp;30, 2005 for future stock option grants and
    purchases under our equity compensation plans. See note&nbsp;10
    of the notes to our consolidated financial statements</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the sale of an additional 12,195,129&nbsp;shares of
    Series&nbsp;B Preferred Stock to certain existing stockholders
    on December&nbsp;9, 2005</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Finally, except, where we state otherwise, the information we
present in this prospectus reflects:</I>
</DIV>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>the conversion of all our outstanding preferred stock as of
    September&nbsp;30, 2005 into 40,081,308&nbsp;shares of common
    stock which will occur immediately prior to this offering</I></TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>the adoption of our restated certificate of incorporation and
    restated bylaws to be effective upon the completion of this
    offering</I></TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>no exercise of the underwriter&#146;s over-allotment
    option</I></TD>
</TR>

</TABLE>

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<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Summary consolidated financial data</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>The following tables summarize our consolidated financial
data. The summary consolidated financial data is derived from
our audited financial statements for the period from
March&nbsp;13, 2003 (inception)&nbsp;through December&nbsp;31,
2003, and the year ended December&nbsp;31, 2004. Data are also
included from our unaudited financial statements for the
nine-month periods ended September&nbsp;30, 2004 and 2005. This
data should be read together with our financial statements and
related notes, &#147;Selected Financial Data,&#148; and
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations&#148; included elsewhere in
this prospectus. The pro forma balance sheet data contained in
the following tables reflects the conversion of all outstanding
shares of our preferred stock into common stock upon completion
of this offering. The pro forma as adjusted balance sheet data
contained in the following tables reflects the pro forma balance
sheet data at September&nbsp;30, 2005, adjusted for the sale of
shares of our 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 (the mid-point of the price range set forth on the cover
page of this prospectus), after deducting the estimated
underwriting discounts, commissions and offering expenses
payable by us, and the automatic conversion of all preferred
stock into common stock upon completion of this offering.</I>
</DIV>
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    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="10">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Statements of operations
    data</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Revenue
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">47,565</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,980</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,980</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Operating expenses:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Research and development
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,010,532</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,442,983</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,033,488</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">11,641,565</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">General and administrative
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,052,659</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,119,394</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,267,485</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,587,147</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total operating expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,063,191</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,562,377</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,300,973</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">17,228,712</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Loss from operations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,015,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,528,397</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,266,993</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,228,712</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest and other income, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">44,805</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">59,060</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,956</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">188,288</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss before tax expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,469,337</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,254,037</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,040,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Tax expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,949</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,733</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,257,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,040,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Beneficial conversion feature&#151;
    deemed dividend to preferred stockholders(1)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(18,500,005</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss attributable to common
    stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,257,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(35,540,429</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss per share applicable to
    common stockholders, basic and diluted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(297.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(947.43</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(625.78</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(934.93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">6

</FONT>

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

<FONT face="helvetica,arial">
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="9">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pro Forma net loss per share
    applicable to common stockholders, basic and diluted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.68</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1.41</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Shares used in computing net loss
    per share, basic and diluted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,014</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Shares used in computing pro forma
    net loss per share, basic and diluted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,913,995</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">25,264,356</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;In September 2005, we completed the sale of an
additional 15,040,654&nbsp;shares of Series&nbsp;B Preferred
Stock for proceeds of approximately $18.5&nbsp;million. After
evaluating the fair value of the common stock obtainable upon
conversion by the stockholders, we determined that the issuance
of the Series&nbsp;B Preferred Stock sold in September 2005
resulted in a beneficial conversion feature of approximately
$18.5&nbsp;million which was fully accreted in September 2005
and is recorded as a deemed dividend to preferred stockholders
for the nine-month period ended September&nbsp;30, 2005.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="56%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="12" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="9">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Pro forma</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">September&nbsp;30, 2005</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Actual</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Pro forma</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">as adjusted</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="12" align="right" nowrap><B><FONT face="helvetica,arial">)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="12" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Balance sheet data</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash, restricted cash and cash
    equivalents
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,264,920</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,264,920</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Working capital
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,145,973</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,145,973</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24,288,683</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24,288,683</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total liabilities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,801,722</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,801,722</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Convertible preferred stock
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">46,808,569</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deficit accumulated during the
    development stage
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,485,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,485,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,486,961</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,486,961</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">7

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='102'></A>
</DIV>

<!-- link1 "Risk factors" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Risk factors</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Investing in our common stock involves a high degree of risk.
You should consider carefully the risks and uncertainties
described below, together with all of the other information in
this prospectus, including the consolidated financial statements
and the related notes appearing at the end of this prospectus,
before deciding to invest in shares of our common stock. If any
of the following risks actually occurs, our business, financial
condition, results of operations and future prospects would
likely be materially and adversely affected. In that event, the
market price of our common stock could decline and you could
lose all or part of your investment.</I>
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Risks related to our business and industry</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Our success is dependent on the success of our three
product candidates in clinical development: iloperidone, VEC-162
and VSF-173. If any of these product candidates are determined
to be unsafe or ineffective in humans, our business will be
materially harmed.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are uncertain whether any of our current product candidates
in clinical development will prove effective and safe in humans
or meet applicable regulatory standards. To date, the data
supporting our product candidates is derived solely from
laboratory and pre-clinical studies and limited clinical trials.
However, for each of our product candidates we must provide the
FDA and similar foreign regulatory authorities with more
extensive clinical data for a defined indication of the product
candidate before these regulatory authorities can approve the
product candidate for commercial sale. Frequently, product
candidates that have shown promising results in early clinical
trials have suffered significant setbacks in later clinical
trials. Future clinical trials involving our product candidates
may reveal that those candidates are ineffective, are
unacceptably toxic, have other undesirable side effects or are
otherwise unfit for future development. It is impossible to
predict when or if any of our product candidates will prove
effective or safe in humans or will receive regulatory approval.
If we are unable to discover and develop products that are
effective and safe in humans, our business will be materially
harmed.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Any failure or delay in completing clinical trials for our
product candidates could severely harm our business.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Pre-clinical studies and clinical trials required to demonstrate
the safety and efficacy of our product candidates are
time-consuming and expensive and together take several years to
complete. To date we have not completed the clinical testing of
any of our product candidates. The completion of clinical trials
for our product candidates may be delayed by many factors,
including:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our inability to manufacture or obtain from third parties
    materials sufficient for use in pre-clinical studies and
    clinical trials</TD>
</TR>

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

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

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

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

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

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

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">8

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

<FONT face="helvetica,arial">

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

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

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

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

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
It is possible that none of our product candidates will complete
clinical trials in any of the markets in which we intend to sell
those product candidates. Accordingly, we may not receive the
regulatory approvals needed to market our product candidates in
any markets. Any failure or delay in commencing or completing
clinical trials or obtaining regulatory approvals for our
product candidates would severely harm our business.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>We face heavy government regulation, and FDA regulatory
approval of our products is uncertain.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The research, testing, manufacturing and marketing of drug
products such as those that we are developing are subject to
extensive regulation by federal, state and local government
authorities, including the FDA. To obtain regulatory approval of
a product, we must demonstrate to the satisfaction of the
applicable regulatory agency that, among other things, the
product is safe and effective for its intended use. In addition,
we must show that the manufacturing facilities used to produce
the products are in compliance with current Good Manufacturing
Practices regulations, or cGMP.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The process of obtaining FDA and other required regulatory
approvals and clearances will require us to expend substantial
time and capital. Despite the time and expense expended,
regulatory approval is never guaranteed. The number of
pre-clinical and clinical tests that will be required for FDA
approval varies depending on the drug candidate, the disease or
condition that the drug candidate is in development for, and the
regulations applicable to that particular drug candidate. The
FDA can delay, limit or deny approval of a drug candidate for
many reasons, including that:
</DIV>

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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a drug candidate may not be safe or effective</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    they may interpret data from pre-clinical and clinical testing
    in different ways than we do</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    they may not approve our manufacturing process</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    they may change their approval policies or adopt new regulations</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
For example, if certain of our methods for analyzing our trial
data are not approved by the FDA, we may fail to obtain
regulatory approval for our product candidates. We will be using
a &#147;mixed-method repeated measures&#148; or &#147;MMRM&#148;
statistical model to analyze data from our pivotal
Phase&nbsp;III trial for iloperidone, as we believe that this
model will reduce certain biases that can be associated with
other statistical models. We have discussed the use of this
statistical model with the FDA in an August 2005 guidance
meeting, and they have agreed that the model is valid. However,
to our knowledge, the MMRM statistical model has not been
previously used as the primary basis for judging efficacy in a
pivotal trial by the FDA. If the FDA does not approve of our
findings based on the MMRM model, our clinical trial for
iloperidone may not be successful.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Moreover, if and when our products do obtain such approval or
clearances, the marketing, distribution and manufacture of such
products would remain subject to extensive ongoing
</DIV>

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regulatory requirements. Failure to comply with applicable
regulatory requirements could result&nbsp;in:
</DIV>

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    <TD align="left">
    warning letters</TD>
</TR>

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

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    recall or seizure of products</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    refusal of the government to grant approvals</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    withdrawal of approvals and criminal prosecution</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Any delay or failure by us to obtain regulatory approvals for
our product candidates could diminish competitive advantages
that we may attain and would adversely affect the marketing of
our products. We have not received regulatory approval to market
any of our product candidates in any jurisdiction.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Even if we do receive regulatory approval for our drug
candidates, the FDA may impose limitations on the indicated uses
for which our products may be marketed, subsequently withdraw
approval or take other actions against us or our products that
are adverse to our business. The FDA generally approves products
for particular indications. An approval for a more limited
indication reduces the size of the potential market for the
product. Product approvals, once granted, may be withdrawn if
problems occur after initial marketing.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We also are subject to numerous federal, state and local laws,
regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the
environment and the use and disposal of hazardous substances
used in connection with our discovery, research and development
work. In addition, we cannot predict the extent of government
regulations or the impact of new governmental regulations that
might significantly harm the discovery, development, production
and marketing of our products. We may be required to incur
significant costs to comply with current or future laws or
regulations, and we may be adversely affected by the cost of
such compliance.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>We intend to seek regulatory approvals for our products in
foreign jurisdictions, but we may not obtain any such
approvals.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We intend to market our products outside the United States,
either alone or with a commercial partner. In order to market
our products in foreign jurisdictions, we may be required to
obtain separate regulatory approvals and comply with numerous
and varying regulatory requirements. The approval procedure
varies among countries and jurisdictions and can involve
additional testing, and the time required to obtain approval may
differ from that required to obtain FDA approval. We have no
experience with obtaining any such foreign approvals.
Additionally, the foreign regulatory approval process may
include all of the risks associated with obtaining FDA approval.
For all of these reasons, we may not obtain foreign regulatory
approvals on a timely basis, if at all. Approval by the FDA does
not ensure approval by regulatory authorities in other countries
or jurisdictions, and approval by one foreign regulatory
authority does not ensure approval by regulatory authorities in
other foreign countries or jurisdictions or by the FDA. We may
not be able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any market.
The failure to obtain these approvals could materially adversely
affect our business, financial condition and results of
operations.
</DIV>

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<B><I>Our product candidates may cause undesirable side effects
or have other properties that could delay or prevent their
regulatory approval or limit their marketability.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Undesirable side effects caused by our product candidates could
interrupt, delay or halt clinical trials and could result in the
denial of regulatory approval by the FDA or other regulatory
authorities for any or all targeted indications, and in turn
prevent us from commercializing our product candidates and
generating revenues from their sale. For example, like many
other drugs in its class, iloperidone is associated with a
prolongation of the heart&#146;s QTc interval, which is a
measurement of specific electrical activity in the heart as
captured on an electrocardiogram, corrected for heart rate. A
QTc interval that is significantly prolonged may result in an
abnormal heart rhythm with adverse consequences including
fainting, dizziness, loss of consciousness and death. No patient
in any of iloperidone&#146;s clinical trials was observed to
have an interval that exceeded a 500&nbsp;millisecond threshold
of particular concern to the FDA. We will continue to assess the
side effect profile of iloperidone and our other product
candidates in our ongoing clinical development program.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition, if any of our product candidates receive marketing
approval and we or others later identify undesirable side
effects caused by the product, we could face one or more of the
following:
</DIV>

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    <TD align="left">
    regulatory authorities may require the addition of labeling
    statements, such as a &#147;black box&#148; warning or a
    contraindication</TD>
</TR>

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

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    we may be required to change the way the product is
    administered, conduct additional clinical trials or change the
    labeling of the product</TD>
</TR>

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

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

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Any of these events could prevent us from achieving or
maintaining market acceptance of the affected product or could
substantially increase the costs and expenses of commercializing
the product candidate, which in turn could delay or prevent us
from generating significant revenues from its sale.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Our product candidates may never achieve market acceptance
even if we obtain regulatory approvals.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Even if we receive regulatory approvals for the sale of our
product candidates, the commercial success of these products
will depend on, among other things, their acceptance by
physicians, patients, third-party payors and other members of
the medical community as a therapeutic and cost-effective
alternative to competing products and treatments. The degree of
market acceptance of any of our product candidates will depend
on a number of factors, including the demonstration of its
safety and efficacy, its cost-effectiveness, its potential
advantages over other therapies, the reimbursement policies of
government and third-party payors with respect to the product
candidate, and the effectiveness of our marketing and
distribution capabilities. If our product candidates fail to
gain market acceptance, we may be unable to earn sufficient
revenue to continue our business. If our product candidates do
not become widely accepted by physicians, patients, third-party
payors and other members of the medical community, it is
unlikely that we will ever become profitable.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>If we fail to obtain the capital necessary to fund our
research and development activities, we may be unable to
continue operations or we may be forced to share our rights to
commercialize our product candidates with third parties on terms
that may not be attractive to us.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Based on our current operating plans, and assuming the sale
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock in this offering at an initial public
offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share (the mid-point of the price range set forth on the cover
page of this prospectus), we believe that the proceeds from this
offering, together with our existing cash, restricted cash and
cash equivalents, will be sufficient to meet our anticipated
operating needs until mid-2007, and after that time we will
require additional capital. We believe that if we sell
the &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock in this offering at an initial public
offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share ($1.00 lower than the mid-point of the price range set
forth on the cover page), the resultant reduction in proceeds we
receive from the offering would cause us to require additional
capital earlier,
in&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
In addition, in budgeting for our activities following this
offering, we have relied on a number of assumptions, including
assumptions that we will enroll approximately 600&nbsp;patients
in our pivotal Phase&nbsp;III iloperidone trial and
approximately 300&nbsp;patients in our
<FONT style="white-space: nowrap">VEC-162</FONT> pivotal
Phase&nbsp;III trial for insomnia, that we will not engage in
further business development activities, that we will not expend
funds on the depot formulation of, or bipolar indication for,
iloperidone or on a Phase&nbsp;II trial of VEC-162 for
depression, that we will be able to continue the manufacturing
of our product candidates at commercially reasonable prices,
that we will be able to retain our key personnel, and that we
will not incur any significant contingent liabilities. We may
need to raise additional funds more quickly if one or more of
our assumptions prove to be incorrect or if we choose to expand
our product development efforts more rapidly than we presently
anticipate, and we may decide to raise additional funds even
before we need them if the conditions for raising capital are
favorable. We may seek to sell additional equity or debt
securities or obtain a bank credit facility. The sale of
additional equity or debt securities, if convertible, could
result in dilution to our stockholders. The incurrence of
indebtedness would result in increased fixed obligations and
could also result in covenants that would restrict our
operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We cannot assure you that additional funds will be available
when we need them on terms that are acceptable to us, or at all.
If we are unable to secure sufficient capital to fund our
research and development activities we may not be able to
continue operations or we may have to enter into strategic
collaborations that could require us to share commercial rights
to our products to a greater extent or at earlier stages in the
drug development process than we currently intend.
Collaborations that are consummated by us prior to
proof-of-efficacy and safety of a product candidate could impair
our ability to realize value from that product candidate.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>We have incurred operating losses in each year since our
inception and expect to continue to incur substantial and
increasing losses for the foreseeable future.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have a limited operating history. We have not generated any
revenue from product sales to date and we cannot estimate the
extent of our future losses. We do not currently have any
products that have been approved for commercial sale and we may
never generate revenue from selling products or achieve
profitability. We expect to continue to incur substantial and
increasing losses for the foreseeable future, particularly as we
increase our research and development, clinical trial and
administrative activity. As a result, we are uncertain when or
if we will achieve profitability and, if so, whether we will be
able to sustain it. We have been
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
engaged in identifying and developing compounds and product
candidates since March 2003. As of September&nbsp;30, 2005, we
have accumulated net losses of approximately $29.5&nbsp;million.
Our ability to achieve revenue and profitability is dependent on
our ability to complete the development of our product
candidates, conduct clinical trials, obtain necessary regulatory
approvals, and have our products manufactured and marketed. We
cannot assure you that we will be profitable even if we
successfully commercialize our products. Failure to become and
remain profitable may adversely affect the market price of our
common stock and our ability to raise capital and continue
operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>If our contract research organizations do not successfully
carry out their duties or if we lose our relationships with
contract research organizations, our drug development efforts
could be delayed.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are dependent on contract research organizations, third-party
vendors and investigators for pre-clinical testing and clinical
trials related to our drug discovery and development efforts and
we will likely continue to depend on them to assist in our
future discovery and development efforts. These parties are not
our employees and we cannot control the amount or timing of
resources that they devote to our programs. If they fail to
devote sufficient time and resources to our drug development
programs or if their performance is substandard, it will delay
the approval of our products. The parties with which we contract
for execution of our clinical trials play a significant role in
the conduct of the trials and the subsequent collection and
analysis of data. Their failure to meet their obligations could
adversely affect clinical development of our products. Moreover,
these parties may also have relationships with other commercial
entities, some of which may compete with us. If they assist our
competitors it could harm our competitive position.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If we lose our relationship with any one or more of these
parties, we could experience a significant delay in both
identifying another comparable provider and then contracting for
its services. We may be unable to retain an alternative provider
on reasonable terms, if at all. Even if we locate an alternative
provider, it is likely that this provider may need additional
time to respond to our needs and may not provide the same type
or level of service as the original provider. In addition, any
provider that we retain will be subject to current Good
Laboratory Practices, or cGLP, and similar foreign standards and
we do not have control over compliance with these regulations by
these providers. Consequently, if these practices and standards
are not adhered to by these providers, the development and
commercialization of our product candidates could be delayed.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Materials necessary to manufacture our product candidates
may not be available on commercially reasonable terms, or at
all, which may delay the development, regulatory approval and
commercialization of our product candidates.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We rely on the manufacturers of our product candidates to
purchase from third-party suppliers the materials necessary to
produce the compounds for our clinical trials. Suppliers may not
sell these materials to our manufacturers at the time we need
them or on commercially reasonable terms. We do not have any
control over the process or timing of the acquisition of these
materials by our manufacturers. Moreover, we currently do not
have any agreements for the commercial production of these
materials. If our manufacturers are unable to obtain these
materials for our clinical trials, product testing and potential
regulatory approval of our product candidates would be delayed,
significantly affecting our ability to develop our product
candidates. If our manufacturers or we are unable to purchase
these materials after
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
regulatory approval has been obtained for our product
candidates, the commercial launch of our product candidates
would be delayed or there would be a shortage in supply, which
would materially affect our ability to generate revenues from
the sale of our product candidates.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>We rely on a limited number of manufacturers for our
product candidates and our business will be seriously harmed if
these manufacturers are not able to satisfy our demand and
alternative sources are not available.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We do not have an in-house manufacturing capability and depend
completely on a small number of third-party manufacturers and
active pharmaceutical ingredient formulators for the manufacture
of our products. We do not have long-term agreements with any of
these third parties, and if they are unable or unwilling to
perform for any reason, we may not be able to locate alternative
acceptable manufacturers or formulators or enter into favorable
agreements with them. Any inability to acquire sufficient
quantities of our compounds in a timely manner from these third
parties could delay clinical trials and prevent us from
developing our product candidates in a cost-effective manner or
on a timely basis. In addition, manufacturers of our compounds
are subject to cGMP and similar foreign standards and we do not
have control over compliance with these regulations by our
manufacturers. If one of our contract manufacturers fails to
maintain compliance, the production of our product candidates
could be interrupted, resulting in delays and additional costs.
In addition, if the facilities of such manufacturers do not pass
a pre-approval plant inspection, the FDA will not grant
pre-market approval of our products.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our manufacturing strategy presents the following additional
risks:
</DIV>

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<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the manufacturing processes for
    <FONT style="white-space: nowrap">VEC-162</FONT> and
    <FONT style="white-space: nowrap">VSF-173</FONT> have not been
    tested in quantities needed for continued clinical trials or
    commercial sales, and delays in
    <FONT style="white-space: nowrap">scale-up</FONT> to commercial
    quantities could delay clinical trials, regulatory submissions
    and commercialization of our compounds</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    because most of our third-party manufacturers and formulators
    are located outside of the United States, there may be
    difficulties in importing our compounds or their components into
    the United States as a result of, among other things, FDA import
    inspections, incomplete or inaccurate import documentation or
    defective packaging</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    because of the complex nature of our compounds, our
    manufacturers may not be able to successfully manufacture our
    compounds in a cost effective and/or timely manner</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>We face substantial competition which may result in others
developing or commercializing products before or more
successfully than we do.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our future success will depend on our ability to demonstrate and
maintain a competitive advantage with respect to our product
candidates and our ability to identify and develop additional
products through the application of our PG expertise. Large,
fully integrated pharmaceutical companies, either alone or
together with collaborative partners, have substantially greater
financial resources and have significantly greater experience
than we do in:
</DIV>

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

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    undertaking pre-clinical testing and clinical trials</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    obtaining FDA and other regulatory approvals of products</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    manufacturing and marketing products</TD>
</TR>

</TABLE>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
These companies may invest heavily and quickly to discover and
develop novel products that could make our products obsolete.
Accordingly, our competitors may succeed in obtaining patent
protection, receiving FDA approval or commercializing superior
products or other competing products before we do.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are also aware of other companies that may currently be
engaged in the discovery and development of products and other
therapies that will compete with the product candidates that we
are developing. In addition, we expect to compete against
current market-leading products in the markets that we are
targeting.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>We have no experience selling, marketing or distributing
products and no internal capability to do so.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
At present, we have no sales or marketing personnel. In order to
commercialize any of our product candidates, we must either
acquire or internally develop sales, marketing and distribution
capabilities, or enter into collaborations with partners to
perform these services for us. We may not be able to establish
sales and distribution partnerships on acceptable terms or at
all, and if we do enter into a distribution arrangement, our
success will be dependent upon the performance of our partner.
In the event that we attempt to acquire or develop our own
<FONT style="white-space: nowrap">in-house</FONT> sales,
marketing and distribution capabilities, factors that may
inhibit our efforts to commercialize our products without
strategic partners or licensees include:
</DIV>

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our inability to recruit and retain adequate numbers of
    effective sales and marketing personnel</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the inability of sales personnel to obtain access to or persuade
    adequate numbers of physicians to prescribe our products</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the lack of complementary products to be offered by our sales
    personnel, which may put us at a competitive disadvantage
    against companies with broader product lines</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    unforeseen costs associated with creating our own sales and
    marketing team or with entering into a partnering agreement with
    an independent sales and marketing organization</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>We will need to increase the size of our organization, and
we may experience difficulties in managing our growth.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of September&nbsp;30, 2005, we had 30&nbsp;full-time
employees. We will need to continue to expand our managerial,
operational, financial and other resources in order to manage
and fund our operations, continue our development activities and
commercialize our product candidates. Our current personnel,
systems and facilities are not adequate to support this future
growth. To manage our growth, we must:
</DIV>

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

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

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    manage our internal development efforts effectively</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    improve our operational, financial, accounting and management
    controls, reporting systems and procedures</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    attract and retain sufficient numbers of talented employees</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We may be unable to successfully implement these tasks on a
larger scale and, accordingly, may not achieve our development
and commercialization goals.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>If we cannot identify, or enter into licensing
arrangements for, new product candidates, our ability to develop
a diverse product portfolio may be limited.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A component of our business strategy is acquiring rights to
develop and commercialize compounds discovered or developed by
other pharmaceutical and biotechnology companies for which we
may find effective uses and markets by using our unique
PG&nbsp;expertise. Competition for the acquisition of these
compounds is intense. If we are not able to identify
opportunities to acquire rights to commercialize additional
products, we may not be able to develop a diverse portfolio of
products and our business may be harmed. Additionally, it may
take substantial human and financial resources to secure
commercial rights to promising product candidates. Moreover, if
other firms develop PG capabilities, we may face increased
competition in identifying and acquiring additional product
candidates.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>If we lose key scientists or management personnel, or if
we fail to recruit additional highly skilled personnel, it will
impair our ability to identify, develop and commercialize
product candidates.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are highly dependent on principal members of our management
team and scientific staff, including our Chief Executive
Officer, Mihael H. Polymeropoulos,&nbsp;M.D. These executives
each have significant pharmaceutical industry experience. The
loss of any such executives, including Dr.&nbsp;Polymeropoulos,
or any other principal member of our management team or
scientific staff, would impair our ability to identify, develop
and market new products.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Product liability lawsuits could divert our resources,
result in substantial liabilities and reduce the commercial
potential of our products.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The risk that we may be sued on product liability claims is
inherent in the development of pharmaceutical products. For
example, we face a risk of product liability exposure related to
the testing of our product candidates in clinical trials and
will face even greater risks upon any commercialization by us of
our product candidates. We believe that we may be at a greater
risk of product liability claims relative to other
pharmaceutical companies because our compounds are intended to
treat behavioral disorders, and it is possible that we may be
held liable for the behavior and actions of patients who use our
compounds. These lawsuits may divert our management from
pursuing our business strategy and may be costly to defend. In
addition, if we are held liable in any of these lawsuits, we may
incur substantial liabilities and may be forced to limit or
forego further commercialization of one or more of our products.
Although we maintain general liability and product liability
insurance, this insurance may not fully cover potential
liabilities. In addition, inability to obtain or maintain
sufficient insurance coverage at an acceptable cost or otherwise
to protect against potential product liability claims could
prevent or inhibit the commercial production and sale of our
products.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Legislative or regulatory reform of the healthcare system
in the U.S. and foreign jurisdictions may affect our ability to
sell our products profitably.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The continuing efforts of the U.S. and foreign governments,
insurance companies, managed care organizations and other payors
of health care services to contain or reduce health care costs
may adversely affect our ability to set prices for our products
which we believe are fair, and our ability to generate revenues
and achieve and maintain profitability.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Specifically, in both the United States and some foreign
jurisdictions there have been a number of legislative and
regulatory proposals to change the healthcare system in ways
that could
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
affect our ability to sell our products profitably. In the
United States, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 reforms the way Medicare will cover
and reimburse for pharmaceutical products. This legislation
could decrease the coverage and price that we may receive for
our products. Other third-party payors are increasingly
challenging the prices charged for medical products and
services. It will be time-consuming and expensive for us to go
through the process of seeking reimbursement from Medicare and
private payors. Our products may not be considered cost
effective, and coverage and reimbursement may not be available
or sufficient to allow us to sell our products on a competitive
and profitable basis. Further federal and state proposals and
healthcare reforms are likely which could limit the prices that
can be charged for the drugs we develop and may further limit
our commercial opportunity. Our results of operations could be
materially adversely affected by the Medicare prescription drug
coverage legislation, by the possible effect of this legislation
on amounts that private insurers will pay and by other
healthcare reforms that may be enacted or adopted in the future.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In some foreign countries, including major markets in the
European Union and Japan, the pricing of prescription
pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities
can take six to twelve months or longer after the receipt of
regulatory marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be
required to conduct a clinical trial that compares the
cost-effectiveness of our product candidate to other available
therapies. If reimbursement of our products is unavailable or
limited in scope or amount or if pricing is set at
unsatisfactory levels, our business could be materially harmed.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Our quarterly operating results may fluctuate
significantly.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We expect our operating results to be subject to quarterly
fluctuations. The revenues we generate, if any, and our
operating results will be affected by numerous factors,
including:
</DIV>

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our addition or termination of development programs</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    variations in the level of expenses related to our existing
    three product candidates or future development programs</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our execution of collaborative, licensing or other arrangements,
    and the timing of payments we may make or receive under these
    arrangements</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    any intellectual property infringement lawsuit in which we may
    become involved</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    regulatory developments affecting our product candidates or
    those of our competitors</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If our quarterly operating results fall below the expectations
of investors or securities analysts, the price of our common
stock could decline substantially. Furthermore, any quarterly
fluctuations in our operating results may, in turn, cause the
price of our stock to fluctuate substantially. We believe that
quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an
indication of our future performance.
</DIV>

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<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Risks related to intellectual property and other legal
matters</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Our rights to develop and commercialize our product
candidates are subject in part to the terms and conditions of
licenses or sublicenses granted to us by other pharmaceutical
companies. With respect to VEC-162 and VSF-173, these terms and
conditions include options in favor of these pharmaceutical
companies to reacquire rights to commercialize and develop these
product candidates in certain circumstances.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Iloperidone is based in part on patents and other intellectual
property owned by Sanofi-Aventis and Novartis. Titan
Pharmaceuticals, Inc. holds an exclusive license from
Sanofi-Aventis to the intellectual property owned by
Sanofi-Aventis, and Titan has sublicensed its rights under such
license on an exclusive basis to Novartis. We have acquired
exclusive rights to this intellectual property through a further
sublicense from Novartis. Our rights with respect to this
intellectual property to develop and commercialize iloperidone
may terminate, in whole or in part, if we fail to meet certain
milestones contained in our sublicense agreement with Novartis.
We may also lose our rights to develop and commercialize
iloperidone if we fail to pay royalties to Novartis, if we fail
to comply with certain requirements in the sublicense regarding
our financial condition, or if we fail to comply with certain
restrictions regarding our other development activities.
Finally, our rights to develop and commercialize iloperidone may
be impaired if we do not cure breaches by Novartis and Titan of
similar obligations contained in these sublicense and license
agreements. In the event of an early termination of our
sublicense agreement, all rights licensed and developed by us
under this agreement may be extinguished, which would have a
material adverse effect on our business.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
VEC-162 is based in part on patents and other intellectual
property that we have licensed on an exclusive basis from
Bristol-Myers Squibb (BMS). Following the completion of our
Phase&nbsp;III program for
<FONT style="white-space: nowrap">VEC-162,</FONT> and in the
event that we have not entered into a development and
commercialization agreement with a third party covering
significant markets, BMS has retained an option to reacquire the
rights it has licensed to us to develop and commercialize
<FONT style="white-space: nowrap">VEC-162,</FONT> subject to
BMS&#146; payment of pre-determined royalties and milestone
payments to us. Additionally, BMS may terminate our license if
we fail to meet certain milestones or if we otherwise breach our
royalty or other obligations in the agreement. In the event that
BMS terminates our license due to our breach, all of our
material rights to
<FONT style="white-space: nowrap">VEC-162</FONT> (including
intellectual property we develop with respect to
<FONT style="white-space: nowrap">VEC-162)</FONT> will revert
back to BMS. Any termination or reversion of our rights to
develop or commercialize
<FONT style="white-space: nowrap">VEC-162,</FONT> including any
reacquisition by BMS of our rights, may have a material adverse
effect on our business.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<FONT style="white-space: nowrap">VSF-173</FONT> is based in
part on patents and other intellectual property that we have
licensed on an exclusive basis from Novartis. Novartis has the
option to reacquire rights to
<FONT style="white-space: nowrap">co-develop</FONT> and
exclusively commercialize
<FONT style="white-space: nowrap">VSF-173</FONT> following the
completion of the Phase&nbsp;II clinical trials, and an
additional option to reacquire exclusive commercialization
rights following the completion of the Phase&nbsp;III clinical
trials, subject in each case to Novartis&#146; payment of
pre-determined royalties and other payments to us. In the event
that Novartis chooses not to exercise either of these options
and we decide to enter into a partnering arrangement to help us
commercialize <FONT style="white-space: nowrap">VSF-173,</FONT>
Novartis has a right of first refusal to negotiate such an
agreement with us, as well as a right to submit a last matching
counteroffer regarding such an agreement. In addition, our
rights with respect to
<FONT style="white-space: nowrap">VSF-173</FONT> may terminate,
in whole or in part, if we fail to meet certain development and
commercialization milestones described in our license agreement,
if we fail to make royalty or milestone payments or if we do not
comply with requirements in our license agreement regarding our
financial condition. In the event of an early termination of our
license agreement, all rights licensed and developed by us under
this agreement may revert
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
back to Novartis. Any termination or reversion of our rights to
develop or commercialize
<FONT style="white-space: nowrap">VSF-173,</FONT> including any
reacquisition by Novartis of our rights, may have a material
adverse effect on our business.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>If our efforts to protect the proprietary nature of the
intellectual property related to our products are not adequate,
we may not be able to compete effectively in our markets.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition to the rights we have licensed from Novartis and BMS
relating to our product candidates, we rely upon intellectual
property we own relating to our products, including patents,
patent applications and trade secrets. As of September&nbsp;30,
2005 we owned 10&nbsp;pending patent applications in the United
States and one pending Patent Cooperation Treaty application,
which permits the pursuit of patents outside of the United
States, relating to our product candidates in clinical
development. Our patent applications may be challenged or fail
to result in issued patents and our existing or future patents
may be too narrow to prevent third parties from developing or
designing around these patents. In addition, we rely on trade
secret protection and confidentiality agreements to protect
certain proprietary know-how that is not patentable, for
processes for which patents are difficult to enforce and for any
other elements of our drug development processes that involve
proprietary know-how, information and technology that is not
covered by patent applications. While we require all of our
employees, consultants, advisors and any third parties who have
access to our proprietary know-how, information and technology
to enter into confidentiality agreements, we cannot be certain
that this know-how, information and technology will not be
disclosed or that competitors will not otherwise gain access to
our trade secrets or independently develop substantially
equivalent information and techniques. Further, the laws of some
foreign countries do not protect proprietary rights to the same
extent as the laws of the United States. As a result, we may
encounter significant problems in protecting and defending our
intellectual property both in the United States and abroad. If
we are unable to prevent material disclosure of the intellectual
property related to our technologies to third parties, we will
not be able to establish or maintain a competitive advantage in
our market.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>If we do not obtain protection under the Hatch-Waxman Act
and similar foreign legislation to extend our patents and to
obtain market exclusivity for our product candidates, our
business will be materially harmed.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The United States Drug Price Competition and Patent Term
Restoration Act of 1984, more commonly known as the
&#147;Hatch-Waxman Act,&#148; provides for an extension of
patent protection for drug compounds for a period of up to five
years to compensate for time spent in development. Assuming we
gain a five-year extension for each of our current product
candidates in clinical development, and that we continue to have
rights under our sublicense and license agreements with respect
to these product candidates, we would have exclusive rights to
iloperidone&#146;s United States NCE patent until 2016, to
<FONT style="white-space: nowrap">VEC-162&#146;s</FONT> United
States NCE patent until 2022 and to
<FONT style="white-space: nowrap">VSF-173&#146;s</FONT> United
States NCE patent until 2019. In Europe, similar legislative
enactments allow patent protection in the European Union to be
extended for up to five years through the grant of a
Supplementary Protection Certificate. Assuming we gain such a
five-year extension for each of our current product candidates
in clinical development, and that we continue to have rights
under our sublicense and license agreements with respect to
these product candidates, we would have exclusive rights to
iloperidone&#146;s European NCE patents until 2015, to
<FONT style="white-space: nowrap">VEC-162&#146;s</FONT> European
NCE patents until 2022 and to
<FONT style="white-space: nowrap">VSF-173&#146;s</FONT> European
NCE patents until 2017. Additionally, a recent directive in the
European Union provides that companies who receive regulatory
approval for a new compound will have a
<FONT style="white-space: nowrap">10-year</FONT> period of
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
market exclusivity for that compound (with the possibility of a
further one-year extension) in most EU countries, beginning on
the date of such European regulatory approval, regardless of
when the European NCE patent covering such compound expires. A
generic version of the approved drug may not be marketed or sold
during such market exclusivity period. This directive may be of
particular importance with respect to iloperidone, since the
European NCE patent for iloperidone will likely expire prior to
the end of this <FONT style="white-space: nowrap">10-year</FONT>
period of market exclusivity. However, there is no assurance
that we will receive the extensions of our patents or other
exclusive rights available under the Hatch-Waxman Act or similar
foreign legislation. If we fail to receive such extensions and
exclusive rights, our ability to prevent competitors from
manufacturing, marketing and selling generic versions of our
products will be materially harmed.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Litigation or third-party claims of intellectual property
infringement could require us to divert resources and may
prevent or delay our drug discovery and development
efforts.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our commercial success depends in part on our not infringing the
patents and proprietary rights of third parties. Third parties
may assert that we are employing their proprietary technology
without authorization. In addition, third parties may obtain
patents in the future and claim that use of our technologies
infringes upon these patents. Furthermore, parties making claims
against us may obtain injunctive or other equitable relief,
which could effectively block our ability to develop and
commercialize one or more of our product candidates. Defense of
these claims, regardless of their merit, would divert
substantial financial and employee resources from our business.
In the event of a successful claim of infringement against us,
we may have to pay substantial damages, obtain one or more
licenses from third parties or pay royalties. In addition, even
in the absence of litigation, we may need to obtain additional
licenses from third parties to advance our research or allow
commercialization of our product candidates. We may fail to
obtain any of these licenses at a reasonable cost or on
reasonable terms, if at all. In that event, we would be unable
to develop and commercialize further one or more of our product
candidates.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition, in the future we could be required to initiate
litigation to enforce our proprietary rights against
infringement by third parties. Prosecution of these claims to
enforce our rights against others could divert substantial
financial and employee resources from our business. If we fail
to enforce our proprietary rights against others, our business
will be harmed.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>If we use hazardous and biological materials in a manner
that causes injury or violates applicable law, we may be liable
for damages.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our research and development activities involve the controlled
use of potentially hazardous substances, including toxic
chemical and biological materials. In addition, our operations
produce hazardous waste products. Federal, state and local laws
and regulations govern the use, manufacture, storage, handling
and disposal of these hazardous materials. While we believe that
we are currently in compliance with these laws and regulations,
continued compliance may be expensive, and current and future
environmental regulations may impair our research, development
and manufacturing efforts. In addition, if we fail to comply
with these laws and regulations at any point in the future, we
may be subject to criminal sanctions and substantial civil
liabilities and could be required to suspend or modify our
operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Even if we continue to comply with all applicable laws and
regulations regarding hazardous materials, we cannot eliminate
the risk of accidental contamination or discharge and our
resultant liability for any injuries or other damages caused by
these accidents. Although we
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
maintain general liability insurance, this insurance may not
fully cover potential liabilities for these damages, and the
amount of uninsured liabilities may exceed our financial
resources and materially harm our business. In addition, our
inability to obtain or maintain sufficient insurance coverage at
an acceptable cost or otherwise to protect against potential
environmental claims could prevent or inhibit the commercial
production and sale of our products.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Our stock price may be extremely volatile and you may not
be able to resell your shares at or above the initial public
offering price.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Prior to this offering, there has been no public market for our
common stock. Negotiations between the underwriters and us will
determine the initial public offering price. This price may not
be indicative of future market prices. In addition, the stock
market has from time to time experienced significant price and
volume fluctuations, and the market prices of the securities of
life sciences companies without product revenues, such as ours,
have been highly volatile.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following factors, in addition to the other risk factors
described in this section, may also have a significant impact on
the market price of our common stock:
</DIV>

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    publicity regarding actual or potential testing or trial results
    or the outcome of regulatory review relating to products under
    development by us or our competitors</TD>
</TR>

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

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

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

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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    developments concerning any collaboration we may undertake</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    announcements of patent issuances or denials, technological
    innovations or new commercial products by us or our competitors</TD>
</TR>

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

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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    economic and other external factors beyond our control</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As a result of these factors, after this offering you might be
unable to resell your shares at or above the initial public
offering price.
</DIV>

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<B><I>An active trading market for our common stock may not
develop.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Prior to this offering, there has been no public market for our
common stock. Although we anticipate that our common stock will
be approved for listing on The Nasdaq National Market, an active
trading market for our shares may never develop or be sustained
following this offering. The initial public offering price for
our common stock will be determined through negotiations with
the underwriters. This initial public offering price may vary
from the market price of our common stock after the offering.
Investors may not be able to sell their common stock at or above
the initial public offering price.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>A substantial number of shares of our common stock could
be sold into the public market shortly after this offering,
which could depress our stock price.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
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. Once a trading market develops for our common
stock, many of our stockholders will have an opportunity to sell
their stock for the first time. These factors could also make it
difficult for us to raise additional capital by selling stock.
Please see the section entitled &#147;Shares eligible for future
sale&#148; for more information regarding these factors.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>You will incur immediate and substantial dilution in the
pro forma as adjusted net tangible book value of the stock you
purchase.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We estimate that the initial public offering price of our common
stock will be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. This amount is substantially higher than the pro forma as
adjusted net tangible book value that our outstanding common
stock will have immediately after this offering. Accordingly, if
you purchase shares of our common stock at the assumed initial
public offering price, you will incur immediate and substantial
dilution of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. If the holders of outstanding options or warrants
exercise those options or warrants, you will suffer further
dilution.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Our management will have broad discretion over the use of
the proceeds we receive in this offering and might not apply the
proceeds in ways that increase the value of your
investment.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our management will have broad discretion to use the net
proceeds from this offering, and you will be relying on the
judgment of our management regarding the application of these
proceeds. They might not apply the net proceeds of this offering
in ways that increase the value of your investment. We expect to
use the net proceeds from this offering for general corporate
purposes, including working capital and capital expenditures,
further clinical development of our current product candidates
and possible investments in, or acquisitions of, new product
candidates. We have not allocated these net proceeds for any
specific purposes. Our management might not be able to yield any
return on the investment and use of these net proceeds. You will
not have the opportunity to influence our decisions on how to
use the proceeds.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>If securities or industry analysts do not publish research
or reports or publish unfavorable research about our business,
our stock price and trading volume could decline.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our stock would
be negatively affected. In the event we obtain securities or
industry analyst coverage, if one or more of the analysts who
covers us downgrades our stock, our stock price would likely
decline. If one or more of these analysts ceases to cover us or
fails to publish regular reports on us, interest in the purchase
of our stock could decrease, which could cause our stock price
or trading volume to decline.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>We will incur increased costs as a result of being a
public company.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As a public company, we will incur significant legal,
accounting, reporting and other expenses that we did not incur
as a private company. We expect these rules and regulations to
increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. We also expect
these new rules and regulations may make it more difficult and
more expensive for us to obtain director and officer liability
insurance and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the
same or similar coverage. As a result, we may experience more
difficulty attracting and retaining qualified individuals to
serve on our board of directors or as executive officers. We
cannot predict or estimate the amount of additional costs we may
incur as a result of these requirements or the timing of such
costs.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Existing stockholders significantly influence us and could
delay or prevent an acquisition by a third party.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Upon completion of this offering, executive officers, key
employees and directors and their affiliates will beneficially
own, in the aggregate,
approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
of our outstanding common stock. As a result, these stockholders
will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of
directors and approval of significant corporate transactions,
which could have the effect of delaying or preventing a third
party from acquiring control over us. For information regarding
the ownership of our outstanding stock by our executive officers
and directors and their affiliates, please see &#147;Principal
stockholders.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Anti-takeover provisions in our charter and bylaws, and in
Delaware law, could prevent or delay a change in control of our
company.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change of control would be beneficial to
our existing stockholders. For more information, see
&#147;Description of capital stock&#151;Anti-takeover effects of
provisions of our amended and restated certificate of
incorporation, bylaws and Delaware law.&#148; In addition, our
amended and restated certificate of incorporation and by laws
may discourage, delay or prevent a change in our management or
control over us that stockholders may consider favorable. Our
amended and restated certificate of incorporation and bylaws,
which will be in effect as of the closing of this offering:
</DIV>

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    authorize the issuance of &#147;blank check&#148; preferred
    stock that could be issued by our board of directors to thwart a
    takeover attempt</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
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    <TD align="left">
    do not provide for cumulative voting in the election of
    directors, which would allow holders of less than a majority of
    the stock to elect some directors</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    establish a classified board of directors, as a result of which
    the successors to the directors whose terms have expired will be
    elected to serve from the time of election and qualification
    until the third annual meeting following their election</TD>
</TR>

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    require that directors only be removed from office for cause</TD>
</TR>

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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    provide that vacancies on the board of directors, including
    newly-created directorships, may be filled only by a majority
    vote of directors then in office</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    limit who may call special meetings of stockholders</TD>
</TR>

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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    prohibit stockholder action by written consent, requiring all
    actions to be taken at a meeting of the stockholders</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    establish advance notice requirements for nominating candidates
    for election to the board of directors or for proposing matters
    that can be acted upon by stockholders at stockholder meetings</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
For information regarding these and other provisions, please see
&#147;Description of capital stock.&#148;
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Completion of this offering may limit our ability to use
our net operating loss carryforwards.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of September&nbsp;30, 2005, we had substantial federal and
state net operating loss carryforwards. Under the provisions of
the Internal Revenue Code, substantial changes in our ownership
may limit the amount of net operating loss carryforwards that
can be utilized annually in the future to offset taxable income.
We believe that, as a result of this offering, it is possible
that a change in our ownership will be deemed to have occurred.
If such a change in our ownership occurs, our ability to use our
net operating loss carryforwards in any fiscal year may be
significantly limited under these provisions.
</DIV>

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<A name='103'></A>
</DIV>

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<B>Forward-looking statements</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
This prospectus includes &#147;forward-looking statements,&#148;
as defined by federal securities laws, with respect to our
financial condition, results of operations and business, and our
expectations or beliefs concerning future events, including
increases in operating margins. Words such as, but not limited
to, &#147;believe,&#148; &#147;expect,&#148;
&#147;anticipate,&#148; &#147;estimate,&#148;
&#147;intend,&#148; &#147;plan,&#148; &#147;targets,&#148;
&#147;likely,&#148; &#147;will,&#148; &#147;would,&#148;
&#147;could,&#148; and similar expressions or phrases identify
forward-looking statements.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
All forward-looking statements involve risks and uncertainties.
The occurrence of the events described, and the achievement of
the expected results, depend on many events, some or all of
which are not predictable or within our control. Actual results
may differ materially from expected results. Factors that may
cause actual results to differ from expected results include,
among others:
</DIV>

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    a failure of our product candidates to be demonstrably safe and
    effective</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
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    <TD>&#149;&nbsp;</TD>
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    a failure to obtain regulatory approval for our products or to
    comply with ongoing regulatory requirements</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a lack of acceptance of our product candidates in the
    marketplace, or a failure to become or remain profitable</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our inability to obtain the capital necessary to fund our
    research and development activities</TD>
</TR>

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

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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our failure to identify or obtain rights to new product
    candidates</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a failure to develop or obtain sales, marketing and distribution
    resources and expertise or to otherwise manage our growth</TD>
</TR>

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    <TD style="font-size: 6pt">&nbsp;</TD>
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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a loss of any of our key scientists or management personnel</TD>
</TR>

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    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    losses incurred from product liability claims made against us</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a loss of rights to develop and commercialize our products under
    our license and sublicense agreements</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the increased expenses and administrative workload associated
    with being a public company</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
All future written and verbal forward-looking statements
attributable to us or any person acting on our behalf are
expressly qualified in their entirety by the cautionary
statements contained or referred to in this section. We
undertake no obligation, and specifically decline any
obligation, to update or revise publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this
prospectus might not occur.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
See the section entitled &#147;Risk factors&#148; for a more
complete discussion of these and other risks and uncertainties.
The risk factors described in this prospectus are not
necessarily all of the important factors that could cause actual
results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable
factors also could affect our results. Consequently, there can
be no assurance that the actual results or developments
anticipated by us will be realized or, even if substantially
realized, that they will have the expected consequences to, or
effects on, us. Given these uncertainties, prospective investors
are cautioned not to place undue reliance on such
forward-looking statements.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">25

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='104'></A>
</DIV>

<!-- link1 "Use of proceeds" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Use of proceeds</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We estimate that we will receive approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
in net proceeds from the sale of our 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 (the midpoint of the initial public offering price range)
and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us. A
$1.00 increase (decrease) in the assumed initial public offering
price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share would increase (decrease) the net proceeds to us from this
offering by
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us. Our net proceeds
will increase by approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
if the underwriters&#146; over-allotment option is exercised in
full.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We currently intend to use
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
of the estimated net proceeds from this offering for research,
pre-clinical development and clinical trials. The balance of
such net proceeds will be used for general corporate purposes,
including working capital and the acquisition of pharmaceutical
products and businesses that are complementary to our own.
Currently, we have no specific plans or commitments with respect
to any acquisition. We cannot assure you that we will complete
any acquisitions or that, if completed, any acquisition will be
successful.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The amount and timing of our actual expenditures will depend on
numerous factors, including the progress of our research and
development activities and clinical trials, the number and
breadth of our product development programs, our ability to
establish and maintain corporate collaborations and other
arrangements and the amount of cash, if any, generated by our
operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We will retain broad discretion in the allocation and use of the
remaining net proceeds of this offering. Pending application of
the net proceeds, as described above, we intend to invest any
remaining proceeds in short-term, investment-grade,
interest-bearing securities.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='105'></A>
</DIV>

<!-- link1 "Dividend policy" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Dividend policy</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have never declared or paid any dividends on our capital
stock. We currently intend to retain any future earnings to
finance our research and development efforts, the further
development of our PG expertise and the expansion of our
business and do not intend to declare or pay cash dividends on
our common stock in the foreseeable future. Any future
determination to pay dividends will be at the discretion of our
board of directors and will depend upon results of operations,
financial condition, contractual restrictions, restrictions
imposed by applicable law and other factors our board of
directors deems relevant.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">26

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='106'></A>
</DIV>

<!-- link1 "Capitalization" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Capitalization</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table sets forth the following information:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our actual capitalization as of September&nbsp;30, 2005</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our pro forma capitalization after giving effect to the
    conversion of all outstanding shares of preferred stock into
    common stock upon the completion of this offering</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our pro forma as adjusted capitalization to reflect our receipt
    of the estimated net proceeds from 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, after deducting the
    underwriting discounts and commissions and estimated offering
    expenses, the filing of a new certificate of incorporation after
    the closing of this offering and the application of our proceeds
    from this offering</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
This table excludes the following shares:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    5,348,975&nbsp;shares of common stock available as of
    September&nbsp;30, 2005 for issuance under our Management Equity
    Plan and agreements entered into pursuant to such Plan</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    12,195,129&nbsp;shares of Series&nbsp;B Preferred Stock issued
    on December&nbsp;9, 2005</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    166,660&nbsp;shares of common stock available for issuance upon
    the exercise of outstanding warrants</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
See &#147;Management&#151; Employee benefit plans,&#148; and
Note&nbsp;10 of &#147;Notes to consolidated financial
statements&#148; for a description of our equity plans.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="52%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


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

<TR style="font-size: 8pt;">
    <TD colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30, 2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Pro forma</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Actual</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">pro forma</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">as adjusted</FONT></B></TD><TD></TD>
</TR>


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

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Convertible Preferred stock,
    $0.001&nbsp;par value; 40,081,308&nbsp;shares authorized,
    40,081,308&nbsp;shares issued and outstanding;
    40,081,308&nbsp;shares authorized, no shares outstanding on a
    pro forma basis; &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    authorized, no shares outstanding on a pro forma as adjusted
    basis, respectively
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">46,808,569</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stockholders&#146; equity:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Common stock, $0.001&nbsp;par
    value; 50,000,000&nbsp;shares authorized, 150,739&nbsp;shares
    issued and outstanding; 50,000,000&nbsp;shares authorized,
    40,232,047&nbsp;shares issued and outstanding on a pro forma
    basis, and &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares issued and
    outstanding on a pro forma as adjusted basis, respectively
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">151</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">40,232</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Additional paid-in capital(1)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,049,479</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">64,817,967</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(13,862,408</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(13,862,408</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,485,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,485,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total stockholders&#146; equity(1)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,486,961</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,486,961</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total capitalization(1)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,486,961</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,486,961</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="14" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;A $1.00 increase (decrease) in the assumed initial
public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per share would
increase (decrease) each of additional paid-in capital, total
stockholders&#146; equity and total capitalization by
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">27

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='107'></A>
</DIV>

<!-- link1 "Dilution" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Dilution</B>
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of September&nbsp;30, 2005, our net tangible book value was
approximately $21.5&nbsp;million, or $142.54&nbsp;per share of
common stock. Our net tangible book value per share represents
the amount of our total tangible assets reduced by the amount of
our total liabilities, divided by the number of shares of our
common stock outstanding as of September&nbsp;30, 2005, before
giving effect to any conversion of our preferred stock into
common stock. Our pro forma net tangible book value as of
September&nbsp;30, 2005 was approximately $21.5&nbsp;million, or
$0.53&nbsp;per share of common stock. Our pro forma net tangible
book value per share represents the amount to our total tangible
assets reduced by the amount of our total liabilities, divided
by the total number of shares of our common stock outstanding as
of September&nbsp;30, 2005, after giving effect to the
conversion of our preferred stock into common stock upon
completion of this offering. After giving effect to our sale in
this offering
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock at an assumed initial public offering price
of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share (the midpoint of the price range set forth on the cover
page of this prospectus) and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value as
of September&nbsp;30, 2005 would have been
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million,
or
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share of our common stock. This represents an immediate increase
of net tangible book value of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to our existing stockholders and an immediate dilution of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to investors purchasing shares in this offering.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table illustrates this per share dilution:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="74%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>

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

</TR>

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

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net tangible book value per share
    applicable to common stockholders as of September&nbsp;30, 2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">142.54</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pro forma net tangible book value
    per share applicable to common stockholders as of
    September&nbsp;30, 2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.53</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Increase in pro forma net tangible
    book value per share attributable to investors purchasing shares
    in this offering
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

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

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

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Dilution in pro forma net tangible
    book value per share to investors purchasing shares in this
    offering
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A $1.00 increase (decrease) in the assumed initial public
offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share would increase (decrease) our pro forma net tangible book
value per share after this offering by
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share and the dilution in pro forma net tangible book value per
share to investors in this offering by
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, assuming that the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same and
after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If the underwriters exercise their option to purchase additional
shares of our common stock in full in this offering, the pro
forma net tangible book value per share after the offering would
be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, the increase in pro forma net tangible book value per
share to existing
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">28

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
stockholders would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share and the dilution to new investors purchasing shares in
this offering would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table presents on a pro forma basis as of
September&nbsp;30, 2005, after giving effect to the conversion
of all outstanding shares of preferred stock into common stock
upon completion of this offering, the differences between the
existing stockholders and the purchasers of shares in the
offering with respect to the number of shares purchased from us,
the total consideration paid and the average price paid per
share:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="21" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Shares purchased</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Total consideration</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Average</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">price per</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Number</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Percent</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Amount</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Percent</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">share</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="21" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Existing stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">40,232,047</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">47,018,083</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1.17</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">New investors(1)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="19" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="22" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;A $1.00 increase (decrease) in the assumed initial
public offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per share would
increase (decrease) the amount of total consideration to
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The discussion and the tables above assume no exercise of stock
options or warrants outstanding on September&nbsp;30, 2005 and
no issuance of shares reserved for future issuance under our
equity compensation plans. In addition, the numbers set forth in
the table above reflect the conversion of all shares of our
outstanding preferred stock into shares of common stock upon
completion of this offering. As of September&nbsp;30, 2005,
there were:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    3,783,490&nbsp;shares of common stock issuable upon exercise of
    outstanding options, each with an exercise price of
    $0.10&nbsp;per share</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    166,660&nbsp;shares of common stock issuable upon exercise of
    outstanding warrants with an exercise price of $0.40&nbsp;per
    share</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an additional 1,565,485&nbsp;shares reserved for future stock
    option grants and purchases under our existing equity
    compensation plans</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If the underwriters&#146; over-allotment option is exercised in
full, the following will occur:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the number of shares held by new investors will be increased
    to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;or
    approximately &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% of the total
    number of shares of our common stock outstanding after this
    offering</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">29

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='108'></A>
</DIV>

<!-- link1 "Selected consolidated financial data" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Selected consolidated financial data</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The consolidated statements of operations data for the period of
March&nbsp;13, 2003 (inception)&nbsp;to December&nbsp;31, 2003
and the year ended December&nbsp;31, 2004 and the consolidated
balance sheet data at December&nbsp;31, 2003 and 2004 are
derived from our audited consolidated financial statements
included in this prospectus. The consolidated statements of
operations data for the nine months ended September&nbsp;30,
2004 and 2005, and the consolidated balance sheet data at
September&nbsp;30, 2004 and September&nbsp;30, 2005, are each
derived from our unaudited consolidated financial statements
included in this prospectus. The unaudited consolidated
financial statements include, in the opinion of management, all
adjustments, consisting of only recurring adjustments, that
management considers necessary for the fair presentation of the
financial information set forth in those statements. The
historical results are not necessarily indicative of the results
to be expected in future periods.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following data should be read together with our consolidated
financial statements and accompanying notes and the section
entitled &#147;Management&#146;s discussion and analysis of
financial condition and results of operations&#148; included in
this prospectus.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="10">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">(unaudited</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">(unaudited</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Statements of operations
    data</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Revenue
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">47,565</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,980</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,980</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Operating expenses:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Research and development
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,010,532</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,442,983</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,033,488</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">11,641,565</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">General and administrative
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,052,659</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,119,394</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,267,485</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,587,147</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total operating expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,063,191</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,562,377</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,300,973</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">17,228,712</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Loss from operations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,015,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,528,397</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,266,993</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,228,712</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest and other income, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">44,805</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">59,060</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,956</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">188,288</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss before tax expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,469,337</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,254,037</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,040,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Tax expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,949</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,733</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net Loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,257,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,040,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Beneficial conversion feature&#151;
    deemed dividend to preferred stockholders(1)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(18,500,005</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss attributable to common
    stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,257,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(35,540,429</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss per share applicable to
    common stockholders, basic and diluted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(297.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(947.43</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(625.78</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(934.93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Shares used in computing net loss
    per share, basic and diluted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,014</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;In September 2005, we completed the sale of an
additional 15,040,654&nbsp;shares of Series&nbsp;B Preferred
Stock for proceeds of approximately $18.5&nbsp;million. After
evaluating the fair value of our common stock obtainable upon
conversion by the stockholders, we determined that the issuance
of the Series&nbsp;B Preferred Stock sold in September 2005
resulted in a beneficial
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">30

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff;">
conversion feature of approximately $18.5&nbsp;million which was
fully accreted in September 2005 and is recorded as a deemed
dividend to preferred stockholders for the nine-month period
ended September&nbsp;30, 2005.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="54%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="12" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">As of December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">As of</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>



<TR valign="bottom" style="font-size: 1px">
    <TD colspan="12" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD colspan="9">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Balance sheet data</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cash, restricted cash and cash
    equivalents
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,165,722</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,259,770</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,264,920</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Working capital
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,204,248</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,827,621</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,145,973</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,385,913</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">17,752,241</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24,288,683</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total liabilities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,378,880</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,808,654</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,801,722</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Convertible preferred stock
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,963,541</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">28,308,564</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">46,808,569</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deficit accumulated during the
    development stage
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(12,445,107</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,485,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,007,033</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15,943,587</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,486,961</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">31

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='109'></A>
</DIV>

<!-- link1 "Management&#146;s discussion and analysis of financial condition and results of operations" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Management&#146;s discussion and analysis of financial
condition</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>and results of operations</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>You should read the following discussion and analysis of our
financial condition and results of operations together with
&#147;Selected Financial Data&#148; and our consolidated
financial statements and related notes appearing at the end of
this prospectus. Some of the information contained in this
discussion and analysis or set forth elsewhere in this
prospectus include historical information and other information
with respect to our plans and strategy for our business and
contain forward-looking statements that involve risk,
uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking
statements as a result of certain factors, including but not
limited to those set forth under the &#147;Risk factors&#148;
section of this prospectus and elsewhere in this prospectus.</I>
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Since we began our operations in March 2003, we have devoted
substantially all of our resources to the in-licensing and
clinical development of small molecule therapeutics for various
central nervous system disorders. Our lead product candidate,
iloperidone, is an atypical antipsychotic for the treatment of
schizophrenia and bipolar disorder and is in a pivotal
Phase&nbsp;III trial for schizophrenia. Our second product
candidate, VEC-162, is a melatonin agonist for the treatment of
insomnia and depression which is entering a pivotal
Phase&nbsp;III trial for insomnia. VEC-162 is also ready for
Phase&nbsp;II trials for the treatment of depression. Our third
product candidate, VSF-173, is a compound for the treatment of
excessive daytime sleepiness and is ready for a Phase&nbsp;II
trial.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We expect to complete our pivotal Phase&nbsp;III trial for
iloperidone in the first half of 2007. If this trial is
successful, we will file an NDA&nbsp;for approval with the
FDA&nbsp;later that year. We recently generated positive
efficacy and safety data in a Phase&nbsp;II trial of VEC-162 for
insomnia and expect to begin a Phase&nbsp;III trial early in
2006. We also expect to begin a Phase&nbsp;II trial of VSF-173
for excessive daytime sleepiness in the second half of 2006.
Assuming successful outcomes of our clinical trials and approval
by the FDA, we expect to commercialize iloperidone and VSF-173
with our own sales force in the U.S. and expect to commercialize
VEC-162 through a strategic partnership with a global
pharmaceutical company.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Based on our current operating plans, and assuming the sale
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock in this offering at an initial public
offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share (the mid-point of the price range set forth on the cover
page of this prospectus), we believe that the proceeds from this
offering, together with our existing cash, restricted cash and
cash equivalents, will be sufficient to meet our anticipated
operating needs until mid-2007, and after that time we will
require additional capital. We believe that if we sell
the &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of our common stock in this offering at an initial public
offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share ($1.00 lower than the mid-point of the price range set
forth on the cover page), the resultant reduction in proceeds we
receive from the offering would cause us to require additional
capital earlier,
in &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
In addition, in budgeting for our activities following this
offering, we have relied on a number of assumptions, including
assumptions that we will enroll approximately 600&nbsp;patients
in our pivotal Phase&nbsp;III iloperidone trial and
approximately 300&nbsp;patients in our VEC-162 pivotal
Phase&nbsp;III trial for insomnia, that we will not engage in
further business development activities, that we will not expend
funds on the depot formulation of, or bipolar indication for,
iloperidone or on a Phase&nbsp;II trial of VEC-162 for
depression, that we will be able to continue the manufacturing
of our product candidates at commercially reasonable prices,
that we will
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">32

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
be able to retain our key personnel, and that we will not incur
any significant contingent liabilities. We may need to raise
additional funds more quickly if one or more of our assumptions
prove to be incorrect or if we choose to expand our product
development efforts more rapidly than we presently anticipate,
and we may decide to raise additional funds even before we need
them if the conditions for raising capital are favorable. We may
seek to sell additional equity or debt securities or obtain a
bank credit facility. The sale of additional equity or debt
securities, if convertible, could result in dilution to our
stockholders. The incurrence of indebtedness would result in
increased fixed obligations and could also result in covenants
that would restrict our operations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In March and June 2004 we entered into separate license
agreements with Novartis and Bristol-Myers Squibb for the
exclusive rights to develop and commercialize our three
compounds in clinical development. In consideration for these
rights, we paid a $500,000 non-refundable fee for each of the
compounds. We are also obligated to make additional payments
upon the achievement of specific clinical and commercial
milestones, as well as the payment of product royalties based on
the net sales of the licensed products. The amount, timing and
likelihood of these potential payments will depend on the
occurrence of future events that may or may not occur, such as
the approval by the FDA for the sale of one or more of our
product candidates.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Revenues.</I> We have generated some revenue under research
and development contracts that were derived principally from
consulting agreements we entered into during our
<FONT style="white-space: nowrap">start-up</FONT> phase to
defray research costs. We completed our obligations under these
agreements and no longer seek such arrangements.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have not generated any other operating revenue since our
inception. Any revenue that we may receive in the near future is
expected to consist primarily of license fees, milestone
payments and research and development reimbursement payments to
be received from partners. If our development efforts result in
clinical success, regulatory approval and successful
commercialization of our products, we could generate revenue
from sales of our products and from receipt of royalties on
sales of licensed products.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Research and development expenses.</I> We expect our research
and development expenses to increase as we continue to develop
our product candidates. These expenses consist primarily of fees
paid to third-party professional service providers in connection
with the services they provide for our clinical trials, costs of
contract manufacturing services, costs of materials used in
clinical trials and research and development, depreciation of
capital resources used to develop our products, and all related
facilities costs. We expense research and development costs as
incurred, including payments made to date under our license
agreements. We believe that significant investment in product
development is a competitive necessity and plan to continue
these investments in order to realize the potential of our
product candidates and PG expertise. From inception through
September&nbsp;30, 2005, we incurred research and development
expenses in the aggregate of approximately $21.1&nbsp;million,
including stock-based compensation expenses of approximately
$660,000. We expect to incur licensing costs in the future that
could be substantial, as we continue our efforts to evaluate
potential in-license product candidates.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">33

</FONT>

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table summarizes our product development
initiatives for the period from March&nbsp;13, 2003
(inception)&nbsp;to December&nbsp;31, 2003, the year ended
December&nbsp;31, 2004 and for the nine months ended
September&nbsp;30, 2004 and 2005. Included in this table is the
research and development expense recognized in connection with
our product candidates in clinical development. Included in
&#147;Other product candidates&#148; are the costs directly
related to research initiatives for all other product
candidates. The numbers in this table have not been audited.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="26%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="21" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003(2)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="21" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Direct Project Costs(1)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Iloperidone
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,123,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">711,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,423,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,546,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">VEC-162
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,221,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,851,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,057,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,278,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">VSF-173
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">568,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">531,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">707,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,275,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Other Product Candidates
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,037,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">945,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">608,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,645,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="19" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total Direct Product Costs
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,949,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,038,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,795,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,744,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="19" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Indirect Project Costs(1)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Facility(3)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">259,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">199,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">185,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">444,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Depreciation
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">69,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">345,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">140,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">281,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">695,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Other Indirect Overhead
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,942,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">890,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">656,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">380,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,212,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="19" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total Indirect Expenses
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,011,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,494,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">995,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">846,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,351,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="19" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Total Research&nbsp;&#38;
    Development Expenses
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,011,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,443,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,033,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">11,641,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,095,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="22" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;Many of our research and development costs are not
attributable to any individual project because we share
resources across several development projects. We record direct
costs, including personnel costs and related benefits and
stock-based compensation, on a project-by-project basis. We
record indirect costs that support a number of our research and
development activities in the aggregate.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(2)&nbsp;In 2003, there were no active development programs in
process for our product candidates listed in the table.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(3)&nbsp;In 2003, all facility-related costs were allocated to
general and administrative expenses.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have allocated
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million
of the proceeds of this offering for research and development,
including pre-clinical development and clinical trials.
Conducting clinical trials is a time-consuming and expensive
process. Currently, iloperidone is in a pivotal Phase&nbsp;III
trial, and VEC-162 is anticipated to begin pivotal
Phase&nbsp;III trials early in 2006. VSF-173 may enter
Phase&nbsp;II clinical trials in late 2006. The commencement and
rate of completion of clinical trials for our products may be
delayed by many factors, including, but not limited to:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    lack of efficacy during the clinical trials</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    slower-than-expected rate of patient recruitment</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    government or regulatory delays</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">34

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition, we may encounter regulatory delays or rejections as
a result of many factors, including results that do not support
our claims, perceived defects in the design of clinical trials
and changes in regulatory policy during the period of product
development. Our business, financial condition and results of
operations may be adversely affected by any delays in, or
termination of, our clinical trials or a determination by the
FDA that the results of our trials are inadequate to justify
regulatory approval. As part of our commercialization strategy,
we may seek to establish collaborative relationships for some of
our products in order to help us develop and market some of
these product candidates. There can be no assurance that we will
be successful in doing so. As a result of these risks and
uncertainties, we are unable to estimate the specific timing and
future costs of our clinical development programs or the timing
of material cash inflows, if any, from our product candidates.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>General and administrative expenses.</I> General and
administrative expenses consist primarily of salaries and other
related costs for personnel serving executive, finance,
accounting, information technology and human resource functions.
Other costs include facility costs not otherwise included in
research and development expense and professional fees for legal
and accounting services. We expect that our general and
administrative expenses will increase as we add personnel and
become subject to the reporting obligations applicable to public
companies. From inception through September&nbsp;30, 2005, we
incurred expenses in the aggregate of approximately
$8.8&nbsp;million, including stock-based compensation expenses
of approximately $3.4&nbsp;million, on general and
administrative expenses.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Stock-based compensation.</I> We have recorded deferred
stock-based compensation expense in connection with the grant of
stock options to employees. Deferred stock-based compensation
for options granted to employees is the difference between the
fair value for financial reporting purposes of our common stock
on the date such options were granted and their exercise price.
We recorded deferred stock-based compensation and additional
paid-in capital of approximately $281,000 in the aggregate and
approximately $13.1&nbsp;million in the aggregate in the year
ended December&nbsp;31, 2004 and the nine months ended
September&nbsp;30, 2005, respectively, related to stock options
granted to employees. These amounts were recorded as a component
of stockholders&#146; equity and are being amortized as charges
to operations over the vesting periods of the options. We
recorded amortization of deferred stock-based compensation of
approximately $23,000 and approximately $567,000 for the year
ended December&nbsp;31, 2004 and the nine month period ended
September&nbsp;30, 2005, respectively. For options granted to
employees through September&nbsp;30, 2005, we expect to record
additional amortization of deferred stock-based compensation in
the following approximate amounts: $828,000 during the remainder
of 2005, $3.3&nbsp;million in 2006, $3.3&nbsp;million in 2007,
$3.3&nbsp;million in 2008 and $2.0&nbsp;million in 2009.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In August 2004, we approved a modification to an employee&#146;s
stock option awards at time of employment termination. The
modification was to accelerate a portion of the unvested stock
options so the shares could be immediately exercisable.
According to FASB Interpretation No.&nbsp;44,
<I>&#147;Accounting for Certain Transactions involving Stock
Compensation&#148;</I> (FIN&nbsp;44), the result of such a
modification is to remeasure the stock options that were
modified. The remeasurement of the stock options resulted in an
immediate charge of approximately $15,000, which was included in
general and administrative expense for the year ended
December&nbsp;31, 2004.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">35

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In February 2005, the board of directors approved a modification
to all outstanding granted stock option awards, repricing the
options from their original exercise price of $0.40 to $0.10.
According to FIN&nbsp;44, the result of such a modification is
to account for the modified stock option awards as variable from
the date of the modification to the date the awards are
exercised, forfeited, or cancelled. For the nine month period
ended September&nbsp;30, 2005, we remeasured approximately
1.1&nbsp;million outstanding stock options, resulting in an
initial deferred stock compensation of approximately
$1.6&nbsp;million. Compensation expense relating to the
remeasurement of modified stock options was approximately
$3.5&nbsp;million for the nine month period ended
September&nbsp;30, 2005, which includes approximately
$3.0&nbsp;million of immediate stock compensation charges for
vested shares at the time of remeasurement for the
nine&nbsp;month period ended September&nbsp;30, 2005. We expect
to record additional amortization of deferred stock-based
compensation in the following approximate amounts: $204,000
during the remainder of 2005, $550,000 in 2006, $249,000 in 2007
and $64,000 in 2008.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
According to
<FONT style="white-space: nowrap">EITF&nbsp;00-23,</FONT>
<I>&#147;Issues Related to the Accounting for Stock Compensation
under APB&nbsp;Opinion No.&nbsp;25 and FASB Interpretation
No.&nbsp;44,&nbsp;&#148;</I> FASB Interpretation No.&nbsp;28,
<I>&#147;Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans and interpretation of APB
Opinions No.&nbsp;15 and 25&#148;</I> (FIN&nbsp;28), is required
for variable awards. FIN&nbsp;28 specifies that compensation
should be measured at the end of each period as the amount by
which the quoted market value of the shares of the
enterprises&#146;s stock covered by the grant exceeds the option
price or value specified under the plan and that amount should
be accrued as a charge to expense over the periods the employee
performs the related services.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
During the quarter ended December&nbsp;31, 2005, the board of
directors granted additional options to purchase up to
1.4&nbsp;million&nbsp;shares of common stock to employees. We
will record deferred stock-based compensation and additional
paid-in capital of approximately $5.9&nbsp;million in the fourth
quarter of 2005 for options granted to employees, which will be
amortized as charges to operations over the vesting periods for
the options. For options granted to employees during the fourth
quarter of 2005, we expect to record approximate additional
amortization of deferred stock-based compensation in the
following approximate amounts: $152,000 during the remainder of
2005, $1.5&nbsp;million in 2006, 2007, and 2008 and
$1.3&nbsp;million in 2009.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">36

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The table below summarizes the amortization of deferred
stock-based compensation to be expensed, including the fourth
quarter of 2005 remeasurement of stock options modified in
February 2005 and those stock options granted during the fourth
quarter of 2005. This table does not reflect the possible
modifications that may occur to the option grants for such
events as accelerations, forfeitures, terminations or exercises
(in thousands):
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="28" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Stock Base</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Compensation</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">from March&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Total</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="19">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2003 (inception)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Future Stock</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">October to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">to September&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Based</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">December</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">Compensation</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2006</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2007</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2008</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">2009</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="28" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stock options granted through
    September&nbsp;30, 2005 that were below fair value
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">590</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,795</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">828</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,336</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,312</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,289</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,030</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Modification to an employee&#146;s
    stock option awards
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Remeasurement of stock options
    modified in February 2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,524</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,067</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">204</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">550</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">249</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">64</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2005 fourth quarter remeasurement
    of stock options modified in February 2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">199</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">156</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">28</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stock options granted during fourth
    quarter of 2005 that were below fair value
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,864</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">152</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,466</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,466</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,466</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,314</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="27" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total amortization of deferred
    stock based compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,129</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">19,925</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,340</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,380</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,039</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,822</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,344</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="29" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe that the adoption of FAS&nbsp;123R in the beginning
of 2006 will have an effect on the additional amortization of
deferred stock-based compensation for future periods, but we do
not know the specific impact of the adoption because we have not
determined which transition method we will adopt.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Beneficial conversion feature.</I> In September 2005, we
completed the sale of an additional 15,040,654&nbsp;shares of
Series&nbsp;B Preferred Stock for proceeds of approximately
$18.5&nbsp;million. After evaluating the fair value of our
common stock obtainable upon conversion by the stockholders, we
determined that the issuance of the Series&nbsp;B Preferred
Stock sold in September 2005 resulted in a beneficial conversion
feature calculated in accordance with EITF Issue
<FONT style="white-space: nowrap">No.&nbsp;98-5,</FONT>
<I>&#147;Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios,&#148;</I> as interpreted by EITF Issue
<FONT style="white-space: nowrap">No.&nbsp;00-27,</FONT>
<I>&#147;Application of Issue
<FONT style="white-space: nowrap">No.&nbsp;98-5</FONT> to
Certain Convertible Instruments,&#148;</I> of approximately
$18.5&nbsp;million which was fully accreted in September 2005
and is recorded as a deemed dividend to preferred stockholders
for the nine-month period ended September&nbsp;30, 2005.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">37

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In December 2005, we closed an additional private placement of
12,195,129&nbsp;shares of Series&nbsp;B Preferred Stock for
proceeds of approximately $15&nbsp;million. We evaluated the
fair value of our common stock obtainable upon conversion by the
stockholders and determined that the issuance of such
convertible securities results in a beneficial conversion
feature of approximately $15&nbsp;million. This amount will be
recorded as a deemed dividend to preferred stockholders for the
year ended December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Interest and other income, net.</I> Interest income consists
of interest earned on our cash, restricted cash and cash
equivalents and short-term investments. Interest expense
consists of interest incurred on equipment debt. Other expense
consists of cumulative foreign currency translation adjustments
related to our wholly owned foreign subsidiary located in
Singapore.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have a limited history of operations. We anticipate that our
quarterly results of operations will fluctuate for the
foreseeable future due to several factors, including any
possible payments made or received pursuant to licensing or
collaboration agreements, progress of our research and
development efforts, and the timing and outcome of clinical
trials and related possible regulatory approvals. Our limited
operating history makes predictions of future operations
difficult or impossible. Since our inception, we have incurred
significant losses. As of September&nbsp;30, 2005, we had a
deficit accumulated during the development stage of
approximately $29.5&nbsp;million. We anticipate incurring
additional losses, which may increase, for the foreseeable
future.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Results of operations</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Nine months ended September&nbsp;30, 2005 compared to nine
months ended September&nbsp;30, 2004</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Revenues.</I> Revenues decreased approximately $34,000 for
the nine months ended September&nbsp;30, 2005 to zero. Revenue
earned in 2004 was derived principally from consulting
agreements we entered into during our
<FONT style="white-space: nowrap">start-up</FONT> phase under
research and development contracts. We have completed its
obligations under these agreements and will not recognize any
related contract revenue in&nbsp;2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Research and development expenses.</I> Research and
development expenses increased by approximately
$6.6&nbsp;million, or 131%, to approximately $11.6&nbsp;million
for the nine months ended September&nbsp;30, 2005 compared to
approximately $5.0&nbsp;million for the nine months ended
September&nbsp;30, 2004. Research and development expense
consists of direct costs which include salaries and related
costs of research and development personnel, and the costs of
consultants, materials and supplies associated with research and
development projects, as well as clinical activities. Indirect
research and development costs include facilities, depreciation,
and other indirect overhead costs.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">38

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table discloses the components of research and
development expenses reflecting all of our project expenses:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="67%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2" align="left" nowrap><B><FONT face="helvetica,arial">Research and development expenses</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Direct project costs:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Personnel, benefits and related
    costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">902,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,539,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">659,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Contract R&#38;D, consultants,
    materials and other costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,781,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,496,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Clinical trials
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">354,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,101,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total direct costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,038,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,795,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Indirect project costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">995,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">846,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,033,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">11,641,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Direct costs increased approximately $6.8&nbsp;million as a
result of approximate increases of $3.7&nbsp;million,
$3.2&nbsp;million and $0.2&nbsp;million, respectively, relating
to clinical development activities for iloperidone,
<FONT style="white-space: nowrap">VEC-162</FONT> and
<FONT style="white-space: nowrap">VSF-173.</FONT> During the
nine months ended September&nbsp;30, 2005, we conducted
additional clinical development and manufacturing work on
iloperidone as we prepared for its pivotal Phase&nbsp;III trial.
We also conducted a Phase&nbsp;II clinical trial for
<FONT style="white-space: nowrap">VEC-162.</FONT> Personnel,
benefits and related costs increased approximately $637,000 for
the nine months ended September&nbsp;30, 2005 due to an increase
in personnel to support the development and clinical trial
activities for iloperidone and
<FONT style="white-space: nowrap">VEC-162.</FONT> Stock-based
compensation expense for the nine months ended
September&nbsp;30, 2005 was approximately $659,000.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Contract research and development, consulting, materials and
other direct costs increased approximately $1.7&nbsp;million for
the nine months ended September&nbsp;30, 2005, primarily due to
regulatory and manufacturing-related development costs of
approximately $4.5&nbsp;million incurred in connection with the
manufacturing of clinical supply materials for the iloperidone
Phase&nbsp;III and the
<FONT style="white-space: nowrap">VEC-162</FONT> clinical trial
programs. Prior to FDA approval of our products,
manufacturing-related costs are included in research and
development expense. Clinical trials expense increased
approximately $3.7&nbsp;million for the nine months ended
September&nbsp;30, 2005 due to the cost incurred as we prepared
for our pivotal Phase&nbsp;III iloperidone clinical trial that
began in the fourth quarter of 2005 and the costs related to the
Phase&nbsp;II <FONT style="white-space: nowrap">VEC-162</FONT>
trial that was conducted in 2005. Indirect project costs also
decreased by approximately $150,000 for the nine months ended
September&nbsp;30, 2005 due primarily to the elimination of
contract manufacturing activities we previously conducted.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
During the remainder of 2005, and thereafter, we expect research
and development expenses to continue to increase substantially
as we increase our research and development efforts and as our
existing and future product candidates proceed through clinical
trials.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>General and administrative expenses.</I> General and
administrative expenses increased approximately
$4.3&nbsp;million, or 341%, to approximately $5.6&nbsp;million
for the nine months ended September&nbsp;30, 2005 from
approximately $1.3&nbsp;million for the nine months ended
September&nbsp;30, 2004.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">39

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table discloses the components of our general and
administrative expenses:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="71%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">General and administrative expenses</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Salaries, benefits and related costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">687,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">946,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,431,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Legal and consulting expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">230,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">680,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">330,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">530,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,267,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,587,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
General and administrative expenses consist of professional
fees, salaries and related costs for executive and other
administrative personnel and facility costs. Salaries, benefits
and related costs increased approximately $259,000 for the nine
months ended September&nbsp;30, 2005 due to an increase in
personnel as we continued to develop the administrative
structure to support the development and clinical trial
activities for iloperidone,
<FONT style="white-space: nowrap">VEC-162</FONT> and our other
product candidates. Stock-based compensation expense was
approximately $3.4&nbsp;million for the nine months ended
September&nbsp;30, 2005 and approximately $20,000 for the same
period in 2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Legal and consulting costs increased approximately $450,000 for
the nine months ended September&nbsp;30, 2005 due primarily to a
higher level of consulting activity in 2005 in support of
business development and market research activities related to
our lead product candidates. Other expenses increased
approximately $200,000 for the nine months ended
September&nbsp;30, 2005, primarily due to insurance and taxes.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
During the remainder of 2005, and thereafter, we expect our
general and administrative expenses to increase substantially.
These increased expenses are expected to be necessary to support
our discovery and development efforts and our commercial
development activities and to fulfill our reporting and other
regulatory obligations applicable to public companies.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Interest and other income, net.</I> Net interest income in
the nine months ended September&nbsp;30, 2005 was approximately
$188,000 compared to net interest income of approximately
$13,000 in the nine months ended September&nbsp;30, 2004.
Interest income was higher in 2005 due to higher average cash
balances for the year and higher short-term interest rates which
generated substantially higher interest income than in 2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our interest income and expense for the nine months ended
September&nbsp;30, 2004 and the nine months ended
September&nbsp;30, 2005 are disclosed on the following table:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="75%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest income
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">43,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">209,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(30,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(21,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">188,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">40

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Year ended December&nbsp;31, 2004 compared to period from
March&nbsp;13, 2003 (inception) to December&nbsp;31, 2003</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Revenues.</I> We recorded revenues of approximately $34,000
and approximately $48,000 for 2004 and 2003, respectively.
Revenue earned in 2004 and 2003 was derived principally from
consulting agreements we entered into during our
<FONT style="white-space: nowrap">start-up</FONT> phase under
research and development contracts. We completed our obligations
under these agreements and will not recognize any related
contract revenue in 2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Research and development expenses.</I> Research and
development expenses increased approximately $5.4&nbsp;million,
or 270%, to approximately $7.4&nbsp;million for the year ended
December&nbsp;31, 2004 compared to approximately
$2.0&nbsp;million for the period from March&nbsp;13, 2003
(inception)&nbsp;to December&nbsp;31, 2003.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table discloses the components of research and
development expenses reflecting all of our project expenses:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="62%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2" align="left" nowrap><B><FONT face="helvetica,arial">Research and development expenses</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Direct project costs:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Personnel, benefits and related
    costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,154,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Contract R&#38;D, consultants,
    materials and other costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,877,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Clinical trials
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">916,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total direct costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,949,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Indirect project costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,011,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,494,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,011,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,443,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Direct costs increased approximately $5.9&nbsp;million from zero
as a result in the shift from contract development activities to
the clinical development of iloperidone and
<FONT style="white-space: nowrap">VEC-162.</FONT> Personnel,
benefits and related costs increased approximately
$1.2&nbsp;million in 2005 due to an increase in personnel to
support the development and clinical trial activities for
iloperidone and
<FONT style="white-space: nowrap">VEC-162.</FONT> Personnel
costs associated with contract development activities were
charged to indirect project costs for the period from
March&nbsp;13, 2003 (inception)&nbsp;to December&nbsp;31, 2003.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Contract research and development, consulting, materials and
other direct costs increased approximately $3.9&nbsp;million
primarily due to clinical manufacturing-related development
costs incurred in connection with the manufacturing of clinical
supply materials for iloperidone and
<FONT style="white-space: nowrap">VEC-162.</FONT> Prior to FDA
approval of our products, manufacturing-related costs are
included in research and development expense. Clinical trials
expense increased approximately $916,000 due to the cost
incurred as we prepared for our iloperidone and
<FONT style="white-space: nowrap">VEC-162</FONT> clinical trials.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Indirect project costs also decreased by approximately $517,000,
due primarily to the elimination of contract manufacturing
activities we previously conducted.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>General and administrative expenses.</I> General and
administrative expenses increased approximately
$1.1&nbsp;million, or 101%, to approximately $2.1&nbsp;million
for the year ended
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">41

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
December&nbsp;31, 2004 compared to approximately
$1.1&nbsp;million for the period from March&nbsp;13, 2003
(inception)&nbsp;to December&nbsp;31, 2003.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table discloses the components of our general and
administrative expenses:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="65%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">General and administrative expenses</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Salaries, benefits and related costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">854,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">36,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Legal and consulting expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">620,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">690,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">412,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">539,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,053,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,119,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
General and administrative expenses consist of professional
fees, salaries and related costs for executive and other
administrative personnel, and facility costs. Salaries, benefits
and related costs increased approximately $833,000 in 2004 due
to an increase in personnel as we continued to develop the
administrative structure to support the development and clinical
trial activities of our product candidates.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Legal and consulting costs and other expenses increased due
primarily to a higher level of consulting activity in 2004 in
support of the business development and market research
activities related to our lead product candidates.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Interest and other income, net.</I> Net interest income for
the year ended December&nbsp;31, 2004 was approximately $59,000
compared to net interest income of approximately $45,000 for the
period from March&nbsp;13, 2003 (inception)&nbsp;to
December&nbsp;31, 2003. The increase in interest income was
attributable to higher average cash balances for the year ended
December&nbsp;31, 2004, and partially offset by an increase in
interest expense attributable to an increase in our equipment
term loan obligations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our interest income and expenses for 2004 and for the period
from March&nbsp;13, 2003 (inception)&nbsp;to December&nbsp;31,
2003 are disclosed on the following table:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="65%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest income
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">53,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">101,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Interest expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(8,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(42,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total, net
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">45,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">59,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">42

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

<FONT face="helvetica,arial">

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have funded our operations through September&nbsp;30, 2005
principally with the proceeds of approximately
$47.0&nbsp;million from preferred stock offerings:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="41%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="9">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Price per</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Approximate</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Issue</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">No. shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">share</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">amount</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="13">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(in&nbsp;millions)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Preferred Stock, Series&nbsp;A
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">March, 2003</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1.00</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10.0</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Preferred Stock, Series&nbsp;B
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">September, 2004</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15,040,654</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1.23</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18.5</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Preferred Stock, Series&nbsp;B
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">September, 2005</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15,040,654</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1.23</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18.5</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">40,081,308</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">47.0</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Each share of preferred stock is convertible into one share of
our common stock.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In September 2005, we completed the sale of an additional
15,040,654&nbsp;shares of Series&nbsp;B Preferred Stock for
proceeds of approximately $18.5&nbsp;million. After evaluating
the fair value of the common stock obtainable upon conversion by
the stockholders, we determined that the issuance of the
Series&nbsp;B Preferred Stock sold in September 2005 resulted in
a beneficial conversion feature of approximately
$18.5&nbsp;million which was fully accreted in September 2005
and is recorded as a deemed dividend to preferred stockholders
for the nine-month period ended September&nbsp;30, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On December&nbsp;9, 2005 we completed the final closing of the
Series&nbsp;B financing pursuant to which we sold an additional
12,195,129&nbsp;shares of Series&nbsp;B Preferred Stock at
$1.23&nbsp;per share, or an aggregate purchase price of
approximately $15.0&nbsp;million. As a result, we will record a
beneficial conversion charge in the form of deemed dividends of
approximately $15.0&nbsp;million during the fourth quarter of
2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In 2003, we entered into a $515,147 line of credit facility to
finance the purchase of specified equipment based on
lender-approved schedules. The interest rate was fixed at
9.3%&nbsp;per annum. We granted a security interest in the
assets purchased under the credit line. During 2004, we had no
draw downs under the line of credit. During 2004 and 2003, we
repaid $156,446 and $45,010 on the line of credit, respectively.
The total indebtedness relating to this line of credit was
$470,137, $313,691, and $187,523 as of December&nbsp;31, 2004
and 2003 and September&nbsp;30, 2005, respectively.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
At September&nbsp;30, 2005, cash, restricted cash and cash
equivalents were approximately $22.3&nbsp;million compared to
approximately $16.3&nbsp;million at December&nbsp;31, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our cash and cash equivalents are highly liquid investments with
a maturity of 90&nbsp;days or less at date of purchase and
consist of time deposits, investments in money market funds with
commercial banks and financial institutions, and commercial
paper of high-quality corporate issuers. As of
September&nbsp;30, 2005, we did not hold any short-term
investments other than cash, restricted cash and cash
equivalents.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Also, we maintain cash balances with financial institutions in
excess of insured limits. We do not anticipate any losses with
respect to such cash balances.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">43

</FONT>

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

<FONT face="helvetica,arial">

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Net cash used in operations was approximately $11.8&nbsp;million
and approximately $6.0&nbsp;million for the nine months ended
September&nbsp;30, 2005 and 2004, respectively. The net loss for
the nine months ended September&nbsp;30, 2005 of approximately
$17.0&nbsp;million was offset primarily by non-cash charges for
depreciation and amortization of approximately $316,000,
stock-based compensation of approximately $4.1&nbsp;million, an
increase in accrued expenses of approximately $1.2&nbsp;million
principally related to clinical trial expenses, and other net
changes in working capital. Net cash used in investing
activities for the nine months ended September&nbsp;30, 2005 was
approximately $527,000 and consisted primarily of an investment
of approximately $430,000 in restricted cash for a security
deposit on our new leased corporate research and development
facility. Net cash provided by financing activities for the nine
months ended September&nbsp;30, 2005 was approximately
$18.3&nbsp;million, consisting primarily of net proceeds from
the issuance of Series&nbsp;B Preferred Stock of approximately
$18.5&nbsp;million, offset primarily by payments of equipment
debt financing obligations of approximately $128,000.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Net cash used in operations was approximately $8.6&nbsp;million
and approximately $2.1&nbsp;million for the year ended
December&nbsp;31, 2004 and the period from March&nbsp;13, 2003
(inception)&nbsp;to December&nbsp;31, 2003, respectively. The
net loss for 2004 of approximately $9.5&nbsp;million was
partially offset by non-cash charges for depreciation and
amortization of approximately $377,000, an increase in accounts
payable and accrued liabilities of approximately $465,000 and
other net changes in working capital. Net cash used from
investing activities for the year ended December&nbsp;31, 2004
was approximately $415,000 and consisted primarily of equipment
purchases. Net cash from financing activities for 2004 was
approximately $18.1&nbsp;million, which consists primarily of
net proceeds from the issuance of Series&nbsp;B Preferred Stock
of approximately $18.3&nbsp;million, offset by principal
payments on notes payable and capital lease obligations of
approximately $200,000.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table summarizes our major contractual obligations
at September&nbsp;30, 2005 and the effects such obligations are
expected to have on our liquidity and cash flows in future
periods.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="36%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="32" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="5">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">October to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="4" align="left" nowrap><B><FONT face="helvetica,arial">Contractual obligations</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="19">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">After</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">(in thousands)</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Total</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2006</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2007</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2008</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2009</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2010</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2010</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="32" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Operating lease obligations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,043</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">57</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">731</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">673</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">567</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">458</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">471</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,086</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Short and long-term debt
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">212</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">65</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">147</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="31" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total contractual cash obligations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,255</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">122</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">878</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">673</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">567</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">458</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">471</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,086</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="33" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We entered into a five-year non-cancelable operating lease
agreement for office and laboratory space in June 2003. The
lease contains an option to renew for an additional five years
on the same terms and conditions and contains a 3% rent
escalation clause.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In August 2005, we entered into a ten-year and six-month
non-cancelable operating lease agreement for office and
laboratory space at a new facility, which is renewable for an
additional five-year period at the end of the original term. The
lease expires in June 2016.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
We will take possession of the lease space in January 2006. The
lease includes rent abatement and scheduled annual base rent
increases of 3% over the term of the lease. The total amount of
the base rent payments and rent abatement will be charged to
expense on a straight-line method over the term of the lease
(excluding renewal periods). In conjunction with a letter of
credit, we collateralized the operating lease with a restricted
cash deposit in the amount of $430,420 in September 2005, which
is recorded as non-current restricted cash at September&nbsp;30,
2005. Total leasehold improvements, net of landlord allowances,
will be approximately $600,000 for our new office and laboratory
facility.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In August 2005, we notified the landlord of our old lease space
of our intention to exercise our sub-lease rights in order to
enter into a lease for a larger office and laboratory facility.
When we take possession of the new lease space in January 2006,
we will vacate the current office and laboratory space.
According to SFAS&nbsp;146 <I>&#147;Accounting for Costs
Associated with Exit or Disposal Activities&#148;</I>, a
liability for costs that will continue to be incurred under a
contract for its remaining term without economic benefit to the
company shall be recognized and measured when the company ceases
using the right conveyed by the lease agreement, reduced by
estimated sublease rentals that could be reasonably obtained. We
expect to incur a charge of approximately $260,000 in the first
quarter of 2006 when we move from the current location to the
new office and laboratory facility in January 2006. We have
included in the table above operating lease obligations related
to the old lease space of approximately $288,000, approximately
$240,000 and approximately $122,000 for 2006, 2007 and 2008
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In April 2004, we entered into a capital lease obligation in
order to finance certain capital equipment purchases of
approximately $92,000. This capital lease had an interest rate
of 7.5% and was payable in monthly installments of $3,312
through April 2006. In February 2005, we cancelled this capital
lease obligation and settled the obligation in full.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have entered into agreements with clinical research
organizations and other outside contractors who will be
responsible for conducting and monitoring our clinical trials
for iloperidone and VEC-162. These contractual obligations are
not reflected in the table above because we may terminate them
without penalty.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In March and June 2004, we entered into separate licensing
agreements with Bristol-Myers Squibb and Novartis, respectively,
for the exclusive rights to develop and commercialize our three
compounds in clinical development. In consideration for these
rights, we paid a $500,000 non-refundable fee for each of the
compounds. We are obligated to make additional payments under
the conditions in the agreements upon the achievement of
specified clinical, regulatory and commercial milestones. If the
products are successfully commercialized we will be required to
pay certain royalties based on net sales for each of the
licensed products. The amount, timing and likelihood of these
payments are unknown and will depend on the successful outcome
of future clinical trials, regulatory filings, favorable FDA
regulatory approvals and growth in product sales.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We expect to incur losses from operations for the foreseeable
future. We expect to incur increasing research and development
expenses, including expenses related to additions to personnel
and clinical trials. We expect that our general and
administrative expenses will increase in the future as we expand
our business development, legal and accounting staff, add
infrastructure and incur additional costs related to being a
public company, including directors&#146; and officers&#146;
insurance, investor relations programs and increased
professional fees. Our future capital requirements will depend
on a number of factors, including our continued progress of our
research and development of product candidates, the timing and
outcome of regulatory
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
approvals, payments received or made under potential
collaborative agreements, the costs involved in preparing,
filing, prosecuting, maintaining, defending and enforcing patent
claims and other intellectual property rights, the acquisition
of licenses to new products or compounds, the status of
competitive products, the availability of financing and our or
our potential partners&#146; success in developing markets for
our product candidates. Based on our current operating plans,
and assuming 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 our common stock in this offering at an initial public
offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share (the mid-point of the price range set forth on the cover
page of this prospectus), we believe that the proceeds from this
offering, together with our existing cash, restricted cash and
cash equivalents, will be sufficient to meet our anticipated
operating needs until mid-2007, and after that time we will
require additional capital. We believe that if we sell
the &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 at an initial public
offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share ($1.00 lower than the mid-point of the price range set
forth on the cover page), the resultant reduction in proceeds we
receive from the offering would cause us to require additional
capital earlier,
in &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
Without the proceeds from this offering, we believe that our
existing cash, restricted cash and cash equivalents will be
sufficient to fund our operating expenses, debt repayments and
capital expenditure until mid-2006 due to our existing clinical
trial commitments.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Except for the equipment debt facility described above, we have
no other lines of credit or other committed sources of capital.
To the extent our capital resources are insufficient to meet
future capital requirements, we will need to raise additional
capital or incur indebtedness to fund our operations. We cannot
assure you that additional debt or equity financing will be
available on acceptable terms, if at all. If adequate funds are
not available, we may be required to delay, reduce the scope of
or eliminate our research and development programs, reduce our
commercialization efforts or obtain funds through arrangements
with collaborative partners or others that may require us to
relinquish rights to certain product candidates that we might
otherwise seek to develop or commercialize. Any future funding
may dilute the ownership of our equity investors.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Quantitative and qualitative disclosures about market risk</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our exposure to market risk is currently confined to our cash,
restricted cash and cash equivalents that have maturities of
less than three months. We currently do not hedge interest rate
exposure. We have not used derivative financial instruments for
speculation or trading purposes. Because of the short-term
maturities of our cash, restricted cash and cash equivalents, we
do not believe that an increase in market rates would have any
significant impact on the realized value of our investments, but
may increase the interest expense associated with any long-term
debt or long-term lease obligations.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our most liquid assets are cash, restricted cash and cash
equivalents. Because of their liquidity, these assets are not
directly affected by inflation. We also believe that we have
intangible assets in the value of our intellectual property. In
accordance with generally accepted accounting principles, we
have not capitalized the value of this intellectual property on
our balance sheet. Due to the nature of this intellectual
property, we believe that these intangible assets are not
affected by inflation. Because we intend to retain and continue
to use our equipment, furniture and fixtures and leasehold
improvements, we believe that the incremental inflation related
to replacement costs of such items will not materially affect
our operations. However, the rate of inflation affects our
expenses, such as those for employee
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
compensation and contract services, which could increase our
level of expenses and the rate at which we use our resources.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have no off balance sheet arrangements.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In December 2004, the FASB issued SFAS&nbsp;123R,
<I>&#147;Share-Based Payment,&#148; </I>a revision of
SFAS&nbsp;123, <I>&#147;Accounting for Stock-based
Compensation.&#148; </I>SFAS&nbsp;123R requires public companies
to recognize expense associated with share-based compensation
arrangements, including employee stock options, using a fair
value-based option pricing model, and eliminates the alternative
to use APB&nbsp;25&#146;s intrinsic value method of accounting
for share-based payments. In April 2005, the SEC announced that
the effective date to implement SFAS&nbsp;123R has been delayed
for certain public companies. Accordingly, we plan to begin
recognizing the expense associated with our share-based
payments, as determined using a fair value-based method, in our
statement of operations beginning on January&nbsp;1, 2006.
Adoption of the expense provisions of SFAS&nbsp;123R is expected
to have a material impact on our results of operations. The
standard generally allows two alternative transition methods for
public companies: modified prospective application without
restatement of prior interim periods in the year of adoption;
and retroactive application with restatement of prior financial
statements to include the same amounts that were previously
included in pro forma disclosures. We have not determined which
transition method we will adopt.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In order to provide implementation guidance related to
SFAS&nbsp;123R, the SEC issued Staff Accounting Bulletin
(&#147;SAB&#148;) No.&nbsp;107, <I>&#147;Share-Based
Payment&#148; </I>in March 2005. SAB&nbsp;107 provides guidance
on numerous issues such as valuation methods (including
assumptions such as expected volatility and expected term), the
classification of compensation expense, capitalization of
compensation cost related to share-based payment arrangements,
the accounting for income tax effects of share-based payment
arrangements upon adoption of SFAS&nbsp;123R, and disclosures in
MD&#38;A subsequent to adoption of SFAS&nbsp;123R.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
SFAS&nbsp;No.&nbsp;154, <I>&#147;Accounting Changes and Error
Corrections&#151; a replacement of APB Opinion No.&nbsp;20 and
FASB Statement No.&nbsp;3&#148; </I>was issued by the FASB in
May 2005. This Statement replaces APB Opinion No.&nbsp;20,
<I>&#147;Accounting Changes&#148;</I>, and FASB Statement
No.&nbsp;3, <I>&#147;Reporting Accounting Changes in Interim
Financial Statements&#148;, </I>and changes the requirements for
the accounting for and reporting of a change in accounting
principle. SFAS&nbsp;No.&nbsp;154 applies to all voluntary
changes in accounting principle and requires retrospective
application to prior periods&#146; financial statements of
changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative
effect of the change. This Statement also requires that a change
in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in
accounting estimate affected by a change in accounting
principle. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after
December&nbsp;15, 2005. SFAS&nbsp;No.&nbsp;154 is not expected
to have a material effect on our consolidated financial
statements.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In June 2005, the FASB Staff issued FASB Staff
<FONT style="white-space: nowrap">Position&nbsp;150-5</FONT>
<FONT style="white-space: nowrap">(FSP&nbsp;150-5),</FONT>
<I>&#147;Issuer&#146;s Accounting under FASB Statement
No.&nbsp;150 for Freestanding Warrants and Other Similar
Instruments on Shares that are Redeemable.&#148;</I>
<FONT style="white-space: nowrap">FSP&nbsp;150-5</FONT>
addresses whether freestanding warrants and other similar
instruments on shares that are redeemable, either puttable or
mandatorily redeemable,
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
would be subject to the requirements of FASB Statement
No.&nbsp;150, <I>&#147;Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity,&#148;</I> regardless of the timing of the redemption
feature or the redemption price. The FSP is effective after
June&nbsp;30, 2005. Adoption of the FSP did not have a material
effect on our financial condition or results of operations.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses. On an ongoing basis, we
evaluate our estimates and judgments, including those related to
revenue recognition, accrued expenses, fair valuation of stock
related to stock-based compensation and income taxes. We based
our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Revenue recognition.</I> Contract revenue is recognized upon
delivery of products to customers. Revenue earned under research
and development contracts are recognized in accordance with the
proportional performance method outlined in Staff Accounting
Bulletin&nbsp;No.&nbsp;104 whereby the extent of progress toward
completion is measured on the
<FONT style="white-space: nowrap">cost-to</FONT>-cost basis;
however, revenue recognized at any point will not exceed the
cash received. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the
entire loss on the contract is made in the period which it
becomes probable. We have generated some revenues earned under
research and development contracts that were derived principally
from consulting agreements we entered into during the company
<FONT style="white-space: nowrap">start-up</FONT> phase to
defray research costs.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We will use the substantive milestone payment method of revenue
recognition when all milestones to be received under contractual
arrangements are determined to be substantive, at-risk and the
culmination of an earnings process. Substantive milestones are
payments that are conditioned upon an event requiring
substantive effort, when the amount of the milestone is
reasonable relative to the time, effort and risk involved in
achieving the milestone and when the milestones are reasonable
relative to each other and the amount of any up-front payment.
If these criteria are not met the timing of the recognition of
revenue from the milestone payment may vary.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Accrued expenses.</I> As part of the process of preparing
financial statements we are required to estimate accrued
expenses. This process involves identifying services that have
been performed on our behalf and estimating the level of service
performed and the associated cost incurred for such service as
of each balance sheet date in our financial statements. Examples
of estimated accrued expenses include professional service fees,
such as lawyers and accountants, and contract service fees such
as amounts paid to clinical monitors, data management
organizations and investigators in conjunction with clinical
trials, and fees paid to contract manufacturers in conjunction
with the production of clinical materials. In connection with
such
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
service fees, our estimates are most affected by our
understanding of the status and timing of services provided
relative to the actual levels of services incurred by such
service providers. The majority of our service providers invoice
us monthly in arrears for services performed. In the event that
we do not identify certain costs that have begun to be incurred
or we under- or over-estimate the level of services performed or
the costs of such services, our reported expenses for such
period would be too low or too high. The date on which certain
services commence, the level of services performed on or before
a given date and the cost of such services are often judgmental.
We make these judgments based upon the facts and circumstances
known to us in accordance with generally accepted accounting
principles.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Stock-based compensation.</I> We have elected to follow APB
Opinion No.&nbsp;25, Accounting for Stock Issued to Employees,
and related interpretations, in accounting for our stock-based
compensation plans, rather than the alternative fair value
accounting method provided for under SFAS&nbsp;No.&nbsp;123,
Accounting for Stock-Based Compensation. In the notes to our
financial statements we provide pro forma disclosures in
accordance with SFAS&nbsp;No.&nbsp;123 and related
pronouncements. We account for transactions in which services
are received in exchange for equity instruments based on the
fair value of such services received from non-employees or of
the equity instruments issued, whichever is more reliably
measured, in accordance with SFAS&nbsp;No.&nbsp;123 and EITF
Issue <FONT style="white-space: nowrap">No.&nbsp;96-18,</FONT>
Accounting for Equity Instruments that Are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods
or Services. The two factors which most affect charges or
credits to operations related to stock-based compensation are
the fair value of the common stock underlying stock options for
which stock-based compensation is recorded and the volatility of
such fair value. If our estimates of the fair value of these
equity instruments are too high or too low, it would have the
effect of overstating or understating expenses. Because shares
of our common stock have not been publicly traded, market
factors historically considered in valuing stock and stock
option grants include comparative values of public companies
discounted for the risk and limited liquidity provided for in
the shares we are issuing, pricing of private sales of our
convertible preferred stock and the effect of events that have
occurred between the time of such grants, economic trends,
perspective provided by investment banks and the comparative
rights and preferences of the security being granted compared to
the rights and preferences of our other outstanding equity.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Income taxes.</I> As part of the process of preparing our
financial statements we are required to estimate our income
taxes in each of the jurisdictions in which we operate. We
account for income taxes by the liability method in accordance
with the provisions of SFAS&nbsp;No.&nbsp;109,
<I>&#147;Accounting for Income Taxes&#148;.</I> Under this
method, deferred income taxes are recognized for tax
consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting
amounts at each year-end, based on enacted laws and statutory
tax rates applicable to the periods in which the difference are
expected to affect taxable income. Valuation allowances are
provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets
will not be realized.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have not recorded any tax provision or benefit for the years
ended December&nbsp;31, 2003 and 2004. We have provided a
valuation allowance for the full amount of our net deferred tax
assets since realization of any future benefit from deductible
temporary differences and net operating loss carry forwards
cannot be sufficiently assured at December&nbsp;31, 2003 and
2004. At December&nbsp;31, 2003 and 2004, we had federal net
operating loss carryforwards of approximately $1.1&nbsp;million
and approximately $3.9&nbsp;million, respectively, available to
reduce future taxable income, which will begin to expire in
2023. Under the provisions of the Internal
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
Revenue Code, certain substantial changes in our ownership may
result in a limitation on the amount of net operating loss
carryforwards that can be used in future years.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Net loss per share.</I> Net loss attributable to common
stockholders per share is calculated in accordance with
SFAS&nbsp;No.&nbsp;128, <I>&#147;Earnings per Share,&#148;
</I>and Staff Accounting Bulletin (&#147;SAB&#148;) No.&nbsp;98.
Basic earnings per share (&#147;EPS&#148;) is calculated by
dividing the net income or loss attributable to common
stockholders by the weighted average number of shares of common
stock and Series&nbsp;A and Series&nbsp;B Preferred Stock
outstanding for the period, reduced by the weighted average
unvested common shares subject to repurchase. In accordance with
Emerging Issues Task Force 03-06, &#147;Participating Securities
and the Two Class&nbsp;Method Under SFAS&nbsp;128&#148;
<FONT style="white-space: nowrap">(&#147;EITF&nbsp;03-06&#148;),</FONT>
Series&nbsp;A and Series&nbsp;B Preferred Stock has been
included in basic and diluted earnings per share as if the
shares of Series&nbsp;A and Series&nbsp;B Preferred Stock were
converted to common stock on a
<FONT style="white-space: nowrap">1-for-1</FONT> basis.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Diluted EPS is computed by dividing the net income or loss
attributable to common stockholders by the weighted average
number of common stock equivalents outstanding for the period
determined using the treasury-stock method. Common stock
equivalents include stock options and warrants but only to the
extent that their inclusion is dilutive. We incurred a net loss
in all periods presented, causing inclusion of any potentially
dilutive securities to have an anti-dilutive affect, resulting
in dilutive loss per share attributable to common stockholders
and basic loss per share attributable to common stockholders
being equivalent. We did not have any common shares issued for
nominal consideration as defined under the terms of
SAB&nbsp;No.&nbsp;98, which would be included in EPS
calculations.
</DIV>

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<A name='110'></A>
</DIV>

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<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Business</B>
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are a biopharmaceutical company focused on the development
and commercialization of small molecule therapeutics, with
exclusive worldwide commercial rights to three product
candidates in clinical development for various central nervous
system disorders. Our lead product candidate, iloperidone, is an
atypical antipsychotic for the treatment of schizophrenia and
bipolar disorder and is in a pivotal Phase&nbsp;III trial for
schizophrenia. Our second product candidate,
<FONT style="white-space: nowrap">VEC-162,</FONT> is a melatonin
agonist for the treatment of insomnia and depression which is
entering a pivotal Phase&nbsp;III trial for insomnia.
<FONT style="white-space: nowrap">VEC-162</FONT> is also ready
for Phase&nbsp;II trials for the treatment of depression. Our
third product candidate,
<FONT style="white-space: nowrap">VSF-173,</FONT> is a compound
for the treatment of excessive daytime sleepiness and is ready
for a Phase&nbsp;II trial. Each of these product candidates
benefits from new chemical entity (NCE)&nbsp;patent protection
and may offer substantial advantages over currently approved
therapies.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We expect to complete our pivotal Phase&nbsp;III trial for
iloperidone in the first half of 2007. If this trial is
successful, we will file a NDA for approval with the FDA later
that year. We recently generated positive efficacy and safety
data in a Phase&nbsp;II trial of
<FONT style="white-space: nowrap">VEC-162</FONT> for insomnia
and expect to begin a pivotal Phase&nbsp;III trial early in
2006. We also expect to begin a Phase&nbsp;II trial of
<FONT style="white-space: nowrap">VSF-173</FONT> for excessive
daytime sleepiness in the second half of 2006. Assuming
successful outcomes of our clinical trials and approval by the
FDA, we expect to commercialize iloperidone and
<FONT style="white-space: nowrap">VSF-173</FONT> with our own
sales force in the U.S. and expect to commercialize
<FONT style="white-space: nowrap">VEC-162</FONT> through a
strategic partnership with a global pharmaceutical company.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our three product candidates target large prescription markets
with significant unmet medical needs. Sales of schizophrenia
drugs exceeded $14&nbsp;billion worldwide in 2004, according to
<I>World Review Analyst</I> by IMS, a leading pharmaceutical
market research company. These sales were achieved despite the
safety concerns, moderate efficacy and poor patient compliance
that are associated with these drugs. We believe that
iloperidone may address some of these shortcomings, based on its
significantly reduced side effect profile observed in trials
involving over 2,000&nbsp;patients to date and based on further
improvements to the product we plan to develop as part of our
lifecycle management strategy. According to IMS, in 2004 the
insomnia market exceeded $3.5&nbsp;billion in worldwide sales
and the depression market accounted for worldwide sales in
excess of $20&nbsp;billion. However, the approved drugs in both
the insomnia and depression markets have sub-optimal safety
profiles and demonstrate only moderate efficacy. We believe
VEC-162 may represent a breakthrough in each of these markets,
based on the product&#146;s efficacy, safety and novel mechanism
of action. The excessive daytime sleepiness market was
approximately $440&nbsp;million in worldwide sales in 2004. Few
available drugs exist to treat this condition, and each of the
available drugs has limitations. We believe that
<FONT style="white-space: nowrap">VSF-173</FONT> may represent a
safe and effective alternative treatment in this growing market.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our team is comprised of experienced pharmaceutical industry
executives, and our scientific team possesses deep expertise in
clinical development and in pharmacogenetics and
pharmacogenomics, or collectively, PG. PG is the scientific
discipline that examines both genetic variations among people
that influence response to a particular drug, and the multiple
pathways through which drugs affect people. Our founder and
Chief Executive Officer, Mihael H. Polymeropoulos,&nbsp;M.D.,
commenced our operations in early 2003 after leading the
Pharmacogenetics Department at Novartis.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe that the combination of our clinical development
expertise and our PG expertise will enable us to shorten our
drug development timeline relative to traditional approaches of
drug discovery and development, and to provide additional
differentiation for our product candidates. We also believe that
this combination will provide us with preferential access to
compounds discovered by other pharmaceutical companies. In June
2004 we acquired from Novartis the exclusive worldwide
commercial rights to iloperidone and
<FONT style="white-space: nowrap">VSF-173.</FONT> Our
team&#146;s expertise in clinical development and PG also
allowed us access to
<FONT style="white-space: nowrap">VEC-162,</FONT> which had
originally been developed by Bristol-Myers Squibb Company (BMS).
Based on its strong pre-clinical and clinical safety data, we
acquired exclusive worldwide commercial rights to
<FONT style="white-space: nowrap">VEC-162</FONT> from BMS in
March 2004.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our goal is to create a leading biopharmaceutical company
focused on developing and commercializing products that address
critical unmet medical needs through the application of our drug
development and PG expertise. The key elements of our strategy
to accomplish this goal are to:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Pursue the clinical development of our current product
    candidates.</I> We believe that our ongoing pivotal
    Phase&nbsp;III trial for iloperidone will complete the
    development work required to file an NDA to market and sell the
    drug commercially. We also believe that the Phase&nbsp;III trial
    we plan to start in early 2006 for
    <FONT style="white-space: nowrap">VEC-162</FONT> will be pivotal
    for regulatory approval of the compound. We intend to initiate a
    Phase&nbsp;II trial for
    <FONT style="white-space: nowrap">VSF-173</FONT> in the second
    half of 2006. We have committed, and will continue to commit,
    substantial resources towards completing the development of, and
    obtaining regulatory approvals for, our product candidates.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Develop a focused commercialization capability in the United
    States.</I> Because the number of physicians accounting for the
    majority of prescriptions in the United States for schizophrenia
    and excessive daytime sleepiness is relatively small, we believe
    that we can cost-effectively develop our own sales force to
    market and sell iloperidone and
    <FONT style="white-space: nowrap">VSF-173.
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Enter into strategic partnerships to extend our commercial
    reach.</I> Given the large number of physicians treating
    insomnia and depression, we intend to enter into a global
    strategic partnership with a large pharmaceutical company to
    market, distribute and sell
    <FONT style="white-space: nowrap">VEC-162.</FONT> Additionally,
    we intend to seek commercial partners for iloperidone and
    <FONT style="white-space: nowrap">VSF-173</FONT> outside of the
    United States.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Apply our PG expertise to differentiate our products.</I> We
    believe that our PG expertise will yield new insights into our
    product candidates. These insights may enable us to target our
    products to certain patient populations and to identify
    unexpected conditions for our product candidates to treat. We
    believe this expertise will enable us to differentiate and
    extend the lifecycle of each of our product candidates. This may
    also include the development of companion diagnostic tests to
    help physicians identify patient populations that will realize
    greater benefits from our compounds.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Expand our product portfolio through the acquisition of
    additional compounds.</I> We intend to continue to draw upon our
    clinical development and PG expertise to identify and pursue the
    acquisition of additional clinical-stage compounds.</TD>
</TR>

</TABLE>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have the following product candidates in clinical trials:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="32%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="31%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Product candidate</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Target indications</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Clinical status</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Iloperidone (Oral)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Schizophrenia
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">In pivotal Phase&nbsp;III trial
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Bipolar Disorder
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Ready for Phase&nbsp;II trial
    </FONT></TD>
</TR>

<TR>
    <TD colspan="5">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Iloperidone (Depot)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Schizophrenia
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Ready for Phase&nbsp;II trial
    </FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">VEC-162
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Insomnia
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Entering pivotal Phase&nbsp;III
    trial
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Depression
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Ready for Phase&nbsp;II trial
    </FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">VSF-173
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Excessive Daytime Sleepiness
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Ready for Phase&nbsp;II trial
    </FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We are developing iloperidone, an oral small molecule, for the
treatment of schizophrenia and bipolar disorder. In three
short-term and three long-term trials comprising over
2,000&nbsp;patients, iloperidone demonstrated reduced side
effects relative to current antipsychotic drugs. We are
currently conducting a pivotal Phase&nbsp;III trial for
iloperidone for schizophrenia in approximately 600&nbsp;patients
to confirm its efficacy, which has also been observed in
previous trials. Based on our End of Phase&nbsp;IIb meeting with
the FDA in September 2005, we believe we will be able to file an
NDA for iloperidone for schizophrenia if we succeed in
demonstrating its efficacy in this trial. If iloperidone obtains
regulatory approval, we believe it will represent a
differentiated new therapy for schizophrenia.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Schizophrenia is a chronic, debilitating mental disorder
characterized by hallucinations, delusions, racing thoughts and
other psychotic symptoms (collectively referred to as
&#147;positive symptoms&#148;), as well as moodiness, anhedonia
(inability to feel pleasure), loss of interest, eating and sleep
disturbances, and difficulty concentrating (collectively
referred to as &#147;negative symptoms&#148;). Schizophrenia
develops in late adolescence or early adulthood in approximately
1% of the world&#146;s population. Genetic and environmental
factors are believed to be responsible for the disease. Most
schizophrenia patients today are treated with drugs known as
&#147;atypical&#148; antipsychotics, which were first approved
in the U.S. in the late 1980s. Atypical antipsychotics currently
comprise over 90% of prescriptions for schizophrenia, having
largely replaced &#147;typical&#148; antipsychotics, which were
first introduced in the 1950s and are now generic. Atypical
antipsychotics are generally regarded as having improved side
effect profiles and efficacy in treating negative symptoms
relative to typical antipsychotics. According to IMS, the global
market for atypical antipsychotics exceeded $13&nbsp;billion in
2004. Currently approved atypical antipsychotics include
olanzapine
(Zyprexa<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,
Eli Lilly and Company), risperidone
(Risperdal<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,
Johnson&nbsp;&#38; Johnson), quetiapine
(Seroquel<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,
AstraZeneca PLC), aripiprazole
(Abilify<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,
BMS), ziprasidone
(Geodon<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,
Pfizer Inc.), and generic clozapine.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The treatment of schizophrenia remains challenging because
currently approved antipsychotics often induce serious side
effects and offer only modest efficacy. Side effects include
weight gain, diabetes, extrapyramidal symptoms (involuntary
bodily movements), hyperprolactinemia
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
(an elevated secretion of the hormone prolactin which can lead
to sexual dysfunction and breast development and milk secretion
in women and men), increased somnolence (sleepiness)&nbsp;and
cognition difficulties. Additionally, nearly half of all
patients on a single atypical antipsychotic fail to achieve a
clinically meaningful response, which is defined as a 20% or
greater reduction in symptoms. The side effect profile and
modest efficacy of currently available antipsychotics result in
poor patient compliance to their prescribed drug regimen.
Consequently, there remains a high degree of dissatisfaction
with atypical antipsychotics among physicians and patients.
Research by LEK Consulting LLC, a leading consulting firm,
supports this, showing that physicians employ a
&#147;trial-and-error&#148; approach of prescribing a series of
different atypical antipsychotics as they attempt to balance
side effects and symptom management in each patient. In
addition, the recent CATIE (Clinical Antipsychotic Trials of
Interventional Effectiveness) study, conducted by the National
Institute of Mental Health and reported in <I>The New England
Journal of Medicine,</I> found that 74% of patients taking
antipsychotics discontinued treatment within 18&nbsp;months. The
average time to discontinuation for these patients in the CATIE
study was approximately 6&nbsp;months.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Potential advantages of iloperidone</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition to the efficacy observed in clinical trials to date,
the experience with iloperidone thus far suggests that the
compound may provide benefits to patients beyond those provided
by currently available drugs:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Safety.</I> Short- and long-term safety trials have shown
    that patients who used iloperidone had reduced side effects
    relative to currently available antipsychotics, including low
    weight gain, no induction of diabetes, low extrapyramidal
    symptoms, including no akathisia (inability to sit still), no
    hyperprolactinemia, low incidence of sleepiness and low negative
    effects on cognition relative to placebo. Like many other
    atypical antipsychotics, iloperidone is associated with a
    prolongation of the heart&#146;s QTc interval, but in no
    instance did any patient taking iloperidone in a clinical trial
    have an interval exceeding a 500 millisecond threshold that the
    FDA has identified as being of particular concern. We believe
    that the safety profile of iloperidone may result in improved
    patient compliance with their treatment regimen.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Depot formulation.</I> We are developing a
    <FONT style="white-space: nowrap">four-week</FONT> injectable
    depot formulation for iloperidone, which we believe will be a
    compelling complement to our oral formulation for both
    physicians and patients. Novartis conducted a two-month
    Phase&nbsp;I/ IIa safety trial of this formulation in
    schizophrenia patients, in which it demonstrated the benefit of
    consistent release over a
    <FONT style="white-space: nowrap">four-week</FONT> time period
    with no greater side effects relative to oral dosing. Further
    development of this formulation will be an immediate priority
    for us following the completion of the ongoing pivotal
    Phase&nbsp;III trial of the oral formulation. The commercial
    potential for our depot formulation has been demonstrated by the
    success of the depot formulation for risperidone,
    Risperdal<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    Consta<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,
    which achieved worldwide sales of $310&nbsp;million in 2004, its
    first full year on the market. We believe that our
    <FONT style="white-space: nowrap">four-week</FONT> depot
    formulation for iloperidone will be an attractive alternative to
    Risperdal Consta, which is a two-week depot.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Additionally, we plan to continue to apply our PG expertise to
develop tools that may allow physicians to avoid the
&#147;trial-and-error&#148; approach to prescribing
antipsychotic medications for their patients:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>PG evaluation of iloperidone&#146;s efficacy.</I> In a
    retrospective analysis of prior clinical data, we discovered a
    statistically significant correlation suggesting that certain
    patients are both more likely to respond to iloperidone and to
    enjoy better treatment results relative to the general
    schizophrenia patient population. These patients have a common
    mutation, or single</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">54

</FONT>
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<FONT face="helvetica,arial">

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD></TD>
    <TD align="left">
    nucleotide polymorphism (SNP), in a gene linked to central
    nervous system function, that is estimated to occur in
    approximately 70% of schizophrenia patients. We have developed a
    genetic test which we are using in our current pivotal
    Phase&nbsp;III trial to confirm this correlation. According to
    market research we conducted with LEK Consulting, physicians
    treating schizophrenia patients would enthusiastically welcome a
    genetic test that would enable them to identify likely
    responders to an antipsychotic, given the unpredictable efficacy
    and serious side effects currently associated with atypical
    antipsychotics, and be more likely to prescribe iloperidone.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>PG evaluation of iloperidone&#146;s safety.</I> We have also
    discovered that patients with an uncommon SNP of a well
    understood gene affecting drug metabolism experience higher
    levels of iloperidone in their blood and are at an elevated risk
    of a QTc interval prolongation while taking iloperidone. This
    genetic attribute is estimated to occur in approximately 5-10%
    of schizophrenia patients. We believe that certain physicians
    may choose to test patients for this SNP if they have a concern
    about QTc interval prolongation with respect to a particular
    patient.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We intend to make one simple blood test for both markers
available through national reference laboratories.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Overview of prior Phase&nbsp;III clinical trials</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Novartis conducted three short-term (six-week) pivotal
Phase&nbsp;III trials with iloperidone. In each of these trials,
one or more dose levels of iloperidone achieved statistically
significant superiority to placebo on the standard scales for
measuring efficacy in schizophrenia, either the Positive and
Negative Symptom Scale (PANSS)&nbsp;or Brief Psychiatric Rating
Scale (BPRS). Each of these scales is a subjective test
administered by a clinician measuring a patient across a range
of potential schizophrenia symptoms. In only one of the three
pivotal Phase&nbsp;III trials was the declared target dose
demonstrated to have statistically significant efficacy better
than placebo, which is required for the results of a trial to
support an efficacy claim with the FDA. With the need to conduct
at least one more Phase&nbsp;III trial to be able to file for
approval, Novartis elected instead to discontinue the
development of iloperidone.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The table below summarizes the efficacy results from the
previous short-term pivotal Phase&nbsp;III trials:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Number of</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">PANSS scale</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Trial number</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">patients</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Doses(1)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">improvement(2)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Significance vs. placebo(3)</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">ILP 3000
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">621</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">placebo</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">-4.6</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">n/a</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4&nbsp;mg/day</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">-9.0</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">Not significant</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">8&nbsp;mg/day(4</FONT></I></B></TD>
    <TD align="left" valign="top" nowrap><B><I><FONT face="helvetica,arial">)</FONT></I></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">-7.8</FONT></I></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">Not significant</FONT></I></B></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">12&nbsp;mg/day(4</FONT></I></B></TD>
    <TD align="left" valign="top" nowrap><B><I><FONT face="helvetica,arial">)</FONT></I></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">-9.9</FONT></I></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">p&nbsp;&#60; 0.05</FONT></I></B></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">ILP 3004
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">616</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">placebo</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">-3.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">n/a</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4-8&nbsp;mg/day</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">-9.4</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">p&#60; 0.02</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">10-16&nbsp;mg/day</FONT></I></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">-11.1</FONT></I></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">p&#60; 0.001</FONT></I></B></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">ILP 3005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">710</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">placebo</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">-7.6</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">n/a</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">12-16 mg/day</FONT></I></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">-11.0</FONT></I></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><B><I><FONT face="helvetica,arial">Not significant</FONT></I></B></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">20-24 mg/day</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">-14.0</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">p&#60; 0.01</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;Declared dose (the dose for which a drug must show
statistically significant improvement vs. placebo) is italicized
and bolded.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(2)&nbsp;As patients improve, their PANSS scale score decreases.
Baseline scores for enrollees in the trials were 94.5
(ILP&nbsp;3000), 94.3 (ILP&nbsp;3004) and 94.7 (ILP 3005).
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">55

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(3)&nbsp;This is represented by p value, which measures
likelihood that a difference between drug and placebo is due to
random chance. A p &#60; 0.05 means the chance that the
difference is due to random chance is less than 5%, and is a
commonly accepted threshold for denoting a meaningful difference
between drug and placebo.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(4)&nbsp;Declared dose in this trial was a composite of 8 and
12&nbsp;mg/day.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have made several observations about these previous
Phase&nbsp;III trials that suggest both reasons for their
failure and ways in which we may improve the chances of success
in our ongoing pivotal Phase&nbsp;III trial.
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Patients who took the drug at our target dose improved
    significantly.</I> At the dose for which we intend to seek
    approval (24&nbsp;mg/day), iloperidone achieved statistically
    significant efficacy in the ILP 3005 trial. This gives us
    confidence that we can replicate that success in our ongoing
    pivotal Phase&nbsp;III trial.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Low doses partially explain the mixed efficacy results of the
    ILP&nbsp;3000 trial.</I> We believe that this trial failed
    principally because the doses of iloperidone administered were
    too low. This is supported by the efficacy of iloperidone that
    was observed at higher doses in the other pivotal trials.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Patient drop-outs explain the mixed efficacy results of the
    ILP&nbsp;3005 trial.</I> An exceptionally high number of
    patients dropped out of this study early and before they had the
    chance of achieving therapeutic blood levels of the drug. While
    high drop-out rates are common in studies of schizophrenia
    drugs, two issues may have exacerbated the drop-out problem in
    this trial: first, the trial was primarily on an outpatient
    basis, which is unusual for clinical trials of antipsychotic
    therapies, and second, the patients in the trial had to take the
    drug in a four-pill, twice-daily regimen. Both factors had a
    negative effect on patient compliance and led to a very high
    drop-out rate. We retrospectively analyzed the data from the
    Novartis trials and determined that, overall, the drop-outs were
    not due to other problems with iloperidone, and we have further
    demonstrated that iloperidone achieved statistically significant
    efficacy among those patients who remained enrolled long enough
    to achieve therapeutic blood levels of the drug.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>The FDA has agreed that we may analyze the data generated
    from the trials in a way that more appropriately addresses early
    drop-outs.</I> Under a standard &#147;last observation carried
    forward&#148; or &#147;LOCF&#148; statistical model used by
    Novartis to analyze the prior trial data, experts in the field
    of clinical trial statistical analysis have noted that results
    may be significantly biased in certain circumstances by the
    presence of early patient drop-outs. To correct for this, these
    experts recommend models such as a &#147;mixed-method repeated
    measures&#148; or &#147;MMRM&#148; statistical model to analyze
    data from clinical trials with early patient drop-outs. While
    the FDA has not previously approved a drug on the basis of
    efficacy measured with an MMRM model, we discussed our intent to
    use it with the FDA in an August 2005 guidance meeting, and they
    have agreed that the LOCF method may be biased under these
    circumstances and that an MMRM model approach is valid for our
    ongoing pivotal Phase&nbsp;III trial. We retrospectively
    analyzed the Phase&nbsp;III data using an MMRM model and
    determined that iloperidone demonstrated statistically
    significant efficacy at Novartis&#146; declared dose in two of
    three previous pivotal trials (trials ILP 3004 and ILP 3005),
    versus just one trial under an LOCF model (trial ILP 3004).</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Though not required for registration, Novartis also conducted
three long-term
<FONT style="white-space: nowrap">(52-week)</FONT>
Phase&nbsp;III trials of iloperidone. In these trials, which
involved more than 1,300&nbsp;patients, Novartis measured the
safety and time to discontinuation of iloperidone at doses
ranging from 4&nbsp;mg/day to 16&nbsp;mg/day compared to the
antipsychotic haloperidol. Iloperidone demonstrated
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">56

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
strong safety results and was statistically non-inferior to the
efficacy of haloperidol in time to discontinuation of therapy.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Overview of our ongoing pivotal Phase&nbsp;III
trial</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In November 2005, we initiated our pivotal Phase&nbsp;III trial
to evaluate iloperidone for the treatment of patients with
schizophrenia. The trial is a randomized, double-blind, placebo-
and active-controlled Phase&nbsp;III trial of approximately
600&nbsp;patients with schizophrenia. To have a successful
clinical trial, we need to demonstrate that iloperidone has
statistically significant efficacy better than placebo. The
active control is present to validate the design of the trial
and to increase the chances that trial participants will receive
some form of treatment while participating in the trial.
Patients will receive four weeks of inpatient treatment in the
trial. The iloperidone formulation being used in the study is an
oral, twice-daily dose of 12&nbsp;mg, or 24&nbsp;mg per day. The
trial is being conducted in the United States and India by
Quintiles Transnational, a contract research organization.
Patient dosing began in November 2005 and will continue through
early 2007.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe that if this trial is successful, our data and
documentation on iloperidone will be adequate to support both
United States and European regulatory filings of oral
iloperidone. We conducted an End of Phase&nbsp;IIb meeting with
the FDA in September 2005, during which the agency agreed that
this trial&#146;s design is adequate to measure short-term
efficacy in schizophrenia. The FDA also agreed that with success
in this trial, the iloperidone package would be sufficient for
filing an NDA.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition to schizophrenia, we believe iloperidone may be
effective in treating bipolar disorder. Most of the approved
atypical antipsychotics have received approval for bipolar
disorder subsequent to commercializing for the treatment of
schizophrenia. Approximately 25% of atypical antipsychotic
prescriptions are for the treatment of bipolar disorder,
according to LEK Consulting. Iloperidone is ready for an initial
Phase&nbsp;II trial in bipolar disorder.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We expect to build our own sales force to market iloperidone
directly to psychiatrists and other target physicians in the
U.S. Because the U.S.&nbsp;psychiatric community is relatively
small, we believe that we can cost-effectively develop our own
sales force to market and sell iloperidone. Outside of the
United States, we expect to find commercial partners for
iloperidone.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Iloperidone and its metabolites, formulations, and uses are
covered by a total of nine patent and patent application
families worldwide. The primary new chemical entity
(NCE)&nbsp;patent covering iloperidone expires normally in 2011
in the United States and 2010 in most of the major markets in
Europe. In the United States, the Hatch-Waxman Act of 1984
provides for an extension of NCE patents for a period of up to
five years following the expiration of the patent covering that
compound to compensate for time spent in development. We believe
that iloperidone will qualify for the full five-year patent term
extension. In Europe, similar legislative enactments provide for
five-year extensions of NCE patents through the granting of
Supplementary Protection Certificates, and we believe that
iloperidone will qualify for this extension as well.
Consequently, assuming that we are granted all available
extensions by the
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">57

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
FDA and European regulatory authorities and that we receive
regulatory approval, we expect that our rights to commercialize
iloperidone will be exclusive until 2016 in the United States
and until 2015 in Europe. Additionally, the patent application
covering the depot formulation of iloperidone, if it is granted,
will expire normally in 2022. Several other patent applications
covering uses, formulations and derivatives relating to
iloperidone extend beyond 2020. Pursuant to a recent European
Union directive, we may also acquire the exclusive right in most
European Union countries to market iloperidone for a period of
10&nbsp;years from the date of its regulatory approval in Europe
(with the possibility for a further one-year extension), even
though the European patents covering iloperidone will likely
expire prior to the end of such
<FONT style="white-space: nowrap">10-year</FONT> period. No
generic versions of iloperidone would be permitted to be
marketed or sold during this
<FONT style="white-space: nowrap">10-year</FONT> period in most
European countries. See &#147;Patents and Intellectual
Property&#148; below for a more complete description of our
intellectual property rights.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We acquired worldwide, exclusive rights to the NCE patent
covering iloperidone and certain related intellectual property
from Novartis under a sublicense agreement we entered into in
2004. Please see &#147;&#151;License agreements&#148; below for
a more complete description of the rights we acquired from
Novartis with respect to iloperidone.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>VEC-162</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
VEC-162 is an oral small molecule entering Phase&nbsp;III trials
for the treatment of insomnia. The compound exhibits highly
selective binding to the
<FONT style="white-space: nowrap">melatonin-1</FONT> (MT1) and
<FONT style="white-space: nowrap">melatonin-2</FONT> (MT2)
receptors, which are thought to govern the body&#146;s natural
sleep/wake cycle. Compounds that bind to these receptors are
thought to be able to help treat sleep disorders, and
additionally are believed to offer potential benefits in
depression. We intend to commence enrollment of a Phase&nbsp;III
trial of <FONT style="white-space: nowrap">VEC-162</FONT> for
insomnia in early 2006.
<FONT style="white-space: nowrap">VEC-162</FONT> is also ready
to commence a Phase&nbsp;II trial for the treatment of
depression.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Industry sources estimate that of the 73&nbsp;million
U.S.&nbsp;adults who suffer from some form of insomnia, only
approximately 11&nbsp;million currently receive treatment. Sleep
disorders are segmented into three major categories: primary
insomnia, secondary insomnia and circadian rhythm sleep
disorders (CRSD). Primary insomnia is a symptom complex that
comprises difficulty falling asleep or staying asleep, or
non-refreshing sleep, in combination with daytime dysfunction or
distress. The symptom complex can be an independent disorder
(primary insomnia) or be a result of another condition such as
depression or anxiety (secondary insomnia). CRSD results from a
misalignment of the sleep/wake cycle and an individual&#146;s
daily activities or lifestyle. The circadian rhythm is the
rhythmic output of the human biological clock and is governed by
melatonin levels in the bloodstream. Both the timing of
behavioral events (activity, sleep, and social interactions) and
the environmental light-dark cycle result in a sleep/wake cycle
that follows the circadian rhythm. Examples of CRSD include
transient disorders such as jet lag and chronic disorders such
as shift work sleep disorder (SWSD). The American Academy of
Sleep Medicine estimates that 25% of all sleep problems are
directly related to CRSD. In 2004, the sleep disorder drug
market exceeded $3.5&nbsp;billion in global sales, according to
IMS.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
There are a number of drugs approved and prescribed for patients
with sleep disorders. The most commonly prescribed drugs are
hypnotics, such as zolpidem
(Ambien<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,
Sanofi-Aventis), eszopiclone
(Lunesta<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,
Sepracor Inc.) and zaleplon
(Sonata<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>,
King Pharmaceuticals, Inc.) These drugs work by acting upon a
set of brain receptors known as GABA receptors. Several drugs in
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
development, including indiplon (Pfizer/Neurocrine Biosciences,
Inc.) and gaboxadol (Merck&nbsp;&#38; Co., Inc./Lundbeck A/S),
also utilize a similar mechanism of action. Members of the
benzodiazapine class of sedatives are also approved for
insomnia, but their usage has declined due to an inferior side
effect profile compared to hypnotics. Anecdotal evidence also
suggests that sedative antidepressants, such as trazodone and
doxepin, are prescribed off-label for insomnia. Recently, the
FDA approved ramelteon
(Rozerem<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>,
Takeda Pharmaceuticals Company Limited), a compound with a
mechanism of action similar to
<FONT style="white-space: nowrap">VEC-162,</FONT> for the
treatment of insomnia.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe that each of the drugs used to treat insomnia has
inherent limitations that leave patients underserved. The key
limitations include the potential for abuse, significant side
effects, and a failure to address the underlying causes of
sleeplessness:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Many of the products prescribed commonly for sleep disorders,
    including Ambien, Lunesta, and Sonata, are classified as
    Schedule&nbsp;IV controlled substances by the DEA due to their
    potential for abuse, tolerance and withdrawal symptoms. Drugs
    that are classified as Schedule&nbsp;IV controlled substances
    are subject to restrictions, and in some cases prohibitions, on
    providing samples to physicians and on prescription refills
    under state laws. For example, many states require a doctor
    visit as a condition for receiving any refill of a prescription
    for a Schedule&nbsp;IV controlled substance.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Many drugs approved for and used in sleep disorders also induce
    a number of nuisance side effects beyond the more serious abuse
    and addiction effects associated with most approved products.
    These side effects include next-day grogginess, memory loss,
    unpleasant taste, dry mouth and hormonal changes.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    We believe that none of the drugs used and approved for sleep,
    other than Rozerem, work through the body&#146;s natural
    sleep/wake cycle, which is governed by melatonin. We believe
    that, for patients whose sleep disruption is due to a
    misalignment of this sleep/wake cycle and the patients&#146;
    need to sleep (as is the case in CRSD), a drug that naturally
    modulates the sleep/wake cycle would be an attractive new
    alternative because it would be addressing the underlying cause
    of the sleeplessness, rather than merely addressing its symptoms.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Potential advantages of VEC-162</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe that VEC-162 may offer efficacy similar to the most
efficacious of the approved sleep drugs, and that it may provide
significant benefits to patients beyond those offered by the
approved drugs. We believe that VEC-162 is unlikely to be
scheduled as a controlled substance by the DEA, because Rozerem,
which has the same mechanism of action as
<FONT style="white-space: nowrap">VEC-162,</FONT> was shown not
to have potential for abuse and was not classified as a
Schedule&nbsp;IV controlled substance by the DEA. However,
despite the fact that the drugs have a similar mechanism of
action, our Phase&nbsp;II results demonstrate that
<FONT style="white-space: nowrap">VEC-162</FONT> has superior
sleep maintenance to Rozerem.
<FONT style="white-space: nowrap">VEC-162</FONT> also appears to
be safe, with no significant side effects or effects on next-day
performance. For patients with CRSD,
<FONT style="white-space: nowrap">VEC-162</FONT> may be able to
align the patient&#146;s sleep/wake cycle with their lifestyle,
something we believe no approved sleep therapy has demonstrated.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">59

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Overview of Phase&nbsp;II clinical results</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We recently completed a randomized, double-blind, multi-center,
placebo-controlled Phase&nbsp;II trial evaluating the effect of
VEC-162 on healthy volunteers in a transient insomnia setting.
This setting involved a five-hour phase shift, which entailed
putting trial participants to bed five hours ahead of their
regular sleep time.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A total of 37&nbsp;healthy volunteers were randomly assigned to
one of four VEC-162 dosing groups (10,&nbsp;20, 50, and
100&nbsp;milligrams) or placebo. Patients took one oral dose
30&nbsp;minutes before bedtime. The results of this trial
demonstrated:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Circadian rhythm shift.</I> There was a statistically
    significant (p&nbsp;&#60; 0.025) shift in circadian rhythm at 50
    and 100&nbsp;mg of up to five hours on the first night, and a
    statistically significant dose-response curve. This finding
    confirmed that the drug acts through the sleep/wake cycle, and
    shows further that the drug can modulate this cycle to address
    the underlying cause of sleeplessness in patients with circadian
    rhythm sleep disorders.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Reduced duration of wake after sleep onset (WASO).</I> WASO
    is defined as the number of minutes awake from the time the
    participant falls asleep to the end of the evaluation period.
    There was a statistically significant (p&nbsp;&#60; 0.05)
    reduction in WASO at 100&nbsp;mg of 68.5&nbsp;minutes, and a
    reduction in the duration of WASO versus placebo of at least 36
    minutes was observed at all doses. The effects were 36 minutes
    (10&nbsp;mg) and 45&nbsp;minutes (20 and 50&nbsp;mg).</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Improved sleep efficiency.</I> Sleep efficiency is defined as
    time asleep divided by time in bed.
    <FONT style="white-space: nowrap">VEC-162</FONT> achieved
    statistically significant improvements in sleep efficiency vs.
    placebo at 50&nbsp;mg (p&nbsp;&#60; 0.05) and 100&nbsp;mg
    (p&nbsp;&#60; 0.02). Absolute improvement occurred at all doses
    with at least 12.5% greater sleep efficiency vs. placebo.
    Specific improvements were 12.5% (10&nbsp;mg), 13.5%
    (20&nbsp;mg), 15.4% (50&nbsp;mg) and 18.1% (100&nbsp;mg).</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>Improved time to achieve persistent sleep.</I> All patients
    experienced a reduction in time it took to achieve persistent
    sleep (otherwise known as latency). The 10&nbsp;mg dose improved
    23.4&nbsp;minutes vs. placebo (p&nbsp;&#60; 0.004), the
    20&nbsp;mg improved 10.1&nbsp;minutes (not significant), the
    50&nbsp;mg improved 18.8&nbsp;minutes (p&nbsp;&#60; 0.02), and
    the 100&nbsp;mg dose improved 19.3&nbsp;minutes
    (p&nbsp;&#60;&nbsp;0.03).</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <I>A placebo-like side effect profile.</I> VEC-162 also
    demonstrated a strong safety profile, with no statistically
    significant side effects versus placebo and no impairment of
    next-day performance or mood.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Overview of planned Phase&nbsp;III clinical trial</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We plan to initiate a Phase&nbsp;III trial in the
U.S.&nbsp;early in 2006 to evaluate the safety and efficacy of
<FONT style="white-space: nowrap">VEC-162</FONT> for the
treatment of insomnia. The trial will be a randomized,
double-blind, placebo-controlled trial of approximately
300&nbsp;healthy volunteers. Primary endpoints will include
sleep efficiency and time to fall asleep, as well as next-day
performance and mood. Participants will receive one to two days
of inpatient treatment. We believe that we will need to conduct
additional trials beyond this Phase&nbsp;III trial to receive
approval for the treatment of primary insomnia. We plan to
confirm our path to filing with the FDA in an End of
Phase&nbsp;IIb meeting after this upcoming clinical trial.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe that VEC-162 may also be effective in treating
depression. Agomelatine, another melatonin agonist, has shown
efficacy and safety that compared favorably to an approved
selective serotonin reuptake inhibitor
(SSRI)&nbsp;antidepressant,
Paxil<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
(paroxetine, GSK), in a Phase&nbsp;III trial. Agomelatine&#146;s
U.S.&nbsp;patent protection has expired. While the precise
mechanism for a melatonin agonist&#146;s effect on depression is
currently unknown, it is possible that by improving sleep, a
melatonin agonist could improve mood because depressed patients
are likely to have sleep disorders.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Approximately 29&nbsp;million adults in the United States suffer
from some form of depression, over 11&nbsp;million of whom are
currently treated with a prescription antidepressant medication.
Sales of antidepressants exceeded $20&nbsp;billion globally in
2004, with SSRI drugs and newer serotonin/norepinephrine
reuptake inhibitor (SNRI)&nbsp;drugs accounting for the majority
of sales.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe that <FONT style="white-space: nowrap">VEC-162</FONT>
will be differentiated from approved antidepressants in several
ways. In the Phase&nbsp;III trial of agomelatine described
above, agomelatine showed significantly improved mood in two
weeks, vs. four weeks for
Paxil<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>.
Consequently, <FONT style="white-space: nowrap">VEC-162</FONT>
may, with its similar properties to agomelatine, enjoy a more
rapid onset of action than approved SSRI and SNRI drugs. We
believe that <FONT style="white-space: nowrap">VEC-162</FONT>
should also have an improved side effect profile when compared
to approved products because it should not have the sexual side
effects, weight gain, and sleep disruption associated with SSRI
and SNRI drugs.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
VEC-162 is ready for Phase&nbsp;II trials in depression. It has
demonstrated an antidepressant effect in animal models and has
completed several Phase&nbsp;I trials, including one with four
weeks of exposure, showing none of the serious side effects
associated with the approved SSRI and SNRI drugs.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Given the size of the prescribing physician base for insomnia
and depression, we plan to partner with a global pharmaceutical
company for the development and commercialization of
<FONT style="white-space: nowrap">VEC-162</FONT> worldwide.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
VEC-162 and its formulations and uses are covered by a total of
five patent and patent application families worldwide. The
primary NCE patent covering
<FONT style="white-space: nowrap">VEC-162</FONT> expires
normally in 2017 in the United States and in most European
markets. We believe that, like iloperidone,
<FONT style="white-space: nowrap">VEC-162</FONT> will meet the
various criteria of the Hatch-Waxman Act and will receive five
additional years of patent protection for
<FONT style="white-space: nowrap">VEC-162</FONT> in the United
States, which would extend its patent protection in the United
States until 2022. In Europe, similar legislative enactments
provide for five-year extensions of European NCE patents through
the granting of Supplementary Protection Certificates, and we
believe that <FONT style="white-space: nowrap">VEC-162</FONT>
will qualify for such an extension, which would extend European
patent protection for
<FONT style="white-space: nowrap">VEC-162</FONT> until 2022.
Several other patent applications covering uses of
<FONT style="white-space: nowrap">VEC-162</FONT> will, if
granted, provide exclusive rights for these uses until 2026.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our rights to the NCE patent covering
<FONT style="white-space: nowrap">VEC-162</FONT> and related
intellectual property have been acquired through a license with
BMS. Please see &#147;&#151;License agreements&#148; below for a
discussion of this license.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">61

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>VSF-173</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
VSF-173 is an oral small molecule that has demonstrated effects
on animal sleep/wake patterns and gene expression patterns
suggestive of a stimulant effect. The compound also demonstrated
a stimulant effect in humans during clinical trials conducted by
Novartis for Alzheimer&#146;s Disease. As a result of these
observations, we are currently planning to begin the clinical
evaluation of <FONT style="white-space: nowrap">VSF-173</FONT>
in excessive daytime sleepiness. We intend to initiate a
Phase&nbsp;II trial for
<FONT style="white-space: nowrap">VSF-173</FONT> in late 2006.
We believe the market opportunity for VSF-173 is significant.
Provigil<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
(modafinil, Cephalon Inc.) alone accounted for sales of
approximately $440&nbsp;million in 2004 and is estimated to have
grown 35% between 2002 and 2005.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Pharmacogenetic and pharmacogenomic (PG)&nbsp;expertise</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our expertise in PG enables us to acquire high quality,
patent-protected clinical compounds that have been discovered
and developed by other pharmaceutical firms. We can capitalize
on the discovery and early development efforts of other firms by
acquiring compounds with clinical safety and possibly efficacy
data that we believe can benefit from our extensive PG expertise.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
PG starts from the premise that a given drug will not just
affect the target/receptor for which it was initially developed,
but will in fact interact with many systems within the body.
Proof of this comes from two different sources. We know, for
instance, that most drugs have side effects. These typically
result from a drug&#146;s interaction not just with its intended
receptor in its intended organ system, but also with either that
receptor outside the intended organ system or with other
receptors entirely. There are many examples of drugs that were
developed initially for one indication but were then shown to be
effective for another. One example of this is
Viagra<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
(sildenafil, Pfizer), which was developed initially for
hypertension (high blood pressure) but proved more effective for
erectile dysfunction. Being compound-focused enables us to
forego the costly discovery work and start with compounds
already known to be drugs, in that they are safe and interact
with at least one biological system.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Starting with safe compounds&#151; ones that have completed at
least Phase&nbsp;I safety trials&#151; we use our PG expertise
to understand the disease or diseases for which the drug has the
optimal biological (and clinical) effect. We have used this
expertise to identify potential points of differentiation for
iloperidone and
<FONT style="white-space: nowrap">VSF-173.</FONT> Beyond these
two, we have already identified a number of unexpected signaling
pathways attributable to known compounds using these techniques,
and we have secured a number of patent filings based on these
findings. For each compound, we may choose to confirm our
findings in animal studies. Compounds clearing this hurdle will
be ready for Phase&nbsp;II trials.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Compounds that we would most likely consider attractive
candidates for applying our expertise would meet the following
criteria:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    were initially developed by a well-established biopharmaceutical
    company</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    have already completed Phase&nbsp;I trials</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    are free of significant formulation issues</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    have potential for strong patent protection through composition
    of matter patents, new doses or new formulations</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">62

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our rights to develop and commercialize our clinical-stage
product candidates are subject to the terms and conditions of
licenses granted to us by other pharmaceutical companies.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We acquired exclusive worldwide rights to patents for
iloperidone through a sublicense agreement with Novartis. A
predecessor company of Sanofi-Aventis, Hoechst Marion Roussel,
Inc. (HMRI), discovered iloperidone and completed early clinical
work on the compound. In 1996, following a review of its product
portfolio, HMRI licensed its rights to the iloperidone patents
to Titan Pharmaceuticals, Inc. on an exclusive basis. In 1997,
soon after it had acquired its rights, Titan sublicensed its
rights to iloperidone on an exclusive basis to Novartis. In June
2004, we acquired exclusive worldwide rights to these patents to
develop and commercialize iloperidone through a sublicense
agreement with Novartis. In consideration for this sublicense,
we paid Novartis an initial license fee of $500,000 and are
obligated to make future milestone payments to Novartis of less
than $100&nbsp;million in the aggregate (the majority of which
are tied to sales milestones), as well as royalty payments to
Novartis at a rate which, as a percentage of net sales, is in
the mid-twenties. Our rights with respect to the patents to
develop and commercialize iloperidone may terminate, in whole or
in part, if we fail to meet certain development or
commercialization milestones, if we do not meet certain other
obligations under our sublicense agreement to make royalty and
milestone payments, if we fail to comply with requirements in
our sublicense agreement regarding our financial condition, or
if we do not abide by certain restrictions in our sublicense
agreement regarding our other development activities.
Additionally, if we do not cure any breaches by Novartis or
Titan of their respective obligations under their agreements
with Titan and Sanofi-Aventis, respectively, our rights to
develop and commercialize iloperidone may revert back to
Novartis.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>VEC-162</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In March 2004, we entered into a license agreement with BMS
under which we received an exclusive worldwide license to
develop and commercialize VEC-162. In consideration for the
license, we paid BMS an initial license fee of $500,000 and are
obligated to make future milestone payments to BMS of less than
$40&nbsp;million in the aggregate (the majority of which are
tied to sales milestones) as well as royalty payments based on
the net sales of
<FONT style="white-space: nowrap">VEC-162</FONT> at a rate
which, as a percentage of net sales, is in the low teens. We are
also obligated under this agreement to pay BMS a percentage of
any sublicense fees, upfront payments and milestone payments
that we receive from a third party in connection with any
partnering arrangement, at a rate which is in the mid-twenties.
We have agreed with BMS in our license agreement for
<FONT style="white-space: nowrap">VEC-162</FONT> to use our
reasonable diligence to develop and commercialize
<FONT style="white-space: nowrap">VEC-162</FONT> and to meet
milestones in completing certain clinical work.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
BMS holds certain rights with respect to
<FONT style="white-space: nowrap">VEC-162</FONT> in our license
agreement. For example, if we have not agreed to a partnering
arrangement to develop and commercialize
<FONT style="white-space: nowrap">VEC-162</FONT> with a
third-party partner after the completion of the entire
Phase&nbsp;III program, BMS has the right to commercialize
<FONT style="white-space: nowrap">VEC-162</FONT> on its own in
exchange for certain milestone and royalty payments.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Either party may terminate the
<FONT style="white-space: nowrap">VEC-162</FONT> license
agreement under certain circumstances, including a material
breach of the agreement by the other. In the event that we
terminate our license without a breach by BMS, or if BMS
terminates our license due to our breach, all rights
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">63

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
licensed and developed by us under this agreement will revert or
otherwise be licensed back to BMS on an exclusive basis.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>VSF-173</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In June 2004, we entered into a license agreement with Novartis
under which we received an exclusive worldwide license to
develop and commercialize
<FONT style="white-space: nowrap">VSF-173.</FONT> In
consideration for the license, we paid Novartis an initial
license fee of $500,000. We are also obligated to make future
milestone payments to Novartis of less than $50&nbsp;million in
the aggregate (the majority of which are tied to sales
milestones) and royalty payments at rates which, as a percentage
of net sales, range from the
<FONT style="white-space: nowrap">low-to</FONT>-mid teens.
Novartis has the right to commercialize
<FONT style="white-space: nowrap">VSF-173</FONT> on its own
after Phase&nbsp;II and Phase&nbsp;III in exchange for certain
milestones and royalty payments. In the event that Novartis
chooses not to exercise either of these options and we decide to
enter into a partnering arrangement to commercialize
<FONT style="white-space: nowrap">VSF-173,</FONT> Novartis has a
right of first refusal to negotiate such an agreement with us,
as well as a right to submit a last matching counteroffer
regarding such an agreement. In addition, our rights with
respect to <FONT style="white-space: nowrap">VSF-173</FONT> may
terminate, in whole or in part, if we fail to meet certain
development and commercialization milestones described in our
license agreement, if we fail to make royalty or milestone
payments or if we do no comply with requirements in our license
agreement regarding our financial condition. In the event of an
early termination of our license agreement, all rights licensed
and developed by us under this agreement may revert back to
Novartis.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Government authorities in the United States, at the federal,
state and local level, as well as foreign countries and local
foreign governments, regulate the research, development,
testing, manufacture, labeling, promotion, advertising,
distribution, sampling, marketing, import and export of our
product candidates. All of our products will require regulatory
approval by government agencies prior to commercialization. In
particular, human pharmaceutical products are subject to
rigorous pre-clinical and clinical trials and other approval
procedures of the FDA and similar regulatory authorities in
foreign countries. The process of obtaining these approvals and
the subsequent compliance with appropriate domestic and foreign
laws, rules and regulations require the expenditure of
significant time and human and financial resources.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In the United States, the FDA regulates drugs under the Federal
Food, Drug and Cosmetic Act and implementing regulations. If we
fail to comply with the applicable requirements at any time
during the product development process, approval process, or
after approval, we may become subject to administrative or
judicial sanctions. These sanctions could include the FDA&#146;s
refusal to approve pending applications, withdrawals of
approvals, clinical holds, warning letters, product recalls,
product seizures, total or partial suspension of our operations,
injunctions, fines, civil penalties or criminal prosecution. Any
such sanction could have a material adverse effect on our
business.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The steps required before a drug may be marketed in the United
States include:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    pre-clinical laboratory tests, animal studies and formulation
    studies under cGLP</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    submission to the FDA of an investigational new drug
    application, or IND, which must become effective before human
    clinical trials may begin</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">64

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    execution of adequate and well-controlled clinical trials to
    establish the safety and efficacy of the product for each
    indication for which approval is sought</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    submission to the FDA of an NDA</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    satisfactory completion of an FDA inspection of the
    manufacturing facility or facilities at which the product is
    produced to assess compliance with cGMP</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    FDA review and approval of the NDA</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Pre-clinical studies generally are conducted in laboratory
animals to evaluate the potential safety and activity of a
product. Violation of the FDA&#146;s good laboratory practices
regulations can, in some cases, lead to invalidation of the
studies, requiring these studies to be replicated. In the United
States, drug developers submit the results of pre-clinical
trials, together with manufacturing information and analytical
and stability data, to the FDA as part of the IND, which must
become effective before clinical trials can begin in the United
States. An IND becomes effective 30&nbsp;days after receipt by
the FDA unless before that time the FDA raises concerns or
questions about issues such as the proposed clinical trials
outlined in the IND. In that case, the IND sponsor and the FDA
must resolve any outstanding FDA concerns or questions before
clinical trials can proceed. If these concerns or questions are
unresolved, the FDA may not allow the clinical trials to
commence.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Pilot studies generally are conducted in a limited patient
population, approximately three to 25&nbsp;subjects, to
determine whether the product candidate warrants further
clinical trials based on preliminary indications of efficacy.
These pilot studies may be performed in the United States after
an IND has become effective or outside of the United States
prior to the filing of an IND in the United States in accordance
with government regulations and institutional procedures.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Clinical trials involve the administration of the
investigational product candidate to human subjects under the
supervision of qualified investigators. Clinical trials are
conducted under protocols detailing, among other things, the
objectives of the study, the parameters to be used in assessing
the safety and the effectiveness of the drug. Each protocol must
be submitted to the FDA as part of the IND prior to beginning
the trial.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Typically, clinical evaluation involves a time-consuming and
costly three-Phase sequential process, but the phases may
overlap. Each trial must be reviewed, approved and conducted
under the auspices of an independent Institutional Review Board,
and each trial must include the patient&#146;s informed consent.
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Phase&nbsp;I: refers typically to closely-monitored clinical
    trials and includes the initial introduction of an
    investigational new drug into human patients or health volunteer
    subjects. Phase&nbsp;I trials are designed to determine the
    safety, metabolism and pharmacologic actions of a drug in
    humans, the potential side effects associated with increasing
    drug doses and, if possible, to gain early evidence of the
    product candidate&#146;s effectiveness. Phase&nbsp;I trials also
    include the study of structure-activity relationships and
    mechanism of action in humans, as well as studies in which
    investigational drugs are used as research tools to explore
    biological phenomena or disease processes. During Phase&nbsp;I
    trials, sufficient information about a drug&#146;s
    pharmacokinetics and pharmacological effects should be obtained
    to permit the design of well-controlled, scientifically valid
    Phase&nbsp;II studies. The total number of subjects and patients
    included in Phase&nbsp;I trials varies, but is generally in the
    range of 20 to 80&nbsp;people.</TD>
</TR>

</TABLE>

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<FONT face="helvetica,arial">

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Phase&nbsp;II: refers to controlled clinical trials conducted to
    evaluate appropriate dosage and the effectiveness of a drug for
    a particular indication or indications in patients with a
    disease or condition under study and to determine the common
    short-term side effects and risks associated with the drug.
    These trials are typically well controlled, closely monitored
    and conducted in a relatively small number of patients, usually
    involving no more than several hundred subjects.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    Phase&nbsp;III: refers to expanded controlled and uncontrolled
    clinical trials. These trials are performed after preliminary
    evidence suggesting effectiveness of a drug has been obtained.
    Phase&nbsp;III trials are intended to gather additional
    information about the effectiveness and safety that is needed to
    evaluate the overall benefit-risk relationship of the drug and
    to provide an adequate basis for physician labeling.
    Phase&nbsp;III trials usually include from several hundred to
    several thousand subjects.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Phase&nbsp;I,&nbsp;II and III testing may not be completed
successfully within any specified time period, if at all. The
FDA closely monitors the progress of each of the three phases of
clinical trials that are conducted in the United States and may,
at its discretion, reevaluate, alter, suspend or terminate the
testing based upon the data accumulated to that point and the
FDA&#146;s assessment of the risk/benefit ratio to the patient.
A clinical program is designed after assessing the causes of the
disease, the mechanism of action of the active pharmaceutical
ingredient of the product candidate and all clinical and
pre-clinical data of previous trials performed. Typically, the
trial design protocols and efficacy endpoints are established in
consultation with the FDA. Upon request through a special
protocol assessment, the FDA can also provide specific guidance
on the acceptability of protocol design for clinical trials. The
FDA or we may suspend or terminate clinical trials at any time
for various reasons, including a finding that the subjects or
patients are being exposed to an unacceptable health risk. The
FDA can also request additional clinical trials be conducted as
a condition to product approval. During all clinical trials,
physicians monitor the patients to determine effectiveness and
to observe and report any reactions or other safety risks that
may result from use of the drug candidate. As noted above,
iloperidone is currently in Phase&nbsp;III trials for the
treatment of schizophrenia,
<FONT style="white-space: nowrap">VEC-162</FONT> is ready for
Phase&nbsp;III trials for the treatment of insomnia and
<FONT style="white-space: nowrap">VSF-173</FONT> is ready for
Phase&nbsp;II trials for the treatment of sleepiness.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Assuming successful completion of the required clinical trials,
drug developers submit the results of pre-clinical studies and
clinical trials, together with other detailed information
including information on the manufacture and composition of the
product, to the FDA, in the form of an NDA, requesting approval
to market the product for one or more indications. In most
cases, the NDA must be accompanied by a substantial user fee.
The FDA reviews an NDA to determine, among other things, whether
a product is safe and effective for its intended use.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Before approving an application, the FDA will inspect the
facility or facilities where the product is manufactured. The
FDA will not approve the application unless cGMP compliance is
satisfactory. The FDA will issue an approval letter if it
determines that the application, manufacturing process and
manufacturing facilities are acceptable. If the FDA determines
that the application, manufacturing process or manufacturing
facilities are not acceptable, it will outline the deficiencies
in the submission and will often request additional testing or
information. Notwithstanding the submission of any requested
additional information, the FDA may ultimately decide that the
application does not satisfy the regulatory criteria for
approval and refuse to approve the application by issuing a not
approvable letter.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The testing and approval process requires substantial time,
effort and financial resources, and each may take several years
to complete. The FDA may not grant approval on a timely basis, or
</DIV>

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at all. We may encounter difficulties or unanticipated costs in
our efforts to secure necessary governmental approvals, which
could delay or preclude us from marketing our products.
Furthermore, the FDA may prevent a drug developer from marketing
a product under a label for its desired indications or place
other conditions on distribution as a condition of any
approvals, which may impair commercialization of the product.
After approval, some types of changes to the approved product,
such as adding new indications, manufacturing changes and
additional labeling claims, are subject to further FDA review
and approval. Similar regulatory procedures must also be
complied with in countries outside the United States.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If the FDA approves the new drug application, the drug becomes
available for physicians to prescribe in the United States.
After approval, the drug developer must comply with a number of
post-approval requirements, including delivering periodic
reports to the FDA, submitting descriptions of any adverse
reactions reported, and complying with drug sampling and
distribution requirements. The holder of an approved NDA is
required to provide updated safety and efficacy information and
to comply with requirements concerning advertising and
promotional labeling. Also, quality control and manufacturing
procedures must continue to conform to cGMP after approval. Drug
manufacturers and their subcontractors are required to register
their facilities and are subject to periodic unannounced
inspections by the FDA to assess compliance with cGMP which
imposes certain procedural and documentation requirements
relating to quality assurance and quality control. Accordingly,
manufacturers must continue to expend time, money and effort in
the area of production and quality control to maintain
compliance with cGMP and other aspects of regulatory compliance.
The FDA may require post market testing and surveillance to
monitor the product&#146;s safety or efficacy, including
additional studies, known as Phase&nbsp;IV trials, to evaluate
long-term effects.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition to studies requested by the FDA after approval, a
drug developer may conduct other trials and studies to explore
use of the approved compound for treatment of new indications,
which require FDA approval. The purpose of these trials and
studies is to broaden the application and use of the drug and
its acceptance in the medical community.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We use, and will continue to use, third-party manufacturers to
produce our products in clinical and commercial quantities.
Future FDA inspections may identify compliance issues at our
facilities or at the facilities of our contract manufacturers
that may disrupt production or distribution, or require
substantial resources to correct. In addition, discovery of
problems with a product or the failure to comply with
requirements may result in restrictions on a product,
manufacturer or holder of an approved NDA, including withdrawal
or recall of the product from the market or other voluntary or
FDA-initiated action that could delay further marketing. Newly
discovered or developed safety or effectiveness data may require
changes to a product&#146;s approved labeling, including the
addition of new warnings and contraindications. Also, new
government requirements may be established that could delay or
prevent regulatory approval of our products under development.
</DIV>

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<B>Foreign regulation</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Whether or not we obtain FDA approval for a product, we must
obtain approval of a product by the comparable regulatory
authorities of foreign countries before we can commence clinical
trials or marketing of the product in those countries. The
approval process varies from country to country, and the time
may be longer or shorter than that required for FDA approval.
The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement also vary greatly
from country to country. Although governed by the applicable
country, clinical trials conducted outside of the United States
typically are administered with
</DIV>

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the three-Phase sequential process that is discussed above under
&#147;&#151;United States government regulation.&#148; However,
the foreign equivalent of an IND is not a prerequisite to
performing pilot studies or Phase&nbsp;I clinical trials.
</DIV>

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Under European Union regulatory systems, we may submit marketing
authorization applications either under a centralized or
decentralized procedure. The centralized procedure which is
available for products produced by biotechnology or which are
highly innovative, provides for the grant of a single marketing
authorization that is valid for all European Union member
states. This authorization is a marketing authorization
approval. The decentralized procedure provides for mutual
recognition of national approval decisions. Under this
procedure, the holder of a national marketing authorization may
submit an application to the remaining member states. Within
90&nbsp;days of receiving the applications and assessment
report, each member state must decide whether to recognize
approval. This procedure is referred to as the mutual
recognition procedure.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition, regulatory approval of prices is required in most
countries other than the United States. We face the risk that
the resulting prices would be insufficient to generate an
acceptable return to us or our collaborators.
</DIV>

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<B>Third-party reimbursement and pricing controls</B>
</DIV>

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In the United States and elsewhere, sales of pharmaceutical
products depend in significant part on the availability of
reimbursement to the consumer from third-party payors, such as
government and private insurance plans. Third-party payors are
increasingly challenging the prices charged for medical products
and services. It will be time consuming and expensive for us to
go through the process of seeking reimbursement from Medicare
and private payors. Our products may not be considered cost
effective, and coverage and reimbursement may not be available
or sufficient to allow us to sell our products on a competitive
and profitable basis. The passage of the Medicare Prescription
Drug and Modernization Act of 2003 imposes new requirements for
the distribution and pricing of prescription drugs which may
affect the marketing of our products.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In many foreign markets, including the countries in the European
Union, pricing of pharmaceutical products is subject to
governmental control. In the United States, there have been, and
we expect that there will continue to be, a number of federal
and state proposals to implement similar governmental pricing
control. While we cannot predict whether such legislative or
regulatory proposals will be adopted, the adoption of such
proposals could have a material adverse effect on our business,
financial condition and profitability.
</DIV>

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<B>Marketing and sales</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We currently have no sales, marketing or distribution
capabilities. However, we plan to develop these capabilities
internally to the extent that it is practical to do so, and
enter into partnering arrangements to the extent that we believe
large sales and marketing forces will be necessary. More
specifically, in the United States we expect to build our own
sales force to market iloperidone and
<FONT style="white-space: nowrap">VSF-173</FONT> directly to
psychiatrists and other target physicians. Because the number of
physicians that would generate the majority of prescriptions for
iloperidone and <FONT style="white-space: nowrap">VSF-173</FONT>
is relatively small, we believe that we can cost-effectively
develop our own sales force to market and sell iloperidone and
<FONT style="white-space: nowrap">VSF-173.</FONT> Outside of the
U.S., we intend to find commercial partners for iloperidone and
<FONT style="white-space: nowrap">VSF-173.</FONT> We will seek a
global commercial partner for VEC-162.
</DIV>

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<B>Patents and proprietary rights; Hatch-Waxman protection</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We will be able to protect our products from unauthorized use by
third parties only to the extent that our products are covered
by valid and enforceable patents&#151; either licensed in from
third parties or generated internally&#151; that give us
sufficient proprietary rights. Accordingly, patents and other
proprietary rights are essential elements of our business.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our three current compounds in clinical development are covered
by new chemical entity (NCE)&nbsp;and other patents. The NCE
patent for iloperidone is owned by Sanofi-Aventis, and other
patents and patent applications relating to iloperidone are
owned by Sanofi-Aventis and Novartis. Novartis also owns the NCE
patent for <FONT style="white-space: nowrap">VSF-173</FONT> and
Bristol-Myers Squibb owns the NCE patent for
<FONT style="white-space: nowrap">VEC-162.</FONT> For all three
compounds we have obtained exclusive worldwide rights to develop
and commercialize the compounds covered by these patents through
license and sublicense arrangements. For more on these license
and sublicense arrangements, please see &#147;&#151;License
agreements&#148; above. In addition, we have generated
intellectual property, and filed patent applications covering
this intellectual property, for each of the three compounds.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The NCE patent covering iloperidone expires normally in 2011 in
the United States and in 2010 in most European markets. The NCE
patent covering <FONT style="white-space: nowrap">VEC-162</FONT>
expires in 2017 in the United States and most European markets.
The NCE patent covering
<FONT style="white-space: nowrap">VSF-173</FONT> expires in 2014
in the United States and in 2012 in most European markets.
Additionally, for each of our late-stage compounds, an
additional period of exclusivity in the United States of up to
five years following the expiration of the patent covering that
compound may be obtained pursuant to the United States Drug
Price Competition and Patent Term Restoration Act of 1984, more
commonly known as the &#147;Hatch-Waxman Act.&#148; Assuming we
gain such a five-year extension and that we continue to have our
intellectual property rights under our sublicense and license
agreements, we would have exclusive NCE patent rights in the
U.S.&nbsp;for iloperidone until 2016, for
<FONT style="white-space: nowrap">VEC-162</FONT> until 2022 and
for <FONT style="white-space: nowrap">VSF-173</FONT> until 2017.
In Europe, similar legislative enactments may allow us to obtain
five-year extensions of the European NCE patents covering our
product candidates through the granting of Supplementary
Protection Certificates, which would allow us to have exclusive
European NCE patent rights for iloperidone until 2015, for
<FONT style="white-space: nowrap">VEC-162</FONT> until 2022 and
for <FONT style="white-space: nowrap">VSF-173</FONT> until 2017.
Additionally, a recent directive in the European Union allows
companies who receive European regulatory approval for a new
compound to have a
<FONT style="white-space: nowrap">10-year</FONT> period of
market exclusivity in most European countries for that compound
(with the possibility of a further one-year extension),
beginning on the date of such European regulatory approval,
regardless of when the European NCE patent covering such
compound expires. No generic version of an approved drug may be
marketed or sold in most European countries during this
<FONT style="white-space: nowrap">10-year</FONT> period. This
directive may be of particular importance with respect to
iloperidone, since the European NCE patent for iloperidone will
likely expire prior to the end of this
<FONT style="white-space: nowrap">10-year</FONT> period of
market exclusivity.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Aside from the NCE patents covering our current late-stage
compounds, as of December&nbsp;11, 2005 we had one issued United
States patent and 17&nbsp;pending patent applications in the
United States, several of which have already been filed
internationally as Patent Cooperation Treaty applications. The
claims in these various patents and patent applications are
directed to compositions of matter, including claims covering
other product candidates, pharmaceutical compositions, and
methods of use.
</DIV>

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For proprietary know-how that is not appropriate for patent
protection, processes for which patents are difficult to enforce
and any other elements of our PG discovery process that involve
proprietary know-how and technology that is not covered by
patent applications, we rely on trade secret protection and
confidentiality agreements to protect our interests. We require
all
</DIV>

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of our employees, consultants and advisors to enter into
confidentiality agreements. Where it is necessary to share our
proprietary information or data with outside parties, our policy
is to make available only that information and data required to
accomplish the desired purpose and only pursuant to a duty of
confidentiality on the part of those parties.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We currently depend and expect to continue to depend on a small
number of third-party manufacturers to produce sufficient
quantities of our product candidates for use in our clinical
studies. We are not obligated to obtain our product candidates
from any particular third-party manufacturer and we believe that
we would be able to obtain our product candidates from a number
of third-party manufacturers at comparable cost.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If any of our product candidates are approved for commercial
use, we plan to rely on third-party contract manufacturers to
produce sufficient quantities for large-scale commercialization.
If we do enter into commercial manufacturing arrangements with
third parties, these third-party manufacturers will be subject
to extensive governmental regulation. Specifically, regulatory
authorities in the markets which we intend to serve will require
that drugs be manufactured, packaged and labeled in conformity
with cGMP or equivalent foreign standards. We intend to engage
only those contract manufacturers who have the capability to
manufacture drug products in compliance with cGMP and other
applicable standards in bulk quantities for commercial use.
</DIV>

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<B>Competition</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The pharmaceutical industry and the central nervous system
segment of that industry in particular, is highly competitive
and includes a number of established large and mid-sized
companies with greater financial, technical and personnel
resources than we have and significantly greater commercial
infrastructures than we have. Our market segment also includes
several smaller emerging companies whose activities are directly
focused on our target markets and areas of expertise. If
approved, our product candidates will compete with numerous
therapeutic treatments offered by these competitors. While we
believe that our product candidates will have certain favorable
features, existing and new treatments may also possess
advantages. Additionally, the development of other drug
technologies and methods of disease prevention are occurring at
a rapid pace. These developments may render our product
candidates or technologies obsolete or noncompetitive.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We believe the primary competitors for each of our product
candidates are as follows:
</DIV>

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    <TD width="1%"></TD>
    <TD width="99%"></TD>
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<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    For iloperidone in the treatment of schizophrenia, the atypical
    antipsychotics
    Risperdal<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (risperidone)&nbsp;by Johnson&nbsp;&#38; Johnson (including the
    depot formulation
    Risperdal<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    Consta<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>),
    Zyprexa<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (olanzapine)&nbsp;by Eli Lilly,
    Seroquel<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (quetiapine)&nbsp;by AstraZeneca,
    Abilify<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (aripiprazole)&nbsp;by BMS/Otsuka Pharmaceutical Co., Ltd., and
    Geodon<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (ziprasidone)&nbsp;by Pfizer, and generic clozapine, as well as
    the typical antipsychotics haloperidol, chlorpromazine,
    thioridazine and sulpiride (all of which are generic). In
    addition to the approved products, compounds in Phase&nbsp;III
    trials for the treatment of schizophrenia include bifeprunox
    (Wyeth Pharmaceuticals/ Solvay S.A./ Lundbeck), paliperidone
    (Johnson&nbsp;&#38; Johnson), and asenapine (Pfizer).</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    For VEC-162 in the treatment of insomnia,
    Rozerem<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>
    (ramelteon)&nbsp;by Takeda Pharmaceuticals, hypnotics such as
    Ambien<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (zolpidem)&nbsp;by Sanofi-Aventis (including Ambien
    CR<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>),
    Lunesta<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (eszopiclone)&nbsp;by Sepracor and
    Sonata<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (zaleplon)&nbsp;by King Pharmaceuticals, generic</TD>
</TR>

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    <TD></TD>
    <TD align="left">
    benzodiazepines such as trazodone and doxepin, and
    <FONT style="white-space: nowrap">over-the</FONT>-counter
    remedies such as
    Benadryl<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    and Tylenol
    PM<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>.
    In addition to the approved products, compounds in
    Phase&nbsp;III trials for insomnia include indiplon (Pfizer/
    Neurocrine Biosciences) gaboxadol (Merck/ Lundbeck), and
    low-dose doxepin
    (Silenor<SUP style="font-size: 85%; vertical-align: text-top"><FONT style="font-variant:SMALL-CAPS">tm</FONT></SUP>,
    Somaxon Pharmaceuticals, Inc.).</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    For VEC-162 in the treatment of depression, agomelatine (Les
    Laboratoires Servier), SSRI/ SNRI drugs such as
    Paxil<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (paroxetine)&nbsp;by GSK,
    Zoloft<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (sertraline)&nbsp;by Pfizer,
    Prozac<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (fluoxetine)&nbsp;by Eli Lilly, and Lexapro
    (escitalopram)&nbsp;by Lundbeck/ Forest Pharmaceuticals Inc.,
    Effexor<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (venlafaxine)&nbsp;by Wyeth as well as other compounds such as
    Wellbutrin<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (buproprion)&nbsp;by GSK and
    Cymbalta<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (duloxetine)&nbsp;by Eli Lilly.</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    For VSF-173 in the treatment of excessive daytime sleepiness,
    Provigil<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (modafinil)&nbsp;by Cephalon and
    Xyrem<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP>
    (sodium oxybate) by Jazz Pharmaceuticals, Inc.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our ability to compete successfully will depend in part on our
ability to utilize our PG and drug development expertise to
identify, develop, secure rights to and obtain regulatory
approvals for promising pharmaceutical compounds before others
are able to develop competitive products. Our ability to compete
successfully will also depend on our ability to attract and
retain skilled and experienced personnel. Additionally, our
ability to compete may be affected because insurers and other
third-party payors in some cases seek to encourage the use of
cheaper, generic products, which could make our products less
attractive.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of September&nbsp;30, 2005 we had 30&nbsp;full-time
employees, 25 of whom were primarily engaged in research and
development activities. 25 of our full-time employees work at
our facility in Rockville, Maryland, and 4 of our full-time
employees work at our Singapore research facility. None of our
employees are represented by a labor union. We have not
experienced any work stoppages and consider our employee
relations to be good.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our current headquarters are located in Rockville, Maryland,
consisting of approximately 9,000&nbsp;square feet of leased
office space. Our annual rent under our lease for this
headquarters is $216,000, with an annual increase of 3%&nbsp;per
year until the expiration of our lease in 2008. In August 2005
we notified our landlord of our intent to exercise our sublease
rights under this lease, in order to move in to a larger
facility to accommodate our development and commercialization
activities. In August 2005, we entered into a new lease for this
larger facility, at 9605&nbsp;Medical Center Drive, Rockville,
Maryland, consisting of approximately 17,000&nbsp;square feet of
office and laboratory space. We will take possession of the
lease space in mid-January 2006. Our annual rent for our new,
larger facility under this new lease will be approximately
$433,000, with an annual increase of 3%&nbsp;per year, until the
expiration of the new lease in 2016. We believe we will be able
to sublease our current headquarters prior to vacating it in
January 2006 for our new, larger facility.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have also entered into a lease for a research facility in
Singapore. Our annual rent for this facility is approximately
$75,000&nbsp;per year; the lease for the facility expires in
December 2006.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='111'></A>
</DIV>

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<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Management</B>
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Executive officers and directors</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following are our executive officers and directors as of
September&nbsp;30, 2005, with the exception of Steven A.
Shallcross and Richard W. Dugan, each of whom joined us after
such date.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="40%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="51%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="7" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Name</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Age</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Position</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="7" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Mihael H. Polymeropoulos,&nbsp;M.D.
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">45</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">President and Chief Executive
    Officer, Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">William D. &#147;Chip&#148; Clark
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">37</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Senior Vice President, Chief
    Business Officer and Secretary
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Steven A. Shallcross
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">44</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Senior Vice President, Chief
    Financial Officer and Treasurer
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Thomas Copmann,&nbsp;Ph.D.
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">53</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Vice President of Regulatory Affairs
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deepak Phadke,&nbsp;Ph.D.
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">55</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Vice President of Manufacturing
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Argeris N.
    Karabelas,&nbsp;Ph.D.(1),(3)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">53</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Director and Chairman of the Board
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Richard W. Dugan(2)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">63</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Brian K. Halak,&nbsp;Ph.D.(2),(3)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">34</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Wayne T.
    Hockmeyer,&nbsp;Ph.D.(1),(3)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">61</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">David Ramsay(2)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">42</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">James B. Tananbaum,&nbsp;M.D.(1)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">42</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;Member of Compensation Committee.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(2)&nbsp;Member of Audit Committee.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(3)&nbsp;Member of Nominating/ Corporate Governance Committee.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Mihael H. Polymeropoulos,</I> M.D. has served as Chief
Executive Officer and a Director of Vanda since May of 2003.
Prior to joining Vanda, Dr.&nbsp;Polymeropoulos was Vice
President and Head of the Pharmacogenetics Department at
Novartis from 1998 to 2003. Prior to his tenure at Novartis, he
served as Chief of the Gene Mapping Section, Laboratory of
Genetic Disease Research, National Human Genome Research
Institute, from 1992 to 1998. Dr.&nbsp;Polymeropoulos is the
co-founder of the Integrated Molecular Analysis of Genome
Expression (IMAGE)&nbsp;Consortium. Dr.&nbsp;Polymeropoulos
holds a degree in Medicine from the University of Patras.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>William D. &#147;Chip&#148; Clark </I>has served as Senior
Vice President and Chief Business Officer of Vanda since
September of 2004 and served as a Director of Vanda from 2002 to
2004. Prior to joining Vanda, Mr.&nbsp;Clark was a Principal at
Care Capital, LLC, a venture capital firm investing in
biopharmaceuticals companies, from 2000 to 2004. Prior to his
tenure at Care Capital, he served in a variety of commercial
roles at SmithKline Beecham (now part of GlaxoSmithKline), from
1990 to 2000. Mr.&nbsp;Clark holds a B.A. from Harvard
University and an M.B.A. from The Wharton School at the
University of Pennsylvania.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Steven A. Shallcross </I>has served as Senior Vice President,
Chief Financial Officer and Treasurer of Vanda since November of
2005. From October 2001 to November 2005, Mr.&nbsp;Shallcross
was the Senior Vice President, Chief Financial Officer and
Treasurer at Advancis Pharmaceutical Corporation, a specialty
pharmaceutical company. Mr.&nbsp;Shallcross was the Vice
President of Finance and Chief Financial Officer at Bering Truck
Corporation, a truck manufacturer, from
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
1997 to 2001. From 1993 to 1997, Mr.&nbsp;Shallcross served as
Vice President of Operations at Precision Scientific, Inc., a
manufacturer of scientific laboratory equipment. He was the
Controller of Precision Scientific from 1993 to 1994.
Mr.&nbsp;Shallcross has over 20&nbsp;years of senior financial
and operations experience in emerging organizations, including
acquisitions and restructurings. Mr.&nbsp;Shallcross received a
bachelor&#146;s degree in accounting from the University of
Illinois and an M.B.A. from the University of Chicago, Graduate
School of Business. Mr.&nbsp;Shallcross is also a certified
public accountant.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Thomas Copmann,</I> Ph.D. has served as Vice President of
Regulatory Affairs at Vanda since April of 2005. Prior to
joining Vanda, Dr.&nbsp;Copmann served as Senior Director of
Regulatory Affairs at Eli Lilly&nbsp;&#38; Co., from 2000 to
2005. Prior to his tenure at Eli Lilly&nbsp;&#38; Co.,
Dr.&nbsp;Copmann was the Associate Vice President for Regulatory
Affairs and Executive Director for the Commission on Drugs for
Rare Diseases at the Pharmaceutical Manufacturers Association,
from 1989 to 1995. Dr.&nbsp;Copmann holds an M.S. in
Endocrinology and a Ph.D. in Physiology from Kent State
University.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Deepak Phadke,</I> Ph.D. has served as Vice President of
Manufacturing at Vanda since August of 2005. Prior to joining
Vanda, Dr.&nbsp;Phadke served as Executive Director of
Pharmaceutical Sciences at Beckloff Associates, a pharmaceutical
research and development consulting company located in the
Kansas City area, from 1998 to 2005. Prior to his tenure at
Beckloff Associates, Dr.&nbsp;Phadke served as a manager and
research scientist in the formulation development departments at
Hoechst Marion Roussel and its predecessor companies in Kansas
City and Indianapolis, from 1986 to 1998. Dr.&nbsp;Phadke holds
a B.S. and an M.S. in Pharmacy and Pharmaceutics, respectively,
from Nagpur University in India, and a Ph.D. in Pharmaceutics
from Rutgers University.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Argeris N. &#147;Jerry&#148; Karabelas,</I> Ph.D. has served
as a Director and Chairman of the Board since 2003.
Dr.&nbsp;Karabelas has served as a Partner of Care Capital, LLC
since 2001. Prior to his tenure at Care Capital,
Dr.&nbsp;Karabelas was the Founder and Chairman of the Novartis
BioVenture fund, from July 2000 to December 2001. From 1998 to
2000, he served as Head of Healthcare and CEO of Worldwide
Pharmaceuticals for Novartis. Prior to joining Novartis,
Dr.&nbsp;Karabelas was Executive Vice President of SmithKline
Beecham responsible for U.S. operations, European operations,
Regulatory, and Strategic Marketing, from 1981 to 1998. He is a
member of the Scientific Advisory Council of the Massachusetts
General Hospital, the Harvard- MIT Health Science and Technology
Visiting Committee, a Director of SykePharma Plc, Human Genome
Sciences, NitroMed Inc., Anadys Pharmaceuticals, Inc., Acura
Pharmaceuticals, Inc. and a Trustee of Fox Chase Cancer Center
and the Philadelphia University of the Sciences.
Dr.&nbsp;Karabelas holds a Ph.D. in Pharmacokinetics from the
Massachusetts College of Pharmacy.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Richard W. Dugan </I>has served as a Director of Vanda since
December of 2005. From 1976 to September 2002, Mr.&nbsp;Dugan
served as a Partner with Ernst&nbsp;&#38; Young, LLP, where he
served in a variety of managing and senior partner positions,
including Mid-Atlantic Area Senior Partner from 2001 to 2002,
Mid-Atlantic Area Managing Partner from 1989 to 2001 and
Pittsburgh Office Managing Partner from 1979 to 1989.
Mr.&nbsp;Dugan retired from Ernst&nbsp;&#38; Young LLP in
September 2002. Mr.&nbsp;Dugan currently serves on the board of
directors of two other publicly-traded pharmaceutical companies,
Advancis Pharmaceutical Corporation and Critical Therapeutics,
Inc. Mr.&nbsp;Dugan holds a B.S.B.A. from Pennsylvania State
University.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Brian K. Halak,</I> Ph.D. has served as a Director of Vanda
since 2004. Dr.&nbsp;Halak has served as a Principal at Domain
Associates, a venture capital firm based in Princeton, New
Jersey, since 2001 and will be a Partner as of January 2006.
Prior to joining Domain, he served as an
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
Associate of the venture capital firm Advanced Technology
Ventures, from 2000 to 2001. Dr.&nbsp;Halak serves on the
Investment Advisory Council for Ben Franklin Technology Partners
and BioAdvance, both seed stage investment groups in
Philadelphia. Dr.&nbsp;Halak holds a B.S.E. from the University
of Pennsylvania and a Ph.D. in Immunology from Thomas Jefferson
University.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Wayne T. Hockmeyer,</I> Ph.D. has served as a Director of
Vanda since 2004. Dr.&nbsp;Hockmeyer founded MedImmune, Inc. in
April 1988 as President and Chief Executive Officer and was
elected to serve on the Board of Directors in May 1988.
Dr.&nbsp;Hockmeyer became Chairman of the Board of Directors of
MedImmune, Inc. in May 1993. He relinquished his position as
Chief Executive Officer in October 2000 and now serves as
Chairman of the Board of MedImmune, Inc. and President of
MedImmune Ventures, Inc. Dr.&nbsp;Hockmeyer earned his
bachelor&#146;s degree from Purdue University and his Ph.D. from
the University of Florida in 1972. Dr.&nbsp;Hockmeyer was
recognized in 1998 by the University of Florida as a
Distinguished Alumnus and in 2002, Dr.&nbsp;Hockmeyer was
awarded a Doctor of Science honoris causa from Purdue
University. Dr.&nbsp;Hockmeyer is a member of the Maryland
Economic Development Commission and the Governor&#146;s
Workforce Investment Board (GWIB). He is also a member of the
Maryland Governor&#146;s Scientific Advisory Board. He is a
member of the Board of Directors of the publicly-traded
biotechnology companies, Advancis Pharmaceutical Corp., GenVec,
Inc. and Idenix Pharmaceuticals, Inc. and serves on the boards
of several educational and philanthropic organizations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>David Ramsay </I>has served as a Director of Vanda since
2004. Mr.&nbsp;Ramsay has served as a Partner of Care Capital,
LLC, which he co-founded in 2000. Prior to founding Care
Capital, Mr.&nbsp;Ramsay served as a Managing Director of the
Rh&#244;ne Group, LLC, from 1997 to 2000 and co-founded
Rh&#244;ne Capital, LLC, a private equity investment vehicle.
Mr.&nbsp;Ramsay previously worked at Morgan Stanley Capital
Partners. Mr.&nbsp;Ramsay holds an A.B. in Mathematics from
Princeton University and an M.B.A. from the Stanford University
Graduate School of Business.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>James B. Tananbaum,</I> M.D. has served as a Director of
Vanda since 2004. Dr.&nbsp;Tananbaum has served as a Managing
Partner of Prospect Venture Partners, a dedicated life science
venture fund group which he co-founded, since 2000. Prior to
co-founding Prospect Venture Partners, he served as Chief
Executive Officer of Theravance, Inc. from 1997 to 2000.
Dr.&nbsp;Tananbaum also served as a Partner at Sierra Ventures,
from 1993 to 1997. Dr.&nbsp;Tananbaum co-founded GelTex
Pharmaceuticals, Inc. in 1991. He is an officer of the Young
Presidents&#146; Organization, Golden Gate Chapter and a member
of the World Economic Forum and the Harvard-MIT Health Science
and Technology Visiting Committee. Dr.&nbsp;Tananbaum serves as
a Director of Critical Therapeutics, Inc. Dr.&nbsp;Tananbaum
holds a bachelor&#146;s degree and a B.S.E.E. from Yale
University and an M.D. and an M.B.A. from Harvard University.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our officers are elected by our board of directors on an annual
basis and serve until their successors are duly elected and
qualified. There are no family relationships among any of our
officers or directors.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our restated certificate of incorporation that will become
effective as of the closing of this offering provides for a
classified board of directors consisting of three classes of
directors, each serving a staggered three-year term. As a
result, a portion of our board of directors will be elected each
year from and after the closing. To implement the classified
structure, upon the
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
consummation of the offering, three of the nominees to the board
will be elected to one-year terms, two will be elected to
two-year terms and two will be elected to three-year terms.
Thereafter, directors will be elected for three-year terms.
Drs.&nbsp;Hockmeyer and Tananbaum and Mr.&nbsp;Ramsay have been
designated Class&nbsp;I directors whose term will expire at the
2007 annual meeting of stockholders, assuming the completion of
the proposed offering. Dr.&nbsp;Halak and Mr.&nbsp;Dugan have
been designated Class&nbsp;II directors whose term will expire
at the 2008 annual meeting of stockholders, assuming the
completion of the proposed offering. Drs.&nbsp;Polymeropoulos
and Karabelas have been designated Class&nbsp;III directors
whose term expires at the 2009 annual meeting of stockholders,
assuming the completion of the proposed offering. Our bylaws
provide that the number of authorized directors may be changed
only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of
authorized directors will be distributed among the three classes
so that, as nearly as reasonably possible, each class will
consist of one-third of the directors. The classification of the
board of directors may have the effect of delaying or preventing
changes in control of our company.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Our board currently has three committees: the audit committee,
the compensation committee and the nominating/corporate
governance committee. The information set forth below assumes
the completion of the proposed offering.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Audit Committee.</I> The members of our audit committee are
Messrs.&nbsp;Dugan, and Ramsay and Dr.&nbsp;Halak.
Mr.&nbsp;Dugan chairs the audit committee. Mr.&nbsp;Dugan is our
audit committee financial expert (as is currently defined under
the SEC rules implementing Section&nbsp;407 of the
Sarbanes-Oxley Act of 2002). Our audit committee, among other
duties:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

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

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

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    considers the adequacy of our internal accounting controls and
    audit procedures</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    approves (or, as permitted, pre-approves) all audit and
    non-audit services to be performed by the independent accountant</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The audit committee has the sole and direct responsibility for
appointing, evaluating and retaining our independent auditors
and for overseeing their work. All audit services and all
non-audit services, other than de minimis non-audit services, to
be provided to us by our independent auditors must be approved
in advance by our audit committee. We believe that the
composition of our audit committee meets the requirements for
independence under the current Nasdaq National Market and SEC
rules and regulations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Compensation Committee.</I> The members of our compensation
committee are Drs.&nbsp;Hockmeyer, Karabelas and Tananbaum. The
purpose of our compensation committee is to discharge the
responsibilities of our board of directors relating to
compensation of our executive officers. Specific
responsibilities of our compensation committee include:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    administering our equity compensation plans</TD>
</TR>

</TABLE>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">75

</FONT>

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<FONT face="helvetica,arial">

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

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

</TABLE>

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

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
On December&nbsp;19, 2005, our board of directors adopted a
compensation program for outside directors. Pursuant to this
program, each member of our board of directors who is not our
employee will receive a $25,000 annual retainer as well as
$2,500 for each board meeting attended in person ($1,250 for
meetings attended by telephone conference). The chairman of the
board of directors will receive an additional annual retainer of
$10,000, and the chairman of each committee of the board of
directors will receive an additional annual retainer of $2,000.
Each director will receive $1,000 for each meeting of any
committee of the board of directors attended in person or by
telephone conference.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Under the director compensation program adopted on
December&nbsp;19, 2005, each member of our board of directors
who is not our employee and who is elected after
December&nbsp;19, 2005 will initially receive a nonstatutory
option to purchase&nbsp;35,000&nbsp;shares of our common stock
upon election, and each member of our board of directors who is
not our employee will also receive annual grants of options to
purchase&nbsp;15,000&nbsp;shares of our common stock. The stock
option granted upon election will vest and become exercisable in
equal monthly installments over a period of four years from the
date of the grant, except that in the event of a change of
control the option will accelerate and become immediately
exercisable. Each annual stock option will vest and become
exercisable in equal monthly installments over a period of one
year from the date of grant, except that in the event of a
change of control the option will accelerate and become
immediately exercisable. All of these options will have an
exercise price equal to the fair market value of our common
stock on the date of the grant. In cases where a director is
serving as such on behalf of an entity, we may issue a warrant
directly to such entity as consideration for the services
provided in lieu of granting an option to the director himself.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Compensation committee interlocks and insider
participation</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The current members of our compensation committee of our board
of directors are Drs.&nbsp;Hockmeyer, Karabelas and Tananbaum.
No interlocking relationship exists between our board of
directors or compensation committee and the board of directors
or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table sets forth the compensation earned by our
Chief Executive Officer and the other highest paid executive
officer whose salary and bonus exceeded $100,000 for services
rendered in all capacities to us during the fiscal year ended
December&nbsp;31, 2004. We use the
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">76

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
term &#147;named executive officers&#148; to refer to these
people later in this prospectus. No other executive officers who
would have otherwise been includable in the following table on
the basis of salary and bonus earned for the year ended
December&nbsp;31, 2004 have been excluded by reason of their
termination of employment or change in executive status during
that year.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="50%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="13">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Long-term</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="13">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">compensation</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="13">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="13">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Awards</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="right" nowrap><B><FONT face="helvetica,arial">Annual compensation</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Securities</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">underlying</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Name and principal position</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Salary($)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Bonus($)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">options</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Mihael H. Polymeropoulos,&nbsp;M.D.
    President and Chief Executive Officer
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2004</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">350,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">147,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">William D. &#147;Chip&#148; Clark
    Senior Vice President, Chief Business Officer and Secretary
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2004</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">75,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">(1)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">303,400</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;In September 2004 Mr.&nbsp;Clark joined us as Senior
Vice President, Chief Business Officer and Secretary at an
annual salary of $225,000.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
This table excludes compensation information for Thomas Copmann,
who joined us in April 2005 as Vice President of Regulatory
Affairs, Deepak Phadke, who joined us in August 2005 as Vice
President of Manufacturing, and Steven A. Shallcross, who joined
us as Senior Vice President, Chief Financial Officer and
Treasurer in November 2005. The terms of Drs.&nbsp;Copmann and
Phadke and Mr.&nbsp;Shallcross&#146; employment are described in
the &#147;&#151;Employment agreements&#148; section below.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Option grants in last fiscal year</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table outlines information regarding stock options
granted to our named officers in 2004. Amounts in the following
table under potential realizable values are amounts that could
be achieved for the respective options if they are exercised at
the end of the option term. For purposes of this analysis, the
Securities and Exchange Commission mandates the use of 5% and
10% assumed annual rates of compounded stock price appreciation,
and these rates do not represent an estimate or projection of
our future common stock prices. The amounts under potential
realizable value represent assumed rates of appreciation in the
value of our common stock from the assumed initial public
offering price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share. Actual gains, if any, in this value will depend on the
future performance of our common stock and overall market
conditions. We may not achieve the amounts reflected in the
following table.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="36%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="24" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Potential</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="right" nowrap><B><FONT face="helvetica,arial">Individual grants</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">realizable value at</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="14" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">assumed annual</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Number of</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Percent of</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">rates of stock</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">securities</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">total options</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">price appreciation</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">underlying</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">granted to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">for option term(3)</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">options</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">employees in</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Exercise</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Expiration</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Name</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">granted</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">fiscal year(1)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">price(2)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">date</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">5%</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">10%</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="24" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Mihael H.
    Polymeropoulos,&nbsp;M.D.&nbsp;</FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">William D. &#147;Chip&#148; Clark
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">303,400</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">94.1%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">09/01/2014</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="25" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;The figures representing percentages of total options
granted to employees in the last fiscal year are based on a
total of 322,373 option shares granted to our employees during
fiscal year 2004.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">77

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(2)&nbsp;The exercise price of each option granted was equal to
the fair market value of our common stock as valued by our board
of directors on the date of grant. The exercise price may be
paid in cash, cash equivalents, or in shares of our common stock.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(3)&nbsp;The potential realizable value is calculated based on
the ten-year term of the option at the time of grant. Stock
price appreciation of 5% and 10% is assumed according to rules
promulgated by the Securities and Exchange Commission and does
not represent our prediction of our stock price performance. The
potential realizable value at 5% and 10% appreciation is
calculated by:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <FONT style="font-size: 8pt">Multiplying the number of shares of
    stock subject to a given stock option by the exercise price per
    share
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <FONT style="font-size: 8pt">Assuming that the aggregate stock
    value derived from that calculation compounds at the annual 5%
    or 10% rate shown in the table until the expiration of the option
    </FONT></TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    <FONT style="font-size: 8pt">Subtracting from that result the
    aggregate option exercise price
    </FONT></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Option exercises and fiscal year-end option values</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
None of the named executive officers exercised options during
2004. The following table presents the number and value of
securities underlying unexercised options that were held by our
named executive officers as of December&nbsp;31, 2004.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="38%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Number of securities</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Value of unexercised</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">underlying unexercised</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">in-the-money options at</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">options at December&nbsp;31, 2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31, 2004(1)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Name</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Exercisable</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Unexercisable</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Exercisable</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Unexercisable</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Mihael H.
    Polymeropoulos,&nbsp;M.D.&nbsp;</FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">493,400</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">William D. &#147;Chip&#148; Clark
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">303,400</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;Amounts presented under the caption &#147;Value of
unexercised
<FONT style="white-space: nowrap">in-the</FONT>-money options at
December&nbsp;31, 2004&#148; are based on the fair market value
of $&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per share
minus the exercise price, multiplied by the number of shares
subject to the stock option, without taking into account any
taxes that might be payable in connection with the transaction.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have entered into offer letters or employment agreements with
each of Mihael H. Polymeropoulos,&nbsp;M.D., our Chief Executive
Officer, Steven Shallcross, our Chief Financial Officer, William
D. &#147;Chip&#148; Clark, our Chief Business Officer, Thomas
Copmann, our Vice President of Regulatory Affairs, and Deepak
Phadke, our Vice President of Manufacturing.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Mihael Polymeropoulos,&nbsp;M.D.</I> We entered into an
employment agreement in February 2005 with
Dr.&nbsp;Polymeropoulos, our President and Chief Executive
Officer, which provides for an annual base salary of $362,250
and the possibility of an annual target bonus amount equal to
40% of his annual base salary upon achievement of certain
performance goals. If Dr.&nbsp;Polymeropoulos&#146; employment
is terminated without cause, he becomes permanently disabled, or
he terminates his employment for good reason, he will receive
the following severance benefits following his employment
termination: (a)&nbsp;a cash payment of his monthly base salary
for 12&nbsp;months; (b)&nbsp;payment of his monthly COBRA health
insurance premiums; and (c)&nbsp;a bonus in an amount determined
as follows: (i)&nbsp;if he is terminated prior to the first
anniversary of this agreement, a pro-rata portion of the
anticipated first-year target bonus will be given to him;
(ii)&nbsp;if he is terminated on or following the first
anniversary and prior to the third, the bonus will equal the
greater of the most recent target bonus or the average target
bonuses awarded for the prior years; or (iii)&nbsp;if he is
terminated on or following the third anniversary, the bonus will
be equal to the greater of the most recent target bonus or the
average target bonus awarded for the prior three years. In
addition, the employment agreement provides for an option grant
covering 918,400&nbsp;shares of our common stock with the
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">78

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
following vesting acceleration terms: if, following a change in
control, Dr.&nbsp;Polymeropoulos is terminated without cause, or
he terminates his employment for good reason, he will become
vested in 100% of his then unvested shares.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>William D. &#147;Chip&#148; Clark.</I> We entered into an
employment agreement in February 2005 with Mr.&nbsp;Clark, our
Senior Vice President, Chief Business Officer and Secretary,
which provides for an annual base salary of $227,625 and the
possibility of a annual target bonus equal to 25% of his annual
base salary upon achievement of certain performance criteria. If
Mr.&nbsp;Clark&#146;s employment is terminated without cause, he
becomes permanently disabled, or he terminates his employment
for good reason, he will receive the following severance
benefits following his employment termination: (a)&nbsp;a cash
payment of his monthly base salary for 12&nbsp;months;
(b)&nbsp;payment of his monthly COBRA health insurance premiums;
and (c)&nbsp;a bonus in an amount determined as follows:
(i)&nbsp;if he is terminated prior to the first anniversary of
this agreement, a pro-rata portion of the anticipated first-year
target bonus will be given to him; (ii)&nbsp;if he is terminated
on or following the first anniversary and prior to the third,
the bonus will equal the greater of the most recent target bonus
or the average target bonuses awarded for the prior years; or
(iii)&nbsp;if he is terminated on or following the third
anniversary, the bonus will be equal to the greater of the most
recent target bonus or the average target bonus awarded for the
prior three years. In addition, the employment agreement
provides for an option grant covering 463,400&nbsp;shares of our
common stock with the following vesting acceleration terms: if,
following a change in control, Mr.&nbsp;Clark is terminated
without cause, or he terminates his employment for good reason,
he will become vested in 24&nbsp;months&#146; worth of his then
unvested shares.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Steven A. Shallcross.</I> We entered into an employment
agreement in October 2005 with Mr.&nbsp;Shallcross, our Senior
Vice President, Chief Financial Officer and Treasurer, which
provides for an annual base salary of $250,000 and the
possibility of an annual target bonus equal to 25% of his annual
base salary upon achievement of certain performance criteria. If
Mr.&nbsp;Shallcross&#146; employment is terminated without
cause, he becomes permanently disabled, or he terminates his
employment for good reason, he will receive the following
severance benefits following his employment termination:
(a)&nbsp;a cash payment of his monthly base salary for
12&nbsp;months; (b)&nbsp;payment of his monthly COBRA health
insurance premiums; and (c)&nbsp;a bonus in an amount determined
as follows: (i)&nbsp;if he is terminated prior to the first
anniversary of this agreement, a pro-rata portion of the
anticipated first-year target bonus will be given to him;
(ii)&nbsp;if he is terminated on or following the first
anniversary and prior to the third, the bonus will equal the
greater of the most recent target bonus or the average target
bonuses awarded for the prior years; or (iii)&nbsp;if he is
terminated on or following the third anniversary, the bonus will
be equal to the greater of the most recent target bonus or the
average target bonus awarded for the prior three years. In
addition, the employment agreement provides for an option grant
covering 275,000&nbsp;shares of our common stock with the
following vesting acceleration terms: if, following a change in
control, Mr.&nbsp;Shallcross is terminated without cause, or he
terminates his employment for good reason, he will become vested
in 24&nbsp;months&#146; worth of his then unvested shares.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Thomas Copmann,&nbsp;Ph.D.</I> We entered into an employment
agreement in May 2005 with Dr.&nbsp;Copmann, our Vice President
of Regulatory Affairs, which provides for an annual base salary
of $200,000 and the possibility of an annual target bonus equal
to 28% of his annual base salary upon achievement of certain
performance criteria. If Dr.&nbsp;Copmann&#146;s employment is
terminated without cause, he becomes permanently disabled, or he
terminates his employment for good reason, he will receive the
following severance benefits following his employment
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">79

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
termination: (a)&nbsp;a cash payment of his monthly base salary
for 6&nbsp;months; (b)&nbsp;payment of his monthly COBRA health
insurance premiums; and (c)&nbsp;a bonus in an amount equal to a
pro-rata portion of the annual target bonus for the year of his
termination. In addition, the employment agreement provides for
an option grant covering 75,000&nbsp;shares of our common stock
with the following vesting acceleration terms: if, following a
change in control, Dr.&nbsp;Copmann is terminated without cause,
or he terminates his employment for good reason, he will become
vested in 12&nbsp;months&#146; worth of his then unvested shares.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Deepak Phadke,&nbsp;Ph.D.</I> We entered into an offer letter
in July 2005 with Dr.&nbsp;Phadke, our Vice President of
Manufacturing, which provides for a sign-on bonus of $20,000,
$10,000 of which was awarded in his first pay period and the
remainder of which will be awarded on the one year anniversary
of his start date. We also entered into an employment agreement
in August 2005 with Dr.&nbsp;Phadke, which provides for an
annual base salary of $170,000 and the possibility of an annual
target bonus equal to 15% of his annual base salary upon
achievement of certain performance criteria. If
Dr.&nbsp;Phadke&#146;s employment is terminated without cause,
he becomes permanently disabled, or he terminates his employment
for good reason, he will receive the following severance
benefits following his employment termination: (a)&nbsp;a cash
payment of his monthly base salary for 6&nbsp;months;
(b)&nbsp;payment of his monthly COBRA health insurance premiums;
and (c)&nbsp;a bonus in an amount equal to a pro-rata portion of
the annual target bonus for the year of his termination. In
addition, the employment agreement provides for an option grant
covering 50,000&nbsp;shares of our common stock with the
following vesting acceleration terms: if, following a change in
control, Dr.&nbsp;Phadke is terminated without cause, or he
terminates his employment for good reason, he will become vested
in 12&nbsp;months&#146; worth of his then unvested shares.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Severance and change in control arrangements</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
See &#147;&#151;Employment agreements&#148; above for a
description of the severance and change in control arrangements
for Drs.&nbsp;Polymeropoulos, Copmann and Phadke and Messrs.
Clark and Shallcross. Drs.&nbsp;Polymeropoulos, Copmann and
Phadke and Messrs. Clark and Shallcross will only be eligible to
receive severance payments if each officer signs a general
release of claims.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The compensation committee of our board of directors, as plan
administrator of the Second Amended and Restated Management
Equity Plan, has the authority to provide for accelerated
vesting of the shares of common stock subject to outstanding
options held by our named executive officers and any other
person in connection with certain changes in control of Vanda.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Second amended and restated management equity plan</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Share reserve.</I> Our Second Amended and Restated Management
Equity Plan was adopted by us and approved by our stockholders
in December 2004. We have reserved a total of
5,348,975&nbsp;shares of our common stock for issuance under the
plan as of September&nbsp;30, 2005. No further option grants
will be made under this plan after the effective date of this
offering. The options that are outstanding under the plan after
the effective date of this offering will continue to be governed
by their existing terms. After the effective date of this
offering, any shares that remained available for grants under
the plan and any shares subject to options or share awards under
the plan that are canceled, forfeited or repurchased will not be
available for future grants or awards. The plan is administered
by our board of directors, or by one or more committees
appointed by the Board of Directors.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">80

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Eligibility.</I> Employees, non-employee members of our board
of directors and consultants are eligible to participate in our
Second Amended and Restated Management Equity Plan.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Types of award.</I> Our Second Amended and Restated
Management Equity Plan provides for the purchase of shares of
our common stock, and incentive and nonstatutory stock options
to purchase shares of our common stock. The exercise price for
incentive stock options and nonstatutory stock options granted
under the plan may not be less than 100% and 30%, respectively,
of the fair market value of our common stock on the option grant
date. Optionees may pay the purchase price or the exercise price
by using cash, shares of common stock that the optionee already
owns, a full-recourse promissory note, by rendering services to
us, by an immediate sale of the option shares through a broker
designated by us, or with a loan from a broker designated by us
and secured by the option shares. In most cases, our options
vest over a four-year period following the date of grant and
generally expire 10&nbsp;years after they are granted, unless
the optionee separates from service with us.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Change in control.</I> If we merge or consolidate with
another company, an option granted under the Second Amended and
Restated Management Equity Plan will be subject to the terms of
the merger or consolidation agreement, which may provide that
the option continues, is assumed or substituted, becomes vested
and exercisable in full, or is canceled and the optionees
receive a payment.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Amendments or termination.</I> Our board of directors may
amend or terminate the Second Amended and Restated Management
Equity Plan at any time. If our board amends the plan, it does
not need to seek stockholder approval of the amendment unless
the number of shares reserved under the plan increases or the
class of person eligible for the grant of incentive stock
options materially changes. The plan will automatically
terminate 10&nbsp;years after its adoption by our board of
directors.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>2006 equity incentive plan</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We expect to adopt a 2006 Equity Incentive Plan prior to the
closing of this offering with the following material terms:
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Share reserve.</I> We expect to
reserve &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 for issuance under the 2006 Equity Incentive
Plan. On January 1 of each year, starting with the year 2007,
the number of shares in the reserve will automatically increase
by &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;%
of the total number of shares of common stock that are
outstanding at that time or, if less,
by &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares.
If options or shares awarded under the 2006 Equity Incentive
Plan are forfeited, then those options or shares will again
become available for awards under this plan.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Administration.</I> The compensation committee of our board
of directors will administer the 2006 Equity Incentive Plan. The
committee will have the complete discretion to make all
decisions relating to the interpretation and operation of this
Plan, including the discretion to determine who will receive an
award, what type of award it will be, how many shares will be
covered by the award, what the vesting requirements will be, if
any, and what the other features and conditions of each award
will be. The compensation committee will be able to reprice
outstanding options and modify outstanding awards in other ways.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">81

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Eligibility.</I> The following groups of individuals will be
eligible to participate in the 2006 Equity Incentive Plan:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    members of our board of directors who are not employees</TD>
</TR>

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

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Types of awards.</I> The 2006 Equity Incentive Plan will
provide for the following types of award:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    options to purchase shares of our common stock</TD>
</TR>

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    stock units (sometimes called phantom shares)</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Options and stock appreciation rights.</I> Both incentive
stock options and nonstatutory stock options will be available
for grant under the 2006 Equity Incentive Plan. An optionee who
exercises an incentive stock option may qualify for favorable
tax treatment under section&nbsp;422 of the Internal Revenue
Code of 1986. On the other hand, nonstatutory stock options do
not qualify for such favorable tax treatment. The exercise price
of options and stock appreciation rights granted under the 2006
Equity Incentive Plan may not be less than 100% of the fair
market value of our common stock on the grant date. Optionees
may pay the exercise price by using:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    shares of common stock that the optionee already owns</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an immediate sale of the option shares through a broker
    designated by us</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a full-recourse promissory note</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Options and stock appreciation rights will vest at the time or
times determined by the compensation committee. In most cases,
our options will vest over the four-year period following the
date of grant. Options and stock appreciation rights generally
expire 10&nbsp;years after they are granted, except that they
generally expire earlier if the optionee&#146;s service
terminates earlier. The 2006 Equity Incentive Plan will provide
that no participant may receive options covering more than
500,000&nbsp;shares and stock appreciation rights covering more
than 500,000&nbsp;shares in the same year, except that a newly
hired employee may receive options covering up to
1,000,000&nbsp;shares and stock appreciation rights covering up
to 1,000,000&nbsp;shares in the first year of employment.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The 2006 Equity Incentive Plan will also provide for automatic
annual option grants to members of our board of directors who
are not our employees. See &#147;&#151;Director
compensation.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Restricted shares and stock units.</I> Restricted shares may
be awarded under the 2006 Equity Incentive Plan in return for:
</DIV>

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

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a full-recourse promissory note</TD>
</TR>

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

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Restricted shares and stock units will vest at the time or times
determined by the compensation committee.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Change in control.</I> If a change in control of Vanda
occurs, an award under the 2006 Equity Incentive Plan will vest
on an accelerated basis to the extent determined by the
compensation
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">82

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
committee. The compensation committee may determine that
outstanding grants will vest in full or in part at the time of
the change in control. It may also determine that the grants
will vest on an accelerated basis only if the participant is
actually or constructively discharged within a specified period
of time after the change in control. Finally, the committee will
have the discretion to determine that the grants will remain
outstanding without acceleration of vesting, except that if the
surviving corporation fails to assume an outstanding award or
replace it with a comparable award or cash payment, then the
award will always become fully vested as a result of the change
in control. A change in control will include the following
events for purposes of the 2006 Equity Incentive Plan:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a merger of Vanda after which our own stockholders own 50% or
    less of the surviving corporation</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a sale of all or substantially all of our assets</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    a proxy contest that results in the replacement of 50% or more
    of our directors over a
    <FONT style="white-space: nowrap">24-month</FONT> period</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    an acquisition of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;% or more of our
    outstanding stock by any person or group, other than a person
    related to Vanda (such as a holding company owned by our
    stockholders)</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Amendments or termination.</I> Our board will be able to
amend or terminate the 2006 Equity Incentive Plan at any time.
If our board were to amend the plan, it would not need to ask
for stockholder approval of the amendment unless applicable law
requires it. The 2006 Equity Incentive Plan would continue in
effect indefinitely, unless the board were to decide to
terminate the plan.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>401(k) plan</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have established a 401(k) plan to allow our employees to save
on a tax-favorable basis for their retirements. We match
contributions made by employees pursuant to the plan.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Limitation of liability and indemnification of officers and
directors</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Upon the closing of this offering, we will adopt and file a new
amended and restated certificate of incorporation and will amend
and restate our bylaws. Our new amended and restated certificate
of incorporation and amended and restated bylaws will provide
that we will indemnify our directors and officers to the fullest
extent permitted by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities
reasonably incurred in connection with their service for or on
behalf of us. In addition, the new amended and restated
certificate of incorporation will provide that our directors
will not be personally liable for monetary damages to us for
breaches of their fiduciary duty as directors, unless they
violated their duty of loyalty to us or our stockholders, acted
in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an
improper personal benefit from their action as directors. We
maintain liability insurance which insures our directors and
officers against certain losses and which insures us against our
obligations to indemnify our directors and officers.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In addition, we have entered into indemnification agreements
with each of our directors and officers. These agreements, among
other things, require us to indemnify each director and officer
to the fullest extent permitted by Delaware law, including
indemnification of expenses such as attorneys&#146; fees,
judgments, fines and settlement amounts incurred by the director
or officer in any action or proceeding, including any action or
proceeding by or in right of us,
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">83

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
arising out of the person&#146;s services as a director or
officer. At present, we are not aware of any pending or
threatened litigation or proceeding involving any of our
directors, officers, employees or agents in which
indemnification would be required or permitted. We believe
provisions in our new amended and restated certificate of
incorporation and indemnification agreements are necessary to
attract and retain qualified persons as directors and officers.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='112'></A>
</DIV>

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<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Certain relationships and related party transactions</B>
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>2004 securityholders&#146; agreement</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have entered into a 2004 Securityholders&#146; Agreement with
certain holders of our Common Stock, Series&nbsp;A Preferred
Stock and Series&nbsp;B Preferred Stock, including our officers
and directors and certain affiliates of such officers and
directors. Under the Securityholders&#146; Agreement, we have
granted the following rights to such stockholders:
</DIV>

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    rights to demand the registration of our common stock and to
    participate in other public offerings of our common stock (for
    more information regarding the registration rights granted
    pursuant to the 2004 Securityholders&#146; Agreement, see
    &#147;Description of capital stock&#151; Registration
    rights&#148;)</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    rights to purchase certain new issuances of our securities
    (which rights do not apply with respect to, and will terminate
    upon the completion of, this offering)</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    rights to information regarding us (which rights will terminate
    upon the conversion of our preferred stock into common stock
    upon completion of this offering)</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    rights to inspect our facilities, books, records and to discuss
    our affairs, finances and accounts with its officers (which
    rights will terminate upon the conversion of our preferred stock
    into common stock upon completion of this offering)</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Additionally, the Securityholders&#146; Agreement restricts the
transfer of securities held by such stockholders, subject to
certain exceptions (including a sale made pursuant to a public
offering of our stock).
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have entered into a voting agreement which provides for the
election of certain stockholder-designated directors to our
board. This agreement will terminate upon the closing of this
offering.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have entered into indemnification agreements with each of our
directors. These agreements, among other things, require us to
indemnify each director to the fullest extent permitted by
Delaware law, including indemnification of expenses such as
attorneys&#146; fees, judgments, fines and settlement amounts
incurred by the director in any action or proceeding, including
any action or proceeding by or in right of us, arising out of
the person&#146;s services as a director.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Relationship with Care Capital, LLC</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
From time to time, we reimbursed Care Capital, LLC (&#147;Care
Capital&#148;), an affiliate of our stockholders, Care Capital
Investments&nbsp;II, LP and Care Capital Offshore
Investments&nbsp;II, LP, for certain expenses incurred by Care
Capital on our behalf. We reimbursed Care Capital for
approximately $54,000 and approximately $299,000 for the year
ended December&nbsp;31, 2004 and for the period from
March&nbsp;13, 2003 (inception)&nbsp;to December&nbsp;31, 2003,
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We also used the services of a Care Capital employee and
reimbursed Care Capital for such personnel services related to
occupancy and salary expenses incurred on our behalf.
Reimbursements related to such expenses were approximately
$31,000 and $49,000 for the year ended December&nbsp;31, 2004
and the period from March&nbsp;13, 2003 (inception)&nbsp;to
December&nbsp;31, 2003, respectively.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='113'></A>
</DIV>

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<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Principal stockholders</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table sets forth certain information known to us
regarding beneficial ownership of our common stock as of
September&nbsp;30, 2005 and as adjusted to reflect the sale of
the shares of common stock in this offering by:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    each person known by us to be the beneficial owner of more than
    5% of our common stock</TD>
</TR>

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

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

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

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Unless otherwise indicated in the footnotes, to our knowledge,
each stockholder possesses sole voting and investment power over
the shares listed, except for shares owned jointly with that
person&#146;s spouse.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Options
and warrants to purchase shares of our common stock that are
exercisable within 60&nbsp;days of September&nbsp;30, 2005, are
deemed to be beneficially owned by the persons holding these
options for the purpose of computing percentage ownership of
that person, but are not treated as outstanding for the purpose
of computing any other person&#146;s ownership percentage.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Percentage of shares beneficially owned before the offering is
based on 40,232,047&nbsp;shares of common stock outstanding as
of September&nbsp;30, 2005, assuming the conversion of all
outstanding Preferred Stock to Common Stock as of such date.
Percentage of shares beneficially owned after the offering is
based
on &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of common stock outstanding
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">86

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
after the closing of the offering. This table does not take into
account the issuance of 12,195,129&nbsp;shares of our
Series&nbsp;B Preferred Stock made on December&nbsp;9, 2005.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="42%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


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


<TR style="font-size: 9pt;">
    <TD colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Percentage of shares</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">beneficially owned</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Number of shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Before</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">After</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2" align="left" nowrap><B><FONT face="helvetica,arial">Name and address of beneficial owner(1)</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">beneficially owned</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">offering</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">offering</FONT></B></TD><TD></TD>
</TR>


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

<TR>
    <TD colspan="14">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">5% Stockholders</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Care Capital Investments&nbsp;II,
    LP(2)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,172,142</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22.80%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">47 Hulfish St., Ste 310<BR>
    Princeton, NJ 08542
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Domain Partners VI, L.P.(3)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,130,082</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20.21%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">One Palmer Square, Suite 515<BR>
    Princeton, NJ 08542
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Biomedical Sciences Investment
    Fund&nbsp;Pte Ltd.(4)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,528,918</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16.23%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">20 Biopolis Way #09-01<BR>
    Centros, Singapore 138668
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Prospect Venture Partners&nbsp;II,
    L.P.(5)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,097,562</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15.16%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">435&nbsp;Tasso St., Ste. 200<BR>
    Palo Alto, CA 94301
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Rho Ventures IV, L.P.(6)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,097,562</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15.16%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Carnegie Hall Tower<BR>
    152 West 57th Street<BR>
    23rd Floor<BR>
    New York, NY 10019
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">MedImmune Ventures,
    Inc.(7)&nbsp;</FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,065,042</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10.10%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">c/o MedImmune, Inc.<BR>
    One MedImmune Way<BR>
    Gaithersburg, MD 20878
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="14">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Executive Officers and
    Directors</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Mihael H.
    Polymeropoulos,&nbsp;M.D.(8)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">308,375</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">William D. &#147;Chip&#148; Clark(9)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">88,492</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Argeris N. Karabelas,&nbsp;Ph.D.(10)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,172,142</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22.80%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Brian K. Halak,&nbsp;Ph.D.(11)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,130,082</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20.21%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Wayne T. Hockmeyer,&nbsp;Ph.D.(12)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,065,042</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10.10%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">David Ramsay(13)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,172,142</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22.79%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">James B. Tananbaum,&nbsp;M.D.(14)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,097,562</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15.16%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deepak Phadke,&nbsp;Ph.D.(15)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Thomas Copmann,&nbsp;Ph.D.(16)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">All executive officers and
    directors as a group
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">34,374,009</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">85.44%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="14" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
*&nbsp;Represents beneficial ownership of less than one percent
of our outstanding common stock.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(1)&nbsp;Unless otherwise indicated, the address for each
beneficial owner is c/o&nbsp;Vanda Pharmaceuticals Inc.,
9620&nbsp;Medical Center Drive, Suite&nbsp;201, Rockville,
Maryland 20850.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(2)&nbsp;Includes 8,583,366&nbsp;shares held of record by Care
Capital Investments&nbsp;II, LP and 588,776&nbsp;shares held of
record by Care Capital Offshore Investments&nbsp;II, LP.
Excludes 2,610,920&nbsp;shares issuable upon the conversion of
Series&nbsp;B Preferred Stock purchased by Care Capital
Investments&nbsp;II, LP on December&nbsp;9, 2005 and
179,097&nbsp;shares issuable upon the conversion of
Series&nbsp;B Preferred Stock purchased by Care Capital Offshore
Investments&nbsp;II, LP on December&nbsp;9, 2005.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(3)&nbsp;Includes 8,043,874&nbsp;shares held of record by Domain
Partners&nbsp;VI, L.P. and 86,208&nbsp;shares held of record by
DP&nbsp;VI Associates, L.P. Excludes 2,446,817&nbsp;shares
issuable upon the conversion of Series&nbsp;B Preferred Stock
purchased by Domain Partners&nbsp;VI, L.P.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">87

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<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff;">
on December&nbsp;9, 2005 and 26,223&nbsp;shares issuable upon
the conversion of Series&nbsp;B Preferred Stock purchased by
DP&nbsp;VI Associates, L.P. on December&nbsp;9, 2005.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(4)&nbsp;Represents 6,528,918&nbsp;shares held directly but
excludes 1,985,991&nbsp;shares issuable upon the conversion of
Series&nbsp;B Preferred Stock purchased by Biomedical Sciences
Investment Fund Pte Ltd. on December&nbsp;9, 2005. EDB
Investments Pte. Ltd (&#147;EDB Investments&#148;), the parent
entity of Biomedical Sciences Investment Fund&nbsp;Pte. Ltd.,
and the Economic Development Board of Singapore
(&#147;EDB&#148;), the ultimate parent entity of EDB
Investments, may be deemed to have voting and dispositive power
over the shares owned beneficially and of record by Biomedical
Sciences Investment Fund&nbsp;Pte. Ltd.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(5)&nbsp;Includes 6,006,098&nbsp;shares held of record by
Prospect Venture Partners&nbsp;II, L.P. and 91,464&nbsp;shares
held of record by Prospect Associates&nbsp;II, L.P. Excludes
1,826,958&nbsp;shares issuable upon the conversion of
Series&nbsp;B Preferred Stock purchased by Prospect Venture
Partners&nbsp;II, L.P. on December&nbsp;9, 2005 and
27,822&nbsp;shares issuable upon the conversion of Series&nbsp;B
Preferred Stock purchased by Prospect Associates&nbsp;II, L.P.
on December&nbsp;9, 2005.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(6)&nbsp;Includes 763,478&nbsp;shares held of record by Rho
Ventures&nbsp;IV, L.P., 1,873,172&nbsp;shares held of record by
Rho Ventures&nbsp;IV GmbH&nbsp;&#38; Co. Beteiligungs KG,
1,797,418&nbsp;shares held of record by Rho Ventures&nbsp;IV
(QP), L.P. and 1,663,494&nbsp;shares held of record by Rho
Management Trust&nbsp;I. Excludes 232,238&nbsp;shares issuable
upon the conversion of Series&nbsp;B Preferred Stock purchased
by Rho Ventures&nbsp;IV, L.P. on December&nbsp;9, 2005,
569,789&nbsp;shares issuable upon the conversion of
Series&nbsp;B Preferred Stock purchased by Rho Ventures&nbsp;IV
GmbH&nbsp;&#38; Co. Beteiligungs KG on December&nbsp;9, 2005,
546,746&nbsp;shares issuable upon the conversion of
Series&nbsp;B Preferred Stock purchased by Rho Ventures&nbsp;IV
(QP), L.P. on December&nbsp;9, 2005 and 506,008&nbsp;shares of
Series&nbsp;B Preferred Stock purchased by Rho Management
Trust&nbsp;I on December&nbsp;9, 2005.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(7)&nbsp;Excludes 1,236,520 shares issuable upon the conversion
of Series B Preferred Stock purchased by MedImmune Ventures,
Inc. on December&nbsp;9, 2005.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(8)&nbsp;Excludes 1,979,006&nbsp;shares unexercisable as of
September&nbsp;30, 2005.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(9)&nbsp;Excludes 1,055,199&nbsp;shares unexercisable as of
September&nbsp;30, 2005.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(10)&nbsp;Includes 8,583,366&nbsp;shares held of record by Care
Capital Investments&nbsp;II, LP and 588,776&nbsp;shares of
record held by Care Capital Offshore Investments&nbsp;II, LP.,
but excludes 2,610,920&nbsp;shares issuable upon the conversion
of Series&nbsp;B Preferred Stock purchased by Care Capital
Investments&nbsp;II, LP on December&nbsp;9, 2005 and
179,097&nbsp;shares issuable upon the conversion of
Series&nbsp;B Preferred Stock purchased by Care Capital Offshore
Investments&nbsp;II, LP on December&nbsp;9, 2005.
Dr.&nbsp;Karabelas is a Partner of Care Capital, LLC. Care
Capital, LLC is the general partner of Care Capital
Investments&nbsp;II, LP and Care Capital Offshore
Investments&nbsp;II, LP. Dr.&nbsp;Karabelas disclaims beneficial
ownership of the shares held by Care Capital
Investments&nbsp;II, LP and Care Capital Offshore
Investments&nbsp;II, LP except to the extent of his pecuniary
interest therein.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(11)&nbsp;Includes 8,043,874&nbsp;shares held of record by
Domain Partners&nbsp;VI, L.P. and 86,208&nbsp;shares held of
record by DP&nbsp;VI Associates, L.P., but excludes
2,446,817&nbsp;shares issuable upon the conversion of
Series&nbsp;B Preferred Stock purchased by Domain
Partners&nbsp;VI, L.P. on December&nbsp;9, 2005 and
26,223&nbsp;shares issuable upon the conversion of Series&nbsp;B
Preferred Stock purchased by DP&nbsp;VI Associates, L.P. on
December&nbsp;9, 2005. Dr.&nbsp;Halak is a Principal of Domain
Associates, LLC, the [general partner] of Domain
Partners&nbsp;VI, L.P. and DP&nbsp;VI Associates, L.P.
Dr.&nbsp;Halak disclaims beneficial ownership of the shares held
by Domain Partners&nbsp;VI, L.P. and DP&nbsp;VI Associates, L.P.
except to the extent of his pecuniary interest therein.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(12)&nbsp;Includes 4,065,042&nbsp;shares held of record by
MedImmune Ventures, Inc., but excludes 1,236,520&nbsp;shares
issuable upon the conversion of Series&nbsp;B Preferred Stock
purchased by MedImmune Ventures, Inc. on December&nbsp;9, 2005.
Dr.&nbsp;Hockmeyer is the President of MedImmune Ventures, Inc.
He disclaims beneficial ownership of the shares held by
MedImmune Ventures, Inc. except to the extent of his pecuniary
interest therein.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(13)&nbsp;Includes 8,583,366&nbsp;shares held of record by Care
Capital Investments&nbsp;II, LP and 588,776&nbsp;shares held of
record held by Care Capital Offshore Investments&nbsp;II, LP,
but excludes 2,610,920&nbsp;shares issuable upon the conversion
of Series&nbsp;B Preferred Stock purchased by Care Capital
Investments&nbsp;II, LP on December&nbsp;9, 2005 and
179,097&nbsp;shares issuable upon the conversion of
Series&nbsp;B Preferred Stock purchased by Care Capital Offshore
Investments&nbsp;II, LP on December&nbsp;9, 2005.
Mr.&nbsp;Ramsay is a Partner of Care Capital, LLC. Care Capital,
LLC is the general partner of Care Capital Investments&nbsp;II,
LP and Care Capital Offshore Investments&nbsp;II, LP.
Mr.&nbsp;Ramsay disclaims beneficial ownership of the shares
held by Care Capital Investments&nbsp;II, LP and Care Capital
Offshore Investments&nbsp;II, LP except to the extent of his
pecuniary interest therein.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(14)&nbsp;Includes 6,006,098&nbsp;shares held of record by
Prospect Venture Partners&nbsp;II, L.P. and 91,464&nbsp;shares
held of record by Prospect Associates&nbsp;II, L.P. but excludes
1,826,958&nbsp;shares issuable upon the conversion of
Series&nbsp;B Preferred Stock purchased by Prospect Venture
Partners&nbsp;II, L.P. on December&nbsp;9, 2005 and
27,822&nbsp;shares issuable upon the conversion of Series&nbsp;B
Preferred Stock purchased by Prospect Associates&nbsp;II, L.P.
on December&nbsp;9, 2005. Dr.&nbsp;Tananbaum serves as Managing
Director of Prospect Venture Partners&nbsp;II, L.P. [and
Prospect Associates&nbsp;II, L.P.] He disclaims beneficial
ownership of the shares held of record by Prospect Venture
Partners&nbsp;II, L.P. and Prospect Associates&nbsp;II, L.P.
except to the extent of his pecuniary interest therein.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(15)&nbsp;Excludes 50,000&nbsp;shares unexercisable as of
September&nbsp;30, 2005.
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(16)&nbsp;Excludes 75,000&nbsp;shares unexercisable as of
September&nbsp;30, 2005.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">88

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='114'></A>
</DIV>

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<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Description of capital stock</B>
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following is a summary of the rights of our common stock and
preferred stock and related provisions of our restated
certificate of incorporation and bylaws as they will be in
effect upon the closing of this offering. For more detailed
information, please see our restated certificate of
incorporation, bylaws, governance agreement and amended and
restated investors&#146; rights agreement, which are filed as
exhibits to the registration statement of which this prospectus
is a part.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Immediately following the closing of this offering, our
authorized capital stock will consist
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares,
each with a par value of $0.01&nbsp;per share, of which:
</DIV>

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<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    are designated as common stock</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
    are designated as preferred stock</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
At September&nbsp;30, 2005, we had outstanding
150,739&nbsp;shares of common stock and 40,081,308&nbsp;shares
of preferred stock. In addition, as of September&nbsp;30, 2005,
3,783,490&nbsp;shares of our common stock were subject to
outstanding options, and 166,660&nbsp;shares of our capital
stock were subject to outstanding warrants. At
September&nbsp;30, 2005, 140,739&nbsp;shares of our outstanding
common stock were held by our employees and consultants. 36,838
of these shares are subject to a lapsing right of repurchase in
our favor, under which we may repurchase these shares upon the
termination of the holder&#146;s employment or consulting
relationship. The number of shares of common stock outstanding
as of September&nbsp;30, 2005 assumes the conversion of all of
our outstanding preferred stock outstanding as of such date into
40,081,308&nbsp;shares of common stock.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Voting rights</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Unless otherwise provided for in our restated certificate of
incorporation or required by applicable law, on all matters
submitted to our stockholders for vote, our common stockholders
will be entitled to one vote per share, voting together as a
single class, upon the closing of this offering.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Upon the closing of this offering, our restated certificate of
incorporation will provide that subject to preferences that may
apply to any shares of preferred stock outstanding at the time,
the holders of common stock shall be entitled to share equally
in any dividends that our board of directors may determine to
issue from time to time. In the event a dividend is paid in the
form of shares of common stock or rights to acquire shares of
common stock, the holders of common stock shall receive common
stock, or rights to acquire common stock, as the case
may&nbsp;be.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Upon the closing of this offering, our restated certificate of
incorporation will provide that upon our liquidation,
dissolution or winding-up, the holders of common stock shall be
entitled to share equally all assets remaining after the payment
of any liabilities and the liquidation preferences on any
outstanding preferred stock.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">89

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<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Anti-takeover effects of our amended and restated certificate
of incorporation, bylaws and Delaware law</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Some provisions of Delaware law and our amended and restated
certificate of incorporation and bylaws could make the following
transactions more difficult:
</DIV>

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

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our acquisition by means of a tender offer</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    our acquisition by means of a proxy contest or otherwise</TD>
</TR>

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    removal of our incumbent officers and directors</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
These provisions, summarized below, are expected to discourage
and prevent coercive takeover practices and inadequate takeover
bids. These provisions are designed to encourage persons seeking
to acquire control of us to first negotiate with our board of
directors, and also are intended to provide management with
flexibility to enhance the likelihood of continuity and
stability in our composition if our board of directors
determines that a takeover is not in our best interests or the
best interests of our stockholders. These provisions, however,
could have the effect of discouraging attempts to acquire us,
which could deprive our stockholders of opportunities to sell
their shares of common stock at prices higher than prevailing
market prices. We believe that the benefits of these provisions,
including increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us, outweigh the
disadvantages of discouraging takeover proposals because
negotiation of takeover proposals could result in an improvement
of their terms.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Election and removal of directors.</I> Our board of directors
is divided into three classes serving staggered three-year
terms. This system of electing directors may tend to discourage
a third party from making a tender offer or otherwise attempting
to obtain control of us because generally at least two
stockholders&#146; meetings will be required for stockholders to
effect a change in control of the board of directors. Our
amended and restated certificate of incorporation and our bylaws
contain provisions that establish specific procedures for
appointing and removing members of the board of directors. Under
our amended and restated certificate of incorporation, vacancies
and newly created directorships on the board of directors may be
filled only by a majority of the directors then serving on the
board, and under our bylaws, directors may be removed by the
stockholders only for cause.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Stockholder meetings.</I> Under our bylaws, only the board of
directors, the Chairman of the board or our Chief Executive
Officer may call special meetings of stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Requirements for advance notification of stockholder
nominations and proposals.</I> Our bylaws establish advance
notice procedures with respect to stockholder proposals and the
nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of
directors or a committee of the board of directors.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Delaware anti-takeover law.</I> Upon the closing of this
offering, we will be subject to Section&nbsp;203 of the Delaware
General Corporation Law, an anti-takeover law. In general,
Section&nbsp;203 prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested
stockholder for a period of three years following the date the
person became an interested stockholder, unless the business
combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner.
Generally, a business combination includes a merger, asset or
stock sale, or another transaction resulting in a financial
benefit to the interested stockholder. Generally, an interested
stockholder is a person who, together with affiliates and
associates, owns, or within three years prior to the date of
determination of interested stockholder status did own, 15% or
more of
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">90

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
the corporation&#146;s voting stock. The existence of this
provision may have an anti-takeover effect with respect to
transactions that are not approved in advance by our board of
directors, including discouraging attempts that might result in
a premium over the market price for the shares of common stock
held by stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Elimination of stockholder action by written consent.</I> Our
amended and restated certificate of incorporation eliminates the
right of stockholders to act by written consent without a
meeting after this offering.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>No cumulative voting.</I> Our amended and restated
certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors. Cumulative
voting allows a minority stockholder to vote a portion or all of
its shares for one or more candidates for seats on the board of
directors. Without cumulative voting, a minority stockholder
will not be able to gain as many seats on our board of directors
based on the number of shares of our stock the stockholder holds
as the stockholder would be able to gain if cumulative voting
were permitted. The absence of cumulative voting makes it more
difficult for a minority stockholder to gain a seat on our board
of directors to influence our board&#146;s decision regarding a
takeover.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>Undesignated preferred stock.</I> The authorization of
undesignated preferred stock makes it possible for our board of
directors to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to
change control of us.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
To the fullest extent permitted by the Delaware General
Corporation Law as it now exists or hereafter may be amended,
our directors will not be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty
as a director.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If the Delaware General Corporation Law is later amended to
authorize the further elimination or limitation of the liability
of directors, then the liability of our directors, in addition
to the limitation on personal liability provided in our
certificate of incorporation, will be limited to the fullest
extent permitted by the amended Delaware General Corporation
Law. Any repeal or modification of the provisions in our
certificate of incorporation by our stockholders relating to the
limitation of the liability of our directors will be prospective
only and will not adversely affect any limitation on the
personal liability of our directors existing at the time of the
repeal or modification.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of September&nbsp;30, 2005, there were warrants outstanding
to purchase a total of 166,660&nbsp;shares of common stock at a
price of $0.40&nbsp;per share.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The holders of 10,000&nbsp;shares of our common stock and
40,081,308&nbsp;shares of our common stock issuable upon the
conversion of our Series&nbsp;A Preferred Stock and
Series&nbsp;B Preferred Stock (not including shares of
Series&nbsp;B Preferred Stock issued on December&nbsp;9, 2005)
are entitled to rights with respect to the registration of their
shares under the Securities Act. These registration rights are
contained in our 2004 Securityholders Agreement and are
described below. These registration rights will expire five
years following the completion of this offering.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
For so long as at least 25% of our outstanding common stock has
been first issued in one or more public offerings, stockholders
with demand registration rights under our 2004 Securityholders
Agreement has the right to require that we register such
stockholders&#146; common stock. We are only obligated to effect
two registrations in response to these demand registration
rights, and we are not obligated to effect any demand
registration for shares having an aggregate market value of less
than $5,000,000 as of the date notice is given to us to effect
such a registration. We may postpone the filing of a
registration statement for up to 90&nbsp;days once in any
<FONT style="white-space: nowrap">12-month</FONT> period if our
board of directors determines in good faith that the filing
would be significantly disadvantageous to us and our affiliates,
taken as a whole. We must pay all expenses incurred in
connection with demand registration rights.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If we register any securities for public sale following the
closing of this offering, stockholders with incidental
registration rights under the 2004 Securityholders&#146;
Agreement have the right to include their shares in the
registration, subject to specified exceptions. The underwriters
of any underwritten offering have the right to limit the number
of shares registered by these stockholders due to marketing
reasons. We must pay all expenses incurred in connection with
these incidental registration rights.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<FONT style="white-space: nowrap"><B>S-3</FONT> registration
rights</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If we are eligible to file a registration statement on
<FONT style="white-space: nowrap">Form&nbsp;S-3,</FONT> the
stockholders
<FONT style="white-space: nowrap">with&nbsp;S-3</FONT>
registration rights under the 2004 Securityholder Agreement can
request that we register their shares, provided that the total
price of the shares of common stock offered to the public is at
least $1,000,000 (before deduction of underwriting discounts and
commissions). The holders
<FONT style="white-space: nowrap">of&nbsp;S-3</FONT>
registration rights may only require us to file one
<FONT style="white-space: nowrap">Form&nbsp;S-3</FONT>
registration statement in any
<FONT style="white-space: nowrap">12-month</FONT> period. We may
postpone the filing of a
<FONT style="white-space: nowrap">Form&nbsp;S-3</FONT>
registration statement for up to 90&nbsp;days once in any
<FONT style="white-space: nowrap">12-month</FONT> period if our
board of directors determines in good faith that the filing
would be seriously detrimental to us.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The transfer agent and registrar for our common stock and the
rights is American Stock Transfer and Trust Company.
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='115'></A>
</DIV>

<!-- link1 "Shares eligible for future sale" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Shares eligible for future sale</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Prior to this offering, there has been no market for our common
stock. Future sales of substantial amounts of our common stock
in the public market could adversely affect prevailing market
prices from time to time. Furthermore, since only a limited
number of shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions
on resale described below, sales of substantial amounts of our
common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Upon completion of this offering, we will have outstanding an
aggregate &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 (not including shares which were issued after
September&nbsp;30, 2005 and which were not issued in connection
with this offering), assuming no exercise of the
underwriters&#146; over-allotment option and no exercise of
outstanding options or warrants. Of these shares,
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 freely tradable without
restrictions or further registration under the Securities Act,
unless one of our existing affiliates as that term is defined in
Rule&nbsp;144 under the Securities Act purchases such shares.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The remaining 40,232,047&nbsp;shares of our common stock held by
existing stockholders as of September&nbsp;30, 2005 are
restricted shares or are restricted by the contractual
provisions described below. Restricted shares may be sold in the
public market only if registered or if they qualify for an
exemption from registration under Rules&nbsp;144, 144(k) or 701
of the Securities Act, which are summarized below. Of these
restricted shares, 10,010,000&nbsp;shares will be available for
resale in the public market in reliance on Rule&nbsp;144(k), all
of which shares are restricted by the terms of the
<FONT style="white-space: nowrap">lock-up</FONT> agreements
described below. An additional 15,040,654 of these restricted
shares will be available for resale in the public market in
reliance on Rule&nbsp;144, all of which shares are restricted by
the terms of the
<FONT style="white-space: nowrap">lock-up</FONT> agreements. The
remaining 15,181,393&nbsp;shares become eligible for resale in
the public market at various dates thereafter, all of which
shares are restricted by the terms of the
<FONT style="white-space: nowrap">lock-up</FONT> agreements and
36,838 of which shares were held by our employees and restricted
as of September&nbsp;30, 2005 by our rights to repurchase such
shares
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
upon termination of employment. The table below sets forth the
approximate number of shares eligible for future sale:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="24%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="23%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="47%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap><B><FONT face="helvetica,arial">Approximate additional</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap><B><FONT face="helvetica,arial">number of shares</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Days after date</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap><B><FONT face="helvetica,arial">becoming eligible for</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">of this prospectus</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap><B><FONT face="helvetica,arial">future sale</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Comment</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">On Effectiveness
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Freely tradable shares sold in
    offering; shares salable under Rule&nbsp;144(k) that are not
    locked up or subject to our rights of repurchase
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">90 Days
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Shares eligible on effectiveness;
    vested options for shares salable under Rule&nbsp;144 and 701
    that are not locked up; additional shares no longer subject to
    our rights of repurchase
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">180 Days
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Lock-up released; shares and vested
    options for shares salable under Rule&nbsp;144, 144(k) and 701;
    additional shares no longer subject to our rights of repurchase
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Thereafter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Restricted securities held for
    1&nbsp;year or less
    </FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Under Rule&nbsp;144 as currently in effect, beginning
90&nbsp;days after the date of this prospectus, a person who has
beneficially owned restricted shares for at least one year and
has complied with the requirements described below would be
entitled to sell some of its shares within any three-month
period. That number of shares cannot exceed the greater of one
percent of the number of shares of our 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;&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, or the average weekly trading
volume of our common stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on
Form&nbsp;144 reporting the sale. Sales under Rule&nbsp;144 are
also restricted by manner of sale provisions, notice
requirements and the availability of current public information
about us. Rule&nbsp;144 also provides that our affiliates who
are selling shares of our common stock that are not restricted
shares must nonetheless comply with the same restrictions
applicable to restricted shares with the exception of the
holding period requirement.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Under Rule&nbsp;144(k), a person who is not deemed to have been
one of our affiliates at any time during the 90&nbsp;days
preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years is entitled to sell
those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of
Rule&nbsp;144. Accordingly, unless otherwise restricted, these
shares may be sold immediately upon the completion of this
offering.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Rule&nbsp;701 provides that the shares of common stock acquired
upon the exercise of currently outstanding options or other
rights granted under our Management Equity Plan may be resold,
to the extent not restricted by the terms of the
<FONT style="white-space: nowrap">lock-up</FONT> agreements, by
persons, other than affiliates, beginning 90&nbsp;days after the
date of this prospectus, restricted only by the manner of sale
provisions of Rule&nbsp;144, and by affiliates in accordance
with Rule&nbsp;144, without compliance
</DIV>

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
with its one-year minimum holding period. 140,739&nbsp;shares
(not including shares issued after September&nbsp;30, 2005 upon
the exercise of options) will be available for resale in the
public market in reliance on Rule&nbsp;701 beginning
90&nbsp;days after the date of this prospectus, all of which
shares are restricted by the terms of the
<FONT style="white-space: nowrap">lock-up</FONT> agreements and
36,838&nbsp;shares of which were restricted as of
September&nbsp;30, 2005 by our rights to repurchase such shares
upon termination of employment. As of September&nbsp;30, 2005,
our board of directors had authorized an aggregate of up to
5,489,714&nbsp;shares of common stock for issuance under our
existing equity plans. As of September&nbsp;30, 2005 options to
purchase a total of 3,783,490&nbsp;shares of common stock were
outstanding, all of which options were exercisable as of such
date. Of these, as of September&nbsp;30, 2005 options to
purchase a total of 3,356,004&nbsp;shares were restricted by our
right to repurchase unvested shares upon the termination of an
optionee&#146;s business relationship with us, and options to
purchase a total of 427,486&nbsp;shares were no longer
restricted by our right of repurchase and will be eligible for
sale, if not restricted by the terms of the
<FONT style="white-space: nowrap">lock-up</FONT> agreements, in
the public market in accordance with Rule&nbsp;701 under the
Securities Act beginning 90&nbsp;days after the date of this
prospectus. All of the shares issuable upon exercise of these
options are restricted by the terms of the
<FONT style="white-space: nowrap">lock-up</FONT> agreements.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We intend to file one or more registration statements on
<FONT style="white-space: nowrap">Form&nbsp;S-8</FONT> under the
Securities Act following this offering to register all shares of
our common stock which have been issued or are issuable upon
exercise of outstanding stock options or other rights granted
under our equity plans. These registration statements are
expected to become effective upon filing. Shares covered by
these registration statements will thereupon be eligible for
sale in the public market, upon the expiration or release from
the terms of the
<FONT style="white-space: nowrap">lock-up</FONT> agreements, to
the extent applicable, or subject in certain cases to vesting of
such shares.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of September&nbsp;30, 2005, we had outstanding warrants
exercisable for a total of 166,600&nbsp;shares of our common
stock, all of which are currently exercisable. All of these
shares are restricted by the terms of the
<FONT style="white-space: nowrap">lock-up</FONT> agreements.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<FONT style="white-space: nowrap"><B>Lock-up</FONT>
agreements</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Except for sales of common stock to the underwriters in
accordance with the terms of the underwriting agreement, we and
our executive officers, directors, stockholders and
substantially all of our optionholders have agreed not to sell
or otherwise dispose of, directly or indirectly, any shares of
our common stock (or any security convertible into or
exchangeable or exercisable for common stock) without the prior
written consent of J.P. Morgan Securities Inc. and Banc of
America Securities LLC for a period of 180&nbsp;days from the
date of this prospectus. In addition, for a period of
180&nbsp;days from the date of this prospectus, except as
required by law, we have agreed that our board of directors will
not consent to any offer for sale, sale or other disposition, or
any transaction which is designed or could be expected to result
in the disposition by any person, directly or indirectly, of any
shares of our common stock without the prior written consent of
J.P. Morgan Securities Inc. and Banc of America Securities LLC,
in their sole discretion, at any time or from time to time and
without notice, may release for sale in the public market all or
any portion of the shares restricted by the terms of the
<FONT style="white-space: nowrap">lock-up</FONT> agreements.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The holders of 40,091,308&nbsp;shares of common stock, including
common stock issuable upon the exercise of our Series&nbsp;A
Preferred Stock and Series&nbsp;B Preferred Stock (but not
including shares of Series&nbsp;B Preferred Stock issued on
December&nbsp;9, 2005), are entitled to have their shares
registered by us under the Securities Act under the terms of an
agreement between us and the holders of these registrable
securities. Subject to limitations specified in the agreement,
these registration rights include the following:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the holders of at least 25% of the then outstanding registrable
    securities may require, on two occasions beginning six months
    after the date of this prospectus, that we use our best efforts
    to register the registrable securities for public resale</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    if we register any common stock, either for our own account or
    for the account of other security holders, the holders of
    registrable securities are entitled to include their shares of
    common stock in the registration, subject to the ability of the
    underwriters to limit the number of shares included in the
    offering in view of market conditions</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    the holders of at least 25% of the then outstanding registrable
    securities may require us to register all or a portion of their
    registrable securities on
    <FONT style="white-space: nowrap">Form&nbsp;S-3</FONT> once in
    any twelve-month period when use of that form becomes available
    to us, provided that the proposed aggregate selling price is at
    least $1,000,000 before underwriting discounts and commissions</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
All such registration rights terminate five years following the
closing of this offering.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='116'></A>
</DIV>

<!-- link1 "Material United States federal income tax consequences" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Material United States federal income tax consequences</B>
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following is a general discussion of the material United
States federal income tax consequences of the ownership and
disposition of our common stock. This discussion is based on the
Internal Revenue Code of 1986, as amended (which we refer to as
the &#147;Code&#148;), final, temporary and proposed Treasury
regulations (which we refer to as the &#147;Treasury
regulations&#148;) promulgated thereunder by the Internal
Revenue Service (which we refer to as the &#147;IRS&#148;), and
administrative and judicial interpretations thereof, each as in
effect and available on the date hereof, all of which are
subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to our
stockholders. You should note that, due to a lack of definitive
judicial or administrative interpretation, uncertainties exist
with respect to many of the tax consequences described below.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
You should also be aware that this discussion is addressed only
to those of our stockholders who are United States citizens and
residents and who hold our stock as capital assets. This
discussion does not address all of the United States federal
income tax consequences that may be relevant to particular
stockholders in light of their individual circumstances, such as
stockholders who are subject to the alternative minimum tax
provisions of the Code, who are dealers in securities or foreign
currency, who are financial institutions or insurance companies,
who are corporations, who are investors in pass-through
entities, who are tax-exempt organizations, who hold their
shares as &#147;qualified small business stock&#148; pursuant to
Section&nbsp;1202 of the Code, who are foreign persons or
entities, who do not hold their shares of our stock as capital
assets, who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory
transactions, who hold shares of our stock as part of
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">96

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
an integrated investment (including a hedge or a straddle)
comprised of shares of our stock and one or more other
positions, or who have previously entered into a conversion
transaction or constructive sale of shares of our stock under
the constructive sale provisions of the Code.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have not requested a ruling from the IRS in connection with
the tax consequences described herein. Accordingly, the
discussion below neither binds the IRS nor precludes it from
adopting a contrary position.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>IN VIEW OF THE FOREGOING AND BECAUSE THE FOLLOWING DISCUSSION
IS INTENDED AS A GENERAL SUMMARY ONLY, YOU ARE URGED TO CONSULT
YOUR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
OWNERSHIP OR DISPOSITION OF OUR STOCK, INCLUDING THE APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES, IN LIGHT OF
YOUR OWN PARTICULAR TAX SITUATIONS.</B>
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>General consequences of owning common stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Distributions, if any, paid with respect to our common stock
will be taxable dividends to the extent of our applicable
earnings and profits. To the extent that distributions on our
common stock exceed our applicable earnings and profits, the
amount distributed will be applied to reduce the tax basis in
such common stock, and, to the extent that the amount
distributed exceeds the tax basis, will constitute long- or
short-term capital gain, depending on the holding period for
such common stock.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>General consequences of disposing of common stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A stockholder will recognize gain or loss upon the sale of its
common stock equal to the difference between its adjusted basis
in its sold shares and the sum of the amount of cash and the
fair market value of any property the stockholder receives in
exchange therefor. Except with respect to the various issues
described herein, any such gain or loss will be long- or
short-term capital gain or loss depending on the
stockholder&#146;s holding period for the common stock.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Under Section&nbsp;1258 of the Code, gain from the sale or other
disposition of stock that is recognized on the disposition or
other termination of a position that was held as part of a
&#147;conversion transaction&#148; will be treated as ordinary
income. A &#147;conversion transaction&#148; includes certain
transactions from which substantially all of a taxpayer&#146;s
expected return is attributable to the time value of the
taxpayer&#146;s investment in the transaction. A holder of our
shares of common stock is not expected to be considered to have
engaged in a &#147;conversion transaction&#148; within the
meaning of Section&nbsp;1258(c) of the Code. Consequently, the
provisions of Section&nbsp;1258 of the Code is not expected to
be applicable to the common stock, although due to a lack of
definitive judicial or administrative interpretation, this issue
is not free from doubt.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">97

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<FONT face="helvetica,arial">

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Certain of our non-corporate stockholders may be subject to
backup withholding at a 28% rate on certain of the payments due
to such stockholders. In order to avoid backup withholding, a
stockholder must complete Form&nbsp;W-8IMY or Form&nbsp;W-8BEN
(if it is a nonresident alien individual or foreign entity) or
<FONT style="white-space: nowrap">Form&nbsp;W-9</FONT> (if it is
a United States resident or domestic entity). Forms&nbsp;W-8IMY,
W-8BEN and <FONT style="white-space: nowrap">W-9</FONT> are
available on the Internal Revenue Service&#146;s web site,
www.irs.gov.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>IN LIGHT OF THE UNCERTAINTY ASSOCIATED WITH THE TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR COMMON
STOCK AND BECAUSE THE TAX CONSEQUENCES TO YOU MAY DIFFER BASED
ON YOUR PARTICULAR CIRCUMSTANCES, YOU SHOULD CONSULT YOUR OWN
TAX ADVISER REGARDING SUCH TAX CONSEQUENCES.</B>
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">98

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='117'></A>
</DIV>

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<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Underwriters</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus, the
underwriters named below, for whom J.P.&nbsp;Morgan Securities
Inc. and Banc of America Securities LLC are acting as
representatives, have severally agreed to purchase, and we have
agreed to sell to them, severally, the number of shares
indicated below:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="76%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="9%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Underwriters</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Number of shares</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="4" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">J.P.&nbsp;Morgan Securities
    Inc.&nbsp;</FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Banc of America Securities LLC
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Thomas Weisel Partners LLC
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The underwriters are offering the shares of common stock subject
to their acceptance of the shares from us and subject to prior
sale. The purchase agreement provides that the obligations of
the several underwriters to pay for and accept delivery of the
shares of common stock offered by this prospectus are subject to
the approval of specified legal matters by their counsel and to
other conditions. The underwriters are obligated to take and pay
for all of the shares of common stock offered by this prospectus
if any such shares are taken. However, the underwriters are not
required to take or pay for the shares covered by the
underwriters&#146; over-allotment option described below.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The underwriters initially propose to offer the shares of common
stock directly to the public at the initial public offering
price listed on the cover page of this prospectus and to certain
dealers at a price that represents a concession not in excess of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share under the public offering price. Any underwriter may
allow, and such dealers may reallow, a concession not in excess
of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share to other underwriters or to certain dealers. After the
initial public offering of the shares of common stock, the
offering price and other selling terms may from time to time be
varied by the representatives.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have granted to the underwriters an option, exercisable for
30&nbsp;days from the date of this prospectus, to purchase up to
an aggregate
of &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;additional
shares of common stock at the public offering price listed on
the cover page of this prospectus, less underwriting discounts
and commissions. The underwriters may exercise this option
solely for the purpose of covering over-allotments, if any, made
in connection with the offering of the shares of common stock
offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to
certain conditions, to purchase about the same percentage of the
additional shares of common stock as the number listed next to
the underwriter&#146;s name in the preceding table bears to the
total number of shares of common stock listed next to the names
of all underwriters in the preceding table. If the underwriters
option is exercised in full, the total price to the public would
be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
the total underwriters discounts and commissions would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;and
the total proceeds to us would be
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">99

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We, each of our directors and officers and holders of
substantially all of our outstanding stock have agreed that,
without the prior written consent of J.P.&nbsp;Morgan Securities
Inc. and Banc of America Securities LLC on behalf of the
underwriters, we and they will not, during the period ending
180&nbsp;days after the date of this prospectus:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    offer, pledge, announce the intention to sell, sell, contract to
    sell, sell any option or contract to purchase, purchase any
    option or contract to sell, grant any option, right or warrant
    to purchase of or otherwise transfer or dispose of directly or
    indirectly, any shares of common stock or any securities
    convertible into or exercisable or exchangeable for common stock</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    enter into any swap or other arrangement that transfers to
    another, in whole or in part, any of the economic consequences
    of ownership of the common stock</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
whether any transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise. These restrictions do not apply to:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    in the case of a corporation, the transfer of shares of our
    common stock or any shares convertible into common stock to any
    wholly-owned subsidiary of such corporation, provided that in
    such case, the transferee will execute an agreement stating that
    the transferee is subject to the restrictions described above</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    transactions relating to shares of common stock or other
    securities acquired in open market transactions after the
    completion of the offering of the shares, provided that no
    filing or other public announcement by any party under the
    Exchange Act shall be required or made in connection with
    subsequent sales of common stock or other securities acquired in
    such open market transactions (other than a filing on a
    Form&nbsp;5 made after the expiration of the 180-day period
    referred to above)</TD>
</TR>

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

<TR valign="top">
    <TD>&#149;&nbsp;</TD>
    <TD align="left">
    transfers of any shares of common stock or other securities
    convertible into common stock made as a gift, to a trust, to
    limited partners, limited liability company members or
    stockholders of our executive officers, directors, or holders of
    substantially all of our stock, or to immediate family members,
    provided that the transferee agrees to be bound by the
    restrictions described above and if the donor or transferor is a
    reporting person subject to Section&nbsp;16(a) of the Exchange
    Act, any gifts or transfers made in accordance with this
    paragraph will not require such person to file a report of such
    transaction on Form&nbsp;4 under the Exchange Act.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Notwithstanding the foregoing, if (1)&nbsp;during the last
17&nbsp;days of the
<FONT style="white-space: nowrap">180-day</FONT> restricted
period, we issue an earnings release or material news or a
material event relating to us occurs; or (2)&nbsp;prior to the
expiration of the
<FONT style="white-space: nowrap">180-day</FONT> restricted
period, we announce that we will release earnings results during
the <FONT style="white-space: nowrap">16-day</FONT> period
beginning on the last day of the
<FONT style="white-space: nowrap">180-day</FONT> period, the
restrictions described above shall continue to apply until the
expiration of the
<FONT style="white-space: nowrap">18-day</FONT> period beginning
on the issuance of the earnings release or the occurrence of the
material news or material event.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
See the section entitled &#147;Shares eligible for future
sale&#148; for further discussion of certain transfer
restrictions.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">100

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<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table shows the underwriting discounts and
commissions that we are to pay to the underwriters in connection
with this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters&#146; option to
purchase additional shares of our common stock.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="66%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD align="left" nowrap><B><FONT face="helvetica,arial">Paid by Vanda</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">No exercise</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Full exercise</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Per Share
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We estimate that the total expenses of this offering payable by
us, not including the underwriting discounts and commissions,
will be approximately
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In order to facilitate the offering of the common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no
greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters
can close out a covered short sale by exercising the
over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the
open market price of shares compared to the price available
under the over-allotment option. The underwriters may also sell
shares in excess of the over-allotment option, creating a naked
short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in this offering. In
addition, to stabilize the price of the common stock, the
underwriters may bid for, and purchase, shares of common stock
in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a
dealer for distributing the common stock in this offering, if
the syndicate repurchases previously distributed common stock in
transactions to cover syndicate short positions or to stabilize
the price of the common stock. Any of these activities may
stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities
at any time.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We will apply to have our common stock approved for quotation on
the Nasdaq National Market under the trading symbol
&#147;VNDA.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We and the underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Certain of the underwriters or their affiliates have provided
from time to time, and may provide in the future, investment and
commercial banking and financial advisory services to Vanda and
its affiliates in the ordinary course of business, for which
they have received and may continue to receive customary fees
and commissions.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A prospectus in electronic format will be made available on the
websites maintained by one or more of the lead managers of this
offering and may also be made available on websites maintained
by other underwriters. The underwriters may agree to allocate a
number of shares to underwriters for sale to their online
brokerage account holders. Internet distributions will be
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">101

</FONT>

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
allocated by the lead managers to underwriters that may make
Internet distributions on the same basis as other allocations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined by negotiations between us and the representatives.
Among the factors to be considered in determining the initial
public offering price will be our future prospects and those of
our industry in general, our revenues, earnings and other
financial operating information in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies
engaged in activities similar to ours. The estimated initial
public offering price range set forth on the cover page of this
preliminary prospectus is subject to change as a result of
market conditions and other factors.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">102

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<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='118'></A>
</DIV>

<!-- link1 "Legal matters" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Legal matters</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Gunderson Dettmer Stough Villeneuve Franklin&nbsp;&#38;
Hachigian, LLP, Waltham, Massachusetts, will pass upon the
validity of the common stock offered by this prospectus. Edward
T. Lentz,&nbsp;Esq. will pass upon certain intellectual property
matters. Davis Polk&nbsp;&#38; Wardwell will pass upon certain
legal matters for the underwriters.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='119'></A>
</DIV>

<!-- link1 "Experts" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Experts</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The financial statements as of December&nbsp;31, 2004 and 2003
and for the year ended December&nbsp;31, 2004 and the period
from March&nbsp;13, 2003 (date of inception)&nbsp;to
December&nbsp;31, 2003, and, cumulatively, for the period from
March&nbsp;13, 2003 (date of inception)&nbsp;to
December&nbsp;31, 2004 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<A name='120'></A>
</DIV>

<!-- link1 "Where you can find more information" -->

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Where you can find more information</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
We have filed with the Securities and Exchange Commission (SEC),
Washington,&nbsp;D.C. 20549, a registration statement on
<FONT style="white-space: nowrap">Form&nbsp;S-1</FONT> under the
Securities Act of 1933, with respect to our common stock offered
hereby. This prospectus, which forms part of the registration
statement, does not contain all of the information set forth in
the registration statement and the exhibits and schedules to the
registration statement. Some items are omitted in accordance
with the rules and regulations of the SEC. For further
information about us and our common stock, we refer you to the
registration statement and the exhibits and schedules to the
registration statement filed as part of the registration
statement. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit
are qualified in all respects by reference to the actual text of
the exhibit. You may read and copy the registration statement,
including the exhibits and schedules to the registration
statement, at the SEC&#146;s Public Reference Room at 100&nbsp;F
Street N.E., Washington,&nbsp;D.C. 20549. You can obtain
information on the operation of the Public Reference Room by
calling the SEC at
<FONT style="white-space: nowrap">1-800-SEC-0330.</FONT> In
addition, the SEC maintains an Internet site at
<I>www.sec.gov,</I> from which you can electronically access the
registration statement, including the exhibits and schedules to
the registration statement.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Upon completion of this offering, we will be subject to the
information reporting requirements of the Securities Exchange
Act of 1934 and we intend to file reports, proxy statements and
other information with the SEC.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">103

</FONT>
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<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Index to consolidated financial statements</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Vanda Pharmaceutical Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Index</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>December&nbsp;31, 2004 and 2003</B>
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="86%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Page(s)</FONT></B></TD><TD></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Report of Independent Registered
    Public Accounting Firm
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">F-2</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Consolidated financial statements
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Balance sheets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">F-3</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Statements of operations
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">F-4</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Statements of changes in
    stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">F-5</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Statements of cash flows
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">F-8</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Notes to financial statements
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">F-9</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-1

</FONT>

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Report of Independent Registered Public Accounting Firm</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
To the Board of Directors and Stockholders of
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
Vanda Pharmaceuticals Inc. (a development stage company)
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, changes in
stockholders&#146; equity and of cash flows present fairly, in
all material respects, the financial position of Vanda
Pharmaceuticals Inc. and its subsidiary (a development stage
company) at December&nbsp;31, 2003 and 2004, and the results of
operations and cash flows for the period from March&nbsp;13,
2003 (date of inception) to December&nbsp;31, 2003 and year
ended December&nbsp;31, 2004 and for the period from
March&nbsp;13, 2003 (date of inception) to December&nbsp;31,
2004 in conformity with accounting principles generally accepted
in the United States of America. 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. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
/s/ PricewaterhouseCoopers LLP
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
McLean, Virginia
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
December&nbsp;29, 2005
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-2

</FONT>
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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Consolidated Balance Sheets</B>
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="46%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


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


<TR>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30, 2005</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Actual</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Pro forma</FONT></B></TD><TD></TD>
</TR>


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

<TR>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="19" align="left" valign="top">
    <B><FONT face="helvetica,arial">Assets</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Current assets
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Cash and cash equivalents
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,165,722</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,259,770</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,264,920</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Accounts receivable
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">28,489</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Prepaid expenses and other current
    assets
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">97,044</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">190,604</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">526,219</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total current assets
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,291,255</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,450,374</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,791,139</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Property and equipment, net
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,094,658</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,251,867</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,017,314</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Deposits
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">50,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">50,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Restricted cash
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">430,230</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total assets
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,385,913</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">17,752,241</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24,288,683</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="19">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="19" align="left" valign="top">
    <B><FONT face="helvetica,arial">Liabilities and
    stockholders&#146; equity</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Current liabilities
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Accounts payable
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">458,608</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">718,606</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">583,658</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Accrued liabilities
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">432,474</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">689,428</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,869,125</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred rent and credit on lease
    concession, current
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,549</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,225</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Current portion of long-term debt
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">195,925</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">173,929</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">186,158</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Current portion of capital lease
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">37,241</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total current liabilities
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,087,007</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,622,753</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,645,166</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Deferred grant revenue
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">127,866</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Deferred rent and credit on lease
    concession
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">17,661</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">30,371</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">27,325</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Long-term debt, less current portion
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">274,212</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">142,487</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,365</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Capital lease, less current portion
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,043</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total liabilities
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,378,880</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,808,654</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,801,722</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Commitments
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Stockholders&#146; equity
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Series&nbsp;A preferred stock,
    $0.001&nbsp;par value; 10,000,000&nbsp;shares authorized, issued
    and outstanding at December&nbsp;31, 2003 and 2004 and
    September&nbsp;30, 2005 (unaudited), respectively; liquidation
    preference of $10,000,000
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,963,541</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,963,541</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,963,541</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Series&nbsp;B preferred stock,
    $0.001&nbsp;par value; 30,081,308&nbsp;shares authorized, 0,
    15,040,654 and 30,081,308&nbsp;shares issued and outstanding at
    December&nbsp;31, 2003 and 2004 and September&nbsp;30, 2005
    (unaudited), respectively; liquidation preference of $37,000,009
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,345,023</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">36,845,028</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Common stock, $0.001&nbsp;par
    value; 50,000,000&nbsp;shares authorized and 10,000&nbsp;shares
    issued and outstanding at December&nbsp;31, 2003 and 2004,
    respectively, and 150,739&nbsp;shares issued and outstanding at
    September&nbsp;30, 2005 (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">151</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Additional paid-in capital
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,618</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">340,630</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,049,479</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Deferred stock-based compensation
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(257,934</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(13,862,408</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Accumulated other comprehensive loss
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,315</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,576</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(23,299</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Deficit accumulated during the
    development stage
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(12,445,107</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,485,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total stockholders&#146; equity
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,007,033</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15,943,587</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,486,961</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3"><FONT style="font-size: 9pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Total liabilities and
    stockholders&#146; equity
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,385,913</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">17,752,241</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">24,288,683</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>The accompanying notes are an integral part of these
consolidated financial statements.</I>
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-3

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Consolidated Statements of Operations</B>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 8pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="29%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="25" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="25" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="14">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Revenues from services
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">47,565</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,980</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">81,545</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,980</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">81,545</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Operating expenses:
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Research and development
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,010,532</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,442,983</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,453,515</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,033,488</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">11,641,565</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,095,080</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">General and administrative
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,052,659</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,119,394</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,172,053</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,267,485</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,587,147</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,759,200</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 8pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Total operating expenses
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,063,191</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,562,377</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,625,568</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,300,973</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">17,228,712</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">29,854,280</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 8pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Loss from operations
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,015,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,528,397</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(12,544,023</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,266,993</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,228,712</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,772,735</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Other income (expense):
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Interest income
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">52,595</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">100,785</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">153,380</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">43,053</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">208,763</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">362,143</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Interest expense
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(8,090</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(41,934</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(50,024</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,867</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(20,568</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(70,592</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Other income (expense)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">300</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">209</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">509</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(230</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">93</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">602</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 8pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Total other income
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">44,805</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">59,060</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">103,865</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,956</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">188,288</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">292,153</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 8pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Loss before tax expense
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,469,337</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(12,440,158</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,254,037</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,040,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,480,582</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Tax expense
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,949</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,949</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,733</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,949</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 8pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Net loss
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(12,445,107</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,257,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,040,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,485,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Beneficial conversion feature&#151;
    deemed dividend to preferred stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(18,500,005</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(18,500,005</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 8pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss attributable to common
    stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(12,445,107</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,257,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(35,540,429</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(47,985,536</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 8pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Basic and diluted net loss per
    share applicable to common stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(297.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(947.43</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(625.78</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(934.93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Shares used in calculation of basic
    and diluted net loss per share applicable to common stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,014</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pro forma net loss per share
    applicable to common stockholders (see Note&nbsp;2) (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.68</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1.41</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Shares used in calculation of pro
    forma net loss per share applicable to common stockholders (see
    Note&nbsp;2) (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,913,995</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">25,264,356</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>The accompanying notes are an integral part of these
consolidated financial statements.</I>
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-4

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<!-- Landscape -->
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Statements of Changes in Stockholders&#146; Equity</B>
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="49" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="19">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Deficit</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Series&nbsp;A</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Series&nbsp;B</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Accumulated</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">accumulated</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">preferred stock</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">preferred stock</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Common stock</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Additional</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Deferred</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">other</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">during the</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">paid-in</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">stock-based</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">comprehensive</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">development</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Comprehensive</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Par value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Par value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Par value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">capital</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">compensation</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">loss</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">stage</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">loss</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Total</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="49" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Balances at March&nbsp;13, 2003
    (Inception)</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Issuance of Series&nbsp;A preferred
    stock, net of issuance costs of $36,459
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,963,541</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,963,541</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Issuance of Class&nbsp;A common
    stock
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,990</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Issuance of warrants in connection
    with capital lease
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,628</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">12,628</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Comprehensive loss:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cumulative translation adjustment
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,315</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,315</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Comprehensive loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,973,136</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,973,136</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="47" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Balances at December&nbsp;31,
    2003</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,963,541</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,618</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,315</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,007,033</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Issuance of Series&nbsp;B preferred
    stock, net of issuance costs of $154,982
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15,040,654</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,345,023</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,345,023</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Issuance of warrants in connection
    with consulting services
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">27,945</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">27,945</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred compensation associated
    with stock options grants
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">281,130</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(281,130</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Amortization of deferred
    stock-based compensation
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23,196</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">23,196</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-5

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<!-- Landscape -->
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Statements of Changes in Stockholders&#146; Equity
(continued)</B>
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="49" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="19">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Deficit</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Series&nbsp;A</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Series&nbsp;B</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Accumulated</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">accumulated</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">preferred stock</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">preferred stock</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Common stock</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Additional</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Deferred</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">other</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">during the</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">paid-in</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">stock-based</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">comprehensive</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">development</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Comprehensive</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Par value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Par value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Par value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">capital</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">compensation</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">loss</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">stage</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">loss</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Total</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="49" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Expense related to accelerated
    unvested stock options
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,937</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,937</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Comprehensive loss:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Net loss
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cumulative translation adjustment
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(261</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(261</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Comprehensive loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,547</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,547</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 8pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="47" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Balances at December&nbsp;31,
    2004</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,963,541</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15,040,654</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,345,023</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">340,630</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(257,934</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,576</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(12,445,107</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15,943,587</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Issuance of Series&nbsp;B preferred
    stock, (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15,040,654</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,500,005</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,500,005</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Issuance of common stock from
    exercised stock options (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">140,739</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">141</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,074</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,215</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred compensation associated
    with stock options grants (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,103,916</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(13,103,916</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred compensation associated
    with remeasurement of unvested stock grants (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,550,193</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,550,193</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-6

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">
<!-- Landscape -->
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Statements of Changes in Stockholders&#146; Equity
(continued)</B>
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="49" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="19">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Deficit</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Series&nbsp;A</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Series&nbsp;B</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Accumulated</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">accumulated</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">preferred stock</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">preferred stock</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Common stock</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Additional</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Deferred</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">other</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">during the</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">paid-in</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">stock-based</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">comprehensive</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">development</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Comprehensive</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 7pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Par value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Par value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Par value</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">capital</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">compensation</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">loss</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">stage</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">loss</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Total</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="49" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Expense related to remeasurement of
    stock options (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,040,666</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,040,666</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Amortization of deferred
    stock-based compensation (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,049,635</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,049,635</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Beneficial conversion feature&#151;
    deemed dividend on issuance of Series&nbsp;B preferred stock
    (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,500,005</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,500,005</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Beneficial conversion feature&#151;
    accretion of beneficial conversion feature for Series&nbsp;B
    preferred stock (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(18,500,005</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(18,500,005</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Comprehensive loss:
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,040,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,040,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cumulative translation adjustment
    (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(20,723</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(20,723</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Comprehensive loss (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,061,147</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,061,147</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="47" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Balances at September&nbsp;30,
    2005 (unaudited)</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,963,541</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">30,081,308</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">36,845,028</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">150,739</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">151</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,049,479</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(13,862,408</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(23,299</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,485,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,486,961</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="47" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="47" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>The accompanying notes are an integral part of these
consolidated financial statements.</I>
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-7

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Consolidated Statements of Cash Flows</B>
</DIV>
<FONT face="times new roman,times">

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0" style="font-size: 7pt; margin-top: 12pt; ">

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="29%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="27" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
</TR>

<TR>
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March 13, 2003</FONT></B></TD><TD></TD>
</TR>

<TR>
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
</TR>

<TR>
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR>
    <TD colspan="4">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="27" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR>
    <TD colspan="16">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <B><FONT face="helvetica,arial">Cash flows from operating
    activities</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Net loss
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(12,445,107</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,257,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,040,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(29,485,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Adjustments to reconcile net loss
    to net cash used in operating activities
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Depreciation and amortization
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">79,891</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">376,709</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">456,600</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">268,597</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">316,435</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">773,035</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Stock-based compensation
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">66,078</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">66,078</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">48,786</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,090,301</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,156,379</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="left" valign="top">
    <FONT face="helvetica,arial">Changes in assets and liabilities:
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Accounts receivable
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(28,489</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">28,489</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">785</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Prepaid expenses and other current
    assets
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(97,044</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(93,024</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(190,068</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(105,843</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(335,615</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(525,683</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Deposits
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(50,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(50,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(50,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(50,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Accounts payable
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">458,608</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">415,506</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">874,114</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">52,342</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(134,948</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">739,166</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Accrued expenses
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">432,474</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">99,335</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">531,809</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">25,700</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,179,697</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,711,506</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Deferred grant revenue
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">127,866</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">127,866</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred rent and credit on lease
    concession
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">17,661</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,259</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,920</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">15,763</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(370</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,550</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 7pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Net cash used in operating
    activities
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,107,720</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(8,614,934</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(10,722,654</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,001,640</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(11,797,058</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(22,519,712</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 7pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <B><FONT face="helvetica,arial">Cash flows from investing
    activities</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Purchases of property and equipment
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(679,428</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(414,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,576,452</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(360,107</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(96,341</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,672,793</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Purchases of short-term investments
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(7,200,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(7,200,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Proceeds from sales of short-term
    investments
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,200,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,200,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Investing in restricted cash
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(430,230</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(430,230</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 7pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Net cash used in investing
    activities
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(679,428</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(414,531</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,576,452</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(360,107</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(526,571</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,103,023</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 7pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <B><FONT face="helvetica,arial">Cash flows from financing
    activities</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Principal payments on obligations
    under capital lease
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(12,356</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(42,887</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(42,887</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(32,849</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(51,246</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(94,133</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Principal payments on note payable
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(156,446</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(201,456</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(115,880</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(127,858</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(329,314</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Proceeds from borrowings on note
    payable
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">515,147</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">515,147</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Proceeds from the issuance of
    preferred stock, net of issuance costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,963,541</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,345,023</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">28,308,564</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,345,023</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,500,005</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">46,808,569</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Proceeds from exercise of stock
    options
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,076</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">14,076</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Proceeds from issuance of common
    stock
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,000</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 7pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Net cash provided by financing
    activities
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,955,185</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,145,690</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">28,583,368</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,196,294</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,334,977</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">46,918,345</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 7pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Effect of foreign currency
    translation
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,315</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(22,177</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(24,492</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(16,092</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,198</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(30,690</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 7pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Net increase in cash and cash
    equivalents
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,165,722</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9,094,048</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,259,770</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">11,818,455</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,005,150</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,264,920</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <B><FONT face="helvetica,arial">Cash and cash
    equivalents</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Beginning of period
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,165,722</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,165,722</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,259,770</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 7pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">End of period
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">7,165,722</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,259,770</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">16,259,770</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,984,177</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,264,920</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,264,920</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4"><FONT style="font-size: 7pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="23" align="right" valign="bottom" style="border-top: 3pt double #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <B><FONT face="helvetica,arial">Supplemental
    disclosure</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <FONT face="helvetica,arial">Cash payments for interest
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,221</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">41,354</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">45,575</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,008</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">65,583</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <B><FONT face="helvetica,arial">Supplemental disclosure of
    noncash financing activities</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Equipment acquired through
    obligation under capital lease
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">482,493</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">95,305</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">95,305</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">95,305</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="4" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accretion of beneficial conversion
    feature for Series&nbsp;B preferred stock
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,500,005</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">18,500,005</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="28" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<I>The accompanying notes are an integral part of these
consolidated financial statements.</I>
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-8

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial statements</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>December&nbsp;31, 2004 and 2003</B>
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Business organization
and presentation</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Business organization</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Vanda Pharmaceuticals Inc. (&#147;Vanda&#148; or the
&#147;Company&#148;) was founded in November 2002 and commenced
its operations on March&nbsp;13, 2003. Vanda is a
biopharmaceutical company focused on the development and
commercialization of small molecule therapeutics, with exclusive
worldwide commercial rights to three product candidates in
clinical development for various central nervous system
disorders. The Company&#146;s lead product candidate,
iloperidone, is an atypical antipsychotic for the treatment of
schizophrenia and bipolar disorder and is in a Phase&nbsp;III
trial for schizophrenia. The Company&#146;s second product
candidate, VEC-162, is a melatonin agonist for the treatment of
insomnia and depression and is entering a pivotal Phase&nbsp;III
trial for insomnia. VEC-162 is also ready for Phase&nbsp;II
trials for the treatment of depression. The Company&#146;s third
product candidate, VSF-173, is a compound for the treatment of
excessive daytime sleepiness and is ready for a Phase&nbsp;II
trial. Each of these product candidates benefits from new
chemical entity (NCE)&nbsp;patent protection and may offer
substantial advantages over approved therapies.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company expects to complete its Phase&nbsp;III trial for
iloperidone in the first half of 2007. If this trial is
successful, the Company will file a New Drug Application
(NDA)&nbsp;for approval with the Food and Drug Administration
(FDA)&nbsp;later that year. The Company recently completed an
efficacy and safety Phase&nbsp;II trial of VEC-162 for insomnia
and expects to begin a Phase&nbsp;III trial early in 2006. The
Company also expects to begin a Phase&nbsp;II trial of
<FONT style="white-space: nowrap">VSF-173</FONT> for excessive
daytime sleepiness in the second half of 2006.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Vanda Pharmaceuticals Pte. Ltd. (&#147;Vanda Singapore&#148;) is
a limited liability company domiciled and incorporated in
Singapore on February&nbsp;24, 2003 as a wholly-owned subsidiary
of Vanda Pharmaceuticals Inc. Vanda Singapore&#146;s principal
activity is drug research using genetic and genomic sciences.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Since its inception, the Company has devoted substantially all
of its efforts to business planning, research and development,
recruiting management and technical staff, acquiring operating
assets and raising capital. Accordingly, the Company is
considered to be in the development stage as defined in
Statement of Financial Accounting Standards
(SFAS)&nbsp;No.&nbsp;7, <I>&#147;Accounting and Reporting by
Development Stage Enterprises.&#148;</I>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company&#146;s expected activities will necessitate
significant uses of working capital throughout 2005 and beyond.
Additionally, the Company&#146;s capital requirements will
depend on many factors, including the success of the
Company&#146;s research and development efforts, payments
received under contractual agreements with other parties, if
any, and the status of competitive products. The Company plans
to continue financing operations with the cash received from the
additional private placement of Series&nbsp;B Preferred Stock
(see Note&nbsp;14) and the Company plans to seek additional
sources of funding in 2006. The Company&#146;s failure to
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-9

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
raise additional capital as and when needed could have a
negative impact on the financial condition and the ability of
the Company to execute its business strategy.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All
inter-company balances and transactions have been eliminated.
The accompanying consolidated financial statements are prepared
in accordance with accounting principles generally accepted in
the United States of America.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The unaudited interim consolidated financial statements as of
and for the nine months ended September&nbsp;30, 2004 and 2005
have been prepared in accordance with generally accepted
accounting principles for interim information. Accordingly, they
do not contain all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. However, in the opinion of management, all
adjustments, consisting of normal, recurring adjustments
considered necessary for a fair statement of the results of the
interim periods have been included.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The results for the nine months ended September&nbsp;30, 2005
are not necessarily indicative of the results to be expected for
the year ending December&nbsp;31, 2005. Certain information in
footnote disclosures normally included in annual financial
statements has been condensed or omitted for the interim periods
presented, in accordance with the rules and regulation of the
Securities and Exchange Commission (the &#147;SEC&#148;) for
interim financial statements.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Summary of significant
accounting policies</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Cash and cash equivalents</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
For purposes of the consolidated balance sheet and consolidated
statement of cash flows, cash equivalents represent all
highly-liquid investments with an original maturity date of
three months or less. At September&nbsp;30, 2005, the Company
maintained all of its cash and cash equivalents in two financial
institutions. Deposits held with these institutions may exceed
the amount of insurance provided on such deposits. Generally,
these deposits may be redeemed upon demand, and the Company
believes there is minimal risk of losses on such cash balances.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company maintained highly-liquid investments throughout the
period ending September&nbsp;30, 2005, which were classified as
available-for-sale because they can be utilized for current
operations. The Company&#146;s investment policy requires the
selection of high-quality issuers, with bond ratings of AAA to
A1+/ P1. The Company&#146;s objective is to maintain its
investment portfolio at an average duration of approximately one
year. Interest income is recorded when earned and included in
interest income. As of December&nbsp;31, 2003 and 2004 and
September&nbsp;30, 2005, the Company did not hold any short-term
investments.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-10

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Concentrations of credit risk</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of
cash and cash equivalents and short-term investments. The
Company places its cash and cash equivalents and short-term
investments with highly-rated financial institutions.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The carrying amounts of the Company&#146;s financial
instruments, which include cash and cash equivalents, short term
investments, and accounts payable, approximate their fair values
due to their short maturities. The fair value of the long term
debt approximates its carrying value based on the variable
nature of interest rates and current market rates available to
the Company.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation of property and
equipment is provided on a straight-line basis over the
estimated useful lives of the assets, generally three to seven
years. Amortization of leasehold improvements is provided on a
straight-line basis over the shorter of their estimated useful
life or the lease term. The costs of additions and betterments
are capitalized, and repairs and maintenance costs are charged
to operations in the period incurred.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Upon retirement or disposition of property and equipment, the
cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in general and
administrative expenses for that period.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company assesses the recoverability of its long-lived assets
by determining whether the carrying value of such assets can be
recovered through undiscounted future operating cash flows. If
impairment is indicated, the Company measures the amount of such
impairment by comparing the fair value to the carrying value.
There have been no indicators of impairment through
September&nbsp;30, 2005.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
During 2005, in conjunction with the lease of the office and
laboratory space building, the Company provided the landlord
with a letter of credit, which was collateralized with a
restricted cash deposit in the amount of $430,230 (see
Note&nbsp;6). These deposits are recorded as non-current
restricted cash at September&nbsp;30, 2005.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Vanda Singapore entered into an agreement with the Economic
Development Board of Singapore (&#147;EDB&#148;) to provide a
grant for a Development Project. During 2005, the Company
submitted its first asset-related claim with the EDB and
received a cash payment of $127,866.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-11

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Given that the Company has not met the conditions attached to
the grant, the payment has been recorded as deferred grant
revenue on the balance sheet at September&nbsp;30, 2005.
Management expects that a resolution is likely to be reached
with the EDB in the near future.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The functional currency of the Company&#146;s wholly-owned
foreign subsidiary located in Singapore is the local currency.
Assets and liabilities of the Company&#146;s foreign subsidiary
are translated to United States dollars based on exchange rates
at the end of the reporting period. Income and expense items are
translated at weighted average exchange rates prevailing during
the reporting period. Translation adjustments are accumulated in
a separate component of stockholder&#146;s equity. Translation
gains or losses are included in the determination of operating
results.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
SFAS&nbsp;No.&nbsp;130, <I>&#147;Reporting Comprehensive
Income,&#148;</I> requires a full set of general-purpose
financial statements to include the reporting of
&#147;comprehensive income.&#148; Other comprehensive loss is
composed of two components, net income and other comprehensive
income. For the period from March&nbsp;13, 2003
(inception)&nbsp;to December&nbsp;31, 2003 and year ended
December&nbsp;31, 2004, other comprehensive loss of $2,315 and
$2,576, respectively, consists of cumulative translation
adjustments due to foreign currency. For the nine month periods
ended September&nbsp;30, 2004 and 2005, other comprehensive loss
of $3,809 and $23,299, respectively, consists of cumulative
translation adjustments due to foreign currency.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Revenue is recognized upon delivery of products to customers.
Revenue earned under research and development contracts are
recognized in accordance with the proportional performance
method outlined in Staff Accounting Bulletin&nbsp;No.&nbsp;104
whereby the extent of progress toward completion is measured on
the <FONT style="white-space: nowrap">cost-to</FONT>-cost basis;
however, revenue recognized at any point will not exceed the
cash received. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the
entire loss on the contract is made in the period which it
becomes probable. All costs related to these agreements are
expensed as incurred. Revenue is derived principally from
consulting agreements the Company entered into during its
<FONT style="white-space: nowrap">start-up</FONT> phase to
defray research costs. Vanda completed its obligations under
these agreements during the year ended December&nbsp;31, 2004,
and no longer seeks such arrangements.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company will use the substantive milestone payment method of
revenues recognition when all milestones to be received under
contractual arrangements are determined to be substantive,
at-risk and the culmination of an earnings process. Substantive
milestones are payments that are conditioned upon an event
requiring substantive effort, when the amount of the milestone
is reasonable relative to the time, effort and risk involved in
achieving the milestones and when the milestones are reasonable
relative to each other and the amount of
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-12

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
any up-front payment. If these criteria are not met, the timing
of the recognition of revenue from the milestone payment may be
deferred.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Research and development costs are expensed as incurred and
include the cost of salaries, building costs, utilities,
allocation of indirect costs, and expenses to third parties who
conduct research and development, pursuant to development and
consulting agreements, on behalf of the Company. Costs related
to the acquisitions of intellectual property are expensed as
incurred since the underlying technology associated with these
acquisitions were made in connection with the Company&#146;s
research and development efforts and have no alternative future
use. Research and development expenses also include the costs
incurred by Vanda Singapore.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
General and administrative costs are expensed as incurred and
consist primarily of salaries and other related costs for
personnel serving executive, finance, accounting, information
technology and human resource functions. Other costs include
facility costs not otherwise included in research and
development expense and professional fees for legal and
accounting services.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Interest income consists of interest earned on the
Company&#146;s cash and cash equivalents and short-term
investments. Interest expense consists of interest incurred on
equipment debt.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As provided by SFAS&nbsp;No.&nbsp;123, <I>&#147;Accounting for
Stock-Based Compensation&#148; </I>(SFAS&nbsp;123), the Company
has elected to continue to account for its stock-based
compensation programs according to the provisions of Accounting
Principles Board Opinion No.&nbsp;25, (APB&nbsp;25)
<I>&#147;Accounting for Stock Issued to Employees.&#148;</I>
Accordingly, compensation expense has been recognized to the
extent of employee or director services rendered based on the
intrinsic value of compensatory options or shares granted under
the plans. Under APB&nbsp;25, compensation expense is recognized
over the vesting period of the option to the extent that the
fair value of the stock exceeds the exercise price of the stock
at the date of grant.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Variable stock-base compensation awards are amortized and
expensed in accordance with Financial Accounting Standards Board
(&#147;FASB&#148;) Interpretation No.&nbsp;28,
<I>&#147;Accounting for Stock Appreciation Rights and other
Variable Stock Option Plan or Award Plans,&#148;</I> an
accelerated vesting model. Under this model, all stock based
employee compensation charges are amortized over the vesting
periods of the individual stock awards.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under
SFAS&nbsp;123, the Company&#146;s net loss and basic and diluted
net loss
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-13

</FONT>

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
attributable to common stockholders per share would have been
changed to the following pro forma amounts:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="center" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="10">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss, attributable to common
    stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,257,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(35,540,429</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Add: Stock based employee
    compensation expense included in net loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,133</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">20,841</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,090,301</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Less: Stock-based employee
    compensation expense determined under SFAS&nbsp;123
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(33,160</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(57,954</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(27,831</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(4,130,518</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pro forma net loss applicable to
    common stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(3,003,981</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,494,107</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,264,760</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(35,580,646</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Net loss per share:
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Basic and diluted, net loss
    attributed to common stockholders as reported
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(297.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(947.43</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(625.78</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(934.93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pro forma basic and diluted, net
    loss attributed to common stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(300.40</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(949.41</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(626.48</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(935.99)</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The weighted average fair value of an option granted during the
period from March&nbsp;13, 2003 (inception)&nbsp;to
December&nbsp;31, 2003 and year ended December&nbsp;31, 2004 was
$0.32 and $1.20, respectively. The weighted average fair value
of an option granted during the nine month periods ended
September&nbsp;30, 2004 and 2005 was $1.17 and $4.54,
respectively. The fair value
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-14

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following
weighted-average assumptions for each year:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="39%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="16" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="9">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="center" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Expected dividend yield
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Expected volatility
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">67%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">67%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">67%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Expected term (years)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Risk-free interest rate
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.65%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.42%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.89%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.44%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company accounts for warrants granted to consultants and
advisors under SFAS&nbsp;123 and Emerging Issues Task Force
<FONT style="white-space: nowrap">Issue&nbsp;96-18,</FONT>
&#147;Accounting for Equity Investments that are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling
Goods or Services,&#148;
<FONT style="white-space: nowrap">(&#147;EITF&nbsp;96-18&#148;).</FONT>
As such, warrants granted to non-employees are periodically
re-measured and expense is incurred during their vesting terms.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company accounts for income taxes under the liability method
in accordance with provisions of SFAS&nbsp;No.&nbsp;109,
<I>&#147;Accounting for Income Taxes,&#148;</I>
(&#147;SFAS&nbsp;109&#148;) which requires companies to account
for deferred income taxes using the asset and liability method.
Under the asset and liability method, current income tax expense
or benefit is the amount of income taxes expected to be payable
or refundable for the current year. A deferred income tax asset
or liability is recognized for future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and tax credits and loss carryforwards.
Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. Tax rate changes are reflected in income during the
period such changes are enacted. Changes in ownership may limit
the amount of net operating loss carryforwards that can be
utilized in the future to offset taxable income.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Net loss attributable to common stockholders per share is
calculated in accordance with SFAS&nbsp;No.&nbsp;128,
<I>&#147;Earnings per Share,&#148; </I>and Staff Accounting
Bulletin (&#147;SAB&#148;) No.&nbsp;98. Basic earnings per share
(&#147;EPS&#148;) is calculated by dividing the net income or
loss attributable to common stockholders by the weighted average
number of common shares outstanding, reduced by the weighted
average unvested common shares subject to repurchase.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-15

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Diluted EPS is computed by dividing the net income or loss
attributable to common stockholders by the weighted average
number of other potential common stock outstanding for the
period. Other potential common stock include Series&nbsp;A and B
Convertible Preferred Stock, stock options and warrants but only
to the extent that their inclusion is dilutive. The Company
incurred a net loss in all periods presented, causing inclusion
of any potentially dilutive securities to have an anti-dilutive
affect, resulting in dilutive loss per share attributable to
common stockholders and basic loss per share attributable to
common stockholders being equivalent. The Company did not have
any common shares issued for nominal consideration as defined
under the terms of SAB&nbsp;No.&nbsp;98, which would be included
in EPS calculations.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The unaudited pro forma shares used to compute basic and diluted
net loss per share is the weighted average shares of common
stock outstanding, reduced by the weighted average unvested
common shares subject to repurchase, and includes the assumed
conversion of the convertible preferred stock into shares of
common stock using the as-if converted method as of
January&nbsp;1, 2004 or the actual date of issuance if later.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD colspan="10">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <B><FONT face="helvetica,arial">Historical:</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Numerator:
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,257,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,040,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Beneficial conversion feature&#151;
    deemed dividend to preferred stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(18,500,005</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net loss attributable to common
    stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(2,970,821</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(6,257,770</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(35,540,429</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Denominator:
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Weighted average common shares
    outstanding
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,872</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Weighted average unvested common
    shares subject to repurchase
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(858</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Denominator for basic and diluted
    net loss per share
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,014</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Basic and diluted net loss per
    share applicable to common stockholders
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(297.08</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(947.43</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(625.78</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(934.93</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="left" style="border-top: 3pt double #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-16

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="37%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Period from</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">March&nbsp;13, 2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Nine months ended</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(inception) to</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Year ended</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="17" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD colspan="10">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <B><FONT face="helvetica,arial">Pro forma:</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Numerator:
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pro forma net loss
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(9,474,286</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(35,540,429</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

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

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Denominator:
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Weighted average common shares
    outstanding
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">38,014</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pro forma adjustments to reflect
    assumed weighted average effect on conversion of preferred stock
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,903,995</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">25,226,342</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Pro forma shares used to compute
    basic and diluted net loss per share
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">13,913,995</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">25,264,356</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <FONT face="helvetica,arial">Basic and diluted pro forma net
    loss per share applicable to common stockholders
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.68</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1.41</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

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

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Historical outstanding
    anti-dilutive securities not included in diluted net loss per
    share calculation:</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Series&nbsp;A and B preferred stock
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,000,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">25,040,654</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">25,040,654</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">40,081,308</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Options to purchase common stock
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">772,100</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,042,480</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,042,480</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,783,490</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Warrants to purchase common stock
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">45,100</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">166,600</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">166,600</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">166,600</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD colspan="15" align="right" valign="bottom" style="border-top: 1pt solid #000000;">
    &nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,817,200</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26,249,734</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26,249,734</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">44,031,398</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company&#146;s product candidates under development require
approval from the Food and Drug Administration (FDA) or other
international regulatory agencies prior to commercial sales.
There can be no assurance our products will receive the
necessary clearance. If we are denied clearance or clearance is
delayed, it may have a material adverse impact on the Company.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company&#146;s products are concentrated in rapidly
changing, highly competitive markets, which are characterized by
rapid technological advances, changes in customer requirements
and evolving regulatory requirements and industry standards. Any
failure by us to anticipate or to respond adequately to
technological developments in our industry, changes in customer
requirements or changes in regulatory requirements or industry
standards, or any significant
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-17

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
delays in the development or introduction of products or
services, could have a material adverse effect on our business,
operating results and future cash flows.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company depends on single source suppliers for critical raw
materials for manufacturing, as well as other components
required for the administration of its product candidates. The
loss of these suppliers could delay our clinical trials or
prevent or delay commercialization of the product candidates.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Management has determined that the Company operates in one
business segment which is the development and commercialization
of pharmaceutical products.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates that affect the
reported amounts of assets and liabilities at the date of the
financial statements, disclosure of contingent assets and
liabilities, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In December 2004, the FASB issued SFAS&nbsp;No.&nbsp;123R,
<I>&#147;Share-Based Payment,&#148;</I> a revision of
SFAS&nbsp;No.&nbsp;123, <I>&#147;Accounting for Stock-based
Compensation.&#148;</I> SFAS&nbsp;123R requires companies to
recognize expense associated with share-based compensation
arrangements, including employee stock options, using a fair
value-based option pricing model, and eliminates the alternative
to use APB&nbsp;25&#146;s intrinsic method of accounting for
share-based payments. In accordance with the new pronouncement,
the Company plans to begin recognizing the expense associated
with its share-based payments, as determined using a
fair-value-based method, in its statements of operations
beginning on January&nbsp;1, 2006. Adoption of the expense
provisions of SFAS&nbsp;123R are expected to have a material
impact on the Company&#146;s results of operations and net loss
per share. The standard generally allows two alternative
transition methods in the year of adoption&#151; modified
prospective application and retroactive application with
restatement of prior financial statements to include the same
amounts that were previously included in the pro forma
disclosures. The Company has not determined which transition to
adopt.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In order to provide implementation guidance related to
SFAS&nbsp;123R, the Securities and Exchange Commission
(&#147;SEC&#148;) issued Staff Accounting Bulletin
(&#147;SAB&#148;) No.&nbsp;107, &#147;Share-Based Payment&#148;
in March 2005. SAB&nbsp;107 provides guidance on numerous issues
such as valuation methods (including assumptions such as
expected volatility and expected term), the classification of
compensation expense, capitalization of compensation cost
related to share-based payment arrangements, the accounting for
income tax effects of share-based payment arrangements upon
adoption of SFAS&nbsp;123R, and disclosures in MD&#38;A
subsequent to adoption of SFAS&nbsp;123R.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-18

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
SFAS&nbsp;No.&nbsp;154, &#147;Accounting Changes and Error
Corrections&#151; a replacement of APB Opinion No.&nbsp;20 and
FASB Statement No.&nbsp;3&#148; was issued by the FASB in May
2005. This Statement replaces APB Opinion No.&nbsp;20,
&#147;Accounting Changes&#148;, and FASB Statement No.&nbsp;3,
&#147;Reporting Accounting Changes in Interim Financial
Statements&#148;, and changes the requirements for the
accounting for and reporting of a change in accounting
principle. SFAS&nbsp;No.&nbsp;154 applies to all voluntary
changes in accounting principle and requires retrospective
application to prior periods&#146; financial statements of
changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative
effect of the change. This Statement also requires that a change
in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in
accounting estimate affected by a change in accounting
principle. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after
December&nbsp;15, 2005. SFAS&nbsp;No.&nbsp;154 is not expected
to have a material effect on the Company&#146;s consolidated
financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In June 2005, the FASB Staff issued FASB Staff
<FONT style="white-space: nowrap">Position&nbsp;150-5</FONT>
<FONT style="white-space: nowrap">(FSP&nbsp;150-5),</FONT>
<I>&#147;Issuer&#146;s Accounting under FASB Statement
No.&nbsp;150 for Freestanding Warrants and Other Similar
Instruments on Shares that are Redeemable.&#148;</I>
<FONT style="white-space: nowrap">FSP&nbsp;150-5</FONT>
addresses whether freestanding warrants and other similar
instruments on shares that are redeemable, either puttable or
mandatorily redeemable, would be subject to the requirements of
FASB Statement No.&nbsp;150, <I>&#147;Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities
and Equity,&#148;</I> regardless of the timing of the redemption
feature or the redemption price. The FSP is effective after
June&nbsp;30, 2005. Adoption of the FSP did not have a material
effect on the Company&#146;s financial condition or results of
operations.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property and
equipment</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Property and equipment&#151; at cost:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="56%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="12" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="12" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="center" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Computer equipment
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">224,741</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">698,405</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">722,700</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Lab equipment
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">636,348</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">681,455</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">705,232</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Furniture and fixtures
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">22,063</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">29,309</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">29,254</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Leasehold improvements
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">291,397</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">304,972</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">330,418</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,174,549</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,714,141</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,787,604</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Less&#151; accumulated depreciation
    and amortization
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">79,891</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">462,274</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">770,290</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,094,658</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,251,867</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,017,314</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Depreciation and amortization expense for the period from
March&nbsp;13, 2003 (inception)&nbsp;to December&nbsp;31, 2003
and year ended December&nbsp;31, 2004 was $79,891 and $376,709,
respectively. Depreciation and amortization expense for the nine
month period ended September&nbsp;30, 2004 and 2005 and 2004 was
$282,621 and $316,435, respectively.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-19

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accrued expenses</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Accrued expenses consist of the following:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="60%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="12" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">September&nbsp;30,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2005</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="12" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD colspan="9">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">(unaudited)</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Bonus accrual
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">334,080</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">284,143</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">284,843</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued professional fees
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">40,000</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">192,977</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">88,025</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued research and development
    expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">172,730</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,384,405</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Insurance and benefits
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">36,753</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">33,680</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">106,254</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Other accrued expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">21,641</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,898</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,598</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total accrued expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">432,474</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">689,428</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,869,125</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Line of credit
facility</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In 2003, the Company entered into a $515,147 line of credit
facility to finance the purchase of specified equipment based on
lender-approved schedules. The interest rate was fixed at
9.3%&nbsp;per annum. The Company has granted a security interest
in the assets purchased under the credit line. During 2003, the
full line of credit amount was drawn down. During 2004, the
Company had no draw downs under the line of credit. During 2003
and 2004, the Company repaid $45,010 and $156,446 on the line of
credit, respectively. The total indebtedness relating to this
line of credit was $470,137, $313,691 and $187,523 as of
December&nbsp;31, 2003 and 2004 and September&nbsp;30, 2005,
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Interest expense for the line of credit facility for the period
from March&nbsp;13, 2003 (inception)&nbsp;to December&nbsp;31,
2003 and the year ended December&nbsp;31, 2004 was $3,971 and
$41,668, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following is a schedule of remaining principal payments
under borrowings as of December&nbsp;31:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="83%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="6" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">197,236</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2006
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">148,356</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

<TR>
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">345,592</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Less: Portion representing interest
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">29,176</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Current portion
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">173,929</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Noncurrent portion
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">142,487</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom" style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap style="border-top: 3pt double #000000;">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="6" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-20

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Commitments</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Lease agreements</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In 2003, the Company entered into a five-year non-cancelable
operating lease agreement for office and laboratory space. The
lease expires in June 2008. The lease contains an option to
renew for an additional five years on the same terms and
conditions. The lease contains a 3% annual escalation.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following is a schedule of future minimum lease payments for
capital and non-cancelable operating leases as of
December&nbsp;31, 2004:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="84%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">302,057</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2006
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">308,832</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2007
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">239,570</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2008
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">121,555</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">972,014</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In August 2005, the Company entered into a ten-year, six-month
non-cancelable operating lease agreement for office and
laboratory space at a new office complex, which is renewable for
an additional five-year period at the end of the original term.
The lease expires in June 2016. The Company will take possession
of the lease space during 2006. The lease includes a rent
abatement and scheduled base rent increases over the term of the
lease. The total amount of the base rent payments and rent
abatement will be charged to expense on a straight-line method
over the term of the lease. In conjunction with a letter of
credit, the Company collateralized the operating lease with a
restricted cash deposit in the amount of $430,230 in September
2005, which is recorded as non-current restricted cash at
September&nbsp;30, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following is a schedule of future minimum lease payments for
capital and non-cancelable operating leases as of
September&nbsp;30, 2005:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="84%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Three months ended
    December&nbsp;31, 2005
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">57,252</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2006
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">730,602</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2007
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">673,121</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2008
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">567,177</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2009
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">458,034</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">2010
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">470,955</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Thereafter
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,086,203</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,043,344</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In 2004, the Company entered into a capital lease obligation at
an interest rate of 7.5&nbsp;percent. The lease obligation was
payable in monthly installments of $3,312 through April 2006. The
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-21

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Company capitalized the equipment in accordance with Statement
of Financial Accounting Standard No.&nbsp;13,
<I>&#147;Accounting for Leases&#148;</I> (SFAS&nbsp;13).
SFAS&nbsp;13 requires the capitalization of leases meeting
certain criteria, with the related asset being recorded in
property and equipment and an offsetting amount recorded as a
liability. During 2005, the Company repaid the capital lease
obligation in full.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Total rent expense for the period from March&nbsp;13, 2003
(inception)&nbsp;through December&nbsp;31, 2003 and the year
ended December&nbsp;31, 2004 and was $143,174 and $315,241,
respectively. Total rent expense for nine month period ended
September&nbsp;30, 2004 and 2005 was $235,793 and $261,471,
respectively.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>License agreements</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In July 2004, the Company acquired exclusive rights to develop
and commercialize iloperidone through a sublicense agreement
with Novartis AG (&#147;Novartis&#148;). In consideration for
this license, the Company paid Novartis an initial license fee
of $500,000, which was immediately expensed to research and
development expenses on the Consolidated Statements of
Operations for the year ended December&nbsp;31, 2004. The
Company is obligated to make future milestone payments to
Novartis of less than $100&nbsp;million in the aggregate (the
majority of which are tied to sales milestones), as well as
royalty payments to Novartis which, as a percentage of net
sales, is in the mid-twenties. The Company&#146;s rights with
respect to these patents and to commercialize iloperidone may
terminate in whole or in part if the Company breaches its
royalty obligations, covenants in the sublicense regarding our
financial condition or certain restrictions in the sublicense
regarding other development activities.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In March 2004, the Company entered into a license agreement with
Bristol-Myers Squibb (&#147;BMS&#148;) under which the Company
received an exclusive worldwide license to develop and
commercialize <FONT style="white-space: nowrap">VEC-162.</FONT>
In consideration for the license, the Company paid BMS an
initial license fee of $500,000, which was immediately expensed
in research and development expenses on the Consolidated
Statements of Operations for the year ended December&nbsp;31,
2004. The Company is obligated to make future milestone payments
to BMS of less than $40&nbsp;million in the aggregate (the
majority of which are tied to sales milestones) as well as
royalty payments based on the net sales of
<FONT style="white-space: nowrap">VEC-162</FONT> at a rate
which, as a percentage of net sales, is in the low teens. The
Company is also obligated under this agreement to pay BMS a
royalty on any upfront payments that the Company receives from a
third party in connection with any partnering arrangement, at a
rate in the mid-twenties. Either party may terminate the
agreement under certain circumstances, including a material
breach of the agreement by the other.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In July 2004, the Company entered into a license agreement with
Novartis under which the Company received an exclusive worldwide
license to develop and commercialize
<FONT style="white-space: nowrap">VSF-173.</FONT> In
consideration for the license, the Company paid Novartis an
initial license fee of $500,000, which was immediately expensed
in research and development expenses on the Consolidated
Statements of Operations for the year ended December&nbsp;31,
2004. The Company is also obligated to make future milestone
payments to Novartis of less than $50&nbsp;million in the
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-22

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
aggregate (the majority of which are tied to sales milestones)
and royalty payments which, as a percentage of net sales, is in
the low to mid teens. Either party may terminate the agreement
under certain circumstances, including a material breach of the
agreement by the other.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company has agreements with clinical sites for the
treatments of patients under clinical protocols. In 2004, the
Company entered into an agreement with a clinical organization
to provide these services under a fee for service arrangement.
The total cost of these trial services will be unknown until the
trials are completed since the fees are based on the amount of
service and the number of patients.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In February 2005, the Company entered into a milestone-based
clinical trial agreement for approximately $416,000 which was
completed in August 2005.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>7.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Related party
transactions</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
From time to time, the Company reimbursed Care Capital, LLC
(&#147;Care&#148;), an affiliate of the majority shareholder of
the Company, for certain expenses paid by Care on behalf of the
Company. The Company reimbursed Care for approximately $299,000
and $54,000 for the period from March&nbsp;13, 2003
(inception)&nbsp;through December&nbsp;31, 2003 and the year
ended December&nbsp;31, 2004, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company used the services of a Care employee and reimbursed
Care for such personnel services related to occupancy and salary
expenses incurred on behalf of the Company. Reimbursements
related to such expenses were approximately $34,000 and
approximately $49,000 for the period from March&nbsp;13, 2003
(inception)&nbsp;through December&nbsp;31, 2003 and the year
ended December&nbsp;31, 2004, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
There were no related party transactions during 2005.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>8.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Preferred and common
stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Series&nbsp;A preferred and common stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In March 2003, the Company closed a private placement of its
securities and raised $10,004,000 in gross proceeds. The Company
sold 10,000&nbsp;shares of newly issued Class&nbsp;A Common
Stock at a per share price of $0.40 and 10,000,000&nbsp;shares
of newly-issued Series&nbsp;A Preferred Stock at a per share
price of $1.00 a share. Each preferred share is convertible into
one share of the Company&#146;s Common Stock, as adjusted. Each
share of Series&nbsp;A Preferred Stock shall entitle the holder
thereof to vote on the election and removal of the directors of
the Company and on all other matters to be voted on by the
stockholders of the Company. The holder of a share of
Series&nbsp;A Preferred Stock shall be entitled to such number
of votes as equal the number of shares of Common Stock into
which such shares of Series&nbsp;A Preferred Stock is then
convertible into at the record date of determination. The
outstanding shares of Series&nbsp;A Preferred Stock shall have
all other voting rights required by law and shall have
additional rights pursuant to Article&nbsp;IV of the
Company&#146;s Second Restated Certificate of Incorporation.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-23

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In September 2004, the Board of Directors approved a
<FONT style="white-space: nowrap">100-for-1</FONT> stock split
on Common and Series&nbsp;A Preferred Stock. All share
information in the financial statements has been retroactively
adjusted to reflect the effect of the split as if it had
occurred at the beginning of the earliest period presented.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In September 2004, the Company closed a private placement of
15,040,654&nbsp;shares of Series&nbsp;B Preferred Stock for
approximately $18.5&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In September 2005, the Company closed an additional private
placement of 15,040,654&nbsp;shares of Series&nbsp;B Preferred
Stock for approximately $18.5&nbsp;million. In December 2005,
the Company closed an additional private placement of
12,195,129&nbsp;shares of Series&nbsp;B Preferred Stock for
approximately $15&nbsp;million (see Note&nbsp;13). The issuance
costs from the issuance of the Series&nbsp;B Preferred Stock in
September and December 2005 were considered insignificant to
record against the Series&nbsp;B Preferred Stock on the balance
sheet.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The holders of preferred stock shall vote together with the
holders of the outstanding shares of Common Stock, and not as a
separate class or series. So long as 10,528,457&nbsp;shares of
Series&nbsp;B Preferred Stock remain outstanding, the holders of
the outstanding shares of Series&nbsp;B Preferred Stock, voting
together as a class and to the exclusion of all other classes of
capital stock of the Company, shall be entitled to elect three
(3)&nbsp;members of the Board of Directors (the
&#147;Series&nbsp;B Preferred Directors&#148;). So long as
3,500,000&nbsp;shares of Series&nbsp;A Preferred Stock remain
outstanding, the holders of the outstanding shares of
Series&nbsp;A Preferred Stock, voting together as a class and to
the exclusion of all other classes of capital stock of the
Company, shall be entitled to elect three (3)&nbsp;members of
the Board of Directors (the &#147;Series&nbsp;A Preferred
Directors&#148; and, together with the Series&nbsp;B Preferred
Directors, the &#147;Preferred Directors&#148;). Any remaining
directors shall be appointed upon the mutual agreement of a
majority of the Series&nbsp;A Preferred Directors and the
Series&nbsp;B Preferred Directors (the &#147;General
Directors&#148;), provided that one of the General Directors
shall be the chief executive officer of the Company.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The holder of each then outstanding share of Series&nbsp;A
Preferred Stock and the holder of each then outstanding share of
Series&nbsp;B Preferred Stock shall be entitled to receive
dividends payable out of funds legally available therefore when,
as and if declared by the Board of Directors of the Company.
Such dividends shall be payable on parity with the holders of
the Common Stock and any such dividend shall be distributed
ratably among the holders of the Common Stock and the holders of
the Preferred Stock as if all such shares of Preferred Stock
were to convert into Common Stock. The right to such dividends
shall not be cumulative, and no right shall accrue to holders of
Preferred Stock. Dividends, if paid, or if declared and set
apart for payment, must be paid, or declared and set apart for
payment, on all outstanding shares of the Preferred Stock
contemporaneously.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-24

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Liquidation preference</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company (a
&#147;Liquidation Event&#148;), after payment or provision for
payment of the debts and other liabilities of the Company, the
holders of each share of Series&nbsp;A Preferred Stock and each
share of Series&nbsp;B Preferred Stock shall be entitled to
receive, on a pari passu basis out of the assets of the Company,
an amount equal to the liquidation preference. The liquidation
preference per share of Series&nbsp;A Preferred Stock as of any
particular date (the &#147;Series&nbsp;A Liquidation
Preference&#148;) shall be the greater of the Original
Series&nbsp;A Purchase Price or the amount per share of
Series&nbsp;A Preferred Stock that the holder of the number of
shares of Common Stock issuable upon conversion thereof would
receive upon any such Liquidation Event. The liquidation
preference per share of Series&nbsp;B Preferred Stock as of any
particular date (the &#147;Series&nbsp;B Liquidation
Preference&#148; and, together with the Series&nbsp;A
Liquidation Preference, the &#147;Liquidation Preference&#148;)
shall be the greater of the Original Series&nbsp;B Purchase
Price or the amount per share of Series&nbsp;B Preferred Stock
that the holder of the number of shares of Common Stock issuable
upon conversion thereof would receive upon any such Liquidation
Event.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
If upon any Liquidation Event the assets of the Company
distributable among the holders of the Series&nbsp;A Preferred
Stock and the Series&nbsp;B Preferred Stock shall be
insufficient to permit the payment to them of the full
preferential amounts to which they are entitled, then the entire
assets of the Company to be distributed shall be distributed
ratably among the holders of the Series&nbsp;A Preferred Stock
and the Series&nbsp;B Preferred Stock, in proportion to the sum
of their respective per share liquidation preferences, until
payment in full of such amount per share.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Each share of the Preferred Stock shall be convertible, at the
option of the holder, at any time after the date of the issuance
of such share, into that number of the fully paid and
nonassessable shares of common stock determined in accordance
with the following provisions:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>(a)&nbsp;</TD>
    <TD align="left">
    Each share of Series&nbsp;A Preferred Stock shall be convertible
    into the number of shares of Common Stock which results from
    dividing the Series&nbsp;A Conversion Price (as defined herein)
    per share in effect at the time into the Original Series&nbsp;A
    Purchase Price;&nbsp;and</TD>
</TR>

</TABLE>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>(b)&nbsp;</TD>
    <TD align="left">
    Each share of Series&nbsp;B Preferred Stock shall be convertible
    into the number of shares of Common Stock which results from
    dividing the Series&nbsp;B Conversion Price (as defined herein)
    per share in effect at the time into the Original Series&nbsp;B
    Purchase Price.</TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The conversion price per share for the Series&nbsp;A Preferred
Stock shall initially be $1.00. The conversion price per share
for the Series&nbsp;B Preferred Stock shall initially be $1.23
and shall be subject to adjustment from time to time as provided
herein.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-25

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Automatic conversion</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Each share of Preferred Stock then outstanding shall be
automatically converted into the number of fully paid and
nonassessable shares of Common Stock determined in accordance
with the conversion features listed above upon the earlier of:
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>(a)&nbsp;</TD>
    <TD align="left">
    The close of business of the day immediately preceding the
    closing of the sale of its Common Stock in connection with a
    Qualified Public Offering (&#147;IPO&#148;);&nbsp;or</TD>
</TR>

</TABLE>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

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

<TR valign="top">
    <TD>(b)&nbsp;</TD>
    <TD align="left">
    The consent of the holders of at least a majority of the
    outstanding shares of Preferred Stock voting or consenting
    together as a single class and to the exclusion of all other
    classes of capital stock of the Company.</TD>
</TR>

</TABLE>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In connection with the additional sale of Series&nbsp;B
Preferred Stock in September 2005, if any holder of shares of
Series&nbsp;B Preferred Stock fails to purchase all shares of
Series&nbsp;B Preferred Stock required to be purchased by such
holder at any additional closing (as defined), all of such
holder&#146;s Series&nbsp;B Preferred Stock shall automatically
and without further action on the part of such holder be
converted into such number of shares of Common Stock into which
such shares of Series&nbsp;B Preferred Stock are then
convertible. Upon conversion, the shares of Series&nbsp;B
Preferred Stock converted shall be canceled and not subject to
reissuance.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>9.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Beneficial conversion
feature&#151; Series&nbsp;B convertible preferred stock</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In September 2005, the Company completed the sale of an
additional 15,040,654&nbsp;shares of Series&nbsp;B Convertible
Preferred Stock for proceeds of approximately
$18.5&nbsp;million. After evaluating the fair value of the
Company&#146;s Common Stock obtainable upon conversion by the
stockholders, the Company determined that the issuance of the
Series&nbsp;B Preferred Stock sold in September 2005 resulted in
a beneficial conversion feature calculated in accordance with
EITF Issue No.&nbsp;98-5, &#147;Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,&#148; as interpreted by EITF Issue
<FONT style="white-space: nowrap">No.&nbsp;00-27,</FONT>
&#147;Application of Issue
<FONT style="white-space: nowrap">No.&nbsp;98-5</FONT> to
Certain Convertible Instruments,&#148; of approximately
$18.5&nbsp;million which was fully accreted in September 2005
and is recorded as a deemed dividend to preferred stockholders
for the nine month period ended September&nbsp;30, 2005.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In March 2003, the Company adopted the Vanda Pharmaceuticals
Inc. Management Equity Plan (&#147;Stock Option Plan&#148;), a
non-qualified stock option plan. The Company has reserved
5,489,714&nbsp;shares of Common Stock to accommodate the
exercise of options granted under the Stock Option Plan. As of
September&nbsp;30, 2005, there were a remaining
1,565,485&nbsp;shares reserved for issuance under the Stock
Option Plan. The Company has issued options to purchase Common
Stock to various employees which expire 10&nbsp;years from the
date of grant. The options become 100% vested on the fourth
anniversary of the date of grant.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-26

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<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Management equity plan</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company has historically granted stock options at exercise
prices that equaled the fair value of its Common Stock at the
date of grant as estimated by its board of directors. Since
there has not been a public market for the Company&#146;s Common
Stock, the board of directors determined the fair value of its
Common Stock by considering a number of objective and subjective
factors, including the pricing of Convertible Preferred Stock,
the preferences and rights of the Company&#146;s Preferred Stock
over the Common Stock, important operational events, the risk
and non-liquid nature of the Common Stock, and underlying market
conditions. The Company has not historically obtained
contemporaneous valuations by an unrelated valuation specialist
because, at the time of the issuances of stock options, the
Company believed its estimates of the fair value of its common
stock to be reasonable based on the foregoing factors.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In connection with this proposed initial public offering, the
Company retrospectively assessed the fair value of its Common
Stock. In reassessing the fair value, the Company considered the
factors used in its historical determinations of fair value, the
likelihood of a liquidity event such as an initial public
offering, and feedback received from investment banks relating
to an initial public offering upon beginning such discussions in
November 2005. In reassessing the fair value of the Common
Stock, the Company determined that an increase in the estimated
fair value of the underlying Common Stock for options granted
after December 2003 was appropriate. As allowed by
SFAS&nbsp;No.&nbsp;123, <I>Accounting for Stock Based
Compensation,</I> the Company accounts for its stock options
granted to employees and directors under APB&nbsp;25,
<I>Accounting for Stock Issued to Employees.</I> Accordingly,
deferred stock compensation is recognized to the extent that the
price of the underlying common stock, as determined in the
retrospective fair value analysis, exceeds the exercise price of
the stock options at the date of grant. Deferred stock
compensation is amortized over the vesting period of the related
options which is generally four years.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
For the year ended December&nbsp;31, 2004, the Company granted
332,080 stock options to employees with a weighted average
intrinsic value of $0.85&nbsp;per share, resulting in deferred
stock compensation of $281,130. For the nine month period ended
September&nbsp;30, 2005, the Company granted 2,899,111 stock
options to employees with a weighted average intrinsic value of
$4.52&nbsp;per share, resulting in deferred stock compensation
of $13,103,916. Compensation expense relating to stock options
with the common stock fair value greater than the exercise price
granted to employees was $23,196 for the year ended
December&nbsp;31, 2004, and $5,904 and $566,682 for the nine
month period ended September&nbsp;30, 2004 and 2005,
respectively. Of the $23,196 of compensation expense recognized
during the year ended December&nbsp;31, 2004, $2,086 was
included in research and development and $21,110 was included in
general and administrative. Of the $5,904 and $566,682 of
compensation expense recognized during the nine month period
ended September&nbsp;30, 2004 and 2005, respectively, $587 and
$183,822 was included in research and development and $5,317 and
$382,860 was included in general and administrative expense.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In August 2004, the Company approved a modification to an
employee&#146;s stock option awards at time of employment
termination. The modification was to accelerate a portion of the
unvested stock options so the shares could be immediately
exercisable. According to FASB Interpretation No.&nbsp;44,
<I>&#147;Accounting for Certain Transactions involving Stock
Compensation&#148;</I> (FIN&nbsp;44), the result
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-27

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
of such a modification is to remeasure the stock options that
were modified. The remeasurement of the stock options resulted
in an immediate charge of $14,937, which was included in general
and administrative expense for the year ended December&nbsp;31,
2004.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In February 2005, the Board of Directors approved a modification
to all outstanding granted stock option awards, repricing the
options from its original exercise price of $0.40 to $0.10.
According to FIN&nbsp;44, the result of such a modification is
to account for the modified stock option awards as variable from
the date of the modification to the date the awards are
exercised, forfeited, or cancelled. For the nine month period
ended September&nbsp;30, 2005, the Company remeasured
approximately 1.1&nbsp;million outstanding stock options,
resulting in an initial deferred stock compensation of
$1,550,193. Compensation expense relating to the remeasurement
of modified stock options was $3,523,619 for the nine month
period ended September&nbsp;30, 2005, which includes $3,040,666
of immediate stock compensation charges for vested shares at the
time of remeasurement for the nine month period ended
September&nbsp;30, 2005. Of the $3,523,619 of compensation
expense recognized during the nine month period ended
September&nbsp;30, 2005, $474,249 was included in research and
development and $3,048,912 was included in general and
administrative expense.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
A summary of stock option activity is as follows with the
repricing the options from its original exercise price of $0.40
to $0.10 reflected for all option activity:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="68%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Weighted</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">average</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="6">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">exercise</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Number of</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">price at</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">grant date</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">March&nbsp;13, 2003 (inception)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Granted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">772,100</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Outstanding at December&nbsp;31,
    2003
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">772,100</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Granted
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">332,080</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cancelled or expired
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(61,700</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Outstanding at December&nbsp;31,
    2004
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,042,480</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Granted (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">2,899,111</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Cancelled or expired (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(17,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Exercised (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(140,739</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Outstanding at September&nbsp;30,
    2005 (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,783,490</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Exercisable at September&nbsp;30,
    2005 (unaudited)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">446,743</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-28

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The following table summarizes information about stock options
outstanding and exercisable at December&nbsp;31, 2004 and
September&nbsp;30, 2005 (unaudited):
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="35%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="21" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>


<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="right" nowrap><B><FONT face="helvetica,arial">Options outstanding</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap><B><FONT face="helvetica,arial">Options exercisable</FONT></B></TD><TD></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="10" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="6" align="right" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Weighted-</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Weighted-</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Weighted-</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">average</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">average</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">average</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Number of</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">exercise</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">remaining</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Number of</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">exercise</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">underlying</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">price per</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">contractual</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">underlying</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">price per</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2" align="left" nowrap><B><FONT face="helvetica,arial">Exercise price</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">share</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">life (years)</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">shares</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">share</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="21" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">December&nbsp;31, 2004</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">$0.10
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,042,480</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">316,058</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">September&nbsp;30, 2005
    (unaudited)</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">$0.10
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,783,490</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">9.4</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">446,743</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.10</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="22" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Certain of the Company&#146;s employees have entered into the
Company&#146;s standard form of stock restriction agreement as a
condition to their exercise of options to acquire common stock
pursuant to the Plan. Shares exercised prior to vesting are
subject to forfeiture in accordance with the vesting schedule of
the granted stock options. During 2005, certain of the
Company&#146;s employees exercised unvested stock options,
awarded under the Company&#146;s Stock Incentive Plan, to
acquire a total of 79,039&nbsp;shares of restricted common
stock. At September&nbsp;30, 2005, 53,203&nbsp;shares of
restricted common stock remain unvested pursuant to awards.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>11.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock warrants</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In 2003, in connection with entering into the line of credit
facility to finance the purchase of equipment, the Company
granted to the lender a freely exercisable warrant to
purchase&nbsp;45,100&nbsp;shares of the Company&#146;s common
stock (the &#147;Lender Warrant Shares&#148;) at an exercise
price of $0.40&nbsp;per share. The Lender Warrant Shares were
valued using the Black Scholes option pricing model at
$0.28&nbsp;per share and the aggregate value was $12,628, which
was recorded as general and administrative for the period from
March&nbsp;13, 2003 through December&nbsp;31, 2003.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In February 2004, the Company issued warrants to a consultant to
purchase&nbsp;121,500&nbsp;shares of the Company&#146;s common
stock (the &#147;Consultant Warrant Shares&#148;) at an exercise
price of $0.40&nbsp;per share. The Consultant Warrant Shares
were valued using the Black Scholes option pricing model at
$0.23&nbsp;per Consultant Warrant Share and the aggregate value
was $27,945, which was recorded as general and administrative
for the year ended December&nbsp;31, 2004.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-29

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company used the following assumptions to calculate the
individual warrant shares through the Black Scholes option
pricing model:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="72%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Lender</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Consultant</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Expected dividend yield
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Expected volatility
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">67%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">67%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Expected term (years)
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Risk-free interest rate
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.65%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.08%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>12.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income taxes</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The tax provision or benefit for the years ended
December&nbsp;31, 2004 and 2003 are as follows:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="64%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Current federal tax expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Current state tax expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Current foreign expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,949</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred tax expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Total Tax Expense
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4,949</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Deferred tax assets consist of the following:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="3%">&nbsp;</TD>
    <TD width="61%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <B><FONT face="helvetica,arial">Deferred Tax Asset
    (Liability)</FONT></B></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net operating loss carryforwards
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,053,424</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3,863,758</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Start-up costs
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">107,710</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">869,656</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Research and development credit
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">110,460</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">365,134</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(37,222</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(52,549</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Amortization of warrants
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">26,878</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">6,818</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">10,083</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accrued expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">64,787</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Net deferred tax assets
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">1,241,190</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,147,747</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Deferred tax asset valuation
    allowance
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(1,241,190</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(5,147,747</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD colspan="2"><FONT style="font-size: 10pt">&nbsp;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">&#151;</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Based on the Company&#146;s limited operating history and
management&#146;s expectation of future profitability,
management believes that the Company&#146;s deferred tax assets
do not meet the &#147;more likely than not&#148; criteria under
SFAS&nbsp;No.&nbsp;109. Accordingly, a valuation allowance for
the entire deferred tax asset amount has been recorded.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-30

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The effective tax rate differs from the U.S.&nbsp;federal
statutory tax rate of 34% due to the following:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="64%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">December&nbsp;31,</FONT></B></TD><TD></TD>
</TR>

<TR style="font-size: 9pt;">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2003</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">2004</FONT></B></TD><TD></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="8" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD><TD></TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Federal tax at statutory rate
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">34.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">34.0%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">State taxes
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4.6%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4.6%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Change in valuation allowance
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(42.3%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(42.5%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Research and development credit
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">3.7%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">4.0%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Meals, entertainment and other
    nondeductable items
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">(0.1%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT face="helvetica,arial">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Effective tax rate
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.0%</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">0.0%</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="9" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
As of December&nbsp;31, 2003 and 2004, the Company had
U.S.&nbsp;federal and state net operating loss carryforwards of
approximately $2.7&nbsp;million and $10.0&nbsp;million,
respectively available to reduce future taxable income, which
will begin to expire in 2023.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Under the Tax Reform Act of 1986, the amounts of and benefits
from the operating loss carryforwards may be impaired in certain
circumstances. Events which cause limitations in the amount of
net operating losses that the Company may utilize in any one
year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>13.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Employee benefit
plan</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company has a defined contribution plan (the Plan) under the
Internal Revenue Code Section&nbsp;401(k). This plan covers
substantially all employees who meet minimum age and service
requirements and allows participants to defer a portion of their
annual compensation on a pre-tax basis. Currently, the Company
matches 50&nbsp;percent up to the first six percent of employee
contributions. All matching contributions have been paid by the
Company. The employer match vests over a 4&nbsp;year period. The
total employer match for the period from March&nbsp;13, 2003
(inception)&nbsp;through December&nbsp;31, 2003 and for the year
ended December&nbsp;31, 2004 was $12,731 and $42,206,
respectively. The total employer match for nine month period
ended September&nbsp;30, 2004 and 2005 was $33,037 and $40,589,
respectively.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>14.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Subsequent events</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In December 2005, the Company closed an additional private
placement of 12,195,129&nbsp;shares of Series&nbsp;B preferred
stock for proceeds of approximately $15.0&nbsp;million. The
Company evaluated the fair value of the Company&#146;s common
stock obtainable upon conversion by the stockholders and
determined that the issuance of the Series Preferred Stock sold
in December 2005 will result in a beneficial conversion feature
of approximately $15.0&nbsp;million that will fully accrete in
December 2005 and will be recorded as a deemed dividend to
Preferred Stockholders for the year ended December&nbsp;31, 2005.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-31

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Vanda Pharmaceuticals Inc.</B>
</DIV>

<DIV align="center" style="font-size: 12pt;color: #000000; background: #ffffff;">
<B>(A development stage company)</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>Notes to consolidated financial
statements&#151;(continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
When the Company takes possession of the new lease space in
January 2006, the Company will vacate the current office and
laboratory space. According to SFAS&nbsp;146 <I>&#147;Accounting
for Costs Associated with Exit or Disposal Activities&#148;</I>,
a liability for costs that will continue to be incurred under a
contract for its remaining term without economic benefit to the
Company shall be recognized and measured when the Company ceases
using the right conveyed by the lease agreement, reduced by
estimated sublease rentals that could be reasonably obtained.
The Company expects to incur a charge of approximately $260,000
at the time the Company moves from the current location to the
new office complex in January 2006.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">F-32

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 18pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares</I></B>
</DIV>

<DIV align="center" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<IMG src="w15453w1545300.gif" alt="(Vanda Logo)">
</DIV>

<DIV align="center" style="font-size: 18pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B><I>Common shares</I></B>
</DIV>

<DIV align="center" style="font-size: 24pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Prospectus</B>
</DIV>

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 16pt;color: #000000; background: #ffffff;">

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

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

</TABLE>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Thomas Weisel Partners LLC</B>
</DIV>

<DIV align="left" style="font-size: 11pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2006
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 9pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell, and seeking offers to buy, common shares
only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of our common shares.</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>No action is being taken in any jurisdiction outside the
United States to permit a public offering of the common shares
or possession or distribution of this prospectus in that
jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any
restrictions as to this offering and the distribution of this
prospectus applicable to that jurisdiction.</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Until &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2006 all dealers that buy, sell or trade in our common shares,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers&#146; obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.</B>
</DIV>

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Part&nbsp;II</B>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff;">
<B>information not required in prospectus</B>
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;13.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Other
expenses of issuance and distribution.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Estimated expenses payable in connection with the sale of the
common stock in this offering are as follows:
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="85%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="6%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">SEC registration fee
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,025.00</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">NASD filing fee
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">8,000.00</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Nasdaq National Market listing fee
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">5,000.00</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Printing and engraving expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">*</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Legal fees and expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">*</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Accounting fees and expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">*</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" bgcolor="#cceeff">
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Transfer agent and registrar fees
    and expenses
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">*</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left: 10px; text-indent: -10px">
    <FONT face="helvetica,arial">Miscellaneous
    </FONT></DIV>
    </TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><FONT face="helvetica,arial">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT face="helvetica,arial">*</FONT></TD>
    <TD>&nbsp;</TD>
</TR>

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

</TR>

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

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
*&nbsp;To be completed by amendment.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The registrant will bear all of the expenses shown above.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;14.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Indemnification
of directors and officers.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Delaware General Corporation Law and the registrant&#146;s
charter and bylaws provide for indemnification of the
registrant&#146;s directors and officers for liabilities and
expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions
taken in good faith in a manner reasonably believed to be in, or
not opposed to, the best interests of the registrant, and with
respect to any criminal action or proceeding, actions that the
indemnitee had no reasonable cause to believe were unlawful.
Reference is made to the registrant&#146;s amended and restated
certificate of incorporation filed as Exhibit&nbsp;3.2 hereto
and the registrant&#146;s bylaws filed as Exhibit&nbsp;3.3
hereto.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The registrant has entered into indemnification agreements with
its officers and directors, a form of which is attached as
Exhibit&nbsp;10.14 hereto and incorporated herein by reference.
The Indemnification Agreements provide the registrant&#146;s
officers and directors with further indemnification to the
maximum extent permitted by the Delaware General Corporation
Law. The underwriting agreement provides that the underwriters
are obligated, under certain circumstances, to indemnify
directors, officers and controlling persons of the registrant
against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of underwriting
agreement filed as Exhibit&nbsp;1.1 hereto.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The registrant currently maintains a directors&#146; and
officers&#146; liability insurance policy.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">II-1

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;15.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Recent
sales of unregistered securities.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In the three years preceding the filing of this registration
statement, the registrant has sold the following securities that
were not registered under the Securities Act:
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In March 2003, the company issued a total of 100&nbsp;shares of
its Series&nbsp;A Common Stock to three accredited investors at
an aggregate purchase price of $4,000. These shares were
subsequently converted into a total of 10,000&nbsp;shares of
Common Stock.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In April 2005, the company issued a total of 1,838&nbsp;shares
of its common stock to employees, officers and directors upon
exercises of options granted pursuant to its Management Equity
Plan, for an aggregate purchase price of $183.80.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In June 2005, the company issued a total of 61,700&nbsp;shares
of its common stock to employees, officers and directors upon
exercises of options granted pursuant to its Management Equity
Plan, for an aggregate purchase price of $6,170.00.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In August 2005, the company issued a total of 3,700&nbsp;shares
of its common stock to employees, officers and directors upon
exercises of options granted pursuant to its Management Equity
Plan, for an aggregate purchase price of $370.00.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In September 2005, the company issued a total of
73,501&nbsp;shares of its common stock to employees, officers
and directors upon exercises of options granted pursuant to its
Management Equity Plan, for an aggregate purchase price of
$7,350.10.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In October 2005, the company issued a total of
133,796&nbsp;shares of its common stock to employees, officers
and directors upon exercises of options granted pursuant to its
Management Equity Plan, for an aggregate purchase price of
$13,379.60.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In November 2005, the company issued a total of
53,939&nbsp;shares of its common stock to employees, officers
and directors upon exercises of options granted pursuant to its
Management Equity Plan, for an aggregate purchase price of
$5,393.90.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
No underwriters were involved in the foregoing sales of
securities. Such sales were made in reliance upon the exemption
provided by Section&nbsp;4(2) of the Securities Act for
transactions not involving a public offering.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In September 2004, the company sold an aggregate of
15,040,654&nbsp;shares of its Series&nbsp;B Preferred Stock to
twelve accredited investors at an aggregate purchase price of
$18,500,004.42.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In September 2005, the company sold an aggregate of
15,040,654&nbsp;shares of its Series&nbsp;B Preferred Stock to
twelve accredited investors at an aggregate purchase price of
$18,500,004.42.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In December 2005, the company sold an aggregate of
12,195,129&nbsp;shares of its Series&nbsp;B Preferred Stock to
twelve accredited investors at an aggregate purchase price of
$15,000,008.67.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">II-2

</FONT>

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

<FONT face="helvetica,arial">

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
No underwriters were involved in the foregoing sales of
securities. Such sales were made in reliance upon the exemption
provided by Section&nbsp;4(2) of the Securities Act for
transactions not involving a public offering.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In March 2003, the company sold an aggregate of
10,000,000&nbsp;shares of its Series&nbsp;A Preferred Stock
(giving effect to a 100 for 1 stock split occurring after such
sale) to three accredited investors at an aggregate purchase
price of $10,000,000.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
No underwriters were involved in the foregoing sales of
securities. Such sales were made in reliance upon the exemption
provided by Section&nbsp;4(2) of the Securities Act for
transactions not involving a public offering.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The Company has granted currently outstanding options to
purchase an aggregate of 5,026,123&nbsp;shares, at prices
ranging from $0.10 to $1.43. These options have been granted to
employees, directors and consultants in accordance with the
terms of the registrant&#146;s equity compensation plans. Such
issuances were made in reliance upon the exemption provided by
Rule&nbsp;701 promulgated under the Securities Act and, in the
case of certain consultants, Section&nbsp;4(2) of the Securities
Act.
</DIV>

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

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In October 2003, the company granted a warrant to
purchase&nbsp;451&nbsp;shares of its Class&nbsp;A Common Stock
which, with the subsequent conversion of Class&nbsp;A Common
Stock to the company&#146;s common stock, has become exercisable
for 45,100&nbsp;shares of the company&#146;s common stock.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
In February 2004, the company granted a warrant to
purchase&nbsp;1,215&nbsp;shares of its Class&nbsp;A Common Stock
which, with the subsequent conversion of Class&nbsp;A Common
Stock to the company&#146;s common stock, has become exercisable
for 121,500&nbsp;shares of the company&#146;s common stock.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
No underwriters were involved in the foregoing sales of
securities. Such sales were made in reliance upon the exemption
provided by Section&nbsp;4(2) of the Securities Act for
transactions not involving a public offering.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">II-3

</FONT>

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

<FONT face="helvetica,arial">

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

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 12pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="11%"></TD>
    <TD width="89%"></TD>
</TR>

<TR valign="top">
    <TD><B>Item&nbsp;16.</B></TD>
    <TD>
    <B><I>Exhibits and financial statement schedules.</I></B></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(a)&nbsp;<I>Exhibits:</I>
</DIV>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Exhibit index</B>
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3" align="left" nowrap><B><FONT face="helvetica,arial">Exhibit no.</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Exhibit index</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">1</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Underwriting Agreement
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Second Restated Certificate of
    Incorporation of the registrant
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Certificate of Amendment of the
    Second Restated Certificate of Incorporation of the registrant
    dated March&nbsp;22, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Certificate of Amendment of the
    Second Restated Certificate of Incorporation of the registrant
    dated December&nbsp;9, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.4*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Amended and Restated
    Certificate of Incorporation of the registrant effecting a
    conversion of Preferred Stock and reverse stock split to take
    effect as of the closing of the offering
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Bylaws of the registrant
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.6*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Amended and Restated Bylaws
    to take effect as of the closing of the offering
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">2004 Securityholder Agreement
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Class&nbsp;A Common Stock Purchase
    Warrant dated February&nbsp;20, 2004 issued to Investment
    Opportunities&nbsp;I, LLC
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Class&nbsp;A Common Stock Purchase
    Warrant dated October&nbsp;28, 2003 issued to Oxford Finance
    Corporation
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.4*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Specimen certificate representing
    the common stock of the registrant
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">5</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Opinion of Gunderson Dettmer Stough
    Villeneuve Franklin&nbsp;&#38; Hachigian, LLP
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Registrant&#146;s Second Amended
    and Restated Management Equity Plan
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2*#</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Sublicense Agreement between the
    registrant and Novartis Pharma&nbsp;AG dated June&nbsp;4, 2004
    (relating to iloperidone)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.3*#</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Amended and Restated License,
    Development and Commercialization Agreement by and between
    Bristol-Myers Squibb Company and the registrant dated
    July&nbsp;24, 2005 (relating to VEC-162)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.4*#</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">NDD-094 License Agreement between
    Novartis Pharma AG, Novartis AG and the registrant dated
    June&nbsp;4, 2004 (relating to VSF-173)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.5*#</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">General Services Agreement between
    the registrant and Quintiles, Inc. dated October&nbsp;13, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.6*#</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Agreement JAA01473 between the
    registrant and Quintiles, Inc. dated February&nbsp;3, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.7</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Lease Agreement between the
    registrant and Red Gate&nbsp;III LLC dated June&nbsp;25, 2003
    (lease of Rockville, MD office space)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.8</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Amendment to Lease Agreement
    between the registrant and Red Gate&nbsp;III LLC dated
    September&nbsp;27, 2003
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.9</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Lease Agreement between the
    registrant and MCC3 LLC (by Spaulding and Slye LLC) dated
    August&nbsp;4, 2005 (for lease of space beginning
    January&nbsp;1, 2006)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Summary Plan Description provided
    for the registrant&#146;s 401(k) Profit Sharing Plan&nbsp;&#38;
    Trust
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.11</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Indemnification Agreement
    entered into by directors
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.12</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Employment Agreement for Mihael H.
    Polymeropoulos dated February&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.13</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Employment Agreement for William D.
    Clark dated February&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Employment Agreement for Steve
    Shallcross dated October&nbsp;18, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.15</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Employment Agreement for Deepak
    Phadke dated August&nbsp;15, 2005
    </FONT></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">II-4

</FONT>

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

<FONT face="helvetica,arial">
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3" align="left" nowrap><B><FONT face="helvetica,arial">Exhibit no.</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Exhibit index</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.16</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Employment Agreement for Thomas
    Copmann dated May&nbsp;27, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">21</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">List of Subsidiaries
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">23</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Consent of Gunderson Dettmer Stough
    Villeneuve Franklin&nbsp;&#38; Hachigian, LLP (included in
    Exhibit&nbsp;5.1)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">23</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Consent of PricewaterhouseCoopers
    LLP, Independent Registered Public Accounting Firm
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">24</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Power of Attorney (included on
    page&nbsp;II-6)
    </FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
*&nbsp;To be included by amendment
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
#&nbsp;Application will be made to the Securities and Exchange
Commission to seek confidential treatment of certain provisions.
Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and
Exchange Commission.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
(b)&nbsp;<I>Consolidated Financial Statements Schedules</I>:
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions, the required
information is disclosed in the notes to the consolidated
financial statements or the schedules are inapplicable, and
therefore have been omitted.
</DIV>

<DIV align="left" style="font-size: 12pt;color: #000000; background: #ffffff; margin-top: 12pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Item&nbsp;17.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Undertakings.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to provisions
described in Item&nbsp;14 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The registrant hereby undertakes (1)&nbsp;to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser; (2)&nbsp;that for purposes of
determining any liability under the Securities Act, 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; and
(3)&nbsp;that for the purpose of determining any liability under
the Securities Act, 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.
</DIV>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">II-5

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Signatures</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement on
<FONT style="white-space: nowrap">Form&nbsp;S-1</FONT> to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Rockville, Maryland on December&nbsp;29, 2005.
</DIV>

<DIV style="margin-top: 24pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT style="font-variant:SMALL-CAPS">Vanda Pharmaceuticals Inc.
    </FONT></TD>
</TR>

</TABLE>

<DIV style="margin-top: 48pt; margin-left: 0; margin-right: 0; margin-bottom: 0; color: #000000; background: #ffffff;"></DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="2%"></TD>
    <TD width="58%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD>By:&nbsp;</TD>
    <TD align="left">
    /s/ <FONT style="font-variant:SMALL-CAPS">Mihael H.
    Polymeropoulos,&nbsp;M.D.
    </FONT></TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 3pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <DIV style="width: 47%; border-top: 1.0pt solid solid black; font-size: 1pt">&nbsp;</DIV></TD>
</TR>

</TABLE>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff;">

</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt;color: #000000; background: #ffffff;">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    Mihael H. Polymeropoulos,&nbsp;M.D.</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <I>Chief Executive Officer</I></TD>
</TR>

</TABLE>

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Power of attorney and signatures</B>
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
The undersigned officers and directors of Vanda Pharmaceuticals
Inc. hereby constitute Mihael H. Polymeropoulos,&nbsp;M.D., and
Steven A. Shallcross, and each of them singly, with full power
of substitution, our true and lawful
<FONT style="white-space: nowrap">attorneys-in</FONT>-fact and
agents to take any actions to enable Vanda Pharmaceuticals Inc.
to comply with the Securities Act, and any rules, regulations
and requirements of the Securities and Exchange Commission, in
connection with this registration statement, including the power
and authority to sign for us in our names in the capacities
indicated below any and all amendments (including post-effective
amendments) to this registration statement and any other
registration statement filed pursuant to the provisions of
Rule&nbsp;462 under the Securities Act and the power to file the
same, with all exhibits thereto, and all other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto each said
<FONT style="white-space: nowrap">attorney-in</FONT>-fact and
agents full power and authority to perform each and every act in
person, hereby ratifying and confirming all that said
<FONT style="white-space: nowrap">attorneys-in</FONT>-fact and
agents or either of them or their or his substitute or
substitutes may lawfully do or cause to be done by virtue
thereof.
</DIV>

<DIV align="left" style="font-size: 10pt;color: #000000; background: #ffffff; margin-top: 6pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
</DIV>
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="39%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>



<TR valign="bottom" style="font-size: 1px">
    <TD colspan="7" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>


<TR style="font-size: 9pt;">
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Name</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap><B><FONT face="helvetica,arial">Title</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap><B><FONT face="helvetica,arial">Date</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="7" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">Mihael H. Polymeropoulos,
    M.D.<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">Mihael
    H. Polymeropoulos,&nbsp;M.D.
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">President and Chief Executive
    Officer and Director (principal executive officer)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">December&nbsp;29, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">Steven A. Shallcross<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">Steven
    A. Shallcross
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Senior Vice President, Chief
    Financial Officer and Treasurer (principal financial and
    accounting officer)
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">December&nbsp;29, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">Argeris N. Karabelas,
    Ph.D.<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">Argeris
    N. Karabelas,&nbsp;Ph.D.
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">December&nbsp;29, 2005
    </FONT></TD>
</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">II-6

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

<FONT face="helvetica,arial">
<FONT face="times new roman,times">

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

<TR style="font-size: 1pt;">
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="39%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="15%">&nbsp;</TD>
</TR>



<TR valign="bottom" style="font-size: 1px">
    <TD colspan="7" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>


<TR style="font-size: 9pt;">
    <TD colspan="2" align="right" nowrap><B><FONT face="helvetica,arial">Name</FONT></B></TD><TD></TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap><B><FONT face="helvetica,arial">Title</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR style="font-size: 9pt;">
    <TD colspan="3">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap><B><FONT face="helvetica,arial">Date</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="7" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">Brian K.
    Halak,&nbsp;Ph.D.<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">Brian
    K. Halak,&nbsp;Ph.D.
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">December&nbsp;29, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">Wayne T.
    Hockmeyer,&nbsp;Ph.D.<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">Wayne
    T. Hockmeyer,&nbsp;Ph.D.
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">December&nbsp;29, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">David Ramsay<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">David
    Ramsay
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">December&nbsp;29, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">James B.
    Tananbaum,&nbsp;M.D.<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">James
    B. Tananbaum,&nbsp;M.D.
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">December&nbsp;29, 2005
    </FONT></TD>
</TR>

<TR>
    <TD colspan="7">&nbsp;</TD>
</TR>

<TR>
    <TD colspan="3" align="center" valign="top">
    <FONT face="helvetica,arial">/s/
    <FONT style="font-variant:SMALL-CAPS">Richard W. Dugan<BR>
    <HR size="1" noshade></FONT></FONT><FONT face="helvetica,arial">Richard
    W. Dugan
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">Director
    </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">
    <FONT face="helvetica,arial">December&nbsp;29, 2005
    </FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="7" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

</TABLE>
</CENTER>
</FONT>

<P align="center" style="font-size: 10pt;color: #000000; background: #ffffff;">II-7

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

<FONT face="helvetica,arial">

<DIV align="center" style="font-size: 16pt;color: #000000; background: #ffffff; margin-top: 18pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
<B>Exhibit index</B>
</DIV>
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    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
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<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
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<TR style="font-size: 8pt;">
    <TD colspan="3" align="left" nowrap><B><FONT face="helvetica,arial">Exhibit no.</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Exhibit index</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">1</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Underwriting Agreement
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Second Restated Certificate of
    Incorporation of the registrant
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Certificate of Amendment of the
    Second Restated Certificate of Incorporation of the registrant
    dated March&nbsp;22, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Certificate of Amendment of the
    Second Restated Certificate of Incorporation of the registrant
    dated December&nbsp;9, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.4*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Amended and Restated
    Certificate of Incorporation of the registrant effecting a
    conversion of Preferred Stock and reverse stock split to take
    effect as of the closing of the offering
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Bylaws of the registrant
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">3</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.6*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Amended and Restated Bylaws
    to take effect as of the closing of the offering
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">2004 Securityholder Agreement
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Class&nbsp;A Common Stock Purchase
    Warrant dated February&nbsp;20, 2004 issued to Investment
    Opportunities&nbsp;I, LLC
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Class&nbsp;A Common Stock Purchase
    Warrant dated October&nbsp;28, 2003 issued to Oxford Finance
    Corporation
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">4</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.4*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Specimen certificate representing
    the common stock of the registrant
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">5</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Opinion of Gunderson Dettmer Stough
    Villeneuve Franklin&nbsp;&#38; Hachigian, LLP
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Registrant&#146;s Second Amended
    and Restated Management Equity Plan
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2*#</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Sublicense Agreement between the
    registrant and Novartis Pharma&nbsp;AG dated June&nbsp;4, 2004
    (relating to iloperidone)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.3*#</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Amended and Restated License,
    Development and Commercialization Agreement by and between
    Bristol-Myers Squibb Company and the registrant dated
    July&nbsp;24, 2005 (relating to VEC-162)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.4*#</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">NDD-094 License Agreement between
    Novartis Pharma AG, Novartis AG and the registrant dated
    June&nbsp;4, 2004 (relating to VSF-173)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.5*#</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">General Services Agreement between
    the registrant and Quintiles, Inc. dated October&nbsp;13, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.6*#</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Agreement JAA01473 between the
    registrant and Quintiles, Inc. dated February&nbsp;3, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.7</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Lease Agreement between the
    registrant and Red Gate&nbsp;III LLC dated June&nbsp;25, 2003
    (lease of Rockville, MD office space)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.8</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Amendment to Lease Agreement
    between the registrant and Red Gate&nbsp;III LLC dated
    September&nbsp;27, 2003
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.9</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Lease Agreement between the
    registrant and MCC3 LLC (by Spaulding and Slye LLC) dated
    August&nbsp;4, 2005 (for lease of space beginning
    January&nbsp;1, 2006)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Summary Plan Description provided
    for the registrant&#146;s 401(k) Profit Sharing Plan&nbsp;&#38;
    Trust
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.11</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Form of Indemnification Agreement
    entered into by directors
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.12</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Employment Agreement for Mihael H.
    Polymeropoulos dated February&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.13</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Employment Agreement for William D.
    Clark dated February&nbsp;10, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Employment Agreement for Steve
    Shallcross dated October&nbsp;18, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.15</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Employment Agreement for Deepak
    Phadke dated August&nbsp;15, 2005
    </FONT></TD>
</TR>

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

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<TR style="font-size: 1pt;">
    <TD width="8%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="8%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="80%">&nbsp;</TD>
</TR>


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    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR style="font-size: 8pt;">
    <TD colspan="3" align="left" nowrap><B><FONT face="helvetica,arial">Exhibit no.</FONT></B></TD>
    <TD>&nbsp;</TD>
    <TD align="center" nowrap><B><FONT face="helvetica,arial">Exhibit index</FONT></B></TD>
</TR>


<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" nowrap style="border-top: 1pt solid #000000;">&nbsp;</TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">10</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.16</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Employment Agreement for Thomas
    Copmann dated May&nbsp;27, 2005
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">21</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">List of Subsidiaries
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">23</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Consent of Gunderson Dettmer Stough
    Villeneuve Franklin&nbsp;&#38; Hachigian, LLP (included in
    Exhibit&nbsp;5.1)
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">23</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Consent of PricewaterhouseCoopers
    LLP, Independent Registered Public Accounting Firm
    </FONT></TD>
</TR>

<TR>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top" nowrap><FONT face="helvetica,arial">24</FONT></TD>
    <TD align="left" valign="top" nowrap><FONT face="helvetica,arial">.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">
    <FONT face="helvetica,arial">Power of Attorney (included on
    page&nbsp;II-6)
    </FONT></TD>
</TR>

<TR valign="bottom" style="font-size: 1px">
    <TD colspan="5" align="left" style="border-top: 1pt solid #000000;">&nbsp;</TD>

</TR>

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*&nbsp;To be included by amendment
</DIV>

<DIV align="left" style="font-size: 8pt;color: #000000; background: #ffffff; margin-top: 3pt; margin-left: 0; margin-right: 0; margin-bottom: 0; ">
#&nbsp;Application will be made to the Securities and Exchange
Commission to seek confidential treatment of certain provisions.
Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and
Exchange Commission.
</DIV>

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FORM S-1
Table of Contents
As filed with the Securities and Exchange Commission on
December 29, 2005.
Registration
No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Vanda Pharmaceuticals Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
2834
03-0491827
(State or Other Jurisdiction
    of
(Primary Standard
    Industrial
(I.R.S. Employer
Incorporation or
    Organization)
Classification Code
    Number)
Identification Number)
9620 Medical Center Drive
Suite 201
Rockville, Maryland 20850
(301) 294-9300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Mihael H. Polymeropoulos, M.D.
Chief Executive Officer
9620 Medical Center Drive
Suite 201
Rockville, Maryland 20850
(301) 294-9300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Jay K.
    Hachigian, Esq.
Richard D.
    Truesdell, Jr., Esq.
Gregg A.
    Griner, Esq.
Davis Polk &
    Wardwell
Gunderson Dettmer
    Stough
450 Lexington Avenue
Villeneuve Franklin &
    Hachigian, LLP
New York, NY 10017
610 Lincoln Street
(212) 450-4000
Waltham, MA 02451
(781) 890-8800
Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the effective date of
this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended,
check the following box.
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
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
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Title of Each Class of
Aggregate Offering
Amount of
Securities to be Registered
Price(1),(2)
Registration Fee
Common Stock, $0.01 par value
$75,000,000
$8,025.00
(1)
Estimated solely for the purpose of calculating the registration
    fee pursuant to Rule 457(o) under the Securities Act of
    1933, as amended.
(2)
Includes offering price of shares that the underwriters have the
    option to purchase to cover over-allotments, if any.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
Table of Contents
The information in this prospectus is not
complete and may be changed. We may not sell these securities
until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an
offer to sell these securities, and we are not soliciting an
offer to buy these securities in any state where the offer or
sale is not permitted.
Subject to completion,
dated                       ,
2006
Prospectus
shares
Common shares
This is our initial public offering of common shares. We are
offering                      shares.
The estimated initial public offering price is between
$          and
$           per
share.
Currently, no public market exists for our common shares. We
will apply to list our common shares on the Nasdaq National
Market under the symbol VNDA.
Per share
Total
Initial public offering price
$
$
Underwriting discounts and
    commissions
$
$
Proceeds to us, before expenses
$
$
We have granted the underwriters an option for a period of
30 days to purchase up
to                     additional
common shares.
Investing in our common shares involves a high degree of
risk. See "Risk factors" beginning on page 8.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
JPMorgan
Banc of America Securities LLC
Thomas Weisel Partners LLC
,
2006
Table of contents
Page
Prospectus
    summary
1
Risk
    factors
8
Forward-looking
    statements
25
Use of
    proceeds
26
Dividend
    policy
26
Capitalization
27
Dilution
28
Selected
    consolidated financial data
30
Management's
    discussion and analysis of financial condition and results of
    operations
32
Business
51
Management
72
Certain
    relationships and related party transactions
85
Principal
    stockholders
86
Description of
    capital stock
89
Shares
    eligible for future sale
93
Material
    United States federal income tax consequences
96
Underwriters
99
Legal
    matters
103
Experts
103
Where you can
    find more information
103
Index to
    consolidated financial statements
F-1
EX-3.1: SECOND RESTATED CERTIFICATE OF INCORPORATION
EX-3.2: CERTIFICATE OF AMENDMENT OF THE SECOND RESTATED CERTIFICATE OF INCORPORATION
EX-3.3: CERTIFICATE OF AMENDMENT OF THE SECOND RESTATED CERTIFICATE OF INCORPORATION
EX-3.5: BYLAWS
EX-4.1: 2004 SECURITYHOLDERS AGREEMENT
EX-4.2: CLASS A COMMON STOCK PURCHASE WARRANT
EX-4.3: CLASS A COMMON STOCK PURCHASE WARRANT
EX-10.1: SECOND AMENDED AND RESTATED MANAGEMENT EQUITY PLAN
EX-10.7: LEASE AGREEMENT
EX-10.8: AMENDMENT TO LEASE AGREEMENT
EX-10.9: LEASE AGREEMENT
EX-10.10: SUMMARY PLAN DESCRIPTION PROVIDED FOR THE 401(K) PROFIT SHARING PLAN & TRUST
EX-10.11: FORM OF INDEMNIFICATION AGREEMENT
EX-10.12: EMPLOYMENT AGREEMENT FORM MIHAEL H. POLYMEROPOULOS
EX-10.13: EMPLOYMENT AGREEMENT FOR WILLIAM D. CLARK
EX-10.14: EMPLOYMENT AGREEMENT FOR STEVE SHALLCROSS
EX-10.15: EMPLOYMENT AGREEMENT FOR DEEPAK PHADKE
EX-10.16: EMPLOYMENT AGREEMENT FOR THOMAS COPMANN
EX-21.1: LIST OF SUBSIDIARIES
EX-23.2: CONSENT OF PRICEWATERHOUSECOOPERS LLP
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell, and are seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of the
common stock.
For investors outside the United States: Neither we nor any of
the underwriters have done anything that would permit this
offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the United States. You are required to inform yourselves
about and to observe any restrictions relating to this offering
and the distribution of this prospectus.
"Vanda" is a trademark of Vanda Pharmaceuticals Inc.
This prospectus may also include other registered and
unregistered trademarks of Vanda Pharmaceuticals Inc. and other
persons.
Unless the context otherwise requires, we use the terms
"Vanda," the "company," "we,"
"us" and "our" in this prospectus to refer
to Vanda Pharmaceuticals Inc.
Table of Contents
Prospectus summary
This summary highlights the most important features of this
offering and the information contained elsewhere in this
prospectus. This summary is not complete and does not contain
all of the information that you should consider before investing
in our common stock. You should read the entire prospectus
carefully, especially the risks of investing in our common stock
discussed under "Risk Factors" and our consolidated
financial statements and related notes included in this
prospectus.
Vanda Pharmaceuticals Inc.
We are a biopharmaceutical company focused on the development
and commercialization of our portfolio of clinical-stage, small
molecule product candidates for central nervous system
disorders. We believe that each of these product candidates will
be a differentiated new therapy that addresses a large market
with significant unmet medical needs. Our product portfolio
includes:
•
iloperidone, an atypical antipsychotic for the treatment of
    schizophrenia and bipolar disorder, which we are currently
    evaluating in a pivotal Phase III trial for schizophrenia
    that we anticipate will be completed in the first half of 2007
•
VEC-162, a melatonin agonist for the treatment of insomnia and
    depression, which is entering a Phase III trial for
    insomnia and is also ready for Phase II trials for
    depression
•
VSF-173, a compound for the treatment of excessive daytime
    sleepiness, for which we expect to begin a Phase II trial
    in the second half of 2006
We hold exclusive, worldwide rights to these molecules and plan
to develop a focused U.S. sales force for the
commercialization of iloperidone and VSF-173. Given the large
size of the prescribing physician base for insomnia and
depression, we plan to partner with a global pharmaceutical
company for the development and commercialization of
VEC-162
worldwide.
Our founder and Chief Executive Officer, Mihael H.
Polymeropoulos, M.D., commenced our operations early in
2003 after leading the Pharmacogenetics Department at Novartis
AG. In acquiring and developing our compounds we have relied
upon our deep expertise in pharmacogenetics and
pharmacogenomics, or collectively, PG. PG is the scientific
discipline that examines both genetic variations among people
that influence response to a particular drug, and the multiple
pathways through which drugs affect people. We believe that the
combination of our PG and drug development expertise will
provide us with preferential access to compounds discovered by
other pharmaceutical companies, and may allow us to identify new
uses for these compounds. These capabilities should also enable
us to shorten the time it takes to commercialize a drug when
compared to traditional approaches.
Iloperidone for Schizophrenia and Bipolar Disorder.
We
are developing iloperidone, an oral small molecule, for the
treatment of schizophrenia and bipolar disorder. Today,
schizophrenia patients are primarily treated with drugs known as
"atypical" antipsychotics. While these drugs offer
only modest and unpredictable efficacy and induce serious side
effects, resulting in poor patient compliance, they achieved
worldwide sales in excess of $13 billion in 2004. There
remains a high degree of dissatisfaction with atypical
antipsychotics among patients and physicians. A recent study
conducted by the National Institute of Mental Health and
published in
The New England Journal of Medicine
found
that 74% of patients taking antipsychotics
1
Table of Contents
discontinued treatment within 18 months. Given the safety
and efficacy shortcomings of current drugs, we believe that
iloperidone may be an attractive and differentiated alternative.
In three short-term and three long-term trials comprising over
2,000 patients, iloperidone differentiated itself from
currently available atypical antipsychotics by demonstrating a
number of reduced side effects. These reduced side effects
included low weight gain, no induction of diabetes, low
extrapyramidal symptoms (involuntary body movements), including
no akathisia (inability to sit still), no hyperprolactinemia (an
elevated secretion of the hormone prolactin which can lead to
sexual dysfunction, breast development and milk secretion in men
and women), low incidence of sleepiness and low negative effects
on cognition relative to placebo.
We are also differentiating iloperidone through the development
of a
four-week
injectable depot formulation. We believe this depot formulation
will help address the patient compliance and discontinuation
problems commonly associated with atypical antipsychotics and
will become a compelling complement to our oral formulation. The
depot formulation has successfully completed a Phase I/IIa
trial.
We are further differentiating iloperidone through the
application of our PG expertise, by identifying genetic
markers that may enable physicians to tailor their prescribing
of iloperidone to certain patients. We have discovered that
patients with a common genetic mutation, estimated to occur in
approximately 70% of the population, may be more likely to
experience better treatment results with iloperidone than other
patients. We have also discovered that patients with an uncommon
genetic attribute are at an elevated risk of QTc interval
prolongation (a measurement of specific electrical activity in
the heart as captured on an electrocardiogram, corrected for
heart rate) while taking iloperidone. Our market research
indicates that physicians treating schizophrenia patients would
welcome a test that could provide this information and may
prescribe iloperidone more frequently as a result.
We initiated a pivotal Phase III trial in November 2005 to
evaluate iloperidone for the treatment of patients with
schizophrenia. The trial is a randomized, double-blind, placebo-
and active-controlled Phase III trial of approximately
600 patients with schizophrenia. Based on discussions with
the United States Food and Drug Administration, or FDA, we
believe that if this trial is successful our data and
documentation on oral iloperidone will be sufficient to support
the filing of a New Drug Application, or NDA, with the FDA. We
expect the pivotal Phase III trial to be completed in the
first half of 2007.
In addition to schizophrenia, we believe iloperidone may be
effective in treating bipolar disorder. Most of the approved
atypical antipsychotics have received approval for bipolar
disorder subsequent to commercialization for the treatment of
schizophrenia. Iloperidone is ready for an initial Phase II
trial in bipolar disorder.
We expect to build our own sales force to market iloperidone
directly to psychiatrists and other target physicians in the
U.S. This medical community is relatively small and we
believe that we can cost-effectively develop such a sales force.
Outside of the U.S., we expect to find commercial partners for
iloperidone.
VEC-162
for Insomnia
and Depression.
VEC-162
is an oral
small molecule melatonin agonist entering Phase III trials
for the treatment of insomnia. The market for sleep disorder
drugs is large and growing, with over $3.5 billion of
worldwide sales in 2004. Industry sources estimate that of the
73 million U.S. adults who suffer from some form of
insomnia, only approximately 11 million currently receive
treatment.
2
Table of Contents
We believe
VEC-162
may
offer several benefits when compared to currently approved
insomnia therapies. Unlike many approved therapies,
VEC-162
appears to
offer a benefit in both sleep onset, or time to fall asleep, and
sleep maintenance, or ability to stay asleep.
VEC-162
appears to be
safe, with no significant side effects or effects on next-day
performance. We believe that
VEC-162
is also
unlikely to be classified as a Schedule IV controlled
substance by the United States Drug Enforcement Agency
(DEA) because its mechanism of action has been shown not to
have potential for abuse. In addition, because it appears to
modulate the sleep/ wake cycle, we believe that
VEC-162
may be the
first drug to address the underlying cause of sleeplessness in
circadian rhythm sleep disorders, or CRSD, which comprise
approximately 25% of the market for sleep disorders. These sleep
disorders are those, such as jet lag, where the circadian
rhythm, or the rhythmic output of the human biological clock
governed by melatonin and other hormones, is out of alignment
with a person's daily activities or lifestyle.
We recently completed a randomized, double-blind, multi-center,
placebo-controlled Phase II trial evaluating the effect of
VEC-162
on sleep in
healthy volunteers with induced transient insomnia. The drug
demonstrated statistically significant improvement in several
parameters used to measure the efficacy of insomnia therapies,
including reduced duration of wake after sleep onset, or WASO,
improved sleep efficiency and shortened time to persistent
sleep. In addition,
VEC-162
demonstrated a
statistically significant shift in patients' circadian
rhythm and a placebo-like side effect profile.
In addition to insomnia, we believe that
VEC-162
may be
effective in treating depression.
VEC-162
has properties
similar to agomelatine, an off-patent melatonin agonist, which
in a Phase III trial demonstrated more rapid efficacy and
reduced side effects when compared to a market-leading
antidepressant.
VEC-162
is ready for Phase II trials in depression, having
demonstrated an antidepressant effect in animal models and
having completed several Phase I trials.
VSF-173
for
Excessive Daytime Sleepiness.
VSF-173
is an oral
small molecule that has demonstrated effects on animal sleep/
wake patterns and gene expression suggestive of a stimulant
effect. As a result of these observations and safety data from
previous human trials, we are planning to initiate a
Phase II trial of
VSF-173
in excessive
daytime sleepiness in late 2006. Excessive daytime sleepiness is
a rapidly growing market which is estimated to be approximately
$440 million worldwide and is currently treated primarily
by stimulants.
Strategy
Our goal is to create a leading biopharmaceutical company
focused on developing and commercializing products that address
critical unmet medical needs through the application of our drug
development and PG expertise. The key elements of our
strategy to accomplish this goal are to:
•
pursue the clinical development of our current product candidates
•
develop a focused commercialization capability in the United
    States
•
enter into strategic partnerships to extend our commercial reach
•
apply our PG expertise to differentiate our products
•
expand our product portfolio through the acquisition of
    additional clinical compounds
Risks associated with our business
Our business is subject to numerous risks, as more fully
described in the section entitled "Risk factors"
immediately following this prospectus summary. We may be unable,
for many reasons,
3
Table of Contents
including those that are beyond our control, to implement our
current business strategy. Those reasons could include delays in
obtaining, or a failure to obtain, regulatory approval for our
product candidates and failure to maintain and to protect our
intellectual property. We have a limited operating history and
have incurred net losses from our inception. We expect to
continue to generate operating losses for the next several
years. We will need to obtain additional capital to fund our
continuing research and development activities. All of our
product candidates are in development and none have been
approved by the FDA for commercial sale. Even if we succeed in
developing and commercializing one or more of our product
candidates, we may never generate sufficient revenue to achieve
and then sustain profitability.
Corporate information
We were incorporated in Delaware in November 2002. Our principal
executive offices are located at 9620 Medical Center Drive,
Rockville, Maryland, 20850 and our telephone number is
(301) 294-9300.
Our website address is www.vandapharma.com. The information on,
or that can be accessed through, our website is not part of this
prospectus.
4
Table of Contents
The offering
Common stock we are offering:
shares
Common stock to be outstanding after this offering:
shares
Use of proceeds
We expect to use the net proceeds of this offering for working
capital and for other general corporate purposes, including the
funding of our clinical development efforts. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol: VNDA
The number of shares of common stock to be outstanding after the
offering is based on 150,739 shares of common stock
outstanding as of September 30, 2005, and the assumed
conversion of 40,081,308 shares of Preferred Stock
outstanding on September 30, 2005 into Common Stock in
connection with the closing of this offering. Except where we
state otherwise, the number of shares of common stock to be
outstanding after this offering does not take into account:
•
3,783,490 shares of common stock issuable upon the exercise
    of stock options outstanding as of September 30, 2005, each
    with an exercise price of $0.10 per share
•
166,660 shares of common stock issuable upon exercise of
    outstanding warrants as of September 30, 2005 with an
    exercise price of $0.40 per share
•
an additional 1,565,485 shares reserved as of
    September 30, 2005 for future stock option grants and
    purchases under our equity compensation plans. See note 10
    of the notes to our consolidated financial statements
•
the sale of an additional 12,195,129 shares of
    Series B Preferred Stock to certain existing stockholders
    on December 9, 2005
Finally, except, where we state otherwise, the information we
present in this prospectus reflects:
•
the conversion of all our outstanding preferred stock as of
    September 30, 2005 into 40,081,308 shares of common
    stock which will occur immediately prior to this offering
•
the adoption of our restated certificate of incorporation and
    restated bylaws to be effective upon the completion of this
    offering
•
no exercise of the underwriter's over-allotment
    option
5
Table of Contents
Summary consolidated financial data
The following tables summarize our consolidated financial
data. The summary consolidated financial data is derived from
our audited financial statements for the period from
March 13, 2003 (inception) through December 31,
2003, and the year ended December 31, 2004. Data are also
included from our unaudited financial statements for the
nine-month periods ended September 30, 2004 and 2005. This
data should be read together with our financial statements and
related notes, "Selected Financial Data," and
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in
this prospectus. The pro forma balance sheet data contained in
the following tables reflects the conversion of all outstanding
shares of our preferred stock into common stock upon completion
of this offering. The pro forma as adjusted balance sheet data
contained in the following tables reflects the pro forma balance
sheet data at September 30, 2005, adjusted for the sale of
shares of our common stock in this offering at an assumed
initial public offering price of
$           per
share (the mid-point of the price range set forth on the cover
page of this prospectus), after deducting the estimated
underwriting discounts, commissions and offering expenses
payable by us, and the automatic conversion of all preferred
stock into common stock upon completion of this offering.
Period from
March 13, 2003
Nine months ended
(inception) to
Year ended
September 30,
December 31,
December 31,
2003
2004
2004
2005
(unaudited
(unaudited
Statements of operations
    data
Revenue
$
47,565
$
33,980
$
33,980
$
—
Operating expenses:
Research and development
2,010,532
7,442,983
5,033,488
11,641,565
General and administrative
1,052,659
2,119,394
1,267,485
5,587,147
Total operating expenses
3,063,191
9,562,377
6,300,973
17,228,712
Loss from operations
(3,015,626
)
(9,528,397
)
(6,266,993
)
(17,228,712
)
Interest and other income, net
44,805
59,060
12,956
188,288
Net loss before tax expense
(2,970,821
)
(9,469,337
)
(6,254,037
)
(17,040,424
)
Tax expense
—
4,949
3,733
—
Net loss
(2,970,821
)
(9,474,286
)
(6,257,770
)
(17,040,424
)
Beneficial conversion feature—
    deemed dividend to preferred stockholders(1)
—
—
—
(18,500,005
)
Net loss attributable to common
    stockholders
$
(2,970,821
)
$
(9,474,286
)
$
(6,257,770
)
$
(35,540,429
)
Net loss per share applicable to
    common stockholders, basic and diluted
$
(297.08
)
$
(947.43
)
$
(625.78
)
$
(934.93
)
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Table of Contents
Period from
March 13, 2003
Nine months ended
(inception) to
Year ended
September 30,
December 31,
December 31,
2003
2004
2004
2005
(unaudited
(unaudited
Pro Forma net loss per share
    applicable to common stockholders, basic and diluted
$
(0.68
)
$
(1.41
)
Shares used in computing net loss
    per share, basic and diluted
10,000
10,000
10,000
38,014
Shares used in computing pro forma
    net loss per share, basic and diluted
13,913,995
25,264,356
(1) In September 2005, we completed the sale of an
additional 15,040,654 shares of Series B Preferred
Stock for proceeds of approximately $18.5 million. After
evaluating the fair value of the common stock obtainable upon
conversion by the stockholders, we determined that the issuance
of the Series B Preferred Stock sold in September 2005
resulted in a beneficial conversion feature of approximately
$18.5 million which was fully accreted in September 2005
and is recorded as a deemed dividend to preferred stockholders
for the nine-month period ended September 30, 2005.
Pro forma
September 30, 2005
Actual
Pro forma
as adjusted
)
(unaudited
(unaudited
(unaudited
Balance sheet data
Cash, restricted cash and cash
    equivalents
$
22,264,920
$
22,264,920
Working capital
20,145,973
20,145,973
Total assets
24,288,683
24,288,683
Total liabilities
2,801,722
2,801,722
Convertible preferred stock
46,808,569
—
Deficit accumulated during the
    development stage
(29,485,531
)
(29,485,531
)
Total stockholders' equity
21,486,961
21,486,961
7
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Risk factors
Investing in our common stock involves a high degree of risk.
You should consider carefully the risks and uncertainties
described below, together with all of the other information in
this prospectus, including the consolidated financial statements
and the related notes appearing at the end of this prospectus,
before deciding to invest in shares of our common stock. If any
of the following risks actually occurs, our business, financial
condition, results of operations and future prospects would
likely be materially and adversely affected. In that event, the
market price of our common stock could decline and you could
lose all or part of your investment.
Risks related to our business and industry
Our success is dependent on the success of our three
product candidates in clinical development: iloperidone, VEC-162
and VSF-173. If any of these product candidates are determined
to be unsafe or ineffective in humans, our business will be
materially harmed.
We are uncertain whether any of our current product candidates
in clinical development will prove effective and safe in humans
or meet applicable regulatory standards. To date, the data
supporting our product candidates is derived solely from
laboratory and pre-clinical studies and limited clinical trials.
However, for each of our product candidates we must provide the
FDA and similar foreign regulatory authorities with more
extensive clinical data for a defined indication of the product
candidate before these regulatory authorities can approve the
product candidate for commercial sale. Frequently, product
candidates that have shown promising results in early clinical
trials have suffered significant setbacks in later clinical
trials. Future clinical trials involving our product candidates
may reveal that those candidates are ineffective, are
unacceptably toxic, have other undesirable side effects or are
otherwise unfit for future development. It is impossible to
predict when or if any of our product candidates will prove
effective or safe in humans or will receive regulatory approval.
If we are unable to discover and develop products that are
effective and safe in humans, our business will be materially
harmed.
Any failure or delay in completing clinical trials for our
product candidates could severely harm our business.
Pre-clinical studies and clinical trials required to demonstrate
the safety and efficacy of our product candidates are
time-consuming and expensive and together take several years to
complete. To date we have not completed the clinical testing of
any of our product candidates. The completion of clinical trials
for our product candidates may be delayed by many factors,
including:
•
our inability to manufacture or obtain from third parties
    materials sufficient for use in pre-clinical studies and
    clinical trials
•
delays in patient enrollment and variability in the number and
    types of patients available for clinical trials
•
difficulty in maintaining contact with patients after treatment,
    resulting in incomplete data
•
poor effectiveness of product candidates during clinical trials
8
Table of Contents
•
unforeseen safety issues or side effects
•
governmental or regulatory delays and changes in regulatory
    requirements and guidelines
It is possible that none of our product candidates will complete
clinical trials in any of the markets in which we intend to sell
those product candidates. Accordingly, we may not receive the
regulatory approvals needed to market our product candidates in
any markets. Any failure or delay in commencing or completing
clinical trials or obtaining regulatory approvals for our
product candidates would severely harm our business.
We face heavy government regulation, and FDA regulatory
approval of our products is uncertain.
The research, testing, manufacturing and marketing of drug
products such as those that we are developing are subject to
extensive regulation by federal, state and local government
authorities, including the FDA. To obtain regulatory approval of
a product, we must demonstrate to the satisfaction of the
applicable regulatory agency that, among other things, the
product is safe and effective for its intended use. In addition,
we must show that the manufacturing facilities used to produce
the products are in compliance with current Good Manufacturing
Practices regulations, or cGMP.
The process of obtaining FDA and other required regulatory
approvals and clearances will require us to expend substantial
time and capital. Despite the time and expense expended,
regulatory approval is never guaranteed. The number of
pre-clinical and clinical tests that will be required for FDA
approval varies depending on the drug candidate, the disease or
condition that the drug candidate is in development for, and the
regulations applicable to that particular drug candidate. The
FDA can delay, limit or deny approval of a drug candidate for
many reasons, including that:
•
a drug candidate may not be safe or effective
•
they may interpret data from pre-clinical and clinical testing
    in different ways than we do
•
they may not approve our manufacturing process
•
they may change their approval policies or adopt new regulations
For example, if certain of our methods for analyzing our trial
data are not approved by the FDA, we may fail to obtain
regulatory approval for our product candidates. We will be using
a "mixed-method repeated measures" or "MMRM"
statistical model to analyze data from our pivotal
Phase III trial for iloperidone, as we believe that this
model will reduce certain biases that can be associated with
other statistical models. We have discussed the use of this
statistical model with the FDA in an August 2005 guidance
meeting, and they have agreed that the model is valid. However,
to our knowledge, the MMRM statistical model has not been
previously used as the primary basis for judging efficacy in a
pivotal trial by the FDA. If the FDA does not approve of our
findings based on the MMRM model, our clinical trial for
iloperidone may not be successful.
Moreover, if and when our products do obtain such approval or
clearances, the marketing, distribution and manufacture of such
products would remain subject to extensive ongoing
9
Table of Contents
regulatory requirements. Failure to comply with applicable
regulatory requirements could result in:
•
warning letters
•
fines
•
civil penalties
•
injunctions
•
recall or seizure of products
•
total or partial suspension of production
•
refusal of the government to grant approvals
•
withdrawal of approvals and criminal prosecution
Any delay or failure by us to obtain regulatory approvals for
our product candidates could diminish competitive advantages
that we may attain and would adversely affect the marketing of
our products. We have not received regulatory approval to market
any of our product candidates in any jurisdiction.
Even if we do receive regulatory approval for our drug
candidates, the FDA may impose limitations on the indicated uses
for which our products may be marketed, subsequently withdraw
approval or take other actions against us or our products that
are adverse to our business. The FDA generally approves products
for particular indications. An approval for a more limited
indication reduces the size of the potential market for the
product. Product approvals, once granted, may be withdrawn if
problems occur after initial marketing.
We also are subject to numerous federal, state and local laws,
regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the
environment and the use and disposal of hazardous substances
used in connection with our discovery, research and development
work. In addition, we cannot predict the extent of government
regulations or the impact of new governmental regulations that
might significantly harm the discovery, development, production
and marketing of our products. We may be required to incur
significant costs to comply with current or future laws or
regulations, and we may be adversely affected by the cost of
such compliance.
We intend to seek regulatory approvals for our products in
foreign jurisdictions, but we may not obtain any such
approvals.
We intend to market our products outside the United States,
either alone or with a commercial partner. In order to market
our products in foreign jurisdictions, we may be required to
obtain separate regulatory approvals and comply with numerous
and varying regulatory requirements. The approval procedure
varies among countries and jurisdictions and can involve
additional testing, and the time required to obtain approval may
differ from that required to obtain FDA approval. We have no
experience with obtaining any such foreign approvals.
Additionally, the foreign regulatory approval process may
include all of the risks associated with obtaining FDA approval.
For all of these reasons, we may not obtain foreign regulatory
approvals on a timely basis, if at all. Approval by the FDA does
not ensure approval by regulatory authorities in other countries
or jurisdictions, and approval by one foreign regulatory
authority does not ensure approval by regulatory authorities in
other foreign countries or jurisdictions or by the FDA. We may
not be able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any market.
The failure to obtain these approvals could materially adversely
affect our business, financial condition and results of
operations.
10
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Our product candidates may cause undesirable side effects
or have other properties that could delay or prevent their
regulatory approval or limit their marketability.
Undesirable side effects caused by our product candidates could
interrupt, delay or halt clinical trials and could result in the
denial of regulatory approval by the FDA or other regulatory
authorities for any or all targeted indications, and in turn
prevent us from commercializing our product candidates and
generating revenues from their sale. For example, like many
other drugs in its class, iloperidone is associated with a
prolongation of the heart's QTc interval, which is a
measurement of specific electrical activity in the heart as
captured on an electrocardiogram, corrected for heart rate. A
QTc interval that is significantly prolonged may result in an
abnormal heart rhythm with adverse consequences including
fainting, dizziness, loss of consciousness and death. No patient
in any of iloperidone's clinical trials was observed to
have an interval that exceeded a 500 millisecond threshold
of particular concern to the FDA. We will continue to assess the
side effect profile of iloperidone and our other product
candidates in our ongoing clinical development program.
In addition, if any of our product candidates receive marketing
approval and we or others later identify undesirable side
effects caused by the product, we could face one or more of the
following:
•
regulatory authorities may require the addition of labeling
    statements, such as a "black box" warning or a
    contraindication
•
regulatory authorities may withdraw their approval of the product
•
we may be required to change the way the product is
    administered, conduct additional clinical trials or change the
    labeling of the product
•
our reputation may suffer
Any of these events could prevent us from achieving or
maintaining market acceptance of the affected product or could
substantially increase the costs and expenses of commercializing
the product candidate, which in turn could delay or prevent us
from generating significant revenues from its sale.
Our product candidates may never achieve market acceptance
even if we obtain regulatory approvals.
Even if we receive regulatory approvals for the sale of our
product candidates, the commercial success of these products
will depend on, among other things, their acceptance by
physicians, patients, third-party payors and other members of
the medical community as a therapeutic and cost-effective
alternative to competing products and treatments. The degree of
market acceptance of any of our product candidates will depend
on a number of factors, including the demonstration of its
safety and efficacy, its cost-effectiveness, its potential
advantages over other therapies, the reimbursement policies of
government and third-party payors with respect to the product
candidate, and the effectiveness of our marketing and
distribution capabilities. If our product candidates fail to
gain market acceptance, we may be unable to earn sufficient
revenue to continue our business. If our product candidates do
not become widely accepted by physicians, patients, third-party
payors and other members of the medical community, it is
unlikely that we will ever become profitable.
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If we fail to obtain the capital necessary to fund our
research and development activities, we may be unable to
continue operations or we may be forced to share our rights to
commercialize our product candidates with third parties on terms
that may not be attractive to us.
Based on our current operating plans, and assuming the sale
of            shares
of our common stock in this offering at an initial public
offering price of
$           per
share (the mid-point of the price range set forth on the cover
page of this prospectus), we believe that the proceeds from this
offering, together with our existing cash, restricted cash and
cash equivalents, will be sufficient to meet our anticipated
operating needs until mid-2007, and after that time we will
require additional capital. We believe that if we sell
the            shares
of our common stock in this offering at an initial public
offering price of
$           per
share ($1.00 lower than the mid-point of the price range set
forth on the cover page), the resultant reduction in proceeds we
receive from the offering would cause us to require additional
capital earlier,
in                     .
In addition, in budgeting for our activities following this
offering, we have relied on a number of assumptions, including
assumptions that we will enroll approximately 600 patients
in our pivotal Phase III iloperidone trial and
approximately 300 patients in our
VEC-162
pivotal
Phase III trial for insomnia, that we will not engage in
further business development activities, that we will not expend
funds on the depot formulation of, or bipolar indication for,
iloperidone or on a Phase II trial of VEC-162 for
depression, that we will be able to continue the manufacturing
of our product candidates at commercially reasonable prices,
that we will be able to retain our key personnel, and that we
will not incur any significant contingent liabilities. We may
need to raise additional funds more quickly if one or more of
our assumptions prove to be incorrect or if we choose to expand
our product development efforts more rapidly than we presently
anticipate, and we may decide to raise additional funds even
before we need them if the conditions for raising capital are
favorable. We may seek to sell additional equity or debt
securities or obtain a bank credit facility. The sale of
additional equity or debt securities, if convertible, could
result in dilution to our stockholders. The incurrence of
indebtedness would result in increased fixed obligations and
could also result in covenants that would restrict our
operations.
We cannot assure you that additional funds will be available
when we need them on terms that are acceptable to us, or at all.
If we are unable to secure sufficient capital to fund our
research and development activities we may not be able to
continue operations or we may have to enter into strategic
collaborations that could require us to share commercial rights
to our products to a greater extent or at earlier stages in the
drug development process than we currently intend.
Collaborations that are consummated by us prior to
proof-of-efficacy and safety of a product candidate could impair
our ability to realize value from that product candidate.
We have incurred operating losses in each year since our
inception and expect to continue to incur substantial and
increasing losses for the foreseeable future.
We have a limited operating history. We have not generated any
revenue from product sales to date and we cannot estimate the
extent of our future losses. We do not currently have any
products that have been approved for commercial sale and we may
never generate revenue from selling products or achieve
profitability. We expect to continue to incur substantial and
increasing losses for the foreseeable future, particularly as we
increase our research and development, clinical trial and
administrative activity. As a result, we are uncertain when or
if we will achieve profitability and, if so, whether we will be
able to sustain it. We have been
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engaged in identifying and developing compounds and product
candidates since March 2003. As of September 30, 2005, we
have accumulated net losses of approximately $29.5 million.
Our ability to achieve revenue and profitability is dependent on
our ability to complete the development of our product
candidates, conduct clinical trials, obtain necessary regulatory
approvals, and have our products manufactured and marketed. We
cannot assure you that we will be profitable even if we
successfully commercialize our products. Failure to become and
remain profitable may adversely affect the market price of our
common stock and our ability to raise capital and continue
operations.
If our contract research organizations do not successfully
carry out their duties or if we lose our relationships with
contract research organizations, our drug development efforts
could be delayed.
We are dependent on contract research organizations, third-party
vendors and investigators for pre-clinical testing and clinical
trials related to our drug discovery and development efforts and
we will likely continue to depend on them to assist in our
future discovery and development efforts. These parties are not
our employees and we cannot control the amount or timing of
resources that they devote to our programs. If they fail to
devote sufficient time and resources to our drug development
programs or if their performance is substandard, it will delay
the approval of our products. The parties with which we contract
for execution of our clinical trials play a significant role in
the conduct of the trials and the subsequent collection and
analysis of data. Their failure to meet their obligations could
adversely affect clinical development of our products. Moreover,
these parties may also have relationships with other commercial
entities, some of which may compete with us. If they assist our
competitors it could harm our competitive position.
If we lose our relationship with any one or more of these
parties, we could experience a significant delay in both
identifying another comparable provider and then contracting for
its services. We may be unable to retain an alternative provider
on reasonable terms, if at all. Even if we locate an alternative
provider, it is likely that this provider may need additional
time to respond to our needs and may not provide the same type
or level of service as the original provider. In addition, any
provider that we retain will be subject to current Good
Laboratory Practices, or cGLP, and similar foreign standards and
we do not have control over compliance with these regulations by
these providers. Consequently, if these practices and standards
are not adhered to by these providers, the development and
commercialization of our product candidates could be delayed.
Materials necessary to manufacture our product candidates
may not be available on commercially reasonable terms, or at
all, which may delay the development, regulatory approval and
commercialization of our product candidates.
We rely on the manufacturers of our product candidates to
purchase from third-party suppliers the materials necessary to
produce the compounds for our clinical trials. Suppliers may not
sell these materials to our manufacturers at the time we need
them or on commercially reasonable terms. We do not have any
control over the process or timing of the acquisition of these
materials by our manufacturers. Moreover, we currently do not
have any agreements for the commercial production of these
materials. If our manufacturers are unable to obtain these
materials for our clinical trials, product testing and potential
regulatory approval of our product candidates would be delayed,
significantly affecting our ability to develop our product
candidates. If our manufacturers or we are unable to purchase
these materials after
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regulatory approval has been obtained for our product
candidates, the commercial launch of our product candidates
would be delayed or there would be a shortage in supply, which
would materially affect our ability to generate revenues from
the sale of our product candidates.
We rely on a limited number of manufacturers for our
product candidates and our business will be seriously harmed if
these manufacturers are not able to satisfy our demand and
alternative sources are not available.
We do not have an in-house manufacturing capability and depend
completely on a small number of third-party manufacturers and
active pharmaceutical ingredient formulators for the manufacture
of our products. We do not have long-term agreements with any of
these third parties, and if they are unable or unwilling to
perform for any reason, we may not be able to locate alternative
acceptable manufacturers or formulators or enter into favorable
agreements with them. Any inability to acquire sufficient
quantities of our compounds in a timely manner from these third
parties could delay clinical trials and prevent us from
developing our product candidates in a cost-effective manner or
on a timely basis. In addition, manufacturers of our compounds
are subject to cGMP and similar foreign standards and we do not
have control over compliance with these regulations by our
manufacturers. If one of our contract manufacturers fails to
maintain compliance, the production of our product candidates
could be interrupted, resulting in delays and additional costs.
In addition, if the facilities of such manufacturers do not pass
a pre-approval plant inspection, the FDA will not grant
pre-market approval of our products.
Our manufacturing strategy presents the following additional
risks:
•
the manufacturing processes for
VEC-162
and
VSF-173
have not been
    tested in quantities needed for continued clinical trials or
    commercial sales, and delays in
scale-up
to commercial
    quantities could delay clinical trials, regulatory submissions
    and commercialization of our compounds
•
because most of our third-party manufacturers and formulators
    are located outside of the United States, there may be
    difficulties in importing our compounds or their components into
    the United States as a result of, among other things, FDA import
    inspections, incomplete or inaccurate import documentation or
    defective packaging
•
because of the complex nature of our compounds, our
    manufacturers may not be able to successfully manufacture our
    compounds in a cost effective and/or timely manner
We face substantial competition which may result in others
developing or commercializing products before or more
successfully than we do.
Our future success will depend on our ability to demonstrate and
maintain a competitive advantage with respect to our product
candidates and our ability to identify and develop additional
products through the application of our PG expertise. Large,
fully integrated pharmaceutical companies, either alone or
together with collaborative partners, have substantially greater
financial resources and have significantly greater experience
than we do in:
•
developing products
•
undertaking pre-clinical testing and clinical trials
•
obtaining FDA and other regulatory approvals of products
•
manufacturing and marketing products
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These companies may invest heavily and quickly to discover and
develop novel products that could make our products obsolete.
Accordingly, our competitors may succeed in obtaining patent
protection, receiving FDA approval or commercializing superior
products or other competing products before we do.
We are also aware of other companies that may currently be
engaged in the discovery and development of products and other
therapies that will compete with the product candidates that we
are developing. In addition, we expect to compete against
current market-leading products in the markets that we are
targeting.
We have no experience selling, marketing or distributing
products and no internal capability to do so.
At present, we have no sales or marketing personnel. In order to
commercialize any of our product candidates, we must either
acquire or internally develop sales, marketing and distribution
capabilities, or enter into collaborations with partners to
perform these services for us. We may not be able to establish
sales and distribution partnerships on acceptable terms or at
all, and if we do enter into a distribution arrangement, our
success will be dependent upon the performance of our partner.
In the event that we attempt to acquire or develop our own
in-house
sales,
marketing and distribution capabilities, factors that may
inhibit our efforts to commercialize our products without
strategic partners or licensees include:
•
our inability to recruit and retain 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 our sales
    personnel, which may put us at a competitive disadvantage
    against companies with broader product lines
•
unforeseen costs associated with creating our own sales and
    marketing team or with entering into a partnering agreement with
    an independent sales and marketing organization
We will need to increase the size of our organization, and
we may experience difficulties in managing our growth.
As of September 30, 2005, we had 30 full-time
employees. We will need to continue to expand our managerial,
operational, financial and other resources in order to manage
and fund our operations, continue our development activities and
commercialize our product candidates. Our current personnel,
systems and facilities are not adequate to support this future
growth. To manage our growth, we must:
•
manage our clinical trials effectively
•
manage our internal development efforts effectively
•
improve our operational, financial, accounting and management
    controls, reporting systems and procedures
•
attract and retain sufficient numbers of talented employees
We may be unable to successfully implement these tasks on a
larger scale and, accordingly, may not achieve our development
and commercialization goals.
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If we cannot identify, or enter into licensing
arrangements for, new product candidates, our ability to develop
a diverse product portfolio may be limited.
A component of our business strategy is acquiring rights to
develop and commercialize compounds discovered or developed by
other pharmaceutical and biotechnology companies for which we
may find effective uses and markets by using our unique
PG expertise. Competition for the acquisition of these
compounds is intense. If we are not able to identify
opportunities to acquire rights to commercialize additional
products, we may not be able to develop a diverse portfolio of
products and our business may be harmed. Additionally, it may
take substantial human and financial resources to secure
commercial rights to promising product candidates. Moreover, if
other firms develop PG capabilities, we may face increased
competition in identifying and acquiring additional product
candidates.
If we lose key scientists or management personnel, or if
we fail to recruit additional highly skilled personnel, it will
impair our ability to identify, develop and commercialize
product candidates.
We are highly dependent on principal members of our management
team and scientific staff, including our Chief Executive
Officer, Mihael H. Polymeropoulos, M.D. These executives
each have significant pharmaceutical industry experience. The
loss of any such executives, including Dr. Polymeropoulos,
or any other principal member of our management team or
scientific staff, would impair our ability to identify, develop
and market new products.
Product liability lawsuits could divert our resources,
result in substantial liabilities and reduce the commercial
potential of our products.
The risk that we may be sued on product liability claims is
inherent in the development of pharmaceutical products. For
example, we face a risk of product liability exposure related to
the testing of our product candidates in clinical trials and
will face even greater risks upon any commercialization by us of
our product candidates. We believe that we may be at a greater
risk of product liability claims relative to other
pharmaceutical companies because our compounds are intended to
treat behavioral disorders, and it is possible that we may be
held liable for the behavior and actions of patients who use our
compounds. These lawsuits may divert our management from
pursuing our business strategy and may be costly to defend. In
addition, if we are held liable in any of these lawsuits, we may
incur substantial liabilities and may be forced to limit or
forego further commercialization of one or more of our products.
Although we maintain general liability and product liability
insurance, this insurance may not fully cover potential
liabilities. In addition, inability to obtain or maintain
sufficient insurance coverage at an acceptable cost or otherwise
to protect against potential product liability claims could
prevent or inhibit the commercial production and sale of our
products.
Legislative or regulatory reform of the healthcare system
in the U.S. and foreign jurisdictions may affect our ability to
sell our products profitably.
The continuing efforts of the U.S. and foreign governments,
insurance companies, managed care organizations and other payors
of health care services to contain or reduce health care costs
may adversely affect our ability to set prices for our products
which we believe are fair, and our ability to generate revenues
and achieve and maintain profitability.
Specifically, in both the United States and some foreign
jurisdictions there have been a number of legislative and
regulatory proposals to change the healthcare system in ways
that could
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affect our ability to sell our products profitably. In the
United States, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 reforms the way Medicare will cover
and reimburse for pharmaceutical products. This legislation
could decrease the coverage and price that we may receive for
our products. Other third-party payors are increasingly
challenging the prices charged for medical products and
services. It will be time-consuming and expensive for us to go
through the process of seeking reimbursement from Medicare and
private payors. Our products may not be considered cost
effective, and coverage and reimbursement may not be available
or sufficient to allow us to sell our products on a competitive
and profitable basis. Further federal and state proposals and
healthcare reforms are likely which could limit the prices that
can be charged for the drugs we develop and may further limit
our commercial opportunity. Our results of operations could be
materially adversely affected by the Medicare prescription drug
coverage legislation, by the possible effect of this legislation
on amounts that private insurers will pay and by other
healthcare reforms that may be enacted or adopted in the future.
In some foreign countries, including major markets in the
European Union and Japan, the pricing of prescription
pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities
can take six to twelve months or longer after the receipt of
regulatory marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be
required to conduct a clinical trial that compares the
cost-effectiveness of our product candidate to other available
therapies. If reimbursement of our products is unavailable or
limited in scope or amount or if pricing is set at
unsatisfactory levels, our business could be materially harmed.
Our quarterly operating results may fluctuate
significantly.
We expect our operating results to be subject to quarterly
fluctuations. The revenues we generate, if any, and our
operating results will be affected by numerous factors,
including:
•
our addition or termination of development programs
•
variations in the level of expenses related to our existing
    three product candidates or future development programs
•
our execution of collaborative, licensing or other arrangements,
    and the timing of payments we may make or receive under these
    arrangements
•
any intellectual property infringement lawsuit in which we may
    become involved
•
regulatory developments affecting our product candidates or
    those of our competitors
If our quarterly operating results fall below the expectations
of investors or securities analysts, the price of our common
stock could decline substantially. Furthermore, any quarterly
fluctuations in our operating results may, in turn, cause the
price of our stock to fluctuate substantially. We believe that
quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an
indication of our future performance.
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Risks related to intellectual property and other legal
matters
Our rights to develop and commercialize our product
candidates are subject in part to the terms and conditions of
licenses or sublicenses granted to us by other pharmaceutical
companies. With respect to VEC-162 and VSF-173, these terms and
conditions include options in favor of these pharmaceutical
companies to reacquire rights to commercialize and develop these
product candidates in certain circumstances.
Iloperidone is based in part on patents and other intellectual
property owned by Sanofi-Aventis and Novartis. Titan
Pharmaceuticals, Inc. holds an exclusive license from
Sanofi-Aventis to the intellectual property owned by
Sanofi-Aventis, and Titan has sublicensed its rights under such
license on an exclusive basis to Novartis. We have acquired
exclusive rights to this intellectual property through a further
sublicense from Novartis. Our rights with respect to this
intellectual property to develop and commercialize iloperidone
may terminate, in whole or in part, if we fail to meet certain
milestones contained in our sublicense agreement with Novartis.
We may also lose our rights to develop and commercialize
iloperidone if we fail to pay royalties to Novartis, if we fail
to comply with certain requirements in the sublicense regarding
our financial condition, or if we fail to comply with certain
restrictions regarding our other development activities.
Finally, our rights to develop and commercialize iloperidone may
be impaired if we do not cure breaches by Novartis and Titan of
similar obligations contained in these sublicense and license
agreements. In the event of an early termination of our
sublicense agreement, all rights licensed and developed by us
under this agreement may be extinguished, which would have a
material adverse effect on our business.
VEC-162 is based in part on patents and other intellectual
property that we have licensed on an exclusive basis from
Bristol-Myers Squibb (BMS). Following the completion of our
Phase III program for
VEC-162,
and in the
event that we have not entered into a development and
commercialization agreement with a third party covering
significant markets, BMS has retained an option to reacquire the
rights it has licensed to us to develop and commercialize
VEC-162,
subject to
BMS' payment of pre-determined royalties and milestone
payments to us. Additionally, BMS may terminate our license if
we fail to meet certain milestones or if we otherwise breach our
royalty or other obligations in the agreement. In the event that
BMS terminates our license due to our breach, all of our
material rights to
VEC-162
(including
intellectual property we develop with respect to
VEC-162)
will revert
back to BMS. Any termination or reversion of our rights to
develop or commercialize
VEC-162,
including any
reacquisition by BMS of our rights, may have a material adverse
effect on our business.
VSF-173
is based in
part on patents and other intellectual property that we have
licensed on an exclusive basis from Novartis. Novartis has the
option to reacquire rights to
co-develop
and
exclusively commercialize
VSF-173
following the
completion of the Phase II clinical trials, and an
additional option to reacquire exclusive commercialization
rights following the completion of the Phase III clinical
trials, subject in each case to Novartis' payment of
pre-determined royalties and other payments to us. In the event
that Novartis chooses not to exercise either of these options
and we decide to enter into a partnering arrangement to help us
commercialize
VSF-173,
Novartis has a right of first refusal to negotiate such an
agreement with us, as well as a right to submit a last matching
counteroffer regarding such an agreement. In addition, our
rights with respect to
VSF-173
may terminate,
in whole or in part, if we fail to meet certain development and
commercialization milestones described in our license agreement,
if we fail to make royalty or milestone payments or if we do not
comply with requirements in our license agreement regarding our
financial condition. In the event of an early termination of our
license agreement, all rights licensed and developed by us under
this agreement may revert
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back to Novartis. Any termination or reversion of our rights to
develop or commercialize
VSF-173,
including any
reacquisition by Novartis of our rights, may have a material
adverse effect on our business.
If our efforts to protect the proprietary nature of the
intellectual property related to our products are not adequate,
we may not be able to compete effectively in our markets.
In addition to the rights we have licensed from Novartis and BMS
relating to our product candidates, we rely upon intellectual
property we own relating to our products, including patents,
patent applications and trade secrets. As of September 30,
2005 we owned 10 pending patent applications in the United
States and one pending Patent Cooperation Treaty application,
which permits the pursuit of patents outside of the United
States, relating to our product candidates in clinical
development. Our patent applications may be challenged or fail
to result in issued patents and our existing or future patents
may be too narrow to prevent third parties from developing or
designing around these patents. In addition, we rely on trade
secret protection and confidentiality agreements to protect
certain proprietary know-how that is not patentable, for
processes for which patents are difficult to enforce and for any
other elements of our drug development processes that involve
proprietary know-how, information and technology that is not
covered by patent applications. While we require all of our
employees, consultants, advisors and any third parties who have
access to our proprietary know-how, information and technology
to enter into confidentiality agreements, we cannot be certain
that this know-how, information and technology will not be
disclosed or that competitors will not otherwise gain access to
our trade secrets or independently develop substantially
equivalent information and techniques. Further, the laws of some
foreign countries do not protect proprietary rights to the same
extent as the laws of the United States. As a result, we may
encounter significant problems in protecting and defending our
intellectual property both in the United States and abroad. If
we are unable to prevent material disclosure of the intellectual
property related to our technologies to third parties, we will
not be able to establish or maintain a competitive advantage in
our market.
If we do not obtain protection under the Hatch-Waxman Act
and similar foreign legislation to extend our patents and to
obtain market exclusivity for our product candidates, our
business will be materially harmed.
The United States Drug Price Competition and Patent Term
Restoration Act of 1984, more commonly known as the
"Hatch-Waxman Act," provides for an extension of
patent protection for drug compounds for a period of up to five
years to compensate for time spent in development. Assuming we
gain a five-year extension for each of our current product
candidates in clinical development, and that we continue to have
rights under our sublicense and license agreements with respect
to these product candidates, we would have exclusive rights to
iloperidone's United States NCE patent until 2016, to
VEC-162's
United
States NCE patent until 2022 and to
VSF-173's
United
States NCE patent until 2019. In Europe, similar legislative
enactments allow patent protection in the European Union to be
extended for up to five years through the grant of a
Supplementary Protection Certificate. Assuming we gain such a
five-year extension for each of our current product candidates
in clinical development, and that we continue to have rights
under our sublicense and license agreements with respect to
these product candidates, we would have exclusive rights to
iloperidone's European NCE patents until 2015, to
VEC-162's
European
NCE patents until 2022 and to
VSF-173's
European
NCE patents until 2017. Additionally, a recent directive in the
European Union provides that companies who receive regulatory
approval for a new compound will have a
10-year
period of
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market exclusivity for that compound (with the possibility of a
further one-year extension) in most EU countries, beginning on
the date of such European regulatory approval, regardless of
when the European NCE patent covering such compound expires. A
generic version of the approved drug may not be marketed or sold
during such market exclusivity period. This directive may be of
particular importance with respect to iloperidone, since the
European NCE patent for iloperidone will likely expire prior to
the end of this
10-year
period of market exclusivity. However, there is no assurance
that we will receive the extensions of our patents or other
exclusive rights available under the Hatch-Waxman Act or similar
foreign legislation. If we fail to receive such extensions and
exclusive rights, our ability to prevent competitors from
manufacturing, marketing and selling generic versions of our
products will be materially harmed.
Litigation or third-party claims of intellectual property
infringement could require us to divert resources and may
prevent or delay our drug discovery and development
efforts.
Our commercial success depends in part on our not infringing the
patents and proprietary rights of third parties. Third parties
may assert that we are employing their proprietary technology
without authorization. In addition, third parties may obtain
patents in the future and claim that use of our technologies
infringes upon these patents. Furthermore, parties making claims
against us may obtain injunctive or other equitable relief,
which could effectively block our ability to develop and
commercialize one or more of our product candidates. Defense of
these claims, regardless of their merit, would divert
substantial financial and employee resources from our business.
In the event of a successful claim of infringement against us,
we may have to pay substantial damages, obtain one or more
licenses from third parties or pay royalties. In addition, even
in the absence of litigation, we may need to obtain additional
licenses from third parties to advance our research or allow
commercialization of our product candidates. We may fail to
obtain any of these licenses at a reasonable cost or on
reasonable terms, if at all. In that event, we would be unable
to develop and commercialize further one or more of our product
candidates.
In addition, in the future we could be required to initiate
litigation to enforce our proprietary rights against
infringement by third parties. Prosecution of these claims to
enforce our rights against others could divert substantial
financial and employee resources from our business. If we fail
to enforce our proprietary rights against others, our business
will be harmed.
If we use hazardous and biological materials in a manner
that causes injury or violates applicable law, we may be liable
for damages.
Our research and development activities involve the controlled
use of potentially hazardous substances, including toxic
chemical and biological materials. In addition, our operations
produce hazardous waste products. Federal, state and local laws
and regulations govern the use, manufacture, storage, handling
and disposal of these hazardous materials. While we believe that
we are currently in compliance with these laws and regulations,
continued compliance may be expensive, and current and future
environmental regulations may impair our research, development
and manufacturing efforts. In addition, if we fail to comply
with these laws and regulations at any point in the future, we
may be subject to criminal sanctions and substantial civil
liabilities and could be required to suspend or modify our
operations.
Even if we continue to comply with all applicable laws and
regulations regarding hazardous materials, we cannot eliminate
the risk of accidental contamination or discharge and our
resultant liability for any injuries or other damages caused by
these accidents. Although we
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maintain general liability insurance, this insurance may not
fully cover potential liabilities for these damages, and the
amount of uninsured liabilities may exceed our financial
resources and materially harm our business. In addition, our
inability to obtain or maintain sufficient insurance coverage at
an acceptable cost or otherwise to protect against potential
environmental claims could prevent or inhibit the commercial
production and sale of our products.
Risks related to this offering
Our stock price may be extremely volatile and you may not
be able to resell your shares at or above the initial public
offering price.
Prior to this offering, there has been no public market for our
common stock. Negotiations between the underwriters and us will
determine the initial public offering price. This price may not
be indicative of future market prices. In addition, the stock
market has from time to time experienced significant price and
volume fluctuations, and the market prices of the securities of
life sciences companies without product revenues, such as ours,
have been highly volatile.
The following factors, in addition to the other risk factors
described in this section, may also have a significant impact on
the market price of our common stock:
•
publicity regarding actual or potential testing or trial results
    or the outcome of regulatory review relating to products under
    development by us or our competitors
•
regulatory developments in the United States and foreign
    countries
•
developments concerning any collaboration we may undertake
•
announcements of patent issuances or denials, technological
    innovations or new commercial products by us or our competitors
•
economic and other external factors beyond our control
As a result of these factors, after this offering you might be
unable to resell your shares at or above the initial public
offering price.
An active trading market for our common stock may not
develop.
Prior to this offering, there has been no public market for our
common stock. Although we anticipate that our common stock will
be approved for listing on The Nasdaq National Market, an active
trading market for our shares may never develop or be sustained
following this offering. The initial public offering price for
our common stock will be determined through negotiations with
the underwriters. This initial public offering price may vary
from the market price of our common stock after the offering.
Investors may not be able to sell their common stock at or above
the initial public offering price.
A substantial number of shares of our common stock could
be sold into the public market shortly after this offering,
which could depress our stock price.
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. Once a trading market develops for our common
stock, many of our stockholders will have an opportunity to sell
their stock for the first time. These factors could also make it
difficult for us to raise additional capital by selling stock.
Please see the section entitled "Shares eligible for future
sale" for more information regarding these factors.
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Table of Contents
You will incur immediate and substantial dilution in the
pro forma as adjusted net tangible book value of the stock you
purchase.
We estimate that the initial public offering price of our common
stock will be
$           per
share. This amount is substantially higher than the pro forma as
adjusted net tangible book value that our outstanding common
stock will have immediately after this offering. Accordingly, if
you purchase shares of our common stock at the assumed initial
public offering price, you will incur immediate and substantial
dilution of
$           per
share. If the holders of outstanding options or warrants
exercise those options or warrants, you will suffer further
dilution.
Our management will have broad discretion over the use of
the proceeds we receive in this offering and might not apply the
proceeds in ways that increase the value of your
investment.
Our management will have broad discretion to use the net
proceeds from this offering, and you will be relying on the
judgment of our management regarding the application of these
proceeds. They might not apply the net proceeds of this offering
in ways that increase the value of your investment. We expect to
use the net proceeds from this offering for general corporate
purposes, including working capital and capital expenditures,
further clinical development of our current product candidates
and possible investments in, or acquisitions of, new product
candidates. We have not allocated these net proceeds for any
specific purposes. Our management might not be able to yield any
return on the investment and use of these net proceeds. You will
not have the opportunity to influence our decisions on how to
use the proceeds.
If securities or industry analysts do not publish research
or reports or publish unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our stock would
be negatively affected. In the event we obtain securities or
industry analyst coverage, if one or more of the analysts who
covers us downgrades our stock, our stock price would likely
decline. If one or more of these analysts ceases to cover us or
fails to publish regular reports on us, interest in the purchase
of our stock could decrease, which could cause our stock price
or trading volume to decline.
We will incur increased costs as a result of being a
public company.
As a public company, we will incur significant legal,
accounting, reporting and other expenses that we did not incur
as a private company. We expect these rules and regulations to
increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. We also expect
these new rules and regulations may make it more difficult and
more expensive for us to obtain director and officer liability
insurance and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the
same or similar coverage. As a result, we may experience more
difficulty attracting and retaining qualified individuals to
serve on our board of directors or as executive officers. We
cannot predict or estimate the amount of additional costs we may
incur as a result of these requirements or the timing of such
costs.
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Table of Contents
Existing stockholders significantly influence us and could
delay or prevent an acquisition by a third party.
Upon completion of this offering, executive officers, key
employees and directors and their affiliates will beneficially
own, in the aggregate,
approximately           %
of our outstanding common stock. As a result, these stockholders
will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of
directors and approval of significant corporate transactions,
which could have the effect of delaying or preventing a third
party from acquiring control over us. For information regarding
the ownership of our outstanding stock by our executive officers
and directors and their affiliates, please see "Principal
stockholders."
Anti-takeover provisions in our charter and bylaws, and in
Delaware law, could prevent or delay a change in control of our
company.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change of control would be beneficial to
our existing stockholders. For more information, see
"Description of capital stock—Anti-takeover effects of
provisions of our amended and restated certificate of
incorporation, bylaws and Delaware law." In addition, our
amended and restated certificate of incorporation and by laws
may discourage, delay or prevent a change in our management or
control over us that stockholders may consider favorable. Our
amended and restated certificate of incorporation and bylaws,
which will be in effect as of the closing of this offering:
•
authorize the issuance of "blank check" preferred
    stock that could be issued by our board of directors to thwart a
    takeover attempt
•
do not provide for cumulative voting in the election of
    directors, which would allow holders of less than a majority of
    the stock to elect some directors
•
establish a classified board of directors, as a result of which
    the successors to the directors whose terms have expired will be
    elected to serve from the time of election and qualification
    until the third annual meeting following their election
•
require that directors only be removed from office for cause
•
provide that vacancies on the board of directors, including
    newly-created directorships, may be filled only by a majority
    vote of directors then in office
•
limit who may call special meetings of stockholders
•
prohibit stockholder action by written consent, requiring all
    actions to be taken at a meeting of the stockholders
•
establish advance notice requirements for nominating candidates
    for election to the board of directors or for proposing matters
    that can be acted upon by stockholders at stockholder meetings
For information regarding these and other provisions, please see
"Description of capital stock."
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Table of Contents
Completion of this offering may limit our ability to use
our net operating loss carryforwards.
As of September 30, 2005, we had substantial federal and
state net operating loss carryforwards. Under the provisions of
the Internal Revenue Code, substantial changes in our ownership
may limit the amount of net operating loss carryforwards that
can be utilized annually in the future to offset taxable income.
We believe that, as a result of this offering, it is possible
that a change in our ownership will be deemed to have occurred.
If such a change in our ownership occurs, our ability to use our
net operating loss carryforwards in any fiscal year may be
significantly limited under these provisions.
24
Table of Contents
Forward-looking statements
This prospectus includes "forward-looking statements,"
as defined by federal securities laws, with respect to our
financial condition, results of operations and business, and our
expectations or beliefs concerning future events, including
increases in operating margins. Words such as, but not limited
to, "believe," "expect,"
"anticipate," "estimate,"
"intend," "plan," "targets,"
"likely," "will," "would,"
"could," and similar expressions or phrases identify
forward-looking statements.
All forward-looking statements involve risks and uncertainties.
The occurrence of the events described, and the achievement of
the expected results, depend on many events, some or all of
which are not predictable or within our control. Actual results
may differ materially from expected results. Factors that may
cause actual results to differ from expected results include,
among others:
•
a failure of our product candidates to be demonstrably safe and
    effective
•
a failure to obtain regulatory approval for our products or to
    comply with ongoing regulatory requirements
•
a lack of acceptance of our product candidates in the
    marketplace, or a failure to become or remain profitable
•
our inability to obtain the capital necessary to fund our
    research and development activities
•
our failure to identify or obtain rights to new product
    candidates
•
a failure to develop or obtain sales, marketing and distribution
    resources and expertise or to otherwise manage our growth
•
a loss of any of our key scientists or management personnel
•
losses incurred from product liability claims made against us
•
a loss of rights to develop and commercialize our products under
    our license and sublicense agreements
•
the increased expenses and administrative workload associated
    with being a public company
All future written and verbal forward-looking statements
attributable to us or any person acting on our behalf are
expressly qualified in their entirety by the cautionary
statements contained or referred to in this section. We
undertake no obligation, and specifically decline any
obligation, to update or revise publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this
prospectus might not occur.
See the section entitled "Risk factors" for a more
complete discussion of these and other risks and uncertainties.
The risk factors described in this prospectus are not
necessarily all of the important factors that could cause actual
results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable
factors also could affect our results. Consequently, there can
be no assurance that the actual results or developments
anticipated by us will be realized or, even if substantially
realized, that they will have the expected consequences to, or
effects on, us. Given these uncertainties, prospective investors
are cautioned not to place undue reliance on such
forward-looking statements.
25
Table of Contents
Use of proceeds
We estimate that we will receive approximately
$           million
in net proceeds from the sale of our common stock in this
offering, based on an assumed initial public offering price of
$           per
share (the midpoint of the initial public offering price range)
and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us. A
$1.00 increase (decrease) in the assumed initial public offering
price of
$           per
share would increase (decrease) the net proceeds to us from this
offering by
$           million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us. Our net proceeds
will increase by approximately
$           million
if the underwriters' over-allotment option is exercised in
full.
We currently intend to use
$           million
of the estimated net proceeds from this offering for research,
pre-clinical development and clinical trials. The balance of
such net proceeds will be used for general corporate purposes,
including working capital and the acquisition of pharmaceutical
products and businesses that are complementary to our own.
Currently, we have no specific plans or commitments with respect
to any acquisition. We cannot assure you that we will complete
any acquisitions or that, if completed, any acquisition will be
successful.
The amount and timing of our actual expenditures will depend on
numerous factors, including the progress of our research and
development activities and clinical trials, the number and
breadth of our product development programs, our ability to
establish and maintain corporate collaborations and other
arrangements and the amount of cash, if any, generated by our
operations.
We will retain broad discretion in the allocation and use of the
remaining net proceeds of this offering. Pending application of
the net proceeds, as described above, we intend to invest any
remaining proceeds in short-term, investment-grade,
interest-bearing securities.
Dividend policy
We have never declared or paid any dividends on our capital
stock. We currently intend to retain any future earnings to
finance our research and development efforts, the further
development of our PG expertise and the expansion of our
business and do not intend to declare or pay cash dividends on
our common stock in the foreseeable future. Any future
determination to pay dividends will be at the discretion of our
board of directors and will depend upon results of operations,
financial condition, contractual restrictions, restrictions
imposed by applicable law and other factors our board of
directors deems relevant.
26
Table of Contents
Capitalization
The following table sets forth the following information:
•
our actual capitalization as of September 30, 2005
•
our pro forma capitalization after giving effect to the
    conversion of all outstanding shares of preferred stock into
    common stock upon the completion of this offering
•
our pro forma as adjusted capitalization to reflect our receipt
    of the estimated net proceeds from our sale
    of                      shares
    of common stock in this offering, after deducting the
    underwriting discounts and commissions and estimated offering
    expenses, the filing of a new certificate of incorporation after
    the closing of this offering and the application of our proceeds
    from this offering
This table excludes the following shares:
•
5,348,975 shares of common stock available as of
    September 30, 2005 for issuance under our Management Equity
    Plan and agreements entered into pursuant to such Plan
•
12,195,129 shares of Series B Preferred Stock issued
    on December 9, 2005
•
166,660 shares of common stock available for issuance upon
    the exercise of outstanding warrants
See "Management— Employee benefit plans," and
Note 10 of "Notes to consolidated financial
statements" for a description of our equity plans.
September 30, 2005
Pro forma
Actual
pro forma
as adjusted
Convertible Preferred stock,
    $0.001 par value; 40,081,308 shares authorized,
    40,081,308 shares issued and outstanding;
    40,081,308 shares authorized, no shares outstanding on a
    pro forma basis;      shares
    authorized, no shares outstanding on a pro forma as adjusted
    basis, respectively
$
46,808,569
$
—
Stockholders' equity:
Common stock, $0.001 par
    value; 50,000,000 shares authorized, 150,739 shares
    issued and outstanding; 50,000,000 shares authorized,
    40,232,047 shares issued and outstanding on a pro forma
    basis, and      shares issued and
    outstanding on a pro forma as adjusted basis, respectively
$
151
$
40,232
Additional paid-in capital(1)
$
18,049,479
$
64,817,967
Deferred compensation
(13,862,408
)
(13,862,408
)
Accumulated deficit
(29,485,531
)
(29,485,531
)
Total stockholders' equity(1)
21,486,961
21,486,961
Total capitalization(1)
21,486,961
21,486,961
(1) A $1.00 increase (decrease) in the assumed initial
public offering price of
$        per share would
increase (decrease) each of additional paid-in capital, total
stockholders' equity and total capitalization by
$        million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
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Table of Contents
Dilution
If you invest in our common stock in this offering, your
interest will be diluted to the extent of the difference between
the public offering price per share of our common stock and the
pro forma net tangible book value per share of our common stock
after this offering.
As of September 30, 2005, our net tangible book value was
approximately $21.5 million, or $142.54 per share of
common stock. Our net tangible book value per share represents
the amount of our total tangible assets reduced by the amount of
our total liabilities, divided by the number of shares of our
common stock outstanding as of September 30, 2005, before
giving effect to any conversion of our preferred stock into
common stock. Our pro forma net tangible book value as of
September 30, 2005 was approximately $21.5 million, or
$0.53 per share of common stock. Our pro forma net tangible
book value per share represents the amount to our total tangible
assets reduced by the amount of our total liabilities, divided
by the total number of shares of our common stock outstanding as
of September 30, 2005, after giving effect to the
conversion of our preferred stock into common stock upon
completion of this offering. After giving effect to our sale in
this offering
of                      shares
of our common stock at an assumed initial public offering price
of
$          per
share (the midpoint of the price range set forth on the cover
page of this prospectus) and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, our pro forma net tangible book value as
of September 30, 2005 would have been
$           million,
or
$          per
share of our common stock. This represents an immediate increase
of net tangible book value of
$           per
share to our existing stockholders and an immediate dilution of
$           per
share to investors purchasing shares in this offering.
The following table illustrates this per share dilution:
Assumed initial public offering
    price per share
$
Net tangible book value per share
    applicable to common stockholders as of September 30, 2005
$
142.54
Pro forma net tangible book value
    per share applicable to common stockholders as of
    September 30, 2005
0.53
Increase in pro forma net tangible
    book value per share attributable to investors purchasing shares
    in this offering
Pro forma net tangible book value
    per share after giving effect to this offering
Dilution in pro forma net tangible
    book value per share to investors purchasing shares in this
    offering
$
A $1.00 increase (decrease) in the assumed initial public
offering price of
$           per
share would increase (decrease) our pro forma net tangible book
value per share after this offering by
$           per
share and the dilution in pro forma net tangible book value per
share to investors in this offering by
$           per
share, assuming that the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same and
after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
If the underwriters exercise their option to purchase additional
shares of our common stock in full in this offering, the pro
forma net tangible book value per share after the offering would
be
$           per
share, the increase in pro forma net tangible book value per
share to existing
28
Table of Contents
stockholders would be
$           per
share and the dilution to new investors purchasing shares in
this offering would be
$           per
share.
The following table presents on a pro forma basis as of
September 30, 2005, after giving effect to the conversion
of all outstanding shares of preferred stock into common stock
upon completion of this offering, the differences between the
existing stockholders and the purchasers of shares in the
offering with respect to the number of shares purchased from us,
the total consideration paid and the average price paid per
share:
Shares purchased
Total consideration
Average
price per
Number
Percent
Amount
Percent
share
Existing stockholders
40,232,047
%
$
47,018,083
%
$
1.17
New investors(1)
%
%
Total
—
100.0%
$
—
100.0%
$
(1) A $1.00 increase (decrease) in the assumed initial
public offering price of
$        per share would
increase (decrease) the amount of total consideration to
$               .
The discussion and the tables above assume no exercise of stock
options or warrants outstanding on September 30, 2005 and
no issuance of shares reserved for future issuance under our
equity compensation plans. In addition, the numbers set forth in
the table above reflect the conversion of all shares of our
outstanding preferred stock into shares of common stock upon
completion of this offering. As of September 30, 2005,
there were:
•
3,783,490 shares of common stock issuable upon exercise of
    outstanding options, each with an exercise price of
    $0.10 per share
•
166,660 shares of common stock issuable upon exercise of
    outstanding warrants with an exercise price of $0.40 per
    share
•
an additional 1,565,485 shares reserved for future stock
    option grants and purchases under our existing equity
    compensation plans
If the underwriters' over-allotment option is exercised in
full, the following will occur:
•
the percentage of shares of common stock held by existing
    stockholders will decrease to
    approximately      % of the total
    number of shares of our common stock outstanding after this
    offering
•
the number of shares held by new investors will be increased
    to                     or
    approximately      % of the total
    number of shares of our common stock outstanding after this
    offering
29
Table of Contents
Selected consolidated financial data
The consolidated statements of operations data for the period of
March 13, 2003 (inception) to December 31, 2003
and the year ended December 31, 2004 and the consolidated
balance sheet data at December 31, 2003 and 2004 are
derived from our audited consolidated financial statements
included in this prospectus. The consolidated statements of
operations data for the nine months ended September 30,
2004 and 2005, and the consolidated balance sheet data at
September 30, 2004 and September 30, 2005, are each
derived from our unaudited consolidated financial statements
included in this prospectus. The unaudited consolidated
financial statements include, in the opinion of management, all
adjustments, consisting of only recurring adjustments, that
management considers necessary for the fair presentation of the
financial information set forth in those statements. The
historical results are not necessarily indicative of the results
to be expected in future periods.
The following data should be read together with our consolidated
financial statements and accompanying notes and the section
entitled "Management's discussion and analysis of
financial condition and results of operations" included in
this prospectus.
Period from
March 13, 2003
Nine months ended
(inception) to
Year ended
September 30,
December 31,
December 31,
2003
2004
2004
2005
(unaudited
(unaudited
Statements of operations
    data
Revenue
$
47,565
$
33,980
$
33,980
$
—
Operating expenses:
Research and development
2,010,532
7,442,983
5,033,488
11,641,565
General and administrative
1,052,659
2,119,394
1,267,485
5,587,147
Total operating expenses
3,063,191
9,562,377
6,300,973
17,228,712
Loss from operations
(3,015,626
)
(9,528,397
)
(6,266,993
)
(17,228,712
)
Interest and other income, net
44,805
59,060
12,956
188,288
Net loss before tax expense
(2,970,821
)
(9,469,337
)
(6,254,037
)
(17,040,424
)
Tax expense
—
4,949
3,733
—
Net Loss
(2,970,821
)
(9,474,286
)
(6,257,770
)
(17,040,424
)
Beneficial conversion feature—
    deemed dividend to preferred stockholders(1)
—
—
—
(18,500,005
)
Net loss attributable to common
    stockholders
$
(2,970,821
)
$
(9,474,286
)
$
(6,257,770
)
$
(35,540,429
)
Net loss per share applicable to
    common stockholders, basic and diluted
$
(297.08
)
$
(947.43
)
$
(625.78
)
$
(934.93
)
Shares used in computing net loss
    per share, basic and diluted
10,000
10,000
10,000
38,014
(1) In September 2005, we completed the sale of an
additional 15,040,654 shares of Series B Preferred
Stock for proceeds of approximately $18.5 million. After
evaluating the fair value of our common stock obtainable upon
conversion by the stockholders, we determined that the issuance
of the Series B Preferred Stock sold in September 2005
resulted in a beneficial
30
Table of Contents
conversion feature of approximately $18.5 million which was
fully accreted in September 2005 and is recorded as a deemed
dividend to preferred stockholders for the nine-month period
ended September 30, 2005.
As of December 31,
As of
September 30,
2003
2004
2005
(unaudited)
Balance sheet data
Cash, restricted cash and cash
    equivalents
$
7,165,722
$
16,259,770
$
22,264,920
Working capital
6,204,248
14,827,621
20,145,973
Total assets
8,385,913
17,752,241
24,288,683
Total liabilities
1,378,880
1,808,654
2,801,722
Convertible preferred stock
9,963,541
28,308,564
46,808,569
Deficit accumulated during the
    development stage
(2,970,821
)
(12,445,107
)
(29,485,531
)
Total stockholders' equity
7,007,033
15,943,587
21,486,961
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Management's discussion and analysis of financial
condition
and results of operations
You should read the following discussion and analysis of our
financial condition and results of operations together with
"Selected Financial Data" and our consolidated
financial statements and related notes appearing at the end of
this prospectus. Some of the information contained in this
discussion and analysis or set forth elsewhere in this
prospectus include historical information and other information
with respect to our plans and strategy for our business and
contain forward-looking statements that involve risk,
uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking
statements as a result of certain factors, including but not
limited to those set forth under the "Risk factors"
section of this prospectus and elsewhere in this prospectus.
Overview
Since we began our operations in March 2003, we have devoted
substantially all of our resources to the in-licensing and
clinical development of small molecule therapeutics for various
central nervous system disorders. Our lead product candidate,
iloperidone, is an atypical antipsychotic for the treatment of
schizophrenia and bipolar disorder and is in a pivotal
Phase III trial for schizophrenia. Our second product
candidate, VEC-162, is a melatonin agonist for the treatment of
insomnia and depression which is entering a pivotal
Phase III trial for insomnia. VEC-162 is also ready for
Phase II trials for the treatment of depression. Our third
product candidate, VSF-173, is a compound for the treatment of
excessive daytime sleepiness and is ready for a Phase II
trial.
We expect to complete our pivotal Phase III trial for
iloperidone in the first half of 2007. If this trial is
successful, we will file an NDA for approval with the
FDA later that year. We recently generated positive
efficacy and safety data in a Phase II trial of VEC-162 for
insomnia and expect to begin a Phase III trial early in
2006. We also expect to begin a Phase II trial of VSF-173
for excessive daytime sleepiness in the second half of 2006.
Assuming successful outcomes of our clinical trials and approval
by the FDA, we expect to commercialize iloperidone and VSF-173
with our own sales force in the U.S. and expect to commercialize
VEC-162 through a strategic partnership with a global
pharmaceutical company.
Based on our current operating plans, and assuming the sale
of            shares
of our common stock in this offering at an initial public
offering price of
$           per
share (the mid-point of the price range set forth on the cover
page of this prospectus), we believe that the proceeds from this
offering, together with our existing cash, restricted cash and
cash equivalents, will be sufficient to meet our anticipated
operating needs until mid-2007, and after that time we will
require additional capital. We believe that if we sell
the            shares
of our common stock in this offering at an initial public
offering price of
$           per
share ($1.00 lower than the mid-point of the price range set
forth on the cover page), the resultant reduction in proceeds we
receive from the offering would cause us to require additional
capital earlier,
in           .
In addition, in budgeting for our activities following this
offering, we have relied on a number of assumptions, including
assumptions that we will enroll approximately 600 patients
in our pivotal Phase III iloperidone trial and
approximately 300 patients in our VEC-162 pivotal
Phase III trial for insomnia, that we will not engage in
further business development activities, that we will not expend
funds on the depot formulation of, or bipolar indication for,
iloperidone or on a Phase II trial of VEC-162 for
depression, that we will be able to continue the manufacturing
of our product candidates at commercially reasonable prices,
that we will
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Table of Contents
be able to retain our key personnel, and that we will not incur
any significant contingent liabilities. We may need to raise
additional funds more quickly if one or more of our assumptions
prove to be incorrect or if we choose to expand our product
development efforts more rapidly than we presently anticipate,
and we may decide to raise additional funds even before we need
them if the conditions for raising capital are favorable. We may
seek to sell additional equity or debt securities or obtain a
bank credit facility. The sale of additional equity or debt
securities, if convertible, could result in dilution to our
stockholders. The incurrence of indebtedness would result in
increased fixed obligations and could also result in covenants
that would restrict our operations.
In March and June 2004 we entered into separate license
agreements with Novartis and Bristol-Myers Squibb for the
exclusive rights to develop and commercialize our three
compounds in clinical development. In consideration for these
rights, we paid a $500,000 non-refundable fee for each of the
compounds. We are also obligated to make additional payments
upon the achievement of specific clinical and commercial
milestones, as well as the payment of product royalties based on
the net sales of the licensed products. The amount, timing and
likelihood of these potential payments will depend on the
occurrence of future events that may or may not occur, such as
the approval by the FDA for the sale of one or more of our
product candidates.
Revenues.
We have generated some revenue under research
and development contracts that were derived principally from
consulting agreements we entered into during our
start-up
phase to
defray research costs. We completed our obligations under these
agreements and no longer seek such arrangements.
We have not generated any other operating revenue since our
inception. Any revenue that we may receive in the near future is
expected to consist primarily of license fees, milestone
payments and research and development reimbursement payments to
be received from partners. If our development efforts result in
clinical success, regulatory approval and successful
commercialization of our products, we could generate revenue
from sales of our products and from receipt of royalties on
sales of licensed products.
Research and development expenses.
We expect our research
and development expenses to increase as we continue to develop
our product candidates. These expenses consist primarily of fees
paid to third-party professional service providers in connection
with the services they provide for our clinical trials, costs of
contract manufacturing services, costs of materials used in
clinical trials and research and development, depreciation of
capital resources used to develop our products, and all related
facilities costs. We expense research and development costs as
incurred, including payments made to date under our license
agreements. We believe that significant investment in product
development is a competitive necessity and plan to continue
these investments in order to realize the potential of our
product candidates and PG expertise. From inception through
September 30, 2005, we incurred research and development
expenses in the aggregate of approximately $21.1 million,
including stock-based compensation expenses of approximately
$660,000. We expect to incur licensing costs in the future that
could be substantial, as we continue our efforts to evaluate
potential in-license product candidates.
33
Table of Contents
The following table summarizes our product development
initiatives for the period from March 13, 2003
(inception) to December 31, 2003, the year ended
December 31, 2004 and for the nine months ended
September 30, 2004 and 2005. Included in this table is the
research and development expense recognized in connection with
our product candidates in clinical development. Included in
"Other product candidates" are the costs directly
related to research initiatives for all other product
candidates. The numbers in this table have not been audited.
March 13, 2003
Nine months ended
March 13, 2003
(inception) to
Year ended
September 30,
(inception) to
December 31,
December 31,
September 30,
2003(2)
2004
2004
2005
2005
Direct Project Costs(1)
Iloperidone
$
1,123,000
$
711,000
$
4,423,000
$
5,546,000
VEC-162
3,221,000
1,851,000
5,057,000
8,278,000
VSF-173
568,000
531,000
707,000
1,275,000
Other Product Candidates
1,037,000
945,000
608,000
1,645,000
Total Direct Product Costs
5,949,000
4,038,000
10,795,000
16,744,000
Indirect Project Costs(1)
Facility(3)
259,000
199,000
185,000
444,000
Depreciation
$
69,000
345,000
140,000
281,000
695,000
Other Indirect Overhead
1,942,000
890,000
656,000
380,000
3,212,000
Total Indirect Expenses
2,011,000
1,494,000
995,000
846,000
4,351,000
Total Research &
    Development Expenses
$
2,011,000
$
7,443,000
$
5,033,000
$
11,641,000
$
21,095,000
(1) Many of our research and development costs are not
attributable to any individual project because we share
resources across several development projects. We record direct
costs, including personnel costs and related benefits and
stock-based compensation, on a project-by-project basis. We
record indirect costs that support a number of our research and
development activities in the aggregate.
(2) In 2003, there were no active development programs in
process for our product candidates listed in the table.
(3) In 2003, all facility-related costs were allocated to
general and administrative expenses.
We have allocated
$           million
of the proceeds of this offering for research and development,
including pre-clinical development and clinical trials.
Conducting clinical trials is a time-consuming and expensive
process. Currently, iloperidone is in a pivotal Phase III
trial, and VEC-162 is anticipated to begin pivotal
Phase III trials early in 2006. VSF-173 may enter
Phase II clinical trials in late 2006. The commencement and
rate of completion of clinical trials for our products may be
delayed by many factors, including, but not limited to:
•
lack of efficacy during the clinical trials
•
unforeseen safety issues
•
slower-than-expected rate of patient recruitment
•
manufacturing delays
•
government or regulatory delays
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Table of Contents
In addition, we may encounter regulatory delays or rejections as
a result of many factors, including results that do not support
our claims, perceived defects in the design of clinical trials
and changes in regulatory policy during the period of product
development. Our business, financial condition and results of
operations may be adversely affected by any delays in, or
termination of, our clinical trials or a determination by the
FDA that the results of our trials are inadequate to justify
regulatory approval. As part of our commercialization strategy,
we may seek to establish collaborative relationships for some of
our products in order to help us develop and market some of
these product candidates. There can be no assurance that we will
be successful in doing so. As a result of these risks and
uncertainties, we are unable to estimate the specific timing and
future costs of our clinical development programs or the timing
of material cash inflows, if any, from our product candidates.
General and administrative expenses.
General and
administrative expenses consist primarily of salaries and other
related costs for personnel serving executive, finance,
accounting, information technology and human resource functions.
Other costs include facility costs not otherwise included in
research and development expense and professional fees for legal
and accounting services. We expect that our general and
administrative expenses will increase as we add personnel and
become subject to the reporting obligations applicable to public
companies. From inception through September 30, 2005, we
incurred expenses in the aggregate of approximately
$8.8 million, including stock-based compensation expenses
of approximately $3.4 million, on general and
administrative expenses.
Stock-based compensation.
We have recorded deferred
stock-based compensation expense in connection with the grant of
stock options to employees. Deferred stock-based compensation
for options granted to employees is the difference between the
fair value for financial reporting purposes of our common stock
on the date such options were granted and their exercise price.
We recorded deferred stock-based compensation and additional
paid-in capital of approximately $281,000 in the aggregate and
approximately $13.1 million in the aggregate in the year
ended December 31, 2004 and the nine months ended
September 30, 2005, respectively, related to stock options
granted to employees. These amounts were recorded as a component
of stockholders' equity and are being amortized as charges
to operations over the vesting periods of the options. We
recorded amortization of deferred stock-based compensation of
approximately $23,000 and approximately $567,000 for the year
ended December 31, 2004 and the nine month period ended
September 30, 2005, respectively. For options granted to
employees through September 30, 2005, we expect to record
additional amortization of deferred stock-based compensation in
the following approximate amounts: $828,000 during the remainder
of 2005, $3.3 million in 2006, $3.3 million in 2007,
$3.3 million in 2008 and $2.0 million in 2009.
In August 2004, we approved a modification to an employee's
stock option awards at time of employment termination. The
modification was to accelerate a portion of the unvested stock
options so the shares could be immediately exercisable.
According to FASB Interpretation No. 44,
"Accounting for Certain Transactions involving Stock
Compensation"
(FIN 44), the result of such a
modification is to remeasure the stock options that were
modified. The remeasurement of the stock options resulted in an
immediate charge of approximately $15,000, which was included in
general and administrative expense for the year ended
December 31, 2004.
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Table of Contents
In February 2005, the board of directors approved a modification
to all outstanding granted stock option awards, repricing the
options from their original exercise price of $0.40 to $0.10.
According to FIN 44, the result of such a modification is
to account for the modified stock option awards as variable from
the date of the modification to the date the awards are
exercised, forfeited, or cancelled. For the nine month period
ended September 30, 2005, we remeasured approximately
1.1 million outstanding stock options, resulting in an
initial deferred stock compensation of approximately
$1.6 million. Compensation expense relating to the
remeasurement of modified stock options was approximately
$3.5 million for the nine month period ended
September 30, 2005, which includes approximately
$3.0 million of immediate stock compensation charges for
vested shares at the time of remeasurement for the
nine month period ended September 30, 2005. We expect
to record additional amortization of deferred stock-based
compensation in the following approximate amounts: $204,000
during the remainder of 2005, $550,000 in 2006, $249,000 in 2007
and $64,000 in 2008.
According to
EITF 00-23,
"Issues Related to the Accounting for Stock Compensation
under APB Opinion No. 25 and FASB Interpretation
No. 44, "
FASB Interpretation No. 28,
"Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans and interpretation of APB
Opinions No. 15 and 25"
(FIN 28), is required
for variable awards. FIN 28 specifies that compensation
should be measured at the end of each period as the amount by
which the quoted market value of the shares of the
enterprises's stock covered by the grant exceeds the option
price or value specified under the plan and that amount should
be accrued as a charge to expense over the periods the employee
performs the related services.
During the quarter ended December 31, 2005, the board of
directors granted additional options to purchase up to
1.4 million shares of common stock to employees. We
will record deferred stock-based compensation and additional
paid-in capital of approximately $5.9 million in the fourth
quarter of 2005 for options granted to employees, which will be
amortized as charges to operations over the vesting periods for
the options. For options granted to employees during the fourth
quarter of 2005, we expect to record approximate additional
amortization of deferred stock-based compensation in the
following approximate amounts: $152,000 during the remainder of
2005, $1.5 million in 2006, 2007, and 2008 and
$1.3 million in 2009.
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The table below summarizes the amortization of deferred
stock-based compensation to be expensed, including the fourth
quarter of 2005 remeasurement of stock options modified in
February 2005 and those stock options granted during the fourth
quarter of 2005. This table does not reflect the possible
modifications that may occur to the option grants for such
events as accelerations, forfeitures, terminations or exercises
(in thousands):
Stock Base
Compensation
from March 31,
Total
2003 (inception)
Future Stock
October to
to September 31,
Based
December
2005
Compensation
2005
2006
2007
2008
2009
Stock options granted through
    September 30, 2005 that were below fair value
$
590
$
12,795
$
828
$
3,336
$
3,312
$
3,289
$
2,030
Modification to an employee's
    stock option awards
15
—
—
—
—
—
—
Remeasurement of stock options
    modified in February 2005
3,524
1,067
204
550
249
64
—
2005 fourth quarter remeasurement
    of stock options modified in February 2005
—
199
156
28
12
3
—
Stock options granted during fourth
    quarter of 2005 that were below fair value
—
5,864
152
1,466
1,466
1,466
1,314
Total amortization of deferred
    stock based compensation
$
4,129
$
19,925
$
1,340
$
5,380
$
5,039
$
4,822
$
3,344
We believe that the adoption of FAS 123R in the beginning
of 2006 will have an effect on the additional amortization of
deferred stock-based compensation for future periods, but we do
not know the specific impact of the adoption because we have not
determined which transition method we will adopt.
Beneficial conversion feature.
In September 2005, we
completed the sale of an additional 15,040,654 shares of
Series B Preferred Stock for proceeds of approximately
$18.5 million. After evaluating the fair value of our
common stock obtainable upon conversion by the stockholders, we
determined that the issuance of the Series B Preferred
Stock sold in September 2005 resulted in a beneficial conversion
feature calculated in accordance with EITF Issue
No. 98-5,
"Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios,"
as interpreted by EITF Issue
No. 00-27,
"Application of Issue
No. 98-5
to
Certain Convertible Instruments,"
of approximately
$18.5 million which was fully accreted in September 2005
and is recorded as a deemed dividend to preferred stockholders
for the nine-month period ended September 30, 2005.
37
Table of Contents
In December 2005, we closed an additional private placement of
12,195,129 shares of Series B Preferred Stock for
proceeds of approximately $15 million. We evaluated the
fair value of our common stock obtainable upon conversion by the
stockholders and determined that the issuance of such
convertible securities results in a beneficial conversion
feature of approximately $15 million. This amount will be
recorded as a deemed dividend to preferred stockholders for the
year ended December 31, 2005.
Interest and other income, net.
Interest income consists
of interest earned on our cash, restricted cash and cash
equivalents and short-term investments. Interest expense
consists of interest incurred on equipment debt. Other expense
consists of cumulative foreign currency translation adjustments
related to our wholly owned foreign subsidiary located in
Singapore.
We have a limited history of operations. We anticipate that our
quarterly results of operations will fluctuate for the
foreseeable future due to several factors, including any
possible payments made or received pursuant to licensing or
collaboration agreements, progress of our research and
development efforts, and the timing and outcome of clinical
trials and related possible regulatory approvals. Our limited
operating history makes predictions of future operations
difficult or impossible. Since our inception, we have incurred
significant losses. As of September 30, 2005, we had a
deficit accumulated during the development stage of
approximately $29.5 million. We anticipate incurring
additional losses, which may increase, for the foreseeable
future.
Results of operations
Nine months ended September 30, 2005 compared to nine
months ended September 30, 2004
Revenues.
Revenues decreased approximately $34,000 for
the nine months ended September 30, 2005 to zero. Revenue
earned in 2004 was derived principally from consulting
agreements we entered into during our
start-up
phase under
research and development contracts. We have completed its
obligations under these agreements and will not recognize any
related contract revenue in 2005.
Research and development expenses.
Research and
development expenses increased by approximately
$6.6 million, or 131%, to approximately $11.6 million
for the nine months ended September 30, 2005 compared to
approximately $5.0 million for the nine months ended
September 30, 2004. Research and development expense
consists of direct costs which include salaries and related
costs of research and development personnel, and the costs of
consultants, materials and supplies associated with research and
development projects, as well as clinical activities. Indirect
research and development costs include facilities, depreciation,
and other indirect overhead costs.
38
Table of Contents
The following table discloses the components of research and
development expenses reflecting all of our project expenses:
Nine months ended
September 30,
Research and development expenses
2004
2005
Direct project costs:
Personnel, benefits and related
    costs
$
902,000
$
1,539,000
Stock-based compensation
1,000
659,000
Contract R&D, consultants,
    materials and other costs
2,781,000
4,496,000
Clinical trials
354,000
4,101,000
Total direct costs
4,038,000
10,795,000
Indirect project costs
995,000
846,000
Total
$
5,033,000
$
11,641,000
Direct costs increased approximately $6.8 million as a
result of approximate increases of $3.7 million,
$3.2 million and $0.2 million, respectively, relating
to clinical development activities for iloperidone,
VEC-162
and
VSF-173.
During the
nine months ended September 30, 2005, we conducted
additional clinical development and manufacturing work on
iloperidone as we prepared for its pivotal Phase III trial.
We also conducted a Phase II clinical trial for
VEC-162.
Personnel,
benefits and related costs increased approximately $637,000 for
the nine months ended September 30, 2005 due to an increase
in personnel to support the development and clinical trial
activities for iloperidone and
VEC-162.
Stock-based
compensation expense for the nine months ended
September 30, 2005 was approximately $659,000.
Contract research and development, consulting, materials and
other direct costs increased approximately $1.7 million for
the nine months ended September 30, 2005, primarily due to
regulatory and manufacturing-related development costs of
approximately $4.5 million incurred in connection with the
manufacturing of clinical supply materials for the iloperidone
Phase III and the
VEC-162
clinical trial
programs. Prior to FDA approval of our products,
manufacturing-related costs are included in research and
development expense. Clinical trials expense increased
approximately $3.7 million for the nine months ended
September 30, 2005 due to the cost incurred as we prepared
for our pivotal Phase III iloperidone clinical trial that
began in the fourth quarter of 2005 and the costs related to the
Phase II
VEC-162
trial that was conducted in 2005. Indirect project costs also
decreased by approximately $150,000 for the nine months ended
September 30, 2005 due primarily to the elimination of
contract manufacturing activities we previously conducted.
During the remainder of 2005, and thereafter, we expect research
and development expenses to continue to increase substantially
as we increase our research and development efforts and as our
existing and future product candidates proceed through clinical
trials.
General and administrative expenses.
General and
administrative expenses increased approximately
$4.3 million, or 341%, to approximately $5.6 million
for the nine months ended September 30, 2005 from
approximately $1.3 million for the nine months ended
September 30, 2004.
39
Table of Contents
The following table discloses the components of our general and
administrative expenses:
Nine months ended
September 30,
General and administrative expenses
2004
2005
Salaries, benefits and related costs
$
687,000
$
946,000
Stock-based compensation
20,000
3,431,000
Legal and consulting expenses
230,000
680,000
Other expenses
330,000
530,000
Total
$
1,267,000
$
5,587,000
General and administrative expenses consist of professional
fees, salaries and related costs for executive and other
administrative personnel and facility costs. Salaries, benefits
and related costs increased approximately $259,000 for the nine
months ended September 30, 2005 due to an increase in
personnel as we continued to develop the administrative
structure to support the development and clinical trial
activities for iloperidone,
VEC-162
and our other
product candidates. Stock-based compensation expense was
approximately $3.4 million for the nine months ended
September 30, 2005 and approximately $20,000 for the same
period in 2004.
Legal and consulting costs increased approximately $450,000 for
the nine months ended September 30, 2005 due primarily to a
higher level of consulting activity in 2005 in support of
business development and market research activities related to
our lead product candidates. Other expenses increased
approximately $200,000 for the nine months ended
September 30, 2005, primarily due to insurance and taxes.
During the remainder of 2005, and thereafter, we expect our
general and administrative expenses to increase substantially.
These increased expenses are expected to be necessary to support
our discovery and development efforts and our commercial
development activities and to fulfill our reporting and other
regulatory obligations applicable to public companies.
Interest and other income, net.
Net interest income in
the nine months ended September 30, 2005 was approximately
$188,000 compared to net interest income of approximately
$13,000 in the nine months ended September 30, 2004.
Interest income was higher in 2005 due to higher average cash
balances for the year and higher short-term interest rates which
generated substantially higher interest income than in 2004.
Our interest income and expense for the nine months ended
September 30, 2004 and the nine months ended
September 30, 2005 are disclosed on the following table:
Nine months ended
September 30,
2004
2005
Interest income
$
43,000
$
209,000
Interest expense
(30,000
)
(21,000
)
Total, net
$
13,000
$
188,000
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Table of Contents
Year ended December 31, 2004 compared to period from
March 13, 2003 (inception) to December 31, 2003
Revenues.
We recorded revenues of approximately $34,000
and approximately $48,000 for 2004 and 2003, respectively.
Revenue earned in 2004 and 2003 was derived principally from
consulting agreements we entered into during our
start-up
phase under
research and development contracts. We completed our obligations
under these agreements and will not recognize any related
contract revenue in 2005.
Research and development expenses.
Research and
development expenses increased approximately $5.4 million,
or 270%, to approximately $7.4 million for the year ended
December 31, 2004 compared to approximately
$2.0 million for the period from March 13, 2003
(inception) to December 31, 2003.
The following table discloses the components of research and
development expenses reflecting all of our project expenses:
Period from
March 13, 2003
(inception) to
Year ended
December 31,
December 31,
Research and development expenses
2003
2004
Direct project costs:
Personnel, benefits and related
    costs
$
—
$
1,154,000
Stock-based compensation
—
2,000
Contract R&D, consultants,
    materials and other costs
—
3,877,000
Clinical trials
—
916,000
Total direct costs
—
5,949,000
Indirect project costs
2,011,000
1,494,000
Total
$
2,011,000
$
7,443,000
Direct costs increased approximately $5.9 million from zero
as a result in the shift from contract development activities to
the clinical development of iloperidone and
VEC-162.
Personnel,
benefits and related costs increased approximately
$1.2 million in 2005 due to an increase in personnel to
support the development and clinical trial activities for
iloperidone and
VEC-162.
Personnel
costs associated with contract development activities were
charged to indirect project costs for the period from
March 13, 2003 (inception) to December 31, 2003.
Contract research and development, consulting, materials and
other direct costs increased approximately $3.9 million
primarily due to clinical manufacturing-related development
costs incurred in connection with the manufacturing of clinical
supply materials for iloperidone and
VEC-162.
Prior to FDA
approval of our products, manufacturing-related costs are
included in research and development expense. Clinical trials
expense increased approximately $916,000 due to the cost
incurred as we prepared for our iloperidone and
VEC-162
clinical trials.
Indirect project costs also decreased by approximately $517,000,
due primarily to the elimination of contract manufacturing
activities we previously conducted.
General and administrative expenses.
General and
administrative expenses increased approximately
$1.1 million, or 101%, to approximately $2.1 million
for the year ended
41
Table of Contents
December 31, 2004 compared to approximately
$1.1 million for the period from March 13, 2003
(inception) to December 31, 2003.
The following table discloses the components of our general and
administrative expenses:
Period from
March 13, 2003
(inception) to
Year ended
December 31,
December 31,
General and administrative expenses
2003
2004
Salaries, benefits and related costs
$
21,000
$
854,000
Stock-based compensation
—
36,000
Legal and consulting expenses
620,000
690,000
Other expenses
412,000
539,000
Total
$
1,053,000
$
2,119,000
General and administrative expenses consist of professional
fees, salaries and related costs for executive and other
administrative personnel, and facility costs. Salaries, benefits
and related costs increased approximately $833,000 in 2004 due
to an increase in personnel as we continued to develop the
administrative structure to support the development and clinical
trial activities of our product candidates.
Legal and consulting costs and other expenses increased due
primarily to a higher level of consulting activity in 2004 in
support of the business development and market research
activities related to our lead product candidates.
Interest and other income, net.
Net interest income for
the year ended December 31, 2004 was approximately $59,000
compared to net interest income of approximately $45,000 for the
period from March 13, 2003 (inception) to
December 31, 2003. The increase in interest income was
attributable to higher average cash balances for the year ended
December 31, 2004, and partially offset by an increase in
interest expense attributable to an increase in our equipment
term loan obligations.
Our interest income and expenses for 2004 and for the period
from March 13, 2003 (inception) to December 31,
2003 are disclosed on the following table:
Period from
March 13, 2003
(inception) to
Year ended
December 31,
December 31,
2003
2004
Interest income
$
53,000
$
101,000
Interest expense
(8,000
)
(42,000
)
Total, net
$
45,000
$
59,000
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Liquidity and capital resources
We have funded our operations through September 30, 2005
principally with the proceeds of approximately
$47.0 million from preferred stock offerings:
Price per
Approximate
Issue
Year
No. shares
share
amount
(in millions)
Preferred Stock, Series A
March, 2003
10,000,000
$
1.00
$
10.0
Preferred Stock, Series B
September, 2004
15,040,654
$
1.23
$
18.5
Preferred Stock, Series B
September, 2005
15,040,654
$
1.23
$
18.5
Total
40,081,308
$
47.0
Each share of preferred stock is convertible into one share of
our common stock.
In September 2005, we completed the sale of an additional
15,040,654 shares of Series B Preferred Stock for
proceeds of approximately $18.5 million. After evaluating
the fair value of the common stock obtainable upon conversion by
the stockholders, we determined that the issuance of the
Series B Preferred Stock sold in September 2005 resulted in
a beneficial conversion feature of approximately
$18.5 million which was fully accreted in September 2005
and is recorded as a deemed dividend to preferred stockholders
for the nine-month period ended September 30, 2005.
On December 9, 2005 we completed the final closing of the
Series B financing pursuant to which we sold an additional
12,195,129 shares of Series B Preferred Stock at
$1.23 per share, or an aggregate purchase price of
approximately $15.0 million. As a result, we will record a
beneficial conversion charge in the form of deemed dividends of
approximately $15.0 million during the fourth quarter of
2005.
In 2003, we entered into a $515,147 line of credit facility to
finance the purchase of specified equipment based on
lender-approved schedules. The interest rate was fixed at
9.3% per annum. We granted a security interest in the
assets purchased under the credit line. During 2004, we had no
draw downs under the line of credit. During 2004 and 2003, we
repaid $156,446 and $45,010 on the line of credit, respectively.
The total indebtedness relating to this line of credit was
$470,137, $313,691, and $187,523 as of December 31, 2004
and 2003 and September 30, 2005, respectively.
Cash, restricted cash and cash equivalents
At September 30, 2005, cash, restricted cash and cash
equivalents were approximately $22.3 million compared to
approximately $16.3 million at December 31, 2004.
Our cash and cash equivalents are highly liquid investments with
a maturity of 90 days or less at date of purchase and
consist of time deposits, investments in money market funds with
commercial banks and financial institutions, and commercial
paper of high-quality corporate issuers. As of
September 30, 2005, we did not hold any short-term
investments other than cash, restricted cash and cash
equivalents.
Also, we maintain cash balances with financial institutions in
excess of insured limits. We do not anticipate any losses with
respect to such cash balances.
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Table of Contents
Cash flow
Net cash used in operations was approximately $11.8 million
and approximately $6.0 million for the nine months ended
September 30, 2005 and 2004, respectively. The net loss for
the nine months ended September 30, 2005 of approximately
$17.0 million was offset primarily by non-cash charges for
depreciation and amortization of approximately $316,000,
stock-based compensation of approximately $4.1 million, an
increase in accrued expenses of approximately $1.2 million
principally related to clinical trial expenses, and other net
changes in working capital. Net cash used in investing
activities for the nine months ended September 30, 2005 was
approximately $527,000 and consisted primarily of an investment
of approximately $430,000 in restricted cash for a security
deposit on our new leased corporate research and development
facility. Net cash provided by financing activities for the nine
months ended September 30, 2005 was approximately
$18.3 million, consisting primarily of net proceeds from
the issuance of Series B Preferred Stock of approximately
$18.5 million, offset primarily by payments of equipment
debt financing obligations of approximately $128,000.
Net cash used in operations was approximately $8.6 million
and approximately $2.1 million for the year ended
December 31, 2004 and the period from March 13, 2003
(inception) to December 31, 2003, respectively. The
net loss for 2004 of approximately $9.5 million was
partially offset by non-cash charges for depreciation and
amortization of approximately $377,000, an increase in accounts
payable and accrued liabilities of approximately $465,000 and
other net changes in working capital. Net cash used from
investing activities for the year ended December 31, 2004
was approximately $415,000 and consisted primarily of equipment
purchases. Net cash from financing activities for 2004 was
approximately $18.1 million, which consists primarily of
net proceeds from the issuance of Series B Preferred Stock
of approximately $18.3 million, offset by principal
payments on notes payable and capital lease obligations of
approximately $200,000.
Contractual obligations and commitments
The following table summarizes our major contractual obligations
at September 30, 2005 and the effects such obligations are
expected to have on our liquidity and cash flows in future
periods.
October to
Contractual obligations
December
After
(in thousands)
Total
2005
2006
2007
2008
2009
2010
2010
Operating lease obligations
$
6,043
$
57
$
731
$
673
$
567
$
458
$
471
$
3,086
Short and long-term debt
212
65
147
—
—
—
—
—
Total contractual cash obligations
$
6,255
$
122
$
878
$
673
$
567
$
458
$
471
$
3,086
We entered into a five-year non-cancelable operating lease
agreement for office and laboratory space in June 2003. The
lease contains an option to renew for an additional five years
on the same terms and conditions and contains a 3% rent
escalation clause.
In August 2005, we entered into a ten-year and six-month
non-cancelable operating lease agreement for office and
laboratory space at a new facility, which is renewable for an
additional five-year period at the end of the original term. The
lease expires in June 2016.
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We will take possession of the lease space in January 2006. The
lease includes rent abatement and scheduled annual base rent
increases of 3% over the term of the lease. The total amount of
the base rent payments and rent abatement will be charged to
expense on a straight-line method over the term of the lease
(excluding renewal periods). In conjunction with a letter of
credit, we collateralized the operating lease with a restricted
cash deposit in the amount of $430,420 in September 2005, which
is recorded as non-current restricted cash at September 30,
2005. Total leasehold improvements, net of landlord allowances,
will be approximately $600,000 for our new office and laboratory
facility.
In August 2005, we notified the landlord of our old lease space
of our intention to exercise our sub-lease rights in order to
enter into a lease for a larger office and laboratory facility.
When we take possession of the new lease space in January 2006,
we will vacate the current office and laboratory space.
According to SFAS 146
"Accounting for Costs
Associated with Exit or Disposal Activities"
, a
liability for costs that will continue to be incurred under a
contract for its remaining term without economic benefit to the
company shall be recognized and measured when the company ceases
using the right conveyed by the lease agreement, reduced by
estimated sublease rentals that could be reasonably obtained. We
expect to incur a charge of approximately $260,000 in the first
quarter of 2006 when we move from the current location to the
new office and laboratory facility in January 2006. We have
included in the table above operating lease obligations related
to the old lease space of approximately $288,000, approximately
$240,000 and approximately $122,000 for 2006, 2007 and 2008
respectively.
In April 2004, we entered into a capital lease obligation in
order to finance certain capital equipment purchases of
approximately $92,000. This capital lease had an interest rate
of 7.5% and was payable in monthly installments of $3,312
through April 2006. In February 2005, we cancelled this capital
lease obligation and settled the obligation in full.
We have entered into agreements with clinical research
organizations and other outside contractors who will be
responsible for conducting and monitoring our clinical trials
for iloperidone and VEC-162. These contractual obligations are
not reflected in the table above because we may terminate them
without penalty.
In March and June 2004, we entered into separate licensing
agreements with Bristol-Myers Squibb and Novartis, respectively,
for the exclusive rights to develop and commercialize our three
compounds in clinical development. In consideration for these
rights, we paid a $500,000 non-refundable fee for each of the
compounds. We are obligated to make additional payments under
the conditions in the agreements upon the achievement of
specified clinical, regulatory and commercial milestones. If the
products are successfully commercialized we will be required to
pay certain royalties based on net sales for each of the
licensed products. The amount, timing and likelihood of these
payments are unknown and will depend on the successful outcome
of future clinical trials, regulatory filings, favorable FDA
regulatory approvals and growth in product sales.
We expect to incur losses from operations for the foreseeable
future. We expect to incur increasing research and development
expenses, including expenses related to additions to personnel
and clinical trials. We expect that our general and
administrative expenses will increase in the future as we expand
our business development, legal and accounting staff, add
infrastructure and incur additional costs related to being a
public company, including directors' and officers'
insurance, investor relations programs and increased
professional fees. Our future capital requirements will depend
on a number of factors, including our continued progress of our
research and development of product candidates, the timing and
outcome of regulatory
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approvals, payments received or made under potential
collaborative agreements, the costs involved in preparing,
filing, prosecuting, maintaining, defending and enforcing patent
claims and other intellectual property rights, the acquisition
of licenses to new products or compounds, the status of
competitive products, the availability of financing and our or
our potential partners' success in developing markets for
our product candidates. Based on our current operating plans,
and assuming the sale
of                      shares
of our common stock in this offering at an initial public
offering price of
$           per
share (the mid-point of the price range set forth on the cover
page of this prospectus), we believe that the proceeds from this
offering, together with our existing cash, restricted cash and
cash equivalents, will be sufficient to meet our anticipated
operating needs until mid-2007, and after that time we will
require additional capital. We believe that if we sell
the                      shares
of our common stock in this offering at an initial public
offering price of
$           per
share ($1.00 lower than the mid-point of the price range set
forth on the cover page), the resultant reduction in proceeds we
receive from the offering would cause us to require additional
capital earlier,
in                     .
Without the proceeds from this offering, we believe that our
existing cash, restricted cash and cash equivalents will be
sufficient to fund our operating expenses, debt repayments and
capital expenditure until mid-2006 due to our existing clinical
trial commitments.
Except for the equipment debt facility described above, we have
no other lines of credit or other committed sources of capital.
To the extent our capital resources are insufficient to meet
future capital requirements, we will need to raise additional
capital or incur indebtedness to fund our operations. We cannot
assure you that additional debt or equity financing will be
available on acceptable terms, if at all. If adequate funds are
not available, we may be required to delay, reduce the scope of
or eliminate our research and development programs, reduce our
commercialization efforts or obtain funds through arrangements
with collaborative partners or others that may require us to
relinquish rights to certain product candidates that we might
otherwise seek to develop or commercialize. Any future funding
may dilute the ownership of our equity investors.
Quantitative and qualitative disclosures about market risk
Our exposure to market risk is currently confined to our cash,
restricted cash and cash equivalents that have maturities of
less than three months. We currently do not hedge interest rate
exposure. We have not used derivative financial instruments for
speculation or trading purposes. Because of the short-term
maturities of our cash, restricted cash and cash equivalents, we
do not believe that an increase in market rates would have any
significant impact on the realized value of our investments, but
may increase the interest expense associated with any long-term
debt or long-term lease obligations.
Effects of inflation
Our most liquid assets are cash, restricted cash and cash
equivalents. Because of their liquidity, these assets are not
directly affected by inflation. We also believe that we have
intangible assets in the value of our intellectual property. In
accordance with generally accepted accounting principles, we
have not capitalized the value of this intellectual property on
our balance sheet. Due to the nature of this intellectual
property, we believe that these intangible assets are not
affected by inflation. Because we intend to retain and continue
to use our equipment, furniture and fixtures and leasehold
improvements, we believe that the incremental inflation related
to replacement costs of such items will not materially affect
our operations. However, the rate of inflation affects our
expenses, such as those for employee
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compensation and contract services, which could increase our
level of expenses and the rate at which we use our resources.
Off balance sheet arrangements
We have no off balance sheet arrangements.
Recent accounting pronouncements
In December 2004, the FASB issued SFAS 123R,
"Share-Based Payment,"
a revision of
SFAS 123,
"Accounting for Stock-based
Compensation."
SFAS 123R requires public companies
to recognize expense associated with share-based compensation
arrangements, including employee stock options, using a fair
value-based option pricing model, and eliminates the alternative
to use APB 25's intrinsic value method of accounting
for share-based payments. In April 2005, the SEC announced that
the effective date to implement SFAS 123R has been delayed
for certain public companies. Accordingly, we plan to begin
recognizing the expense associated with our share-based
payments, as determined using a fair value-based method, in our
statement of operations beginning on January 1, 2006.
Adoption of the expense provisions of SFAS 123R is expected
to have a material impact on our results of operations. The
standard generally allows two alternative transition methods for
public companies: modified prospective application without
restatement of prior interim periods in the year of adoption;
and retroactive application with restatement of prior financial
statements to include the same amounts that were previously
included in pro forma disclosures. We have not determined which
transition method we will adopt.
In order to provide implementation guidance related to
SFAS 123R, the SEC issued Staff Accounting Bulletin
("SAB") No. 107,
"Share-Based
Payment"
in March 2005. SAB 107 provides guidance
on numerous issues such as valuation methods (including
assumptions such as expected volatility and expected term), the
classification of compensation expense, capitalization of
compensation cost related to share-based payment arrangements,
the accounting for income tax effects of share-based payment
arrangements upon adoption of SFAS 123R, and disclosures in
MD&A subsequent to adoption of SFAS 123R.
SFAS No. 154,
"Accounting Changes and Error
Corrections— a replacement of APB Opinion No. 20 and
FASB Statement No. 3"
was issued by the FASB in
May 2005. This Statement replaces APB Opinion No. 20,
"Accounting Changes"
, and FASB Statement
No. 3,
"Reporting Accounting Changes in Interim
Financial Statements",
and changes the requirements for
the accounting for and reporting of a change in accounting
principle. SFAS No. 154 applies to all voluntary
changes in accounting principle and requires retrospective
application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative
effect of the change. This Statement also requires that a change
in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in
accounting estimate affected by a change in accounting
principle. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after
December 15, 2005. SFAS No. 154 is not expected
to have a material effect on our consolidated financial
statements.
In June 2005, the FASB Staff issued FASB Staff
Position 150-5
(FSP 150-5),
"Issuer's Accounting under FASB Statement
No. 150 for Freestanding Warrants and Other Similar
Instruments on Shares that are Redeemable."
FSP 150-5
addresses whether freestanding warrants and other similar
instruments on shares that are redeemable, either puttable or
mandatorily redeemable,
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Table of Contents
would be subject to the requirements of FASB Statement
No. 150,
"Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity,"
regardless of the timing of the redemption
feature or the redemption price. The FSP is effective after
June 30, 2005. Adoption of the FSP did not have a material
effect on our financial condition or results of operations.
Critical accounting policies
Our discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities and expenses. On an ongoing basis, we
evaluate our estimates and judgments, including those related to
revenue recognition, accrued expenses, fair valuation of stock
related to stock-based compensation and income taxes. We based
our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our financial statements.
Revenue recognition.
Contract revenue is recognized upon
delivery of products to customers. Revenue earned under research
and development contracts are recognized in accordance with the
proportional performance method outlined in Staff Accounting
Bulletin No. 104 whereby the extent of progress toward
completion is measured on the
cost-to
-cost basis;
however, revenue recognized at any point will not exceed the
cash received. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the
entire loss on the contract is made in the period which it
becomes probable. We have generated some revenues earned under
research and development contracts that were derived principally
from consulting agreements we entered into during the company
start-up
phase to
defray research costs.
We will use the substantive milestone payment method of revenue
recognition when all milestones to be received under contractual
arrangements are determined to be substantive, at-risk and the
culmination of an earnings process. Substantive milestones are
payments that are conditioned upon an event requiring
substantive effort, when the amount of the milestone is
reasonable relative to the time, effort and risk involved in
achieving the milestone and when the milestones are reasonable
relative to each other and the amount of any up-front payment.
If these criteria are not met the timing of the recognition of
revenue from the milestone payment may vary.
Accrued expenses.
As part of the process of preparing
financial statements we are required to estimate accrued
expenses. This process involves identifying services that have
been performed on our behalf and estimating the level of service
performed and the associated cost incurred for such service as
of each balance sheet date in our financial statements. Examples
of estimated accrued expenses include professional service fees,
such as lawyers and accountants, and contract service fees such
as amounts paid to clinical monitors, data management
organizations and investigators in conjunction with clinical
trials, and fees paid to contract manufacturers in conjunction
with the production of clinical materials. In connection with
such
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service fees, our estimates are most affected by our
understanding of the status and timing of services provided
relative to the actual levels of services incurred by such
service providers. The majority of our service providers invoice
us monthly in arrears for services performed. In the event that
we do not identify certain costs that have begun to be incurred
or we under- or over-estimate the level of services performed or
the costs of such services, our reported expenses for such
period would be too low or too high. The date on which certain
services commence, the level of services performed on or before
a given date and the cost of such services are often judgmental.
We make these judgments based upon the facts and circumstances
known to us in accordance with generally accepted accounting
principles.
Stock-based compensation.
We have elected to follow APB
Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, in accounting for our stock-based
compensation plans, rather than the alternative fair value
accounting method provided for under SFAS No. 123,
Accounting for Stock-Based Compensation. In the notes to our
financial statements we provide pro forma disclosures in
accordance with SFAS No. 123 and related
pronouncements. We account for transactions in which services
are received in exchange for equity instruments based on the
fair value of such services received from non-employees or of
the equity instruments issued, whichever is more reliably
measured, in accordance with SFAS No. 123 and EITF
Issue
No. 96-18,
Accounting for Equity Instruments that Are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling, Goods
or Services. The two factors which most affect charges or
credits to operations related to stock-based compensation are
the fair value of the common stock underlying stock options for
which stock-based compensation is recorded and the volatility of
such fair value. If our estimates of the fair value of these
equity instruments are too high or too low, it would have the
effect of overstating or understating expenses. Because shares
of our common stock have not been publicly traded, market
factors historically considered in valuing stock and stock
option grants include comparative values of public companies
discounted for the risk and limited liquidity provided for in
the shares we are issuing, pricing of private sales of our
convertible preferred stock and the effect of events that have
occurred between the time of such grants, economic trends,
perspective provided by investment banks and the comparative
rights and preferences of the security being granted compared to
the rights and preferences of our other outstanding equity.
Income taxes.
As part of the process of preparing our
financial statements we are required to estimate our income
taxes in each of the jurisdictions in which we operate. We
account for income taxes by the liability method in accordance
with the provisions of SFAS No. 109,
"Accounting for Income Taxes".
Under this
method, deferred income taxes are recognized for tax
consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting
amounts at each year-end, based on enacted laws and statutory
tax rates applicable to the periods in which the difference are
expected to affect taxable income. Valuation allowances are
provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets
will not be realized.
We have not recorded any tax provision or benefit for the years
ended December 31, 2003 and 2004. We have provided a
valuation allowance for the full amount of our net deferred tax
assets since realization of any future benefit from deductible
temporary differences and net operating loss carry forwards
cannot be sufficiently assured at December 31, 2003 and
2004. At December 31, 2003 and 2004, we had federal net
operating loss carryforwards of approximately $1.1 million
and approximately $3.9 million, respectively, available to
reduce future taxable income, which will begin to expire in
2023. Under the provisions of the Internal
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Revenue Code, certain substantial changes in our ownership may
result in a limitation on the amount of net operating loss
carryforwards that can be used in future years.
Net loss per share.
Net loss attributable to common
stockholders per share is calculated in accordance with
SFAS No. 128,
"Earnings per Share,"
and Staff Accounting Bulletin ("SAB") No. 98.
Basic earnings per share ("EPS") is calculated by
dividing the net income or loss attributable to common
stockholders by the weighted average number of shares of common
stock and Series A and Series B Preferred Stock
outstanding for the period, reduced by the weighted average
unvested common shares subject to repurchase. In accordance with
Emerging Issues Task Force 03-06, "Participating Securities
and the Two Class Method Under SFAS 128"
("EITF 03-06"),
Series A and Series B Preferred Stock has been
included in basic and diluted earnings per share as if the
shares of Series A and Series B Preferred Stock were
converted to common stock on a
1-for-1
basis.
Diluted EPS is computed by dividing the net income or loss
attributable to common stockholders by the weighted average
number of common stock equivalents outstanding for the period
determined using the treasury-stock method. Common stock
equivalents include stock options and warrants but only to the
extent that their inclusion is dilutive. We incurred a net loss
in all periods presented, causing inclusion of any potentially
dilutive securities to have an anti-dilutive affect, resulting
in dilutive loss per share attributable to common stockholders
and basic loss per share attributable to common stockholders
being equivalent. We did not have any common shares issued for
nominal consideration as defined under the terms of
SAB No. 98, which would be included in EPS
calculations.
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Business
Overview
We are a biopharmaceutical company focused on the development
and commercialization of small molecule therapeutics, with
exclusive worldwide commercial rights to three product
candidates in clinical development for various central nervous
system disorders. Our lead product candidate, iloperidone, is an
atypical antipsychotic for the treatment of schizophrenia and
bipolar disorder and is in a pivotal Phase III trial for
schizophrenia. Our second product candidate,
VEC-162,
is a melatonin
agonist for the treatment of insomnia and depression which is
entering a pivotal Phase III trial for insomnia.
VEC-162
is also ready
for Phase II trials for the treatment of depression. Our
third product candidate,
VSF-173,
is a compound
for the treatment of excessive daytime sleepiness and is ready
for a Phase II trial. Each of these product candidates
benefits from new chemical entity (NCE) patent protection
and may offer substantial advantages over currently approved
therapies.
We expect to complete our pivotal Phase III trial for
iloperidone in the first half of 2007. If this trial is
successful, we will file a NDA for approval with the FDA later
that year. We recently generated positive efficacy and safety
data in a Phase II trial of
VEC-162
for insomnia
and expect to begin a pivotal Phase III trial early in
2006. We also expect to begin a Phase II trial of
VSF-173
for excessive
daytime sleepiness in the second half of 2006. Assuming
successful outcomes of our clinical trials and approval by the
FDA, we expect to commercialize iloperidone and
VSF-173
with our own
sales force in the U.S. and expect to commercialize
VEC-162
through a
strategic partnership with a global pharmaceutical company.
Our three product candidates target large prescription markets
with significant unmet medical needs. Sales of schizophrenia
drugs exceeded $14 billion worldwide in 2004, according to
World Review Analyst
by IMS, a leading pharmaceutical
market research company. These sales were achieved despite the
safety concerns, moderate efficacy and poor patient compliance
that are associated with these drugs. We believe that
iloperidone may address some of these shortcomings, based on its
significantly reduced side effect profile observed in trials
involving over 2,000 patients to date and based on further
improvements to the product we plan to develop as part of our
lifecycle management strategy. According to IMS, in 2004 the
insomnia market exceeded $3.5 billion in worldwide sales
and the depression market accounted for worldwide sales in
excess of $20 billion. However, the approved drugs in both
the insomnia and depression markets have sub-optimal safety
profiles and demonstrate only moderate efficacy. We believe
VEC-162 may represent a breakthrough in each of these markets,
based on the product's efficacy, safety and novel mechanism
of action. The excessive daytime sleepiness market was
approximately $440 million in worldwide sales in 2004. Few
available drugs exist to treat this condition, and each of the
available drugs has limitations. We believe that
VSF-173
may represent a
safe and effective alternative treatment in this growing market.
Our team is comprised of experienced pharmaceutical industry
executives, and our scientific team possesses deep expertise in
clinical development and in pharmacogenetics and
pharmacogenomics, or collectively, PG. PG is the scientific
discipline that examines both genetic variations among people
that influence response to a particular drug, and the multiple
pathways through which drugs affect people. Our founder and
Chief Executive Officer, Mihael H. Polymeropoulos, M.D.,
commenced our operations in early 2003 after leading the
Pharmacogenetics Department at Novartis.
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We believe that the combination of our clinical development
expertise and our PG expertise will enable us to shorten our
drug development timeline relative to traditional approaches of
drug discovery and development, and to provide additional
differentiation for our product candidates. We also believe that
this combination will provide us with preferential access to
compounds discovered by other pharmaceutical companies. In June
2004 we acquired from Novartis the exclusive worldwide
commercial rights to iloperidone and
VSF-173.
Our
team's expertise in clinical development and PG also
allowed us access to
VEC-162,
which had
originally been developed by Bristol-Myers Squibb Company (BMS).
Based on its strong pre-clinical and clinical safety data, we
acquired exclusive worldwide commercial rights to
VEC-162
from BMS in
March 2004.
Our strategy
Our goal is to create a leading biopharmaceutical company
focused on developing and commercializing products that address
critical unmet medical needs through the application of our drug
development and PG expertise. The key elements of our strategy
to accomplish this goal are to:
•
Pursue the clinical development of our current product
    candidates.
We believe that our ongoing pivotal
    Phase III trial for iloperidone will complete the
    development work required to file an NDA to market and sell the
    drug commercially. We also believe that the Phase III trial
    we plan to start in early 2006 for
VEC-162
will be pivotal
    for regulatory approval of the compound. We intend to initiate a
    Phase II trial for
VSF-173
in the second
    half of 2006. We have committed, and will continue to commit,
    substantial resources towards completing the development of, and
    obtaining regulatory approvals for, our product candidates.
•
Develop a focused commercialization capability in the United
    States.
Because the number of physicians accounting for the
    majority of prescriptions in the United States for schizophrenia
    and excessive daytime sleepiness is relatively small, we believe
    that we can cost-effectively develop our own sales force to
    market and sell iloperidone and
VSF-173.
•
Enter into strategic partnerships to extend our commercial
    reach.
Given the large number of physicians treating
    insomnia and depression, we intend to enter into a global
    strategic partnership with a large pharmaceutical company to
    market, distribute and sell
VEC-162.
Additionally,
    we intend to seek commercial partners for iloperidone and
VSF-173
outside of the
    United States.
•
Apply our PG expertise to differentiate our products.
We
    believe that our PG expertise will yield new insights into our
    product candidates. These insights may enable us to target our
    products to certain patient populations and to identify
    unexpected conditions for our product candidates to treat. We
    believe this expertise will enable us to differentiate and
    extend the lifecycle of each of our product candidates. This may
    also include the development of companion diagnostic tests to
    help physicians identify patient populations that will realize
    greater benefits from our compounds.
•
Expand our product portfolio through the acquisition of
    additional compounds.
We intend to continue to draw upon our
    clinical development and PG expertise to identify and pursue the
    acquisition of additional clinical-stage compounds.
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Development programs
We have the following product candidates in clinical trials:
Product candidate
Target indications
Clinical status
Iloperidone (Oral)
Schizophrenia
In pivotal Phase III trial
Bipolar Disorder
Ready for Phase II trial
Iloperidone (Depot)
Schizophrenia
Ready for Phase II trial
VEC-162
Insomnia
Entering pivotal Phase III
    trial
Depression
Ready for Phase II trial
VSF-173
Excessive Daytime Sleepiness
Ready for Phase II trial
Iloperidone
We are developing iloperidone, an oral small molecule, for the
treatment of schizophrenia and bipolar disorder. In three
short-term and three long-term trials comprising over
2,000 patients, iloperidone demonstrated reduced side
effects relative to current antipsychotic drugs. We are
currently conducting a pivotal Phase III trial for
iloperidone for schizophrenia in approximately 600 patients
to confirm its efficacy, which has also been observed in
previous trials. Based on our End of Phase IIb meeting with
the FDA in September 2005, we believe we will be able to file an
NDA for iloperidone for schizophrenia if we succeed in
demonstrating its efficacy in this trial. If iloperidone obtains
regulatory approval, we believe it will represent a
differentiated new therapy for schizophrenia.
Therapeutic opportunity
Schizophrenia is a chronic, debilitating mental disorder
characterized by hallucinations, delusions, racing thoughts and
other psychotic symptoms (collectively referred to as
"positive symptoms"), as well as moodiness, anhedonia
(inability to feel pleasure), loss of interest, eating and sleep
disturbances, and difficulty concentrating (collectively
referred to as "negative symptoms"). Schizophrenia
develops in late adolescence or early adulthood in approximately
1% of the world's population. Genetic and environmental
factors are believed to be responsible for the disease. Most
schizophrenia patients today are treated with drugs known as
"atypical" antipsychotics, which were first approved
in the U.S. in the late 1980s. Atypical antipsychotics currently
comprise over 90% of prescriptions for schizophrenia, having
largely replaced "typical" antipsychotics, which were
first introduced in the 1950s and are now generic. Atypical
antipsychotics are generally regarded as having improved side
effect profiles and efficacy in treating negative symptoms
relative to typical antipsychotics. According to IMS, the global
market for atypical antipsychotics exceeded $13 billion in
2004. Currently approved atypical antipsychotics include
olanzapine
(Zyprexa
®
,
Eli Lilly and Company), risperidone
(Risperdal
®
,
Johnson & Johnson), quetiapine
(Seroquel
®
,
AstraZeneca PLC), aripiprazole
(Abilify
®
,
BMS), ziprasidone
(Geodon
®
,
Pfizer Inc.), and generic clozapine.
Limitations of current treatments
The treatment of schizophrenia remains challenging because
currently approved antipsychotics often induce serious side
effects and offer only modest efficacy. Side effects include
weight gain, diabetes, extrapyramidal symptoms (involuntary
bodily movements), hyperprolactinemia
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(an elevated secretion of the hormone prolactin which can lead
to sexual dysfunction and breast development and milk secretion
in women and men), increased somnolence (sleepiness) and
cognition difficulties. Additionally, nearly half of all
patients on a single atypical antipsychotic fail to achieve a
clinically meaningful response, which is defined as a 20% or
greater reduction in symptoms. The side effect profile and
modest efficacy of currently available antipsychotics result in
poor patient compliance to their prescribed drug regimen.
Consequently, there remains a high degree of dissatisfaction
with atypical antipsychotics among physicians and patients.
Research by LEK Consulting LLC, a leading consulting firm,
supports this, showing that physicians employ a
"trial-and-error" approach of prescribing a series of
different atypical antipsychotics as they attempt to balance
side effects and symptom management in each patient. In
addition, the recent CATIE (Clinical Antipsychotic Trials of
Interventional Effectiveness) study, conducted by the National
Institute of Mental Health and reported in
The New England
Journal of Medicine,
found that 74% of patients taking
antipsychotics discontinued treatment within 18 months. The
average time to discontinuation for these patients in the CATIE
study was approximately 6 months.
Potential advantages of iloperidone
In addition to the efficacy observed in clinical trials to date,
the experience with iloperidone thus far suggests that the
compound may provide benefits to patients beyond those provided
by currently available drugs:
•
Safety.
Short- and long-term safety trials have shown
    that patients who used iloperidone had reduced side effects
    relative to currently available antipsychotics, including low
    weight gain, no induction of diabetes, low extrapyramidal
    symptoms, including no akathisia (inability to sit still), no
    hyperprolactinemia, low incidence of sleepiness and low negative
    effects on cognition relative to placebo. Like many other
    atypical antipsychotics, iloperidone is associated with a
    prolongation of the heart's QTc interval, but in no
    instance did any patient taking iloperidone in a clinical trial
    have an interval exceeding a 500 millisecond threshold that the
    FDA has identified as being of particular concern. We believe
    that the safety profile of iloperidone may result in improved
    patient compliance with their treatment regimen.
•
Depot formulation.
We are developing a
four-week
injectable
    depot formulation for iloperidone, which we believe will be a
    compelling complement to our oral formulation for both
    physicians and patients. Novartis conducted a two-month
    Phase I/ IIa safety trial of this formulation in
    schizophrenia patients, in which it demonstrated the benefit of
    consistent release over a
four-week
time period
    with no greater side effects relative to oral dosing. Further
    development of this formulation will be an immediate priority
    for us following the completion of the ongoing pivotal
    Phase III trial of the oral formulation. The commercial
    potential for our depot formulation has been demonstrated by the
    success of the depot formulation for risperidone,
    Risperdal
®
Consta
®
,
    which achieved worldwide sales of $310 million in 2004, its
    first full year on the market. We believe that our
four-week
depot
    formulation for iloperidone will be an attractive alternative to
    Risperdal Consta, which is a two-week depot.
Additionally, we plan to continue to apply our PG expertise to
develop tools that may allow physicians to avoid the
"trial-and-error" approach to prescribing
antipsychotic medications for their patients:
•
PG evaluation of iloperidone's efficacy.
In a
    retrospective analysis of prior clinical data, we discovered a
    statistically significant correlation suggesting that certain
    patients are both more likely to respond to iloperidone and to
    enjoy better treatment results relative to the general
    schizophrenia patient population. These patients have a common
    mutation, or single
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nucleotide polymorphism (SNP), in a gene linked to central
    nervous system function, that is estimated to occur in
    approximately 70% of schizophrenia patients. We have developed a
    genetic test which we are using in our current pivotal
    Phase III trial to confirm this correlation. According to
    market research we conducted with LEK Consulting, physicians
    treating schizophrenia patients would enthusiastically welcome a
    genetic test that would enable them to identify likely
    responders to an antipsychotic, given the unpredictable efficacy
    and serious side effects currently associated with atypical
    antipsychotics, and be more likely to prescribe iloperidone.
•
PG evaluation of iloperidone's safety.
We have also
    discovered that patients with an uncommon SNP of a well
    understood gene affecting drug metabolism experience higher
    levels of iloperidone in their blood and are at an elevated risk
    of a QTc interval prolongation while taking iloperidone. This
    genetic attribute is estimated to occur in approximately 5-10%
    of schizophrenia patients. We believe that certain physicians
    may choose to test patients for this SNP if they have a concern
    about QTc interval prolongation with respect to a particular
    patient.
We intend to make one simple blood test for both markers
available through national reference laboratories.
Overview of prior Phase III clinical trials
Novartis conducted three short-term (six-week) pivotal
Phase III trials with iloperidone. In each of these trials,
one or more dose levels of iloperidone achieved statistically
significant superiority to placebo on the standard scales for
measuring efficacy in schizophrenia, either the Positive and
Negative Symptom Scale (PANSS) or Brief Psychiatric Rating
Scale (BPRS). Each of these scales is a subjective test
administered by a clinician measuring a patient across a range
of potential schizophrenia symptoms. In only one of the three
pivotal Phase III trials was the declared target dose
demonstrated to have statistically significant efficacy better
than placebo, which is required for the results of a trial to
support an efficacy claim with the FDA. With the need to conduct
at least one more Phase III trial to be able to file for
approval, Novartis elected instead to discontinue the
development of iloperidone.
The table below summarizes the efficacy results from the
previous short-term pivotal Phase III trials:
Number of
PANSS scale
Trial number
patients
Doses(1)
improvement(2)
Significance vs. placebo(3)
ILP 3000
621
placebo
-4.6
n/a
4 mg/day
-9.0
Not significant
8 mg/day(4
)
-7.8
Not significant
12 mg/day(4
)
-9.9
p < 0.05
ILP 3004
616
placebo
-3.5
n/a
4-8 mg/day
-9.4
p< 0.02
10-16 mg/day
-11.1
p< 0.001
ILP 3005
710
placebo
-7.6
n/a
12-16 mg/day
-11.0
Not significant
20-24 mg/day
-14.0
p< 0.01
(1) Declared dose (the dose for which a drug must show
statistically significant improvement vs. placebo) is italicized
and bolded.
(2) As patients improve, their PANSS scale score decreases.
Baseline scores for enrollees in the trials were 94.5
(ILP 3000), 94.3 (ILP 3004) and 94.7 (ILP 3005).
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(3) This is represented by p value, which measures
likelihood that a difference between drug and placebo is due to
random chance. A p < 0.05 means the chance that the
difference is due to random chance is less than 5%, and is a
commonly accepted threshold for denoting a meaningful difference
between drug and placebo.
(4) Declared dose in this trial was a composite of 8 and
12 mg/day.
We have made several observations about these previous
Phase III trials that suggest both reasons for their
failure and ways in which we may improve the chances of success
in our ongoing pivotal Phase III trial.
•
Patients who took the drug at our target dose improved
    significantly.
At the dose for which we intend to seek
    approval (24 mg/day), iloperidone achieved statistically
    significant efficacy in the ILP 3005 trial. This gives us
    confidence that we can replicate that success in our ongoing
    pivotal Phase III trial.
•
Low doses partially explain the mixed efficacy results of the
    ILP 3000 trial.
We believe that this trial failed
    principally because the doses of iloperidone administered were
    too low. This is supported by the efficacy of iloperidone that
    was observed at higher doses in the other pivotal trials.
•
Patient drop-outs explain the mixed efficacy results of the
    ILP 3005 trial.
An exceptionally high number of
    patients dropped out of this study early and before they had the
    chance of achieving therapeutic blood levels of the drug. While
    high drop-out rates are common in studies of schizophrenia
    drugs, two issues may have exacerbated the drop-out problem in
    this trial: first, the trial was primarily on an outpatient
    basis, which is unusual for clinical trials of antipsychotic
    therapies, and second, the patients in the trial had to take the
    drug in a four-pill, twice-daily regimen. Both factors had a
    negative effect on patient compliance and led to a very high
    drop-out rate. We retrospectively analyzed the data from the
    Novartis trials and determined that, overall, the drop-outs were
    not due to other problems with iloperidone, and we have further
    demonstrated that iloperidone achieved statistically significant
    efficacy among those patients who remained enrolled long enough
    to achieve therapeutic blood levels of the drug.
•
The FDA has agreed that we may analyze the data generated
    from the trials in a way that more appropriately addresses early
    drop-outs.
Under a standard "last observation carried
    forward" or "LOCF" statistical model used by
    Novartis to analyze the prior trial data, experts in the field
    of clinical trial statistical analysis have noted that results
    may be significantly biased in certain circumstances by the
    presence of early patient drop-outs. To correct for this, these
    experts recommend models such as a "mixed-method repeated
    measures" or "MMRM" statistical model to analyze
    data from clinical trials with early patient drop-outs. While
    the FDA has not previously approved a drug on the basis of
    efficacy measured with an MMRM model, we discussed our intent to
    use it with the FDA in an August 2005 guidance meeting, and they
    have agreed that the LOCF method may be biased under these
    circumstances and that an MMRM model approach is valid for our
    ongoing pivotal Phase III trial. We retrospectively
    analyzed the Phase III data using an MMRM model and
    determined that iloperidone demonstrated statistically
    significant efficacy at Novartis' declared dose in two of
    three previous pivotal trials (trials ILP 3004 and ILP 3005),
    versus just one trial under an LOCF model (trial ILP 3004).
Though not required for registration, Novartis also conducted
three long-term
(52-week)
Phase III trials of iloperidone. In these trials, which
involved more than 1,300 patients, Novartis measured the
safety and time to discontinuation of iloperidone at doses
ranging from 4 mg/day to 16 mg/day compared to the
antipsychotic haloperidol. Iloperidone demonstrated
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strong safety results and was statistically non-inferior to the
efficacy of haloperidol in time to discontinuation of therapy.
Overview of our ongoing pivotal Phase III
trial
In November 2005, we initiated our pivotal Phase III trial
to evaluate iloperidone for the treatment of patients with
schizophrenia. The trial is a randomized, double-blind, placebo-
and active-controlled Phase III trial of approximately
600 patients with schizophrenia. To have a successful
clinical trial, we need to demonstrate that iloperidone has
statistically significant efficacy better than placebo. The
active control is present to validate the design of the trial
and to increase the chances that trial participants will receive
some form of treatment while participating in the trial.
Patients will receive four weeks of inpatient treatment in the
trial. The iloperidone formulation being used in the study is an
oral, twice-daily dose of 12 mg, or 24 mg per day. The
trial is being conducted in the United States and India by
Quintiles Transnational, a contract research organization.
Patient dosing began in November 2005 and will continue through
early 2007.
We believe that if this trial is successful, our data and
documentation on iloperidone will be adequate to support both
United States and European regulatory filings of oral
iloperidone. We conducted an End of Phase IIb meeting with
the FDA in September 2005, during which the agency agreed that
this trial's design is adequate to measure short-term
efficacy in schizophrenia. The FDA also agreed that with success
in this trial, the iloperidone package would be sufficient for
filing an NDA.
Potential indication for bipolar disorder
In addition to schizophrenia, we believe iloperidone may be
effective in treating bipolar disorder. Most of the approved
atypical antipsychotics have received approval for bipolar
disorder subsequent to commercializing for the treatment of
schizophrenia. Approximately 25% of atypical antipsychotic
prescriptions are for the treatment of bipolar disorder,
according to LEK Consulting. Iloperidone is ready for an initial
Phase II trial in bipolar disorder.
Commercialization
We expect to build our own sales force to market iloperidone
directly to psychiatrists and other target physicians in the
U.S. Because the U.S. psychiatric community is relatively
small, we believe that we can cost-effectively develop our own
sales force to market and sell iloperidone. Outside of the
United States, we expect to find commercial partners for
iloperidone.
Intellectual property
Iloperidone and its metabolites, formulations, and uses are
covered by a total of nine patent and patent application
families worldwide. The primary new chemical entity
(NCE) patent covering iloperidone expires normally in 2011
in the United States and 2010 in most of the major markets in
Europe. In the United States, the Hatch-Waxman Act of 1984
provides for an extension of NCE patents for a period of up to
five years following the expiration of the patent covering that
compound to compensate for time spent in development. We believe
that iloperidone will qualify for the full five-year patent term
extension. In Europe, similar legislative enactments provide for
five-year extensions of NCE patents through the granting of
Supplementary Protection Certificates, and we believe that
iloperidone will qualify for this extension as well.
Consequently, assuming that we are granted all available
extensions by the
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FDA and European regulatory authorities and that we receive
regulatory approval, we expect that our rights to commercialize
iloperidone will be exclusive until 2016 in the United States
and until 2015 in Europe. Additionally, the patent application
covering the depot formulation of iloperidone, if it is granted,
will expire normally in 2022. Several other patent applications
covering uses, formulations and derivatives relating to
iloperidone extend beyond 2020. Pursuant to a recent European
Union directive, we may also acquire the exclusive right in most
European Union countries to market iloperidone for a period of
10 years from the date of its regulatory approval in Europe
(with the possibility for a further one-year extension), even
though the European patents covering iloperidone will likely
expire prior to the end of such
10-year
period. No
generic versions of iloperidone would be permitted to be
marketed or sold during this
10-year
period in most
European countries. See "Patents and Intellectual
Property" below for a more complete description of our
intellectual property rights.
We acquired worldwide, exclusive rights to the NCE patent
covering iloperidone and certain related intellectual property
from Novartis under a sublicense agreement we entered into in
2004. Please see "—License agreements" below for
a more complete description of the rights we acquired from
Novartis with respect to iloperidone.
VEC-162
VEC-162 is an oral small molecule entering Phase III trials
for the treatment of insomnia. The compound exhibits highly
selective binding to the
melatonin-1
(MT1) and
melatonin-2
(MT2)
receptors, which are thought to govern the body's natural
sleep/wake cycle. Compounds that bind to these receptors are
thought to be able to help treat sleep disorders, and
additionally are believed to offer potential benefits in
depression. We intend to commence enrollment of a Phase III
trial of
VEC-162
for
insomnia in early 2006.
VEC-162
is also ready
to commence a Phase II trial for the treatment of
depression.
Therapeutic opportunity
Industry sources estimate that of the 73 million
U.S. adults who suffer from some form of insomnia, only
approximately 11 million currently receive treatment. Sleep
disorders are segmented into three major categories: primary
insomnia, secondary insomnia and circadian rhythm sleep
disorders (CRSD). Primary insomnia is a symptom complex that
comprises difficulty falling asleep or staying asleep, or
non-refreshing sleep, in combination with daytime dysfunction or
distress. The symptom complex can be an independent disorder
(primary insomnia) or be a result of another condition such as
depression or anxiety (secondary insomnia). CRSD results from a
misalignment of the sleep/wake cycle and an individual's
daily activities or lifestyle. The circadian rhythm is the
rhythmic output of the human biological clock and is governed by
melatonin levels in the bloodstream. Both the timing of
behavioral events (activity, sleep, and social interactions) and
the environmental light-dark cycle result in a sleep/wake cycle
that follows the circadian rhythm. Examples of CRSD include
transient disorders such as jet lag and chronic disorders such
as shift work sleep disorder (SWSD). The American Academy of
Sleep Medicine estimates that 25% of all sleep problems are
directly related to CRSD. In 2004, the sleep disorder drug
market exceeded $3.5 billion in global sales, according to
IMS.
There are a number of drugs approved and prescribed for patients
with sleep disorders. The most commonly prescribed drugs are
hypnotics, such as zolpidem
(Ambien
®
,
Sanofi-Aventis), eszopiclone
(Lunesta
®
,
Sepracor Inc.) and zaleplon
(Sonata
®
,
King Pharmaceuticals, Inc.) These drugs work by acting upon a
set of brain receptors known as GABA receptors. Several drugs in
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development, including indiplon (Pfizer/Neurocrine Biosciences,
Inc.) and gaboxadol (Merck & Co., Inc./Lundbeck A/S),
also utilize a similar mechanism of action. Members of the
benzodiazapine class of sedatives are also approved for
insomnia, but their usage has declined due to an inferior side
effect profile compared to hypnotics. Anecdotal evidence also
suggests that sedative antidepressants, such as trazodone and
doxepin, are prescribed off-label for insomnia. Recently, the
FDA approved ramelteon
(Rozerem
tm
,
Takeda Pharmaceuticals Company Limited), a compound with a
mechanism of action similar to
VEC-162,
for the
treatment of insomnia.
Limitations of current treatments
We believe that each of the drugs used to treat insomnia has
inherent limitations that leave patients underserved. The key
limitations include the potential for abuse, significant side
effects, and a failure to address the underlying causes of
sleeplessness:
•
Many of the products prescribed commonly for sleep disorders,
    including Ambien, Lunesta, and Sonata, are classified as
    Schedule IV controlled substances by the DEA due to their
    potential for abuse, tolerance and withdrawal symptoms. Drugs
    that are classified as Schedule IV controlled substances
    are subject to restrictions, and in some cases prohibitions, on
    providing samples to physicians and on prescription refills
    under state laws. For example, many states require a doctor
    visit as a condition for receiving any refill of a prescription
    for a Schedule IV controlled substance.
•
Many drugs approved for and used in sleep disorders also induce
    a number of nuisance side effects beyond the more serious abuse
    and addiction effects associated with most approved products.
    These side effects include next-day grogginess, memory loss,
    unpleasant taste, dry mouth and hormonal changes.
•
We believe that none of the drugs used and approved for sleep,
    other than Rozerem, work through the body's natural
    sleep/wake cycle, which is governed by melatonin. We believe
    that, for patients whose sleep disruption is due to a
    misalignment of this sleep/wake cycle and the patients'
    need to sleep (as is the case in CRSD), a drug that naturally
    modulates the sleep/wake cycle would be an attractive new
    alternative because it would be addressing the underlying cause
    of the sleeplessness, rather than merely addressing its symptoms.
Potential advantages of VEC-162
We believe that VEC-162 may offer efficacy similar to the most
efficacious of the approved sleep drugs, and that it may provide
significant benefits to patients beyond those offered by the
approved drugs. We believe that VEC-162 is unlikely to be
scheduled as a controlled substance by the DEA, because Rozerem,
which has the same mechanism of action as
VEC-162,
was shown not
to have potential for abuse and was not classified as a
Schedule IV controlled substance by the DEA. However,
despite the fact that the drugs have a similar mechanism of
action, our Phase II results demonstrate that
VEC-162
has superior
sleep maintenance to Rozerem.
VEC-162
also appears to
be safe, with no significant side effects or effects on next-day
performance. For patients with CRSD,
VEC-162
may be able to
align the patient's sleep/wake cycle with their lifestyle,
something we believe no approved sleep therapy has demonstrated.
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Overview of Phase II clinical results
We recently completed a randomized, double-blind, multi-center,
placebo-controlled Phase II trial evaluating the effect of
VEC-162 on healthy volunteers in a transient insomnia setting.
This setting involved a five-hour phase shift, which entailed
putting trial participants to bed five hours ahead of their
regular sleep time.
A total of 37 healthy volunteers were randomly assigned to
one of four VEC-162 dosing groups (10, 20, 50, and
100 milligrams) or placebo. Patients took one oral dose
30 minutes before bedtime. The results of this trial
demonstrated:
•
Circadian rhythm shift.
There was a statistically
    significant (p < 0.025) shift in circadian rhythm at 50
    and 100 mg of up to five hours on the first night, and a
    statistically significant dose-response curve. This finding
    confirmed that the drug acts through the sleep/wake cycle, and
    shows further that the drug can modulate this cycle to address
    the underlying cause of sleeplessness in patients with circadian
    rhythm sleep disorders.
•
Reduced duration of wake after sleep onset (WASO).
WASO
    is defined as the number of minutes awake from the time the
    participant falls asleep to the end of the evaluation period.
    There was a statistically significant (p < 0.05)
    reduction in WASO at 100 mg of 68.5 minutes, and a
    reduction in the duration of WASO versus placebo of at least 36
    minutes was observed at all doses. The effects were 36 minutes
    (10 mg) and 45 minutes (20 and 50 mg).
•
Improved sleep efficiency.
Sleep efficiency is defined as
    time asleep divided by time in bed.
VEC-162
achieved
    statistically significant improvements in sleep efficiency vs.
    placebo at 50 mg (p < 0.05) and 100 mg
    (p < 0.02). Absolute improvement occurred at all doses
    with at least 12.5% greater sleep efficiency vs. placebo.
    Specific improvements were 12.5% (10 mg), 13.5%
    (20 mg), 15.4% (50 mg) and 18.1% (100 mg).
•
Improved time to achieve persistent sleep.
All patients
    experienced a reduction in time it took to achieve persistent
    sleep (otherwise known as latency). The 10 mg dose improved
    23.4 minutes vs. placebo (p < 0.004), the
    20 mg improved 10.1 minutes (not significant), the
    50 mg improved 18.8 minutes (p < 0.02), and
    the 100 mg dose improved 19.3 minutes
    (p < 0.03).
•
A placebo-like side effect profile.
VEC-162 also
    demonstrated a strong safety profile, with no statistically
    significant side effects versus placebo and no impairment of
    next-day performance or mood.
Overview of planned Phase III clinical trial
We plan to initiate a Phase III trial in the
U.S. early in 2006 to evaluate the safety and efficacy of
VEC-162
for the
treatment of insomnia. The trial will be a randomized,
double-blind, placebo-controlled trial of approximately
300 healthy volunteers. Primary endpoints will include
sleep efficiency and time to fall asleep, as well as next-day
performance and mood. Participants will receive one to two days
of inpatient treatment. We believe that we will need to conduct
additional trials beyond this Phase III trial to receive
approval for the treatment of primary insomnia. We plan to
confirm our path to filing with the FDA in an End of
Phase IIb meeting after this upcoming clinical trial.
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Potential indication for depression
We believe that VEC-162 may also be effective in treating
depression. Agomelatine, another melatonin agonist, has shown
efficacy and safety that compared favorably to an approved
selective serotonin reuptake inhibitor
(SSRI) antidepressant,
Paxil
®
(paroxetine, GSK), in a Phase III trial. Agomelatine's
U.S. patent protection has expired. While the precise
mechanism for a melatonin agonist's effect on depression is
currently unknown, it is possible that by improving sleep, a
melatonin agonist could improve mood because depressed patients
are likely to have sleep disorders.
Approximately 29 million adults in the United States suffer
from some form of depression, over 11 million of whom are
currently treated with a prescription antidepressant medication.
Sales of antidepressants exceeded $20 billion globally in
2004, with SSRI drugs and newer serotonin/norepinephrine
reuptake inhibitor (SNRI) drugs accounting for the majority
of sales.
We believe that
VEC-162
will be differentiated from approved antidepressants in several
ways. In the Phase III trial of agomelatine described
above, agomelatine showed significantly improved mood in two
weeks, vs. four weeks for
Paxil
®
.
Consequently,
VEC-162
may, with its similar properties to agomelatine, enjoy a more
rapid onset of action than approved SSRI and SNRI drugs. We
believe that
VEC-162
should also have an improved side effect profile when compared
to approved products because it should not have the sexual side
effects, weight gain, and sleep disruption associated with SSRI
and SNRI drugs.
VEC-162 is ready for Phase II trials in depression. It has
demonstrated an antidepressant effect in animal models and has
completed several Phase I trials, including one with four
weeks of exposure, showing none of the serious side effects
associated with the approved SSRI and SNRI drugs.
Commercialization
Given the size of the prescribing physician base for insomnia
and depression, we plan to partner with a global pharmaceutical
company for the development and commercialization of
VEC-162
worldwide.
Intellectual property
VEC-162 and its formulations and uses are covered by a total of
five patent and patent application families worldwide. The
primary NCE patent covering
VEC-162
expires
normally in 2017 in the United States and in most European
markets. We believe that, like iloperidone,
VEC-162
will meet the
various criteria of the Hatch-Waxman Act and will receive five
additional years of patent protection for
VEC-162
in the United
States, which would extend its patent protection in the United
States until 2022. In Europe, similar legislative enactments
provide for five-year extensions of European NCE patents through
the granting of Supplementary Protection Certificates, and we
believe that
VEC-162
will qualify for such an extension, which would extend European
patent protection for
VEC-162
until 2022.
Several other patent applications covering uses of
VEC-162
will, if
granted, provide exclusive rights for these uses until 2026.
Our rights to the NCE patent covering
VEC-162
and related
intellectual property have been acquired through a license with
BMS. Please see "—License agreements" below for a
discussion of this license.
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VSF-173
VSF-173 is an oral small molecule that has demonstrated effects
on animal sleep/wake patterns and gene expression patterns
suggestive of a stimulant effect. The compound also demonstrated
a stimulant effect in humans during clinical trials conducted by
Novartis for Alzheimer's Disease. As a result of these
observations, we are currently planning to begin the clinical
evaluation of
VSF-173
in excessive daytime sleepiness. We intend to initiate a
Phase II trial for
VSF-173
in late 2006.
We believe the market opportunity for VSF-173 is significant.
Provigil
®
(modafinil, Cephalon Inc.) alone accounted for sales of
approximately $440 million in 2004 and is estimated to have
grown 35% between 2002 and 2005.
Pharmacogenetic and pharmacogenomic (PG) expertise
Our expertise in PG enables us to acquire high quality,
patent-protected clinical compounds that have been discovered
and developed by other pharmaceutical firms. We can capitalize
on the discovery and early development efforts of other firms by
acquiring compounds with clinical safety and possibly efficacy
data that we believe can benefit from our extensive PG expertise.
PG starts from the premise that a given drug will not just
affect the target/receptor for which it was initially developed,
but will in fact interact with many systems within the body.
Proof of this comes from two different sources. We know, for
instance, that most drugs have side effects. These typically
result from a drug's interaction not just with its intended
receptor in its intended organ system, but also with either that
receptor outside the intended organ system or with other
receptors entirely. There are many examples of drugs that were
developed initially for one indication but were then shown to be
effective for another. One example of this is
Viagra
®
(sildenafil, Pfizer), which was developed initially for
hypertension (high blood pressure) but proved more effective for
erectile dysfunction. Being compound-focused enables us to
forego the costly discovery work and start with compounds
already known to be drugs, in that they are safe and interact
with at least one biological system.
Starting with safe compounds— ones that have completed at
least Phase I safety trials— we use our PG expertise
to understand the disease or diseases for which the drug has the
optimal biological (and clinical) effect. We have used this
expertise to identify potential points of differentiation for
iloperidone and
VSF-173.
Beyond these
two, we have already identified a number of unexpected signaling
pathways attributable to known compounds using these techniques,
and we have secured a number of patent filings based on these
findings. For each compound, we may choose to confirm our
findings in animal studies. Compounds clearing this hurdle will
be ready for Phase II trials.
Compounds that we would most likely consider attractive
candidates for applying our expertise would meet the following
criteria:
•
were initially developed by a well-established biopharmaceutical
    company
•
have already completed Phase I trials
•
are free of significant formulation issues
•
have potential for strong patent protection through composition
    of matter patents, new doses or new formulations
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License agreements
Our rights to develop and commercialize our clinical-stage
product candidates are subject to the terms and conditions of
licenses granted to us by other pharmaceutical companies.
Iloperidone
We acquired exclusive worldwide rights to patents for
iloperidone through a sublicense agreement with Novartis. A
predecessor company of Sanofi-Aventis, Hoechst Marion Roussel,
Inc. (HMRI), discovered iloperidone and completed early clinical
work on the compound. In 1996, following a review of its product
portfolio, HMRI licensed its rights to the iloperidone patents
to Titan Pharmaceuticals, Inc. on an exclusive basis. In 1997,
soon after it had acquired its rights, Titan sublicensed its
rights to iloperidone on an exclusive basis to Novartis. In June
2004, we acquired exclusive worldwide rights to these patents to
develop and commercialize iloperidone through a sublicense
agreement with Novartis. In consideration for this sublicense,
we paid Novartis an initial license fee of $500,000 and are
obligated to make future milestone payments to Novartis of less
than $100 million in the aggregate (the majority of which
are tied to sales milestones), as well as royalty payments to
Novartis at a rate which, as a percentage of net sales, is in
the mid-twenties. Our rights with respect to the patents to
develop and commercialize iloperidone may terminate, in whole or
in part, if we fail to meet certain development or
commercialization milestones, if we do not meet certain other
obligations under our sublicense agreement to make royalty and
milestone payments, if we fail to comply with requirements in
our sublicense agreement regarding our financial condition, or
if we do not abide by certain restrictions in our sublicense
agreement regarding our other development activities.
Additionally, if we do not cure any breaches by Novartis or
Titan of their respective obligations under their agreements
with Titan and Sanofi-Aventis, respectively, our rights to
develop and commercialize iloperidone may revert back to
Novartis.
VEC-162
In March 2004, we entered into a license agreement with BMS
under which we received an exclusive worldwide license to
develop and commercialize VEC-162. In consideration for the
license, we paid BMS an initial license fee of $500,000 and are
obligated to make future milestone payments to BMS of less than
$40 million in the aggregate (the majority of which are
tied to sales milestones) as well as royalty payments based on
the net sales of
VEC-162
at a rate
which, as a percentage of net sales, is in the low teens. We are
also obligated under this agreement to pay BMS a percentage of
any sublicense fees, upfront payments and milestone payments
that we receive from a third party in connection with any
partnering arrangement, at a rate which is in the mid-twenties.
We have agreed with BMS in our license agreement for
VEC-162
to use our
reasonable diligence to develop and commercialize
VEC-162
and to meet
milestones in completing certain clinical work.
BMS holds certain rights with respect to
VEC-162
in our license
agreement. For example, if we have not agreed to a partnering
arrangement to develop and commercialize
VEC-162
with a
third-party partner after the completion of the entire
Phase III program, BMS has the right to commercialize
VEC-162
on its own in
exchange for certain milestone and royalty payments.
Either party may terminate the
VEC-162
license
agreement under certain circumstances, including a material
breach of the agreement by the other. In the event that we
terminate our license without a breach by BMS, or if BMS
terminates our license due to our breach, all rights
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licensed and developed by us under this agreement will revert or
otherwise be licensed back to BMS on an exclusive basis.
VSF-173
In June 2004, we entered into a license agreement with Novartis
under which we received an exclusive worldwide license to
develop and commercialize
VSF-173.
In
consideration for the license, we paid Novartis an initial
license fee of $500,000. We are also obligated to make future
milestone payments to Novartis of less than $50 million in
the aggregate (the majority of which are tied to sales
milestones) and royalty payments at rates which, as a percentage
of net sales, range from the
low-to
-mid teens.
Novartis has the right to commercialize
VSF-173
on its own
after Phase II and Phase III in exchange for certain
milestones and royalty payments. In the event that Novartis
chooses not to exercise either of these options and we decide to
enter into a partnering arrangement to commercialize
VSF-173,
Novartis has a
right of first refusal to negotiate such an agreement with us,
as well as a right to submit a last matching counteroffer
regarding such an agreement. In addition, our rights with
respect to
VSF-173
may
terminate, in whole or in part, if we fail to meet certain
development and commercialization milestones described in our
license agreement, if we fail to make royalty or milestone
payments or if we do no comply with requirements in our license
agreement regarding our financial condition. In the event of an
early termination of our license agreement, all rights licensed
and developed by us under this agreement may revert back to
Novartis.
Government regulation
Government authorities in the United States, at the federal,
state and local level, as well as foreign countries and local
foreign governments, regulate the research, development,
testing, manufacture, labeling, promotion, advertising,
distribution, sampling, marketing, import and export of our
product candidates. All of our products will require regulatory
approval by government agencies prior to commercialization. In
particular, human pharmaceutical products are subject to
rigorous pre-clinical and clinical trials and other approval
procedures of the FDA and similar regulatory authorities in
foreign countries. The process of obtaining these approvals and
the subsequent compliance with appropriate domestic and foreign
laws, rules and regulations require the expenditure of
significant time and human and financial resources.
United States government regulation
In the United States, the FDA regulates drugs under the Federal
Food, Drug and Cosmetic Act and implementing regulations. If we
fail to comply with the applicable requirements at any time
during the product development process, approval process, or
after approval, we may become subject to administrative or
judicial sanctions. These sanctions could include the FDA's
refusal to approve pending applications, withdrawals of
approvals, clinical holds, warning letters, product recalls,
product seizures, total or partial suspension of our operations,
injunctions, fines, civil penalties or criminal prosecution. Any
such sanction could have a material adverse effect on our
business.
The steps required before a drug may be marketed in the United
States include:
•
pre-clinical laboratory tests, animal studies and formulation
    studies under cGLP
•
submission to the FDA of an investigational new drug
    application, or IND, which must become effective before human
    clinical trials may begin
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•
execution of adequate and well-controlled clinical trials to
    establish the safety and efficacy of the product for each
    indication for which approval is sought
•
submission to the FDA of an NDA
•
satisfactory completion of an FDA inspection of the
    manufacturing facility or facilities at which the product is
    produced to assess compliance with cGMP
•
FDA review and approval of the NDA
Pre-clinical studies generally are conducted in laboratory
animals to evaluate the potential safety and activity of a
product. Violation of the FDA's good laboratory practices
regulations can, in some cases, lead to invalidation of the
studies, requiring these studies to be replicated. In the United
States, drug developers submit the results of pre-clinical
trials, together with manufacturing information and analytical
and stability data, to the FDA as part of the IND, which must
become effective before clinical trials can begin in the United
States. An IND becomes effective 30 days after receipt by
the FDA unless before that time the FDA raises concerns or
questions about issues such as the proposed clinical trials
outlined in the IND. In that case, the IND sponsor and the FDA
must resolve any outstanding FDA concerns or questions before
clinical trials can proceed. If these concerns or questions are
unresolved, the FDA may not allow the clinical trials to
commence.
Pilot studies generally are conducted in a limited patient
population, approximately three to 25 subjects, to
determine whether the product candidate warrants further
clinical trials based on preliminary indications of efficacy.
These pilot studies may be performed in the United States after
an IND has become effective or outside of the United States
prior to the filing of an IND in the United States in accordance
with government regulations and institutional procedures.
Clinical trials involve the administration of the
investigational product candidate to human subjects under the
supervision of qualified investigators. Clinical trials are
conducted under protocols detailing, among other things, the
objectives of the study, the parameters to be used in assessing
the safety and the effectiveness of the drug. Each protocol must
be submitted to the FDA as part of the IND prior to beginning
the trial.
Typically, clinical evaluation involves a time-consuming and
costly three-Phase sequential process, but the phases may
overlap. Each trial must be reviewed, approved and conducted
under the auspices of an independent Institutional Review Board,
and each trial must include the patient's informed consent.
•
Phase I: refers typically to closely-monitored clinical
    trials and includes the initial introduction of an
    investigational new drug into human patients or health volunteer
    subjects. Phase I trials are designed to determine the
    safety, metabolism and pharmacologic actions of a drug in
    humans, the potential side effects associated with increasing
    drug doses and, if possible, to gain early evidence of the
    product candidate's effectiveness. Phase I trials also
    include the study of structure-activity relationships and
    mechanism of action in humans, as well as studies in which
    investigational drugs are used as research tools to explore
    biological phenomena or disease processes. During Phase I
    trials, sufficient information about a drug's
    pharmacokinetics and pharmacological effects should be obtained
    to permit the design of well-controlled, scientifically valid
    Phase II studies. The total number of subjects and patients
    included in Phase I trials varies, but is generally in the
    range of 20 to 80 people.
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•
Phase II: refers to controlled clinical trials conducted to
    evaluate appropriate dosage and the effectiveness of a drug for
    a particular indication or indications in patients with a
    disease or condition under study and to determine the common
    short-term side effects and risks associated with the drug.
    These trials are typically well controlled, closely monitored
    and conducted in a relatively small number of patients, usually
    involving no more than several hundred subjects.
•
Phase III: refers to expanded controlled and uncontrolled
    clinical trials. These trials are performed after preliminary
    evidence suggesting effectiveness of a drug has been obtained.
    Phase III trials are intended to gather additional
    information about the effectiveness and safety that is needed to
    evaluate the overall benefit-risk relationship of the drug and
    to provide an adequate basis for physician labeling.
    Phase III trials usually include from several hundred to
    several thousand subjects.
Phase I, II and III testing may not be completed
successfully within any specified time period, if at all. The
FDA closely monitors the progress of each of the three phases of
clinical trials that are conducted in the United States and may,
at its discretion, reevaluate, alter, suspend or terminate the
testing based upon the data accumulated to that point and the
FDA's assessment of the risk/benefit ratio to the patient.
A clinical program is designed after assessing the causes of the
disease, the mechanism of action of the active pharmaceutical
ingredient of the product candidate and all clinical and
pre-clinical data of previous trials performed. Typically, the
trial design protocols and efficacy endpoints are established in
consultation with the FDA. Upon request through a special
protocol assessment, the FDA can also provide specific guidance
on the acceptability of protocol design for clinical trials. The
FDA or we may suspend or terminate clinical trials at any time
for various reasons, including a finding that the subjects or
patients are being exposed to an unacceptable health risk. The
FDA can also request additional clinical trials be conducted as
a condition to product approval. During all clinical trials,
physicians monitor the patients to determine effectiveness and
to observe and report any reactions or other safety risks that
may result from use of the drug candidate. As noted above,
iloperidone is currently in Phase III trials for the
treatment of schizophrenia,
VEC-162
is ready for
Phase III trials for the treatment of insomnia and
VSF-173
is ready for
Phase II trials for the treatment of sleepiness.
Assuming successful completion of the required clinical trials,
drug developers submit the results of pre-clinical studies and
clinical trials, together with other detailed information
including information on the manufacture and composition of the
product, to the FDA, in the form of an NDA, requesting approval
to market the product for one or more indications. In most
cases, the NDA must be accompanied by a substantial user fee.
The FDA reviews an NDA to determine, among other things, whether
a product is safe and effective for its intended use.
Before approving an application, the FDA will inspect the
facility or facilities where the product is manufactured. The
FDA will not approve the application unless cGMP compliance is
satisfactory. The FDA will issue an approval letter if it
determines that the application, manufacturing process and
manufacturing facilities are acceptable. If the FDA determines
that the application, manufacturing process or manufacturing
facilities are not acceptable, it will outline the deficiencies
in the submission and will often request additional testing or
information. Notwithstanding the submission of any requested
additional information, the FDA may ultimately decide that the
application does not satisfy the regulatory criteria for
approval and refuse to approve the application by issuing a not
approvable letter.
The testing and approval process requires substantial time,
effort and financial resources, and each may take several years
to complete. The FDA may not grant approval on a timely basis, or
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at all. We may encounter difficulties or unanticipated costs in
our efforts to secure necessary governmental approvals, which
could delay or preclude us from marketing our products.
Furthermore, the FDA may prevent a drug developer from marketing
a product under a label for its desired indications or place
other conditions on distribution as a condition of any
approvals, which may impair commercialization of the product.
After approval, some types of changes to the approved product,
such as adding new indications, manufacturing changes and
additional labeling claims, are subject to further FDA review
and approval. Similar regulatory procedures must also be
complied with in countries outside the United States.
If the FDA approves the new drug application, the drug becomes
available for physicians to prescribe in the United States.
After approval, the drug developer must comply with a number of
post-approval requirements, including delivering periodic
reports to the FDA, submitting descriptions of any adverse
reactions reported, and complying with drug sampling and
distribution requirements. The holder of an approved NDA is
required to provide updated safety and efficacy information and
to comply with requirements concerning advertising and
promotional labeling. Also, quality control and manufacturing
procedures must continue to conform to cGMP after approval. Drug
manufacturers and their subcontractors are required to register
their facilities and are subject to periodic unannounced
inspections by the FDA to assess compliance with cGMP which
imposes certain procedural and documentation requirements
relating to quality assurance and quality control. Accordingly,
manufacturers must continue to expend time, money and effort in
the area of production and quality control to maintain
compliance with cGMP and other aspects of regulatory compliance.
The FDA may require post market testing and surveillance to
monitor the product's safety or efficacy, including
additional studies, known as Phase IV trials, to evaluate
long-term effects.
In addition to studies requested by the FDA after approval, a
drug developer may conduct other trials and studies to explore
use of the approved compound for treatment of new indications,
which require FDA approval. The purpose of these trials and
studies is to broaden the application and use of the drug and
its acceptance in the medical community.
We use, and will continue to use, third-party manufacturers to
produce our products in clinical and commercial quantities.
Future FDA inspections may identify compliance issues at our
facilities or at the facilities of our contract manufacturers
that may disrupt production or distribution, or require
substantial resources to correct. In addition, discovery of
problems with a product or the failure to comply with
requirements may result in restrictions on a product,
manufacturer or holder of an approved NDA, including withdrawal
or recall of the product from the market or other voluntary or
FDA-initiated action that could delay further marketing. Newly
discovered or developed safety or effectiveness data may require
changes to a product's approved labeling, including the
addition of new warnings and contraindications. Also, new
government requirements may be established that could delay or
prevent regulatory approval of our products under development.
Foreign regulation
Whether or not we obtain FDA approval for a product, we must
obtain approval of a product by the comparable regulatory
authorities of foreign countries before we can commence clinical
trials or marketing of the product in those countries. The
approval process varies from country to country, and the time
may be longer or shorter than that required for FDA approval.
The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement also vary greatly
from country to country. Although governed by the applicable
country, clinical trials conducted outside of the United States
typically are administered with
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the three-Phase sequential process that is discussed above under
"—United States government regulation." However,
the foreign equivalent of an IND is not a prerequisite to
performing pilot studies or Phase I clinical trials.
Under European Union regulatory systems, we may submit marketing
authorization applications either under a centralized or
decentralized procedure. The centralized procedure which is
available for products produced by biotechnology or which are
highly innovative, provides for the grant of a single marketing
authorization that is valid for all European Union member
states. This authorization is a marketing authorization
approval. The decentralized procedure provides for mutual
recognition of national approval decisions. Under this
procedure, the holder of a national marketing authorization may
submit an application to the remaining member states. Within
90 days of receiving the applications and assessment
report, each member state must decide whether to recognize
approval. This procedure is referred to as the mutual
recognition procedure.
In addition, regulatory approval of prices is required in most
countries other than the United States. We face the risk that
the resulting prices would be insufficient to generate an
acceptable return to us or our collaborators.
Third-party reimbursement and pricing controls
In the United States and elsewhere, sales of pharmaceutical
products depend in significant part on the availability of
reimbursement to the consumer from third-party payors, such as
government and private insurance plans. Third-party payors are
increasingly challenging the prices charged for medical products
and services. It will be time consuming and expensive for us to
go through the process of seeking reimbursement from Medicare
and private payors. Our products may not be considered cost
effective, and coverage and reimbursement may not be available
or sufficient to allow us to sell our products on a competitive
and profitable basis. The passage of the Medicare Prescription
Drug and Modernization Act of 2003 imposes new requirements for
the distribution and pricing of prescription drugs which may
affect the marketing of our products.
In many foreign markets, including the countries in the European
Union, pricing of pharmaceutical products is subject to
governmental control. In the United States, there have been, and
we expect that there will continue to be, a number of federal
and state proposals to implement similar governmental pricing
control. While we cannot predict whether such legislative or
regulatory proposals will be adopted, the adoption of such
proposals could have a material adverse effect on our business,
financial condition and profitability.
Marketing and sales
We currently have no sales, marketing or distribution
capabilities. However, we plan to develop these capabilities
internally to the extent that it is practical to do so, and
enter into partnering arrangements to the extent that we believe
large sales and marketing forces will be necessary. More
specifically, in the United States we expect to build our own
sales force to market iloperidone and
VSF-173
directly to
psychiatrists and other target physicians. Because the number of
physicians that would generate the majority of prescriptions for
iloperidone and
VSF-173
is relatively small, we believe that we can cost-effectively
develop our own sales force to market and sell iloperidone and
VSF-173.
Outside of the
U.S., we intend to find commercial partners for iloperidone and
VSF-173.
We will seek a
global commercial partner for VEC-162.
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Patents and proprietary rights; Hatch-Waxman protection
We will be able to protect our products from unauthorized use by
third parties only to the extent that our products are covered
by valid and enforceable patents— either licensed in from
third parties or generated internally— that give us
sufficient proprietary rights. Accordingly, patents and other
proprietary rights are essential elements of our business.
Our three current compounds in clinical development are covered
by new chemical entity (NCE) and other patents. The NCE
patent for iloperidone is owned by Sanofi-Aventis, and other
patents and patent applications relating to iloperidone are
owned by Sanofi-Aventis and Novartis. Novartis also owns the NCE
patent for
VSF-173
and
Bristol-Myers Squibb owns the NCE patent for
VEC-162.
For all three
compounds we have obtained exclusive worldwide rights to develop
and commercialize the compounds covered by these patents through
license and sublicense arrangements. For more on these license
and sublicense arrangements, please see "—License
agreements" above. In addition, we have generated
intellectual property, and filed patent applications covering
this intellectual property, for each of the three compounds.
The NCE patent covering iloperidone expires normally in 2011 in
the United States and in 2010 in most European markets. The NCE
patent covering
VEC-162
expires in 2017 in the United States and most European markets.
The NCE patent covering
VSF-173
expires in 2014
in the United States and in 2012 in most European markets.
Additionally, for each of our late-stage compounds, an
additional period of exclusivity in the United States of up to
five years following the expiration of the patent covering that
compound may be obtained pursuant to the United States Drug
Price Competition and Patent Term Restoration Act of 1984, more
commonly known as the "Hatch-Waxman Act." Assuming we
gain such a five-year extension and that we continue to have our
intellectual property rights under our sublicense and license
agreements, we would have exclusive NCE patent rights in the
U.S. for iloperidone until 2016, for
VEC-162
until 2022 and
for
VSF-173
until 2017.
In Europe, similar legislative enactments may allow us to obtain
five-year extensions of the European NCE patents covering our
product candidates through the granting of Supplementary
Protection Certificates, which would allow us to have exclusive
European NCE patent rights for iloperidone until 2015, for
VEC-162
until 2022 and
for
VSF-173
until 2017.
Additionally, a recent directive in the European Union allows
companies who receive European regulatory approval for a new
compound to have a
10-year
period of
market exclusivity in most European countries for that compound
(with the possibility of a further one-year extension),
beginning on the date of such European regulatory approval,
regardless of when the European NCE patent covering such
compound expires. No generic version of an approved drug may be
marketed or sold in most European countries during this
10-year
period. This
directive may be of particular importance with respect to
iloperidone, since the European NCE patent for iloperidone will
likely expire prior to the end of this
10-year
period of
market exclusivity.
Aside from the NCE patents covering our current late-stage
compounds, as of December 11, 2005 we had one issued United
States patent and 17 pending patent applications in the
United States, several of which have already been filed
internationally as Patent Cooperation Treaty applications. The
claims in these various patents and patent applications are
directed to compositions of matter, including claims covering
other product candidates, pharmaceutical compositions, and
methods of use.
For proprietary know-how that is not appropriate for patent
protection, processes for which patents are difficult to enforce
and any other elements of our PG discovery process that involve
proprietary know-how and technology that is not covered by
patent applications, we rely on trade secret protection and
confidentiality agreements to protect our interests. We require
all
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of our employees, consultants and advisors to enter into
confidentiality agreements. Where it is necessary to share our
proprietary information or data with outside parties, our policy
is to make available only that information and data required to
accomplish the desired purpose and only pursuant to a duty of
confidentiality on the part of those parties.
Manufacturing
We currently depend and expect to continue to depend on a small
number of third-party manufacturers to produce sufficient
quantities of our product candidates for use in our clinical
studies. We are not obligated to obtain our product candidates
from any particular third-party manufacturer and we believe that
we would be able to obtain our product candidates from a number
of third-party manufacturers at comparable cost.
If any of our product candidates are approved for commercial
use, we plan to rely on third-party contract manufacturers to
produce sufficient quantities for large-scale commercialization.
If we do enter into commercial manufacturing arrangements with
third parties, these third-party manufacturers will be subject
to extensive governmental regulation. Specifically, regulatory
authorities in the markets which we intend to serve will require
that drugs be manufactured, packaged and labeled in conformity
with cGMP or equivalent foreign standards. We intend to engage
only those contract manufacturers who have the capability to
manufacture drug products in compliance with cGMP and other
applicable standards in bulk quantities for commercial use.
Competition
The pharmaceutical industry and the central nervous system
segment of that industry in particular, is highly competitive
and includes a number of established large and mid-sized
companies with greater financial, technical and personnel
resources than we have and significantly greater commercial
infrastructures than we have. Our market segment also includes
several smaller emerging companies whose activities are directly
focused on our target markets and areas of expertise. If
approved, our product candidates will compete with numerous
therapeutic treatments offered by these competitors. While we
believe that our product candidates will have certain favorable
features, existing and new treatments may also possess
advantages. Additionally, the development of other drug
technologies and methods of disease prevention are occurring at
a rapid pace. These developments may render our product
candidates or technologies obsolete or noncompetitive.
We believe the primary competitors for each of our product
candidates are as follows:
•
For iloperidone in the treatment of schizophrenia, the atypical
    antipsychotics
    Risperdal
®
(risperidone) by Johnson & Johnson (including the
    depot formulation
    Risperdal
®
Consta
®
),
    Zyprexa
®
(olanzapine) by Eli Lilly,
    Seroquel
®
(quetiapine) by AstraZeneca,
    Abilify
®
(aripiprazole) by BMS/Otsuka Pharmaceutical Co., Ltd., and
    Geodon
®
(ziprasidone) by Pfizer, and generic clozapine, as well as
    the typical antipsychotics haloperidol, chlorpromazine,
    thioridazine and sulpiride (all of which are generic). In
    addition to the approved products, compounds in Phase III
    trials for the treatment of schizophrenia include bifeprunox
    (Wyeth Pharmaceuticals/ Solvay S.A./ Lundbeck), paliperidone
    (Johnson & Johnson), and asenapine (Pfizer).
•
For VEC-162 in the treatment of insomnia,
    Rozerem
tm
(ramelteon) by Takeda Pharmaceuticals, hypnotics such as
    Ambien
®
(zolpidem) by Sanofi-Aventis (including Ambien
    CR
®
),
    Lunesta
®
(eszopiclone) by Sepracor and
    Sonata
®
(zaleplon) by King Pharmaceuticals, generic
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benzodiazepines such as trazodone and doxepin, and
over-the
-counter
    remedies such as
    Benadryl
®
and Tylenol
    PM
®
.
    In addition to the approved products, compounds in
    Phase III trials for insomnia include indiplon (Pfizer/
    Neurocrine Biosciences) gaboxadol (Merck/ Lundbeck), and
    low-dose doxepin
    (Silenor
tm
,
    Somaxon Pharmaceuticals, Inc.).
•
For VEC-162 in the treatment of depression, agomelatine (Les
    Laboratoires Servier), SSRI/ SNRI drugs such as
    Paxil
®
(paroxetine) by GSK,
    Zoloft
®
(sertraline) by Pfizer,
    Prozac
®
(fluoxetine) by Eli Lilly, and Lexapro
    (escitalopram) by Lundbeck/ Forest Pharmaceuticals Inc.,
    Effexor
®
(venlafaxine) by Wyeth as well as other compounds such as
    Wellbutrin
®
(buproprion) by GSK and
    Cymbalta
®
(duloxetine) by Eli Lilly.
•
For VSF-173 in the treatment of excessive daytime sleepiness,
    Provigil
®
(modafinil) by Cephalon and
    Xyrem
®
(sodium oxybate) by Jazz Pharmaceuticals, Inc.
Our ability to compete successfully will depend in part on our
ability to utilize our PG and drug development expertise to
identify, develop, secure rights to and obtain regulatory
approvals for promising pharmaceutical compounds before others
are able to develop competitive products. Our ability to compete
successfully will also depend on our ability to attract and
retain skilled and experienced personnel. Additionally, our
ability to compete may be affected because insurers and other
third-party payors in some cases seek to encourage the use of
cheaper, generic products, which could make our products less
attractive.
Employees
As of September 30, 2005 we had 30 full-time
employees, 25 of whom were primarily engaged in research and
development activities. 25 of our full-time employees work at
our facility in Rockville, Maryland, and 4 of our full-time
employees work at our Singapore research facility. None of our
employees are represented by a labor union. We have not
experienced any work stoppages and consider our employee
relations to be good.
Facilities
Our current headquarters are located in Rockville, Maryland,
consisting of approximately 9,000 square feet of leased
office space. Our annual rent under our lease for this
headquarters is $216,000, with an annual increase of 3% per
year until the expiration of our lease in 2008. In August 2005
we notified our landlord of our intent to exercise our sublease
rights under this lease, in order to move in to a larger
facility to accommodate our development and commercialization
activities. In August 2005, we entered into a new lease for this
larger facility, at 9605 Medical Center Drive, Rockville,
Maryland, consisting of approximately 17,000 square feet of
office and laboratory space. We will take possession of the
lease space in mid-January 2006. Our annual rent for our new,
larger facility under this new lease will be approximately
$433,000, with an annual increase of 3% per year, until the
expiration of the new lease in 2016. We believe we will be able
to sublease our current headquarters prior to vacating it in
January 2006 for our new, larger facility.
We have also entered into a lease for a research facility in
Singapore. Our annual rent for this facility is approximately
$75,000 per year; the lease for the facility expires in
December 2006.
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Management
Executive officers and directors
The following are our executive officers and directors as of
September 30, 2005, with the exception of Steven A.
Shallcross and Richard W. Dugan, each of whom joined us after
such date.
Name
Age
Position
Mihael H. Polymeropoulos, M.D.
45
President and Chief Executive
    Officer, Director
William D. "Chip" Clark
37
Senior Vice President, Chief
    Business Officer and Secretary
Steven A. Shallcross
44
Senior Vice President, Chief
    Financial Officer and Treasurer
Thomas Copmann, Ph.D.
53
Vice President of Regulatory Affairs
Deepak Phadke, Ph.D.
55
Vice President of Manufacturing
Argeris N.
    Karabelas, Ph.D.(1),(3)
53
Director and Chairman of the Board
Richard W. Dugan(2)
63
Director
Brian K. Halak, Ph.D.(2),(3)
34
Director
Wayne T.
    Hockmeyer, Ph.D.(1),(3)
61
Director
David Ramsay(2)
42
Director
James B. Tananbaum, M.D.(1)
42
Director
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Member of Nominating/ Corporate Governance Committee.
Mihael H. Polymeropoulos,
M.D. has served as Chief
Executive Officer and a Director of Vanda since May of 2003.
Prior to joining Vanda, Dr. Polymeropoulos was Vice
President and Head of the Pharmacogenetics Department at
Novartis from 1998 to 2003. Prior to his tenure at Novartis, he
served as Chief of the Gene Mapping Section, Laboratory of
Genetic Disease Research, National Human Genome Research
Institute, from 1992 to 1998. Dr. Polymeropoulos is the
co-founder of the Integrated Molecular Analysis of Genome
Expression (IMAGE) Consortium. Dr. Polymeropoulos
holds a degree in Medicine from the University of Patras.
William D. "Chip" Clark
has served as Senior
Vice President and Chief Business Officer of Vanda since
September of 2004 and served as a Director of Vanda from 2002 to
2004. Prior to joining Vanda, Mr. Clark was a Principal at
Care Capital, LLC, a venture capital firm investing in
biopharmaceuticals companies, from 2000 to 2004. Prior to his
tenure at Care Capital, he served in a variety of commercial
roles at SmithKline Beecham (now part of GlaxoSmithKline), from
1990 to 2000. Mr. Clark holds a B.A. from Harvard
University and an M.B.A. from The Wharton School at the
University of Pennsylvania.
Steven A. Shallcross
has served as Senior Vice President,
Chief Financial Officer and Treasurer of Vanda since November of
2005. From October 2001 to November 2005, Mr. Shallcross
was the Senior Vice President, Chief Financial Officer and
Treasurer at Advancis Pharmaceutical Corporation, a specialty
pharmaceutical company. Mr. Shallcross was the Vice
President of Finance and Chief Financial Officer at Bering Truck
Corporation, a truck manufacturer, from
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1997 to 2001. From 1993 to 1997, Mr. Shallcross served as
Vice President of Operations at Precision Scientific, Inc., a
manufacturer of scientific laboratory equipment. He was the
Controller of Precision Scientific from 1993 to 1994.
Mr. Shallcross has over 20 years of senior financial
and operations experience in emerging organizations, including
acquisitions and restructurings. Mr. Shallcross received a
bachelor's degree in accounting from the University of
Illinois and an M.B.A. from the University of Chicago, Graduate
School of Business. Mr. Shallcross is also a certified
public accountant.
Thomas Copmann,
Ph.D. has served as Vice President of
Regulatory Affairs at Vanda since April of 2005. Prior to
joining Vanda, Dr. Copmann served as Senior Director of
Regulatory Affairs at Eli Lilly & Co., from 2000 to
2005. Prior to his tenure at Eli Lilly & Co.,
Dr. Copmann was the Associate Vice President for Regulatory
Affairs and Executive Director for the Commission on Drugs for
Rare Diseases at the Pharmaceutical Manufacturers Association,
from 1989 to 1995. Dr. Copmann holds an M.S. in
Endocrinology and a Ph.D. in Physiology from Kent State
University.
Deepak Phadke,
Ph.D. has served as Vice President of
Manufacturing at Vanda since August of 2005. Prior to joining
Vanda, Dr. Phadke served as Executive Director of
Pharmaceutical Sciences at Beckloff Associates, a pharmaceutical
research and development consulting company located in the
Kansas City area, from 1998 to 2005. Prior to his tenure at
Beckloff Associates, Dr. Phadke served as a manager and
research scientist in the formulation development departments at
Hoechst Marion Roussel and its predecessor companies in Kansas
City and Indianapolis, from 1986 to 1998. Dr. Phadke holds
a B.S. and an M.S. in Pharmacy and Pharmaceutics, respectively,
from Nagpur University in India, and a Ph.D. in Pharmaceutics
from Rutgers University.
Argeris N. "Jerry" Karabelas,
Ph.D. has served
as a Director and Chairman of the Board since 2003.
Dr. Karabelas has served as a Partner of Care Capital, LLC
since 2001. Prior to his tenure at Care Capital,
Dr. Karabelas was the Founder and Chairman of the Novartis
BioVenture fund, from July 2000 to December 2001. From 1998 to
2000, he served as Head of Healthcare and CEO of Worldwide
Pharmaceuticals for Novartis. Prior to joining Novartis,
Dr. Karabelas was Executive Vice President of SmithKline
Beecham responsible for U.S. operations, European operations,
Regulatory, and Strategic Marketing, from 1981 to 1998. He is a
member of the Scientific Advisory Council of the Massachusetts
General Hospital, the Harvard- MIT Health Science and Technology
Visiting Committee, a Director of SykePharma Plc, Human Genome
Sciences, NitroMed Inc., Anadys Pharmaceuticals, Inc., Acura
Pharmaceuticals, Inc. and a Trustee of Fox Chase Cancer Center
and the Philadelphia University of the Sciences.
Dr. Karabelas holds a Ph.D. in Pharmacokinetics from the
Massachusetts College of Pharmacy.
Richard W. Dugan
has served as a Director of Vanda since
December of 2005. From 1976 to September 2002, Mr. Dugan
served as a Partner with Ernst & Young, LLP, where he
served in a variety of managing and senior partner positions,
including Mid-Atlantic Area Senior Partner from 2001 to 2002,
Mid-Atlantic Area Managing Partner from 1989 to 2001 and
Pittsburgh Office Managing Partner from 1979 to 1989.
Mr. Dugan retired from Ernst & Young LLP in
September 2002. Mr. Dugan currently serves on the board of
directors of two other publicly-traded pharmaceutical companies,
Advancis Pharmaceutical Corporation and Critical Therapeutics,
Inc. Mr. Dugan holds a B.S.B.A. from Pennsylvania State
University.
Brian K. Halak,
Ph.D. has served as a Director of Vanda
since 2004. Dr. Halak has served as a Principal at Domain
Associates, a venture capital firm based in Princeton, New
Jersey, since 2001 and will be a Partner as of January 2006.
Prior to joining Domain, he served as an
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Associate of the venture capital firm Advanced Technology
Ventures, from 2000 to 2001. Dr. Halak serves on the
Investment Advisory Council for Ben Franklin Technology Partners
and BioAdvance, both seed stage investment groups in
Philadelphia. Dr. Halak holds a B.S.E. from the University
of Pennsylvania and a Ph.D. in Immunology from Thomas Jefferson
University.
Wayne T. Hockmeyer,
Ph.D. has served as a Director of
Vanda since 2004. Dr. Hockmeyer founded MedImmune, Inc. in
April 1988 as President and Chief Executive Officer and was
elected to serve on the Board of Directors in May 1988.
Dr. Hockmeyer became Chairman of the Board of Directors of
MedImmune, Inc. in May 1993. He relinquished his position as
Chief Executive Officer in October 2000 and now serves as
Chairman of the Board of MedImmune, Inc. and President of
MedImmune Ventures, Inc. Dr. Hockmeyer earned his
bachelor's degree from Purdue University and his Ph.D. from
the University of Florida in 1972. Dr. Hockmeyer was
recognized in 1998 by the University of Florida as a
Distinguished Alumnus and in 2002, Dr. Hockmeyer was
awarded a Doctor of Science honoris causa from Purdue
University. Dr. Hockmeyer is a member of the Maryland
Economic Development Commission and the Governor's
Workforce Investment Board (GWIB). He is also a member of the
Maryland Governor's Scientific Advisory Board. He is a
member of the Board of Directors of the publicly-traded
biotechnology companies, Advancis Pharmaceutical Corp., GenVec,
Inc. and Idenix Pharmaceuticals, Inc. and serves on the boards
of several educational and philanthropic organizations.
David Ramsay
has served as a Director of Vanda since
2004. Mr. Ramsay has served as a Partner of Care Capital,
LLC, which he co-founded in 2000. Prior to founding Care
Capital, Mr. Ramsay served as a Managing Director of the
Rhône Group, LLC, from 1997 to 2000 and co-founded
Rhône Capital, LLC, a private equity investment vehicle.
Mr. Ramsay previously worked at Morgan Stanley Capital
Partners. Mr. Ramsay holds an A.B. in Mathematics from
Princeton University and an M.B.A. from the Stanford University
Graduate School of Business.
James B. Tananbaum,
M.D. has served as a Director of
Vanda since 2004. Dr. Tananbaum has served as a Managing
Partner of Prospect Venture Partners, a dedicated life science
venture fund group which he co-founded, since 2000. Prior to
co-founding Prospect Venture Partners, he served as Chief
Executive Officer of Theravance, Inc. from 1997 to 2000.
Dr. Tananbaum also served as a Partner at Sierra Ventures,
from 1993 to 1997. Dr. Tananbaum co-founded GelTex
Pharmaceuticals, Inc. in 1991. He is an officer of the Young
Presidents' Organization, Golden Gate Chapter and a member
of the World Economic Forum and the Harvard-MIT Health Science
and Technology Visiting Committee. Dr. Tananbaum serves as
a Director of Critical Therapeutics, Inc. Dr. Tananbaum
holds a bachelor's degree and a B.S.E.E. from Yale
University and an M.D. and an M.B.A. from Harvard University.
Election of officers
Our officers are elected by our board of directors on an annual
basis and serve until their successors are duly elected and
qualified. There are no family relationships among any of our
officers or directors.
Classified board
Our restated certificate of incorporation that will become
effective as of the closing of this offering provides for a
classified board of directors consisting of three classes of
directors, each serving a staggered three-year term. As a
result, a portion of our board of directors will be elected each
year from and after the closing. To implement the classified
structure, upon the
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consummation of the offering, three of the nominees to the board
will be elected to one-year terms, two will be elected to
two-year terms and two will be elected to three-year terms.
Thereafter, directors will be elected for three-year terms.
Drs. Hockmeyer and Tananbaum and Mr. Ramsay have been
designated Class I directors whose term will expire at the
2007 annual meeting of stockholders, assuming the completion of
the proposed offering. Dr. Halak and Mr. Dugan have
been designated Class II directors whose term will expire
at the 2008 annual meeting of stockholders, assuming the
completion of the proposed offering. Drs. Polymeropoulos
and Karabelas have been designated Class III directors
whose term expires at the 2009 annual meeting of stockholders,
assuming the completion of the proposed offering. Our bylaws
provide that the number of authorized directors may be changed
only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of
authorized directors will be distributed among the three classes
so that, as nearly as reasonably possible, each class will
consist of one-third of the directors. The classification of the
board of directors may have the effect of delaying or preventing
changes in control of our company.
Committees of the board of directors
Our board currently has three committees: the audit committee,
the compensation committee and the nominating/corporate
governance committee. The information set forth below assumes
the completion of the proposed offering.
Audit Committee.
The members of our audit committee are
Messrs. Dugan, and Ramsay and Dr. Halak.
Mr. Dugan chairs the audit committee. Mr. Dugan is our
audit committee financial expert (as is currently defined under
the SEC rules implementing Section 407 of the
Sarbanes-Oxley Act of 2002). Our audit committee, among other
duties:
•
appoints a firm to serve as independent accountant to audit our
    financial statements
•
discusses the scope and results of the audit with the
    independent accountant, and reviews with management and the
    independent accountant our interim and year-end operating results
•
considers the adequacy of our internal accounting controls and
    audit procedures
•
approves (or, as permitted, pre-approves) all audit and
    non-audit services to be performed by the independent accountant
The audit committee has the sole and direct responsibility for
appointing, evaluating and retaining our independent auditors
and for overseeing their work. All audit services and all
non-audit services, other than de minimis non-audit services, to
be provided to us by our independent auditors must be approved
in advance by our audit committee. We believe that the
composition of our audit committee meets the requirements for
independence under the current Nasdaq National Market and SEC
rules and regulations.
Compensation Committee.
The members of our compensation
committee are Drs. Hockmeyer, Karabelas and Tananbaum. The
purpose of our compensation committee is to discharge the
responsibilities of our board of directors relating to
compensation of our executive officers. Specific
responsibilities of our compensation committee include:
•
reviewing and recommending approval of compensation of our
    executive officers
•
administering our equity compensation plans
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•
reviewing and making recommendations to our board with respect
    to incentive compensation and equity plans
Nominating/ Corporate Governance Committee.
The members
of our nominating/corporate governance committee are
Drs. Halak, Hockmeyer and Karabelas. Our
nominating/corporate governance committee identifies, evaluates
and recommends nominees to our board of directors and committees
of our board of directors, conducts searches for appropriate
directors, and evaluates the performance of our board of
directors and of individual directors. The nominating/corporate
governance committee is also responsible for reviewing
developments in corporate governance practices, evaluating the
adequacy of our corporate governance practices and reporting and
making recommendations to the board concerning corporate
governance matters.
Director compensation
On December 19, 2005, our board of directors adopted a
compensation program for outside directors. Pursuant to this
program, each member of our board of directors who is not our
employee will receive a $25,000 annual retainer as well as
$2,500 for each board meeting attended in person ($1,250 for
meetings attended by telephone conference). The chairman of the
board of directors will receive an additional annual retainer of
$10,000, and the chairman of each committee of the board of
directors will receive an additional annual retainer of $2,000.
Each director will receive $1,000 for each meeting of any
committee of the board of directors attended in person or by
telephone conference.
Under the director compensation program adopted on
December 19, 2005, each member of our board of directors
who is not our employee and who is elected after
December 19, 2005 will initially receive a nonstatutory
option to purchase 35,000 shares of our common stock
upon election, and each member of our board of directors who is
not our employee will also receive annual grants of options to
purchase 15,000 shares of our common stock. The stock
option granted upon election will vest and become exercisable in
equal monthly installments over a period of four years from the
date of the grant, except that in the event of a change of
control the option will accelerate and become immediately
exercisable. Each annual stock option will vest and become
exercisable in equal monthly installments over a period of one
year from the date of grant, except that in the event of a
change of control the option will accelerate and become
immediately exercisable. All of these options will have an
exercise price equal to the fair market value of our common
stock on the date of the grant. In cases where a director is
serving as such on behalf of an entity, we may issue a warrant
directly to such entity as consideration for the services
provided in lieu of granting an option to the director himself.
Compensation committee interlocks and insider
participation
The current members of our compensation committee of our board
of directors are Drs. Hockmeyer, Karabelas and Tananbaum.
No interlocking relationship exists between our board of
directors or compensation committee and the board of directors
or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
Executive compensation
The following table sets forth the compensation earned by our
Chief Executive Officer and the other highest paid executive
officer whose salary and bonus exceeded $100,000 for services
rendered in all capacities to us during the fiscal year ended
December 31, 2004. We use the
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term "named executive officers" to refer to these
people later in this prospectus. No other executive officers who
would have otherwise been includable in the following table on
the basis of salary and bonus earned for the year ended
December 31, 2004 have been excluded by reason of their
termination of employment or change in executive status during
that year.
Long-term
compensation
Awards
Annual compensation
Securities
underlying
Name and principal position
Year
Salary($)
Bonus($)
options
Mihael H. Polymeropoulos, M.D.
    President and Chief Executive Officer
2004
$
350,000
$
147,000
—
William D. "Chip" Clark
    Senior Vice President, Chief Business Officer and Secretary
2004
$
75,000
(1)
$
—
303,400
(1) In September 2004 Mr. Clark joined us as Senior
Vice President, Chief Business Officer and Secretary at an
annual salary of $225,000.
This table excludes compensation information for Thomas Copmann,
who joined us in April 2005 as Vice President of Regulatory
Affairs, Deepak Phadke, who joined us in August 2005 as Vice
President of Manufacturing, and Steven A. Shallcross, who joined
us as Senior Vice President, Chief Financial Officer and
Treasurer in November 2005. The terms of Drs. Copmann and
Phadke and Mr. Shallcross' employment are described in
the "—Employment agreements" section below.
Option grants in last fiscal year
The following table outlines information regarding stock options
granted to our named officers in 2004. Amounts in the following
table under potential realizable values are amounts that could
be achieved for the respective options if they are exercised at
the end of the option term. For purposes of this analysis, the
Securities and Exchange Commission mandates the use of 5% and
10% assumed annual rates of compounded stock price appreciation,
and these rates do not represent an estimate or projection of
our future common stock prices. The amounts under potential
realizable value represent assumed rates of appreciation in the
value of our common stock from the assumed initial public
offering price of
$           per
share. Actual gains, if any, in this value will depend on the
future performance of our common stock and overall market
conditions. We may not achieve the amounts reflected in the
following table.
Potential
Individual grants
realizable value at
assumed annual
Number of
Percent of
rates of stock
securities
total options
price appreciation
underlying
granted to
for option term(3)
options
employees in
Exercise
Expiration
Name
granted
fiscal year(1)
price(2)
date
5%
10%
Mihael H.
    Polymeropoulos, M.D.
—
—
—
—
William D. "Chip" Clark
303,400
94.1%
$
0.10
09/01/2014
(1) The figures representing percentages of total options
granted to employees in the last fiscal year are based on a
total of 322,373 option shares granted to our employees during
fiscal year 2004.
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(2) The exercise price of each option granted was equal to
the fair market value of our common stock as valued by our board
of directors on the date of grant. The exercise price may be
paid in cash, cash equivalents, or in shares of our common stock.
(3) The potential realizable value is calculated based on
the ten-year term of the option at the time of grant. Stock
price appreciation of 5% and 10% is assumed according to rules
promulgated by the Securities and Exchange Commission and does
not represent our prediction of our stock price performance. The
potential realizable value at 5% and 10% appreciation is
calculated by:
•
Multiplying the number of shares of
    stock subject to a given stock option by the exercise price per
    share
•
Assuming that the aggregate stock
    value derived from that calculation compounds at the annual 5%
    or 10% rate shown in the table until the expiration of the option
•
Subtracting from that result the
    aggregate option exercise price
Option exercises and fiscal year-end option values
None of the named executive officers exercised options during
2004. The following table presents the number and value of
securities underlying unexercised options that were held by our
named executive officers as of December 31, 2004.
Number of securities
Value of unexercised
underlying unexercised
in-the-money options at
options at December 31, 2004
December 31, 2004(1)
Name
Exercisable
Unexercisable
Exercisable
Unexercisable
Mihael H.
    Polymeropoulos, M.D.
—
493,400
—
William D. "Chip" Clark
—
303,400
—
(1) Amounts presented under the caption "Value of
unexercised
in-the
-money options at
December 31, 2004" are based on the fair market value
of $        per share
minus the exercise price, multiplied by the number of shares
subject to the stock option, without taking into account any
taxes that might be payable in connection with the transaction.
Employment agreements
We have entered into offer letters or employment agreements with
each of Mihael H. Polymeropoulos, M.D., our Chief Executive
Officer, Steven Shallcross, our Chief Financial Officer, William
D. "Chip" Clark, our Chief Business Officer, Thomas
Copmann, our Vice President of Regulatory Affairs, and Deepak
Phadke, our Vice President of Manufacturing.
Mihael Polymeropoulos, M.D.
We entered into an
employment agreement in February 2005 with
Dr. Polymeropoulos, our President and Chief Executive
Officer, which provides for an annual base salary of $362,250
and the possibility of an annual target bonus amount equal to
40% of his annual base salary upon achievement of certain
performance goals. If Dr. Polymeropoulos' employment
is terminated without cause, he becomes permanently disabled, or
he terminates his employment for good reason, he will receive
the following severance benefits following his employment
termination: (a) a cash payment of his monthly base salary
for 12 months; (b) payment of his monthly COBRA health
insurance premiums; and (c) a bonus in an amount determined
as follows: (i) if he is terminated prior to the first
anniversary of this agreement, a pro-rata portion of the
anticipated first-year target bonus will be given to him;
(ii) if he is terminated on or following the first
anniversary and prior to the third, the bonus will equal the
greater of the most recent target bonus or the average target
bonuses awarded for the prior years; or (iii) if he is
terminated on or following the third anniversary, the bonus will
be equal to the greater of the most recent target bonus or the
average target bonus awarded for the prior three years. In
addition, the employment agreement provides for an option grant
covering 918,400 shares of our common stock with the
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following vesting acceleration terms: if, following a change in
control, Dr. Polymeropoulos is terminated without cause, or
he terminates his employment for good reason, he will become
vested in 100% of his then unvested shares.
William D. "Chip" Clark.
We entered into an
employment agreement in February 2005 with Mr. Clark, our
Senior Vice President, Chief Business Officer and Secretary,
which provides for an annual base salary of $227,625 and the
possibility of a annual target bonus equal to 25% of his annual
base salary upon achievement of certain performance criteria. If
Mr. Clark's employment is terminated without cause, he
becomes permanently disabled, or he terminates his employment
for good reason, he will receive the following severance
benefits following his employment termination: (a) a cash
payment of his monthly base salary for 12 months;
(b) payment of his monthly COBRA health insurance premiums;
and (c) a bonus in an amount determined as follows:
(i) if he is terminated prior to the first anniversary of
this agreement, a pro-rata portion of the anticipated first-year
target bonus will be given to him; (ii) if he is terminated
on or following the first anniversary and prior to the third,
the bonus will equal the greater of the most recent target bonus
or the average target bonuses awarded for the prior years; or
(iii) if he is terminated on or following the third
anniversary, the bonus will be equal to the greater of the most
recent target bonus or the average target bonus awarded for the
prior three years. In addition, the employment agreement
provides for an option grant covering 463,400 shares of our
common stock with the following vesting acceleration terms: if,
following a change in control, Mr. Clark is terminated
without cause, or he terminates his employment for good reason,
he will become vested in 24 months' worth of his then
unvested shares.
Steven A. Shallcross.
We entered into an employment
agreement in October 2005 with Mr. Shallcross, our Senior
Vice President, Chief Financial Officer and Treasurer, which
provides for an annual base salary of $250,000 and the
possibility of an annual target bonus equal to 25% of his annual
base salary upon achievement of certain performance criteria. If
Mr. Shallcross' employment is terminated without
cause, he becomes permanently disabled, or he terminates his
employment for good reason, he will receive the following
severance benefits following his employment termination:
(a) a cash payment of his monthly base salary for
12 months; (b) payment of his monthly COBRA health
insurance premiums; and (c) a bonus in an amount determined
as follows: (i) if he is terminated prior to the first
anniversary of this agreement, a pro-rata portion of the
anticipated first-year target bonus will be given to him;
(ii) if he is terminated on or following the first
anniversary and prior to the third, the bonus will equal the
greater of the most recent target bonus or the average target
bonuses awarded for the prior years; or (iii) if he is
terminated on or following the third anniversary, the bonus will
be equal to the greater of the most recent target bonus or the
average target bonus awarded for the prior three years. In
addition, the employment agreement provides for an option grant
covering 275,000 shares of our common stock with the
following vesting acceleration terms: if, following a change in
control, Mr. Shallcross is terminated without cause, or he
terminates his employment for good reason, he will become vested
in 24 months' worth of his then unvested shares.
Thomas Copmann, Ph.D.
We entered into an employment
agreement in May 2005 with Dr. Copmann, our Vice President
of Regulatory Affairs, which provides for an annual base salary
of $200,000 and the possibility of an annual target bonus equal
to 28% of his annual base salary upon achievement of certain
performance criteria. If Dr. Copmann's employment is
terminated without cause, he becomes permanently disabled, or he
terminates his employment for good reason, he will receive the
following severance benefits following his employment
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termination: (a) a cash payment of his monthly base salary
for 6 months; (b) payment of his monthly COBRA health
insurance premiums; and (c) a bonus in an amount equal to a
pro-rata portion of the annual target bonus for the year of his
termination. In addition, the employment agreement provides for
an option grant covering 75,000 shares of our common stock
with the following vesting acceleration terms: if, following a
change in control, Dr. Copmann is terminated without cause,
or he terminates his employment for good reason, he will become
vested in 12 months' worth of his then unvested shares.
Deepak Phadke, Ph.D.
We entered into an offer letter
in July 2005 with Dr. Phadke, our Vice President of
Manufacturing, which provides for a sign-on bonus of $20,000,
$10,000 of which was awarded in his first pay period and the
remainder of which will be awarded on the one year anniversary
of his start date. We also entered into an employment agreement
in August 2005 with Dr. Phadke, which provides for an
annual base salary of $170,000 and the possibility of an annual
target bonus equal to 15% of his annual base salary upon
achievement of certain performance criteria. If
Dr. Phadke's employment is terminated without cause,
he becomes permanently disabled, or he terminates his employment
for good reason, he will receive the following severance
benefits following his employment termination: (a) a cash
payment of his monthly base salary for 6 months;
(b) payment of his monthly COBRA health insurance premiums;
and (c) a bonus in an amount equal to a pro-rata portion of
the annual target bonus for the year of his termination. In
addition, the employment agreement provides for an option grant
covering 50,000 shares of our common stock with the
following vesting acceleration terms: if, following a change in
control, Dr. Phadke is terminated without cause, or he
terminates his employment for good reason, he will become vested
in 12 months' worth of his then unvested shares.
Severance and change in control arrangements
See "—Employment agreements" above for a
description of the severance and change in control arrangements
for Drs. Polymeropoulos, Copmann and Phadke and Messrs.
Clark and Shallcross. Drs. Polymeropoulos, Copmann and
Phadke and Messrs. Clark and Shallcross will only be eligible to
receive severance payments if each officer signs a general
release of claims.
The compensation committee of our board of directors, as plan
administrator of the Second Amended and Restated Management
Equity Plan, has the authority to provide for accelerated
vesting of the shares of common stock subject to outstanding
options held by our named executive officers and any other
person in connection with certain changes in control of Vanda.
Equity benefit plans
Second amended and restated management equity plan
Share reserve.
Our Second Amended and Restated Management
Equity Plan was adopted by us and approved by our stockholders
in December 2004. We have reserved a total of
5,348,975 shares of our common stock for issuance under the
plan as of September 30, 2005. No further option grants
will be made under this plan after the effective date of this
offering. The options that are outstanding under the plan after
the effective date of this offering will continue to be governed
by their existing terms. After the effective date of this
offering, any shares that remained available for grants under
the plan and any shares subject to options or share awards under
the plan that are canceled, forfeited or repurchased will not be
available for future grants or awards. The plan is administered
by our board of directors, or by one or more committees
appointed by the Board of Directors.
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Eligibility.
Employees, non-employee members of our board
of directors and consultants are eligible to participate in our
Second Amended and Restated Management Equity Plan.
Types of award.
Our Second Amended and Restated
Management Equity Plan provides for the purchase of shares of
our common stock, and incentive and nonstatutory stock options
to purchase shares of our common stock. The exercise price for
incentive stock options and nonstatutory stock options granted
under the plan may not be less than 100% and 30%, respectively,
of the fair market value of our common stock on the option grant
date. Optionees may pay the purchase price or the exercise price
by using cash, shares of common stock that the optionee already
owns, a full-recourse promissory note, by rendering services to
us, by an immediate sale of the option shares through a broker
designated by us, or with a loan from a broker designated by us
and secured by the option shares. In most cases, our options
vest over a four-year period following the date of grant and
generally expire 10 years after they are granted, unless
the optionee separates from service with us.
Change in control.
If we merge or consolidate with
another company, an option granted under the Second Amended and
Restated Management Equity Plan will be subject to the terms of
the merger or consolidation agreement, which may provide that
the option continues, is assumed or substituted, becomes vested
and exercisable in full, or is canceled and the optionees
receive a payment.
Amendments or termination.
Our board of directors may
amend or terminate the Second Amended and Restated Management
Equity Plan at any time. If our board amends the plan, it does
not need to seek stockholder approval of the amendment unless
the number of shares reserved under the plan increases or the
class of person eligible for the grant of incentive stock
options materially changes. The plan will automatically
terminate 10 years after its adoption by our board of
directors.
2006 equity incentive plan
We expect to adopt a 2006 Equity Incentive Plan prior to the
closing of this offering with the following material terms:
Share reserve.
We expect to
reserve                      shares
of our common stock for issuance under the 2006 Equity Incentive
Plan. On January 1 of each year, starting with the year 2007,
the number of shares in the reserve will automatically increase
by                     %
of the total number of shares of common stock that are
outstanding at that time or, if less,
by                      shares.
If options or shares awarded under the 2006 Equity Incentive
Plan are forfeited, then those options or shares will again
become available for awards under this plan.
Administration.
The compensation committee of our board
of directors will administer the 2006 Equity Incentive Plan. The
committee will have the complete discretion to make all
decisions relating to the interpretation and operation of this
Plan, including the discretion to determine who will receive an
award, what type of award it will be, how many shares will be
covered by the award, what the vesting requirements will be, if
any, and what the other features and conditions of each award
will be. The compensation committee will be able to reprice
outstanding options and modify outstanding awards in other ways.
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Eligibility.
The following groups of individuals will be
eligible to participate in the 2006 Equity Incentive Plan:
•
employees
•
members of our board of directors who are not employees
•
consultants
Types of awards.
The 2006 Equity Incentive Plan will
provide for the following types of award:
•
options to purchase shares of our common stock
•
stock appreciation rights
•
restricted shares of our common stock
•
stock units (sometimes called phantom shares)
Options and stock appreciation rights.
Both incentive
stock options and nonstatutory stock options will be available
for grant under the 2006 Equity Incentive Plan. An optionee who
exercises an incentive stock option may qualify for favorable
tax treatment under section 422 of the Internal Revenue
Code of 1986. On the other hand, nonstatutory stock options do
not qualify for such favorable tax treatment. The exercise price
of options and stock appreciation rights granted under the 2006
Equity Incentive Plan may not be less than 100% of the fair
market value of our common stock on the grant date. Optionees
may pay the exercise price by using:
•
cash
•
shares of common stock that the optionee already owns
•
an immediate sale of the option shares through a broker
    designated by us
•
a full-recourse promissory note
Options and stock appreciation rights will vest at the time or
times determined by the compensation committee. In most cases,
our options will vest over the four-year period following the
date of grant. Options and stock appreciation rights generally
expire 10 years after they are granted, except that they
generally expire earlier if the optionee's service
terminates earlier. The 2006 Equity Incentive Plan will provide
that no participant may receive options covering more than
500,000 shares and stock appreciation rights covering more
than 500,000 shares in the same year, except that a newly
hired employee may receive options covering up to
1,000,000 shares and stock appreciation rights covering up
to 1,000,000 shares in the first year of employment.
The 2006 Equity Incentive Plan will also provide for automatic
annual option grants to members of our board of directors who
are not our employees. See "—Director
compensation."
Restricted shares and stock units.
Restricted shares may
be awarded under the 2006 Equity Incentive Plan in return for:
•
cash
•
a full-recourse promissory note
•
services
Restricted shares and stock units will vest at the time or times
determined by the compensation committee.
Change in control.
If a change in control of Vanda
occurs, an award under the 2006 Equity Incentive Plan will vest
on an accelerated basis to the extent determined by the
compensation
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committee. The compensation committee may determine that
outstanding grants will vest in full or in part at the time of
the change in control. It may also determine that the grants
will vest on an accelerated basis only if the participant is
actually or constructively discharged within a specified period
of time after the change in control. Finally, the committee will
have the discretion to determine that the grants will remain
outstanding without acceleration of vesting, except that if the
surviving corporation fails to assume an outstanding award or
replace it with a comparable award or cash payment, then the
award will always become fully vested as a result of the change
in control. A change in control will include the following
events for purposes of the 2006 Equity Incentive Plan:
•
a merger of Vanda after which our own stockholders own 50% or
    less of the surviving corporation
•
a sale of all or substantially all of our assets
•
a proxy contest that results in the replacement of 50% or more
    of our directors over a
24-month
period
•
an acquisition of      % or more of our
    outstanding stock by any person or group, other than a person
    related to Vanda (such as a holding company owned by our
    stockholders)
Amendments or termination.
Our board will be able to
amend or terminate the 2006 Equity Incentive Plan at any time.
If our board were to amend the plan, it would not need to ask
for stockholder approval of the amendment unless applicable law
requires it. The 2006 Equity Incentive Plan would continue in
effect indefinitely, unless the board were to decide to
terminate the plan.
401(k) plan
We have established a 401(k) plan to allow our employees to save
on a tax-favorable basis for their retirements. We match
contributions made by employees pursuant to the plan.
Limitation of liability and indemnification of officers and
directors
Upon the closing of this offering, we will adopt and file a new
amended and restated certificate of incorporation and will amend
and restate our bylaws. Our new amended and restated certificate
of incorporation and amended and restated bylaws will provide
that we will indemnify our directors and officers to the fullest
extent permitted by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities
reasonably incurred in connection with their service for or on
behalf of us. In addition, the new amended and restated
certificate of incorporation will provide that our directors
will not be personally liable for monetary damages to us for
breaches of their fiduciary duty as directors, unless they
violated their duty of loyalty to us or our stockholders, acted
in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions or derived an
improper personal benefit from their action as directors. We
maintain liability insurance which insures our directors and
officers against certain losses and which insures us against our
obligations to indemnify our directors and officers.
In addition, we have entered into indemnification agreements
with each of our directors and officers. These agreements, among
other things, require us to indemnify each director and officer
to the fullest extent permitted by Delaware law, including
indemnification of expenses such as attorneys' fees,
judgments, fines and settlement amounts incurred by the director
or officer in any action or proceeding, including any action or
proceeding by or in right of us,
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arising out of the person's services as a director or
officer. At present, we are not aware of any pending or
threatened litigation or proceeding involving any of our
directors, officers, employees or agents in which
indemnification would be required or permitted. We believe
provisions in our new amended and restated certificate of
incorporation and indemnification agreements are necessary to
attract and retain qualified persons as directors and officers.
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Certain relationships and related party transactions
2004 securityholders' agreement
We have entered into a 2004 Securityholders' Agreement with
certain holders of our Common Stock, Series A Preferred
Stock and Series B Preferred Stock, including our officers
and directors and certain affiliates of such officers and
directors. Under the Securityholders' Agreement, we have
granted the following rights to such stockholders:
•
rights to demand the registration of our common stock and to
    participate in other public offerings of our common stock (for
    more information regarding the registration rights granted
    pursuant to the 2004 Securityholders' Agreement, see
    "Description of capital stock— Registration
    rights")
•
rights to purchase certain new issuances of our securities
    (which rights do not apply with respect to, and will terminate
    upon the completion of, this offering)
•
rights to information regarding us (which rights will terminate
    upon the conversion of our preferred stock into common stock
    upon completion of this offering)
•
rights to inspect our facilities, books, records and to discuss
    our affairs, finances and accounts with its officers (which
    rights will terminate upon the conversion of our preferred stock
    into common stock upon completion of this offering)
Additionally, the Securityholders' Agreement restricts the
transfer of securities held by such stockholders, subject to
certain exceptions (including a sale made pursuant to a public
offering of our stock).
Voting agreement
We have entered into a voting agreement which provides for the
election of certain stockholder-designated directors to our
board. This agreement will terminate upon the closing of this
offering.
Indemnification agreements
We have entered into indemnification agreements with each of our
directors. These agreements, among other things, require us to
indemnify each director to the fullest extent permitted by
Delaware law, including indemnification of expenses such as
attorneys' fees, judgments, fines and settlement amounts
incurred by the director in any action or proceeding, including
any action or proceeding by or in right of us, arising out of
the person's services as a director.
Relationship with Care Capital, LLC
From time to time, we reimbursed Care Capital, LLC ("Care
Capital"), an affiliate of our stockholders, Care Capital
Investments II, LP and Care Capital Offshore
Investments II, LP, for certain expenses incurred by Care
Capital on our behalf. We reimbursed Care Capital for
approximately $54,000 and approximately $299,000 for the year
ended December 31, 2004 and for the period from
March 13, 2003 (inception) to December 31, 2003,
respectively.
We also used the services of a Care Capital employee and
reimbursed Care Capital for such personnel services related to
occupancy and salary expenses incurred on our behalf.
Reimbursements related to such expenses were approximately
$31,000 and $49,000 for the year ended December 31, 2004
and the period from March 13, 2003 (inception) to
December 31, 2003, respectively.
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Principal stockholders
The following table sets forth certain information known to us
regarding beneficial ownership of our common stock as of
September 30, 2005 and as adjusted to reflect the sale of
the shares of common stock in this offering by:
•
each person known by us to be the beneficial owner of more than
    5% of our common stock
•
our named executive officers
•
each of our directors
•
all executive officers and directors as a group
Unless otherwise indicated in the footnotes, to our knowledge,
each stockholder possesses sole voting and investment power over
the shares listed, except for shares owned jointly with that
person's spouse.
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Options
and warrants to purchase shares of our common stock that are
exercisable within 60 days of September 30, 2005, are
deemed to be beneficially owned by the persons holding these
options for the purpose of computing percentage ownership of
that person, but are not treated as outstanding for the purpose
of computing any other person's ownership percentage.
Percentage of shares beneficially owned before the offering is
based on 40,232,047 shares of common stock outstanding as
of September 30, 2005, assuming the conversion of all
outstanding Preferred Stock to Common Stock as of such date.
Percentage of shares beneficially owned after the offering is
based
on                      shares
of common stock outstanding
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after the closing of the offering. This table does not take into
account the issuance of 12,195,129 shares of our
Series B Preferred Stock made on December 9, 2005.
Percentage of shares
beneficially owned
Number of shares
Before
After
Name and address of beneficial owner(1)
beneficially owned
offering
offering
5% Stockholders
Care Capital Investments II,
    LP(2)
9,172,142
22.80%
47 Hulfish St., Ste 310
Princeton, NJ 08542
Domain Partners VI, L.P.(3)
8,130,082
20.21%
One Palmer Square, Suite 515
Princeton, NJ 08542
Biomedical Sciences Investment
    Fund Pte Ltd.(4)
6,528,918
16.23%
20 Biopolis Way #09-01
Centros, Singapore 138668
Prospect Venture Partners II,
    L.P.(5)
6,097,562
15.16%
435 Tasso St., Ste. 200
Palo Alto, CA 94301
Rho Ventures IV, L.P.(6)
6,097,562
15.16%
Carnegie Hall Tower
152 West 57th Street
23rd Floor
New York, NY 10019
MedImmune Ventures,
    Inc.(7)
4,065,042
10.10%
c/o MedImmune, Inc.
One MedImmune Way
Gaithersburg, MD 20878
Executive Officers and
    Directors
Mihael H.
    Polymeropoulos, M.D.(8)
308,375
*
William D. "Chip" Clark(9)
88,492
*
Argeris N. Karabelas, Ph.D.(10)
9,172,142
22.80%
Brian K. Halak, Ph.D.(11)
8,130,082
20.21%
Wayne T. Hockmeyer, Ph.D.(12)
4,065,042
10.10%
David Ramsay(13)
9,172,142
22.79%
James B. Tananbaum, M.D.(14)
6,097,562
15.16%
Deepak Phadke, Ph.D.(15)
—
*
Thomas Copmann, Ph.D.(16)
—
*
All executive officers and
    directors as a group
34,374,009
85.44%
* Represents beneficial ownership of less than one percent
of our outstanding common stock.
(1) Unless otherwise indicated, the address for each
beneficial owner is c/o Vanda Pharmaceuticals Inc.,
9620 Medical Center Drive, Suite 201, Rockville,
Maryland 20850.
(2) Includes 8,583,366 shares held of record by Care
Capital Investments II, LP and 588,776 shares held of
record by Care Capital Offshore Investments II, LP.
Excludes 2,610,920 shares issuable upon the conversion of
Series B Preferred Stock purchased by Care Capital
Investments II, LP on December 9, 2005 and
179,097 shares issuable upon the conversion of
Series B Preferred Stock purchased by Care Capital Offshore
Investments II, LP on December 9, 2005.
(3) Includes 8,043,874 shares held of record by Domain
Partners VI, L.P. and 86,208 shares held of record by
DP VI Associates, L.P. Excludes 2,446,817 shares
issuable upon the conversion of Series B Preferred Stock
purchased by Domain Partners VI, L.P.
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on December 9, 2005 and 26,223 shares issuable upon
the conversion of Series B Preferred Stock purchased by
DP VI Associates, L.P. on December 9, 2005.
(4) Represents 6,528,918 shares held directly but
excludes 1,985,991 shares issuable upon the conversion of
Series B Preferred Stock purchased by Biomedical Sciences
Investment Fund Pte Ltd. on December 9, 2005. EDB
Investments Pte. Ltd ("EDB Investments"), the parent
entity of Biomedical Sciences Investment Fund Pte. Ltd.,
and the Economic Development Board of Singapore
("EDB"), the ultimate parent entity of EDB
Investments, may be deemed to have voting and dispositive power
over the shares owned beneficially and of record by Biomedical
Sciences Investment Fund Pte. Ltd.
(5) Includes 6,006,098 shares held of record by
Prospect Venture Partners II, L.P. and 91,464 shares
held of record by Prospect Associates II, L.P. Excludes
1,826,958 shares issuable upon the conversion of
Series B Preferred Stock purchased by Prospect Venture
Partners II, L.P. on December 9, 2005 and
27,822 shares issuable upon the conversion of Series B
Preferred Stock purchased by Prospect Associates II, L.P.
on December 9, 2005.
(6) Includes 763,478 shares held of record by Rho
Ventures IV, L.P., 1,873,172 shares held of record by
Rho Ventures IV GmbH & Co. Beteiligungs KG,
1,797,418 shares held of record by Rho Ventures IV
(QP), L.P. and 1,663,494 shares held of record by Rho
Management Trust I. Excludes 232,238 shares issuable
upon the conversion of Series B Preferred Stock purchased
by Rho Ventures IV, L.P. on December 9, 2005,
569,789 shares issuable upon the conversion of
Series B Preferred Stock purchased by Rho Ventures IV
GmbH & Co. Beteiligungs KG on December 9, 2005,
546,746 shares issuable upon the conversion of
Series B Preferred Stock purchased by Rho Ventures IV
(QP), L.P. on December 9, 2005 and 506,008 shares of
Series B Preferred Stock purchased by Rho Management
Trust I on December 9, 2005.
(7) Excludes 1,236,520 shares issuable upon the conversion
of Series B Preferred Stock purchased by MedImmune Ventures,
Inc. on December 9, 2005.
(8) Excludes 1,979,006 shares unexercisable as of
September 30, 2005.
(9) Excludes 1,055,199 shares unexercisable as of
September 30, 2005.
(10) Includes 8,583,366 shares held of record by Care
Capital Investments II, LP and 588,776 shares of
record held by Care Capital Offshore Investments II, LP.,
but excludes 2,610,920 shares issuable upon the conversion
of Series B Preferred Stock purchased by Care Capital
Investments II, LP on December 9, 2005 and
179,097 shares issuable upon the conversion of
Series B Preferred Stock purchased by Care Capital Offshore
Investments II, LP on December 9, 2005.
Dr. Karabelas is a Partner of Care Capital, LLC. Care
Capital, LLC is the general partner of Care Capital
Investments II, LP and Care Capital Offshore
Investments II, LP. Dr. Karabelas disclaims beneficial
ownership of the shares held by Care Capital
Investments II, LP and Care Capital Offshore
Investments II, LP except to the extent of his pecuniary
interest therein.
(11) Includes 8,043,874 shares held of record by
Domain Partners VI, L.P. and 86,208 shares held of
record by DP VI Associates, L.P., but excludes
2,446,817 shares issuable upon the conversion of
Series B Preferred Stock purchased by Domain
Partners VI, L.P. on December 9, 2005 and
26,223 shares issuable upon the conversion of Series B
Preferred Stock purchased by DP VI Associates, L.P. on
December 9, 2005. Dr. Halak is a Principal of Domain
Associates, LLC, the [general partner] of Domain
Partners VI, L.P. and DP VI Associates, L.P.
Dr. Halak disclaims beneficial ownership of the shares held
by Domain Partners VI, L.P. and DP VI Associates, L.P.
except to the extent of his pecuniary interest therein.
(12) Includes 4,065,042 shares held of record by
MedImmune Ventures, Inc., but excludes 1,236,520 shares
issuable upon the conversion of Series B Preferred Stock
purchased by MedImmune Ventures, Inc. on December 9, 2005.
Dr. Hockmeyer is the President of MedImmune Ventures, Inc.
He disclaims beneficial ownership of the shares held by
MedImmune Ventures, Inc. except to the extent of his pecuniary
interest therein.
(13) Includes 8,583,366 shares held of record by Care
Capital Investments II, LP and 588,776 shares held of
record held by Care Capital Offshore Investments II, LP,
but excludes 2,610,920 shares issuable upon the conversion
of Series B Preferred Stock purchased by Care Capital
Investments II, LP on December 9, 2005 and
179,097 shares issuable upon the conversion of
Series B Preferred Stock purchased by Care Capital Offshore
Investments II, LP on December 9, 2005.
Mr. Ramsay is a Partner of Care Capital, LLC. Care Capital,
LLC is the general partner of Care Capital Investments II,
LP and Care Capital Offshore Investments II, LP.
Mr. Ramsay disclaims beneficial ownership of the shares
held by Care Capital Investments II, LP and Care Capital
Offshore Investments II, LP except to the extent of his
pecuniary interest therein.
(14) Includes 6,006,098 shares held of record by
Prospect Venture Partners II, L.P. and 91,464 shares
held of record by Prospect Associates II, L.P. but excludes
1,826,958 shares issuable upon the conversion of
Series B Preferred Stock purchased by Prospect Venture
Partners II, L.P. on December 9, 2005 and
27,822 shares issuable upon the conversion of Series B
Preferred Stock purchased by Prospect Associates II, L.P.
on December 9, 2005. Dr. Tananbaum serves as Managing
Director of Prospect Venture Partners II, L.P. [and
Prospect Associates II, L.P.] He disclaims beneficial
ownership of the shares held of record by Prospect Venture
Partners II, L.P. and Prospect Associates II, L.P.
except to the extent of his pecuniary interest therein.
(15) Excludes 50,000 shares unexercisable as of
September 30, 2005.
(16) Excludes 75,000 shares unexercisable as of
September 30, 2005.
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Description of capital stock
General
The following is a summary of the rights of our common stock and
preferred stock and related provisions of our restated
certificate of incorporation and bylaws as they will be in
effect upon the closing of this offering. For more detailed
information, please see our restated certificate of
incorporation, bylaws, governance agreement and amended and
restated investors' rights agreement, which are filed as
exhibits to the registration statement of which this prospectus
is a part.
Immediately following the closing of this offering, our
authorized capital stock will consist
of                      shares,
each with a par value of $0.01 per share, of which:
•
shares
    are designated as common stock
•
shares
    are designated as preferred stock
At September 30, 2005, we had outstanding
150,739 shares of common stock and 40,081,308 shares
of preferred stock. In addition, as of September 30, 2005,
3,783,490 shares of our common stock were subject to
outstanding options, and 166,660 shares of our capital
stock were subject to outstanding warrants. At
September 30, 2005, 140,739 shares of our outstanding
common stock were held by our employees and consultants. 36,838
of these shares are subject to a lapsing right of repurchase in
our favor, under which we may repurchase these shares upon the
termination of the holder's employment or consulting
relationship. The number of shares of common stock outstanding
as of September 30, 2005 assumes the conversion of all of
our outstanding preferred stock outstanding as of such date into
40,081,308 shares of common stock.
Common stock
Voting rights
Unless otherwise provided for in our restated certificate of
incorporation or required by applicable law, on all matters
submitted to our stockholders for vote, our common stockholders
will be entitled to one vote per share, voting together as a
single class, upon the closing of this offering.
Dividends
Upon the closing of this offering, our restated certificate of
incorporation will provide that subject to preferences that may
apply to any shares of preferred stock outstanding at the time,
the holders of common stock shall be entitled to share equally
in any dividends that our board of directors may determine to
issue from time to time. In the event a dividend is paid in the
form of shares of common stock or rights to acquire shares of
common stock, the holders of common stock shall receive common
stock, or rights to acquire common stock, as the case
may be.
Liquidation
Upon the closing of this offering, our restated certificate of
incorporation will provide that upon our liquidation,
dissolution or winding-up, the holders of common stock shall be
entitled to share equally all assets remaining after the payment
of any liabilities and the liquidation preferences on any
outstanding preferred stock.
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Anti-takeover effects of our amended and restated certificate
of incorporation, bylaws and Delaware law
Some provisions of Delaware law and our amended and restated
certificate of incorporation and bylaws could make the following
transactions more difficult:
•
our acquisition by means of a tender offer
•
our acquisition by means of a proxy contest or otherwise
•
removal of our incumbent officers and directors
These provisions, summarized below, are expected to discourage
and prevent coercive takeover practices and inadequate takeover
bids. These provisions are designed to encourage persons seeking
to acquire control of us to first negotiate with our board of
directors, and also are intended to provide management with
flexibility to enhance the likelihood of continuity and
stability in our composition if our board of directors
determines that a takeover is not in our best interests or the
best interests of our stockholders. These provisions, however,
could have the effect of discouraging attempts to acquire us,
which could deprive our stockholders of opportunities to sell
their shares of common stock at prices higher than prevailing
market prices. We believe that the benefits of these provisions,
including increased protection of our potential ability to
negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us, outweigh the
disadvantages of discouraging takeover proposals because
negotiation of takeover proposals could result in an improvement
of their terms.
Election and removal of directors.
Our board of directors
is divided into three classes serving staggered three-year
terms. This system of electing directors may tend to discourage
a third party from making a tender offer or otherwise attempting
to obtain control of us because generally at least two
stockholders' meetings will be required for stockholders to
effect a change in control of the board of directors. Our
amended and restated certificate of incorporation and our bylaws
contain provisions that establish specific procedures for
appointing and removing members of the board of directors. Under
our amended and restated certificate of incorporation, vacancies
and newly created directorships on the board of directors may be
filled only by a majority of the directors then serving on the
board, and under our bylaws, directors may be removed by the
stockholders only for cause.
Stockholder meetings.
Under our bylaws, only the board of
directors, the Chairman of the board or our Chief Executive
Officer may call special meetings of stockholders.
Requirements for advance notification of stockholder
nominations and proposals.
Our bylaws establish advance
notice procedures with respect to stockholder proposals and the
nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of
directors or a committee of the board of directors.
Delaware anti-takeover law.
Upon the closing of this
offering, we will be subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general,
Section 203 prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested
stockholder for a period of three years following the date the
person became an interested stockholder, unless the business
combination or the transaction in which the person became an
interested stockholder is approved in a prescribed manner.
Generally, a business combination includes a merger, asset or
stock sale, or another transaction resulting in a financial
benefit to the interested stockholder. Generally, an interested
stockholder is a person who, together with affiliates and
associates, owns, or within three years prior to the date of
determination of interested stockholder status did own, 15% or
more of
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the corporation's voting stock. The existence of this
provision may have an anti-takeover effect with respect to
transactions that are not approved in advance by our board of
directors, including discouraging attempts that might result in
a premium over the market price for the shares of common stock
held by stockholders.
Elimination of stockholder action by written consent.
Our
amended and restated certificate of incorporation eliminates the
right of stockholders to act by written consent without a
meeting after this offering.
No cumulative voting.
Our amended and restated
certificate of incorporation and bylaws do not provide for
cumulative voting in the election of directors. Cumulative
voting allows a minority stockholder to vote a portion or all of
its shares for one or more candidates for seats on the board of
directors. Without cumulative voting, a minority stockholder
will not be able to gain as many seats on our board of directors
based on the number of shares of our stock the stockholder holds
as the stockholder would be able to gain if cumulative voting
were permitted. The absence of cumulative voting makes it more
difficult for a minority stockholder to gain a seat on our board
of directors to influence our board's decision regarding a
takeover.
Undesignated preferred stock.
The authorization of
undesignated preferred stock makes it possible for our board of
directors to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to
change control of us.
These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management.
Limitation of liability of directors
To the fullest extent permitted by the Delaware General
Corporation Law as it now exists or hereafter may be amended,
our directors will not be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty
as a director.
If the Delaware General Corporation Law is later amended to
authorize the further elimination or limitation of the liability
of directors, then the liability of our directors, in addition
to the limitation on personal liability provided in our
certificate of incorporation, will be limited to the fullest
extent permitted by the amended Delaware General Corporation
Law. Any repeal or modification of the provisions in our
certificate of incorporation by our stockholders relating to the
limitation of the liability of our directors will be prospective
only and will not adversely affect any limitation on the
personal liability of our directors existing at the time of the
repeal or modification.
Warrants
As of September 30, 2005, there were warrants outstanding
to purchase a total of 166,660 shares of common stock at a
price of $0.40 per share.
Registration rights
The holders of 10,000 shares of our common stock and
40,081,308 shares of our common stock issuable upon the
conversion of our Series A Preferred Stock and
Series B Preferred Stock (not including shares of
Series B Preferred Stock issued on December 9, 2005)
are entitled to rights with respect to the registration of their
shares under the Securities Act. These registration rights are
contained in our 2004 Securityholders Agreement and are
described below. These registration rights will expire five
years following the completion of this offering.
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Demand registration rights
For so long as at least 25% of our outstanding common stock has
been first issued in one or more public offerings, stockholders
with demand registration rights under our 2004 Securityholders
Agreement has the right to require that we register such
stockholders' common stock. We are only obligated to effect
two registrations in response to these demand registration
rights, and we are not obligated to effect any demand
registration for shares having an aggregate market value of less
than $5,000,000 as of the date notice is given to us to effect
such a registration. We may postpone the filing of a
registration statement for up to 90 days once in any
12-month
period if our
board of directors determines in good faith that the filing
would be significantly disadvantageous to us and our affiliates,
taken as a whole. We must pay all expenses incurred in
connection with demand registration rights.
Incidental registration rights
If we register any securities for public sale following the
closing of this offering, stockholders with incidental
registration rights under the 2004 Securityholders'
Agreement have the right to include their shares in the
registration, subject to specified exceptions. The underwriters
of any underwritten offering have the right to limit the number
of shares registered by these stockholders due to marketing
reasons. We must pay all expenses incurred in connection with
these incidental registration rights.
S-3
registration
rights
If we are eligible to file a registration statement on
Form S-3,
the
stockholders
with S-3
registration rights under the 2004 Securityholder Agreement can
request that we register their shares, provided that the total
price of the shares of common stock offered to the public is at
least $1,000,000 (before deduction of underwriting discounts and
commissions). The holders
of S-3
registration rights may only require us to file one
Form S-3
registration statement in any
12-month
period. We may
postpone the filing of a
Form S-3
registration statement for up to 90 days once in any
12-month
period if our
board of directors determines in good faith that the filing
would be seriously detrimental to us.
Transfer agent and registrar
The transfer agent and registrar for our common stock and the
rights is American Stock Transfer and Trust Company.
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Shares eligible for future sale
Prior to this offering, there has been no market for our common
stock. Future sales of substantial amounts of our common stock
in the public market could adversely affect prevailing market
prices from time to time. Furthermore, since only a limited
number of shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions
on resale described below, sales of substantial amounts of our
common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Sales of restricted shares
Upon completion of this offering, we will have outstanding an
aggregate                      shares
of common stock (not including shares which were issued after
September 30, 2005 and which were not issued in connection
with this offering), assuming no exercise of the
underwriters' over-allotment option and no exercise of
outstanding options or warrants. Of these shares,
the                      shares
sold in this offering will be freely tradable without
restrictions or further registration under the Securities Act,
unless one of our existing affiliates as that term is defined in
Rule 144 under the Securities Act purchases such shares.
The remaining 40,232,047 shares of our common stock held by
existing stockholders as of September 30, 2005 are
restricted shares or are restricted by the contractual
provisions described below. Restricted shares may be sold in the
public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701
of the Securities Act, which are summarized below. Of these
restricted shares, 10,010,000 shares will be available for
resale in the public market in reliance on Rule 144(k), all
of which shares are restricted by the terms of the
lock-up
agreements
described below. An additional 15,040,654 of these restricted
shares will be available for resale in the public market in
reliance on Rule 144, all of which shares are restricted by
the terms of the
lock-up
agreements. The
remaining 15,181,393 shares become eligible for resale in
the public market at various dates thereafter, all of which
shares are restricted by the terms of the
lock-up
agreements and
36,838 of which shares were held by our employees and restricted
as of September 30, 2005 by our rights to repurchase such
shares
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upon termination of employment. The table below sets forth the
approximate number of shares eligible for future sale:
Approximate additional
number of shares
Days after date
becoming eligible for
of this prospectus
future sale
Comment
On Effectiveness
Freely tradable shares sold in
    offering; shares salable under Rule 144(k) that are not
    locked up or subject to our rights of repurchase
90 Days
Shares eligible on effectiveness;
    vested options for shares salable under Rule 144 and 701
    that are not locked up; additional shares no longer subject to
    our rights of repurchase
180 Days
Lock-up released; shares and vested
    options for shares salable under Rule 144, 144(k) and 701;
    additional shares no longer subject to our rights of repurchase
Thereafter
Restricted securities held for
    1 year or less
Under Rule 144 as currently in effect, beginning
90 days after the date of this prospectus, a person who has
beneficially owned restricted shares for at least one year and
has complied with the requirements described below would be
entitled to sell some of its shares within any three-month
period. That number of shares cannot exceed the greater of one
percent of the number of shares of our common stock then
outstanding, which will equal
approximately                                          shares
immediately after this offering, or the average weekly trading
volume of our common stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on
Form 144 reporting the sale. Sales under Rule 144 are
also restricted by manner of sale provisions, notice
requirements and the availability of current public information
about us. Rule 144 also provides that our affiliates who
are selling shares of our common stock that are not restricted
shares must nonetheless comply with the same restrictions
applicable to restricted shares with the exception of the
holding period requirement.
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the 90 days
preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years is entitled to sell
those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of
Rule 144. Accordingly, unless otherwise restricted, these
shares may be sold immediately upon the completion of this
offering.
Options
Rule 701 provides that the shares of common stock acquired
upon the exercise of currently outstanding options or other
rights granted under our Management Equity Plan may be resold,
to the extent not restricted by the terms of the
lock-up
agreements, by
persons, other than affiliates, beginning 90 days after the
date of this prospectus, restricted only by the manner of sale
provisions of Rule 144, and by affiliates in accordance
with Rule 144, without compliance
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with its one-year minimum holding period. 140,739 shares
(not including shares issued after September 30, 2005 upon
the exercise of options) will be available for resale in the
public market in reliance on Rule 701 beginning
90 days after the date of this prospectus, all of which
shares are restricted by the terms of the
lock-up
agreements and
36,838 shares of which were restricted as of
September 30, 2005 by our rights to repurchase such shares
upon termination of employment. As of September 30, 2005,
our board of directors had authorized an aggregate of up to
5,489,714 shares of common stock for issuance under our
existing equity plans. As of September 30, 2005 options to
purchase a total of 3,783,490 shares of common stock were
outstanding, all of which options were exercisable as of such
date. Of these, as of September 30, 2005 options to
purchase a total of 3,356,004 shares were restricted by our
right to repurchase unvested shares upon the termination of an
optionee's business relationship with us, and options to
purchase a total of 427,486 shares were no longer
restricted by our right of repurchase and will be eligible for
sale, if not restricted by the terms of the
lock-up
agreements, in
the public market in accordance with Rule 701 under the
Securities Act beginning 90 days after the date of this
prospectus. All of the shares issuable upon exercise of these
options are restricted by the terms of the
lock-up
agreements.
We intend to file one or more registration statements on
Form S-8
under the
Securities Act following this offering to register all shares of
our common stock which have been issued or are issuable upon
exercise of outstanding stock options or other rights granted
under our equity plans. These registration statements are
expected to become effective upon filing. Shares covered by
these registration statements will thereupon be eligible for
sale in the public market, upon the expiration or release from
the terms of the
lock-up
agreements, to
the extent applicable, or subject in certain cases to vesting of
such shares.
Warrants
As of September 30, 2005, we had outstanding warrants
exercisable for a total of 166,600 shares of our common
stock, all of which are currently exercisable. All of these
shares are restricted by the terms of the
lock-up
agreements.
Lock-up
agreements
Except for sales of common stock to the underwriters in
accordance with the terms of the underwriting agreement, we and
our executive officers, directors, stockholders and
substantially all of our optionholders have agreed not to sell
or otherwise dispose of, directly or indirectly, any shares of
our common stock (or any security convertible into or
exchangeable or exercisable for common stock) without the prior
written consent of J.P. Morgan Securities Inc. and Banc of
America Securities LLC for a period of 180 days from the
date of this prospectus. In addition, for a period of
180 days from the date of this prospectus, except as
required by law, we have agreed that our board of directors will
not consent to any offer for sale, sale or other disposition, or
any transaction which is designed or could be expected to result
in the disposition by any person, directly or indirectly, of any
shares of our common stock without the prior written consent of
J.P. Morgan Securities Inc. and Banc of America Securities LLC,
in their sole discretion, at any time or from time to time and
without notice, may release for sale in the public market all or
any portion of the shares restricted by the terms of the
lock-up
agreements.
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Registration rights
The holders of 40,091,308 shares of common stock, including
common stock issuable upon the exercise of our Series A
Preferred Stock and Series B Preferred Stock (but not
including shares of Series B Preferred Stock issued on
December 9, 2005), are entitled to have their shares
registered by us under the Securities Act under the terms of an
agreement between us and the holders of these registrable
securities. Subject to limitations specified in the agreement,
these registration rights include the following:
•
the holders of at least 25% of the then outstanding registrable
    securities may require, on two occasions beginning six months
    after the date of this prospectus, that we use our best efforts
    to register the registrable securities for public resale
•
if we register any common stock, either for our own account or
    for the account of other security holders, the holders of
    registrable securities are entitled to include their shares of
    common stock in the registration, subject to the ability of the
    underwriters to limit the number of shares included in the
    offering in view of market conditions
•
the holders of at least 25% of the then outstanding registrable
    securities may require us to register all or a portion of their
    registrable securities on
Form S-3
once in
    any twelve-month period when use of that form becomes available
    to us, provided that the proposed aggregate selling price is at
    least $1,000,000 before underwriting discounts and commissions
All such registration rights terminate five years following the
closing of this offering.
Material United States federal income tax consequences
Overview
The following is a general discussion of the material United
States federal income tax consequences of the ownership and
disposition of our common stock. This discussion is based on the
Internal Revenue Code of 1986, as amended (which we refer to as
the "Code"), final, temporary and proposed Treasury
regulations (which we refer to as the "Treasury
regulations") promulgated thereunder by the Internal
Revenue Service (which we refer to as the "IRS"), and
administrative and judicial interpretations thereof, each as in
effect and available on the date hereof, all of which are
subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to our
stockholders. You should note that, due to a lack of definitive
judicial or administrative interpretation, uncertainties exist
with respect to many of the tax consequences described below.
You should also be aware that this discussion is addressed only
to those of our stockholders who are United States citizens and
residents and who hold our stock as capital assets. This
discussion does not address all of the United States federal
income tax consequences that may be relevant to particular
stockholders in light of their individual circumstances, such as
stockholders who are subject to the alternative minimum tax
provisions of the Code, who are dealers in securities or foreign
currency, who are financial institutions or insurance companies,
who are corporations, who are investors in pass-through
entities, who are tax-exempt organizations, who hold their
shares as "qualified small business stock" pursuant to
Section 1202 of the Code, who are foreign persons or
entities, who do not hold their shares of our stock as capital
assets, who acquired their shares in connection with stock
option or stock purchase plans or in other compensatory
transactions, who hold shares of our stock as part of
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an integrated investment (including a hedge or a straddle)
comprised of shares of our stock and one or more other
positions, or who have previously entered into a conversion
transaction or constructive sale of shares of our stock under
the constructive sale provisions of the Code.
We have not requested a ruling from the IRS in connection with
the tax consequences described herein. Accordingly, the
discussion below neither binds the IRS nor precludes it from
adopting a contrary position.
IN VIEW OF THE FOREGOING AND BECAUSE THE FOLLOWING DISCUSSION
IS INTENDED AS A GENERAL SUMMARY ONLY, YOU ARE URGED TO CONSULT
YOUR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
OWNERSHIP OR DISPOSITION OF OUR STOCK, INCLUDING THE APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES, IN LIGHT OF
YOUR OWN PARTICULAR TAX SITUATIONS.
General consequences of owning common stock
Distributions, if any, paid with respect to our common stock
will be taxable dividends to the extent of our applicable
earnings and profits. To the extent that distributions on our
common stock exceed our applicable earnings and profits, the
amount distributed will be applied to reduce the tax basis in
such common stock, and, to the extent that the amount
distributed exceeds the tax basis, will constitute long- or
short-term capital gain, depending on the holding period for
such common stock.
General consequences of disposing of common stock
A stockholder will recognize gain or loss upon the sale of its
common stock equal to the difference between its adjusted basis
in its sold shares and the sum of the amount of cash and the
fair market value of any property the stockholder receives in
exchange therefor. Except with respect to the various issues
described herein, any such gain or loss will be long- or
short-term capital gain or loss depending on the
stockholder's holding period for the common stock.
Under Section 1258 of the Code, gain from the sale or other
disposition of stock that is recognized on the disposition or
other termination of a position that was held as part of a
"conversion transaction" will be treated as ordinary
income. A "conversion transaction" includes certain
transactions from which substantially all of a taxpayer's
expected return is attributable to the time value of the
taxpayer's investment in the transaction. A holder of our
shares of common stock is not expected to be considered to have
engaged in a "conversion transaction" within the
meaning of Section 1258(c) of the Code. Consequently, the
provisions of Section 1258 of the Code is not expected to
be applicable to the common stock, although due to a lack of
definitive judicial or administrative interpretation, this issue
is not free from doubt.
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Backup withholding
Certain of our non-corporate stockholders may be subject to
backup withholding at a 28% rate on certain of the payments due
to such stockholders. In order to avoid backup withholding, a
stockholder must complete Form W-8IMY or Form W-8BEN
(if it is a nonresident alien individual or foreign entity) or
Form W-9
(if it is
a United States resident or domestic entity). Forms W-8IMY,
W-8BEN and
W-9
are
available on the Internal Revenue Service's web site,
www.irs.gov.
IN LIGHT OF THE UNCERTAINTY ASSOCIATED WITH THE TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR COMMON
STOCK AND BECAUSE THE TAX CONSEQUENCES TO YOU MAY DIFFER BASED
ON YOUR PARTICULAR CIRCUMSTANCES, YOU SHOULD CONSULT YOUR OWN
TAX ADVISER REGARDING SUCH TAX CONSEQUENCES.
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Underwriters
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus, the
underwriters named below, for whom J.P. Morgan Securities
Inc. and Banc of America Securities LLC are acting as
representatives, have severally agreed to purchase, and we have
agreed to sell to them, severally, the number of shares
indicated below:
Underwriters
Number of shares
J.P. Morgan Securities
    Inc.
Banc of America Securities LLC
Thomas Weisel Partners LLC
Total
The underwriters are offering the shares of common stock subject
to their acceptance of the shares from us and subject to prior
sale. The purchase agreement provides that the obligations of
the several underwriters to pay for and accept delivery of the
shares of common stock offered by this prospectus are subject to
the approval of specified legal matters by their counsel and to
other conditions. The underwriters are obligated to take and pay
for all of the shares of common stock offered by this prospectus
if any such shares are taken. However, the underwriters are not
required to take or pay for the shares covered by the
underwriters' over-allotment option described below.
The underwriters initially propose to offer the shares of common
stock directly to the public at the initial public offering
price listed on the cover page of this prospectus and to certain
dealers at a price that represents a concession not in excess of
$           per
share under the public offering price. Any underwriter may
allow, and such dealers may reallow, a concession not in excess
of
$           per
share to other underwriters or to certain dealers. After the
initial public offering of the shares of common stock, the
offering price and other selling terms may from time to time be
varied by the representatives.
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to
an aggregate
of           additional
shares of common stock at the public offering price listed on
the cover page of this prospectus, less underwriting discounts
and commissions. The underwriters may exercise this option
solely for the purpose of covering over-allotments, if any, made
in connection with the offering of the shares of common stock
offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to
certain conditions, to purchase about the same percentage of the
additional shares of common stock as the number listed next to
the underwriter's name in the preceding table bears to the
total number of shares of common stock listed next to the names
of all underwriters in the preceding table. If the underwriters
option is exercised in full, the total price to the public would
be
$          ,
the total underwriters discounts and commissions would be
$          and
the total proceeds to us would be
$          .
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.
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We, each of our directors and officers and holders of
substantially all of our outstanding stock have agreed that,
without the prior written consent of J.P. Morgan Securities
Inc. and Banc of America Securities LLC on behalf of the
underwriters, we and they will not, during the period ending
180 days after the date of this prospectus:
•
offer, pledge, announce the intention to sell, sell, contract to
    sell, sell any option or contract to purchase, purchase any
    option or contract to sell, grant any option, right or warrant
    to purchase of or otherwise transfer or dispose of directly or
    indirectly, any shares of common stock or any securities
    convertible into or exercisable or exchangeable for common stock
•
enter into any swap or other arrangement that transfers to
    another, in whole or in part, any of the economic consequences
    of ownership of the common stock
whether any transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise. These restrictions do not apply to:
•
in the case of a corporation, the transfer of shares of our
    common stock or any shares convertible into common stock to any
    wholly-owned subsidiary of such corporation, provided that in
    such case, the transferee will execute an agreement stating that
    the transferee is subject to the restrictions described above
•
transactions relating to shares of common stock or other
    securities acquired in open market transactions after the
    completion of the offering of the shares, provided that no
    filing or other public announcement by any party under the
    Exchange Act shall be required or made in connection with
    subsequent sales of common stock or other securities acquired in
    such open market transactions (other than a filing on a
    Form 5 made after the expiration of the 180-day period
    referred to above)
•
transfers of any shares of common stock or other securities
    convertible into common stock made as a gift, to a trust, to
    limited partners, limited liability company members or
    stockholders of our executive officers, directors, or holders of
    substantially all of our stock, or to immediate family members,
    provided that the transferee agrees to be bound by the
    restrictions described above and if the donor or transferor is a
    reporting person subject to Section 16(a) of the Exchange
    Act, any gifts or transfers made in accordance with this
    paragraph will not require such person to file a report of such
    transaction on Form 4 under the Exchange Act.
Notwithstanding the foregoing, if (1) during the last
17 days of the
180-day
restricted
period, we issue an earnings release or material news or a
material event relating to us occurs; or (2) prior to the
expiration of the
180-day
restricted
period, we announce that we will release earnings results during
the
16-day
period
beginning on the last day of the
180-day
period, the
restrictions described above shall continue to apply until the
expiration of the
18-day
period beginning
on the issuance of the earnings release or the occurrence of the
material news or material event.
See the section entitled "Shares eligible for future
sale" for further discussion of certain transfer
restrictions.
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The following table shows the underwriting discounts and
commissions that we are to pay to the underwriters in connection
with this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock.
Paid by Vanda
No exercise
Full exercise
Per Share
$
$
Total
$
$
We estimate that the total expenses of this offering payable by
us, not including the underwriting discounts and commissions,
will be approximately
$           million.
In order to facilitate the offering of the common stock, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common stock. Specifically,
the underwriters may sell more shares than they are obligated to
purchase under the underwriting agreement, creating a short
position. A short sale is covered if the short position is no
greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters
can close out a covered short sale by exercising the
over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out a covered short
sale, the underwriters will consider, among other things, the
open market price of shares compared to the price available
under the over-allotment option. The underwriters may also sell
shares in excess of the over-allotment option, creating a naked
short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in this offering. In
addition, to stabilize the price of the common stock, the
underwriters may bid for, and purchase, shares of common stock
in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a
dealer for distributing the common stock in this offering, if
the syndicate repurchases previously distributed common stock in
transactions to cover syndicate short positions or to stabilize
the price of the common stock. Any of these activities may
stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities
at any time.
We will apply to have our common stock approved for quotation on
the Nasdaq National Market under the trading symbol
"VNDA."
We and the underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Certain of the underwriters or their affiliates have provided
from time to time, and may provide in the future, investment and
commercial banking and financial advisory services to Vanda and
its affiliates in the ordinary course of business, for which
they have received and may continue to receive customary fees
and commissions.
A prospectus in electronic format will be made available on the
websites maintained by one or more of the lead managers of this
offering and may also be made available on websites maintained
by other underwriters. The underwriters may agree to allocate a
number of shares to underwriters for sale to their online
brokerage account holders. Internet distributions will be
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allocated by the lead managers to underwriters that may make
Internet distributions on the same basis as other allocations.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined by negotiations between us and the representatives.
Among the factors to be considered in determining the initial
public offering price will be our future prospects and those of
our industry in general, our revenues, earnings and other
financial operating information in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies
engaged in activities similar to ours. The estimated initial
public offering price range set forth on the cover page of this
preliminary prospectus is subject to change as a result of
market conditions and other factors.
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Legal matters
Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP, Waltham, Massachusetts, will pass upon the
validity of the common stock offered by this prospectus. Edward
T. Lentz, Esq. will pass upon certain intellectual property
matters. Davis Polk & Wardwell will pass upon certain
legal matters for the underwriters.
Experts
The financial statements as of December 31, 2004 and 2003
and for the year ended December 31, 2004 and the period
from March 13, 2003 (date of inception) to
December 31, 2003, and, cumulatively, for the period from
March 13, 2003 (date of inception) to
December 31, 2004 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
Where you can find more information
We have filed with the Securities and Exchange Commission (SEC),
Washington, D.C. 20549, a registration statement on
Form S-1
under the
Securities Act of 1933, with respect to our common stock offered
hereby. This prospectus, which forms part of the registration
statement, does not contain all of the information set forth in
the registration statement and the exhibits and schedules to the
registration statement. Some items are omitted in accordance
with the rules and regulations of the SEC. For further
information about us and our common stock, we refer you to the
registration statement and the exhibits and schedules to the
registration statement filed as part of the registration
statement. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit
are qualified in all respects by reference to the actual text of
the exhibit. You may read and copy the registration statement,
including the exhibits and schedules to the registration
statement, at the SEC's Public Reference Room at 100 F
Street N.E., Washington, D.C. 20549. You can obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
In
addition, the SEC maintains an Internet site at
www.sec.gov,
from which you can electronically access the
registration statement, including the exhibits and schedules to
the registration statement.
Upon completion of this offering, we will be subject to the
information reporting requirements of the Securities Exchange
Act of 1934 and we intend to file reports, proxy statements and
other information with the SEC.
103
Table of Contents
Index to consolidated financial statements
Vanda Pharmaceutical Inc.
(A development stage company)
Index
December 31, 2004 and 2003
Page(s)
Report of Independent Registered
    Public Accounting Firm
F-2
Consolidated financial statements
Balance sheets
F-3
Statements of operations
F-4
Statements of changes in
    stockholders' equity
F-5
Statements of cash flows
F-8
Notes to financial statements
F-9
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Vanda Pharmaceuticals Inc. (a development stage company)
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, changes in
stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of Vanda
Pharmaceuticals Inc. and its subsidiary (a development stage
company) at December 31, 2003 and 2004, and the results of
operations and cash flows for the period from March 13,
2003 (date of inception) to December 31, 2003 and year
ended December 31, 2004 and for the period from
March 13, 2003 (date of inception) to December 31,
2004 in conformity with accounting principles generally accepted
in the United States of America. 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 of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
December 29, 2005
F-2
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Consolidated Balance Sheets
December 31,
September 30, 2005
2003
2004
Actual
Pro forma
(unaudited)
(unaudited)
Assets
Current assets
Cash and cash equivalents
$
7,165,722
$
16,259,770
$
22,264,920
Accounts receivable
28,489
—
—
Prepaid expenses and other current
    assets
97,044
190,604
526,219
Total current assets
7,291,255
16,450,374
22,791,139
Property and equipment, net
1,094,658
1,251,867
1,017,314
Deposits
—
50,000
50,000
Restricted cash
—
—
430,230
Total assets
$
8,385,913
$
17,752,241
$
24,288,683
Liabilities and
    stockholders' equity
Current liabilities
Accounts payable
$
458,608
$
718,606
$
583,658
Accrued liabilities
432,474
689,428
1,869,125
Deferred rent and credit on lease
    concession, current
—
3,549
6,225
Current portion of long-term debt
195,925
173,929
186,158
Current portion of capital lease
—
37,241
—
Total current liabilities
1,087,007
1,622,753
2,645,166
Deferred grant revenue
—
—
127,866
Deferred rent and credit on lease
    concession
17,661
30,371
27,325
Long-term debt, less current portion
274,212
142,487
1,365
Capital lease, less current portion
—
13,043
—
Total liabilities
1,378,880
1,808,654
2,801,722
Commitments
Stockholders' equity
Series A preferred stock,
    $0.001 par value; 10,000,000 shares authorized, issued
    and outstanding at December 31, 2003 and 2004 and
    September 30, 2005 (unaudited), respectively; liquidation
    preference of $10,000,000
9,963,541
9,963,541
9,963,541
Series B preferred stock,
    $0.001 par value; 30,081,308 shares authorized, 0,
    15,040,654 and 30,081,308 shares issued and outstanding at
    December 31, 2003 and 2004 and September 30, 2005
    (unaudited), respectively; liquidation preference of $37,000,009
—
18,345,023
36,845,028
Common stock, $0.001 par
    value; 50,000,000 shares authorized and 10,000 shares
    issued and outstanding at December 31, 2003 and 2004,
    respectively, and 150,739 shares issued and outstanding at
    September 30, 2005 (unaudited)
10
10
151
Additional paid-in capital
16,618
340,630
18,049,479
Deferred stock-based compensation
—
(257,934
)
(13,862,408
)
Accumulated other comprehensive loss
(2,315
)
(2,576
)
(23,299
)
Deficit accumulated during the
    development stage
(2,970,821
)
(12,445,107
)
(29,485,531
)
Total stockholders' equity
7,007,033
15,943,587
21,486,961
Total liabilities and
    stockholders' equity
$
8,385,913
$
17,752,241
$
24,288,683
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Consolidated Statements of Operations
Period from
Period from
Period from
March 13, 2003
March 13, 2003
Nine months ended
March 13, 2003
(inception) to
Year ended
(inception) to
September 30,
(inception) to
December 31,
December 31,
December 31,
September 30,
2003
2004
2004
2004
2005
2005
(unaudited)
(unaudited)
(unaudited)
Revenues from services
$
47,565
$
33,980
$
81,545
$
33,980
$
—
$
81,545
Operating expenses:
Research and development
2,010,532
7,442,983
9,453,515
5,033,488
11,641,565
21,095,080
General and administrative
1,052,659
2,119,394
3,172,053
1,267,485
5,587,147
8,759,200
Total operating expenses
3,063,191
9,562,377
12,625,568
6,300,973
17,228,712
29,854,280
Loss from operations
(3,015,626
)
(9,528,397
)
(12,544,023
)
(6,266,993
)
(17,228,712
)
(29,772,735
)
Other income (expense):
Interest income
52,595
100,785
153,380
43,053
208,763
362,143
Interest expense
(8,090
)
(41,934
)
(50,024
)
(29,867
)
(20,568
)
(70,592
)
Other income (expense)
300
209
509
(230
)
93
602
Total other income
44,805
59,060
103,865
12,956
188,288
292,153
Loss before tax expense
(2,970,821
)
(9,469,337
)
(12,440,158
)
(6,254,037
)
(17,040,424
)
(29,480,582
)
Tax expense
—
4,949
4,949
3,733
—
4,949
Net loss
(2,970,821
)
(9,474,286
)
(12,445,107
)
(6,257,770
)
(17,040,424
)
(29,485,531
)
Beneficial conversion feature—
    deemed dividend to preferred stockholders
—
—
—
—
(18,500,005
)
(18,500,005
)
Net loss attributable to common
    stockholders
$
(2,970,821
)
$
(9,474,286
)
$
(12,445,107
)
$
(6,257,770
)
$
(35,540,429
)
$
(47,985,536
)
Basic and diluted net loss per
    share applicable to common stockholders
$
(297.08
)
$
(947.43
)
$
(625.78
)
$
(934.93
)
Shares used in calculation of basic
    and diluted net loss per share applicable to common stockholders
10,000
10,000
10,000
38,014
Pro forma net loss per share
    applicable to common stockholders (see Note 2) (unaudited)
$
(0.68
)
$
(1.41
)
Shares used in calculation of pro
    forma net loss per share applicable to common stockholders (see
    Note 2) (unaudited)
13,913,995
25,264,356
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Statements of Changes in Stockholders' Equity
Deficit
Series A
Series B
Accumulated
accumulated
preferred stock
preferred stock
Common stock
Additional
Deferred
other
during the
paid-in
stock-based
comprehensive
development
Comprehensive
Shares
Par value
Shares
Par value
Shares
Par value
capital
compensation
loss
stage
loss
Total
Balances at March 13, 2003
    (Inception)
—
$
—
—
$
—
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
Issuance of Series A preferred
    stock, net of issuance costs of $36,459
10,000,000
9,963,541
—
—
—
—
—
—
—
—
—
9,963,541
Issuance of Class A common
    stock
—
—
—
—
10,000
10
3,990
—
—
—
—
4,000
Issuance of warrants in connection
    with capital lease
—
—
—
—
—
—
12,628
—
—
—
—
12,628
Comprehensive loss:
Net loss
—
—
—
—
—
—
—
—
—
(2,970,821
)
(2,970,821
)
Cumulative translation adjustment
—
—
—
—
—
—
—
—
(2,315
)
—
(2,315
)
Comprehensive loss
(2,973,136
)
(2,973,136
)
Balances at December 31,
    2003
10,000,000
9,963,541
—
—
10,000
10
16,618
—
(2,315
)
(2,970,821
)
—
7,007,033
Issuance of Series B preferred
    stock, net of issuance costs of $154,982
—
—
15,040,654
18,345,023
—
—
—
—
—
—
—
18,345,023
Issuance of warrants in connection
    with consulting services
—
—
—
—
—
—
27,945
—
—
—
—
27,945
Deferred compensation associated
    with stock options grants
—
—
—
—
—
—
281,130
(281,130
)
—
—
—
—
Amortization of deferred
    stock-based compensation
—
—
—
—
—
—
—
23,196
—
—
—
23,196
F-5
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Statements of Changes in Stockholders' Equity
(continued)
Deficit
Series A
Series B
Accumulated
accumulated
preferred stock
preferred stock
Common stock
Additional
Deferred
other
during the
paid-in
stock-based
comprehensive
development
Comprehensive
Shares
Par value
Shares
Par value
Shares
Par value
capital
compensation
loss
stage
loss
Total
Expense related to accelerated
    unvested stock options
—
—
—
—
—
—
14,937
—
—
—
—
14,937
Comprehensive loss:
Net loss
—
—
—
—
—
—
—
—
—
(9,474,286
)
(9,474,286
)
Cumulative translation adjustment
—
—
—
—
—
—
—
—
(261
)
—
(261
)
Comprehensive loss
(9,474,547
)
(9,474,547
)
Balances at December 31,
    2004
10,000,000
9,963,541
15,040,654
18,345,023
10,000
10
340,630
(257,934
)
(2,576
)
(12,445,107
)
—
15,943,587
Issuance of Series B preferred
    stock, (unaudited)
—
—
15,040,654
18,500,005
—
—
—
—
—
—
—
18,500,005
Issuance of common stock from
    exercised stock options (unaudited)
—
—
—
—
140,739
141
14,074
—
—
—
—
14,215
Deferred compensation associated
    with stock options grants (unaudited)
—
—
—
—
—
—
13,103,916
(13,103,916
)
—
—
—
—
Deferred compensation associated
    with remeasurement of unvested stock grants (unaudited)
—
—
—
—
—
—
1,550,193
(1,550,193
)
—
—
—
—
F-6
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Statements of Changes in Stockholders' Equity
(continued)
Deficit
Series A
Series B
Accumulated
accumulated
preferred stock
preferred stock
Common stock
Additional
Deferred
other
during the
paid-in
stock-based
comprehensive
development
Comprehensive
Shares
Par value
Shares
Par value
Shares
Par value
capital
compensation
loss
stage
loss
Total
Expense related to remeasurement of
    stock options (unaudited)
—
—
—
—
—
—
3,040,666
—
—
—
—
3,040,666
Amortization of deferred
    stock-based compensation (unaudited)
—
—
—
—
—
—
—
1,049,635
—
—
—
1,049,635
Beneficial conversion feature—
    deemed dividend on issuance of Series B preferred stock
    (unaudited)
—
—
—
—
—
—
18,500,005
—
—
—
—
18,500,005
Beneficial conversion feature—
    accretion of beneficial conversion feature for Series B
    preferred stock (unaudited)
—
—
—
—
—
—
(18,500,005
)
—
—
—
—
(18,500,005
)
Comprehensive loss:
Net loss (unaudited)
—
—
—
—
—
—
—
—
—
(17,040,424
)
(17,040,424
)
Cumulative translation adjustment
    (unaudited)
—
—
—
—
—
—
—
—
(20,723
)
—
(20,723
)
Comprehensive loss (unaudited)
(17,061,147
)
(17,061,147
)
Balances at September 30,
    2005 (unaudited)
10,000,000
$
9,963,541
30,081,308
$
36,845,028
150,739
$
151
$
18,049,479
$
(13,862,408
)
$
(23,299
)
$
(29,485,531
)
—
$
21,486,961
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Consolidated Statements of Cash Flows
Period from
Period from
Period from
March 13, 2003
March 13, 2003
Nine months ended
March 13, 2003
(inception) to
Year ended
(inception) to
September 30,
(inception) to
December 31,
December 31,
December 31,
September 30,
2003
2004
2004
2004
2005
2005
(unaudited)
(unaudited)
(unaudited)
Cash flows from operating
    activities
Net loss
$
(2,970,821
)
$
(9,474,286
)
$
(12,445,107
)
$
(6,257,770
)
$
(17,040,424
)
$
(29,485,531
)
Adjustments to reconcile net loss
    to net cash used in operating activities
Depreciation and amortization
79,891
376,709
456,600
268,597
316,435
773,035
Stock-based compensation
—
66,078
66,078
48,786
4,090,301
4,156,379
Changes in assets and liabilities:
Accounts receivable
(28,489
)
28,489
—
785
—
—
Prepaid expenses and other current
    assets
(97,044
)
(93,024
)
(190,068
)
(105,843
)
(335,615
)
(525,683
)
Deposits
—
(50,000
)
(50,000
)
(50,000
)
—
(50,000
)
Accounts payable
458,608
415,506
874,114
52,342
(134,948
)
739,166
Accrued expenses
432,474
99,335
531,809
25,700
1,179,697
1,711,506
Deferred grant revenue
—
—
—
—
127,866
127,866
Deferred rent and credit on lease
    concession
17,661
16,259
33,920
15,763
(370
)
33,550
Net cash used in operating
    activities
(2,107,720
)
(8,614,934
)
(10,722,654
)
(6,001,640
)
(11,797,058
)
(22,519,712
)
Cash flows from investing
    activities
Purchases of property and equipment
(679,428
)
(414,531
)
(1,576,452
)
(360,107
)
(96,341
)
(1,672,793
)
Purchases of short-term investments
—
—
—
—
(7,200,000
)
(7,200,000
)
Proceeds from sales of short-term
    investments
—
—
—
—
7,200,000
7,200,000
Investing in restricted cash
—
—
—
—
(430,230
)
(430,230
)
Net cash used in investing
    activities
(679,428
)
(414,531
)
(1,576,452
)
(360,107
)
(526,571
)
(2,103,023
)
Cash flows from financing
    activities
Principal payments on obligations
    under capital lease
(12,356
)
(42,887
)
(42,887
)
(32,849
)
(51,246
)
(94,133
)
Principal payments on note payable
—
(156,446
)
(201,456
)
(115,880
)
(127,858
)
(329,314
)
Proceeds from borrowings on note
    payable
—
—
515,147
—
—
515,147
Proceeds from the issuance of
    preferred stock, net of issuance costs
9,963,541
18,345,023
28,308,564
18,345,023
18,500,005
46,808,569
Proceeds from exercise of stock
    options
—
—
—
—
14,076
14,076
Proceeds from issuance of common
    stock
4,000
—
4,000
—
—
4,000
Net cash provided by financing
    activities
9,955,185
18,145,690
28,583,368
18,196,294
18,334,977
46,918,345
Effect of foreign currency
    translation
(2,315
)
(22,177
)
(24,492
)
(16,092
)
(6,198
)
(30,690
)
Net increase in cash and cash
    equivalents
7,165,722
9,094,048
16,259,770
11,818,455
6,005,150
22,264,920
Cash and cash
    equivalents
Beginning of period
—
7,165,722
—
7,165,722
16,259,770
—
End of period
$
7,165,722
$
16,259,770
$
16,259,770
$
18,984,177
$
22,264,920
$
22,264,920
Supplemental
    disclosure
Cash payments for interest
$
4,221
$
41,354
$
45,575
$
—
$
20,008
$
65,583
Supplemental disclosure of
    noncash financing activities
Equipment acquired through
    obligation under capital lease
$
482,493
$
95,305
$
95,305
$
—
$
—
$
95,305
Accretion of beneficial conversion
    feature for Series B preferred stock
—
—
—
—
18,500,005
18,500,005
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial statements
December 31, 2004 and 2003
1.      Business organization
and presentation
Business organization
Vanda Pharmaceuticals Inc. ("Vanda" or the
"Company") was founded in November 2002 and commenced
its operations on March 13, 2003. Vanda is a
biopharmaceutical company focused on the development and
commercialization of small molecule therapeutics, with exclusive
worldwide commercial rights to three product candidates in
clinical development for various central nervous system
disorders. The Company's lead product candidate,
iloperidone, is an atypical antipsychotic for the treatment of
schizophrenia and bipolar disorder and is in a Phase III
trial for schizophrenia. The Company's second product
candidate, VEC-162, is a melatonin agonist for the treatment of
insomnia and depression and is entering a pivotal Phase III
trial for insomnia. VEC-162 is also ready for Phase II
trials for the treatment of depression. The Company's third
product candidate, VSF-173, is a compound for the treatment of
excessive daytime sleepiness and is ready for a Phase II
trial. Each of these product candidates benefits from new
chemical entity (NCE) patent protection and may offer
substantial advantages over approved therapies.
The Company expects to complete its Phase III trial for
iloperidone in the first half of 2007. If this trial is
successful, the Company will file a New Drug Application
(NDA) for approval with the Food and Drug Administration
(FDA) later that year. The Company recently completed an
efficacy and safety Phase II trial of VEC-162 for insomnia
and expects to begin a Phase III trial early in 2006. The
Company also expects to begin a Phase II trial of
VSF-173
for excessive
daytime sleepiness in the second half of 2006.
Vanda Pharmaceuticals Pte. Ltd. ("Vanda Singapore") is
a limited liability company domiciled and incorporated in
Singapore on February 24, 2003 as a wholly-owned subsidiary
of Vanda Pharmaceuticals Inc. Vanda Singapore's principal
activity is drug research using genetic and genomic sciences.
Capital resources
Since its inception, the Company has devoted substantially all
of its efforts to business planning, research and development,
recruiting management and technical staff, acquiring operating
assets and raising capital. Accordingly, the Company is
considered to be in the development stage as defined in
Statement of Financial Accounting Standards
(SFAS) No. 7,
"Accounting and Reporting by
Development Stage Enterprises."
The Company's expected activities will necessitate
significant uses of working capital throughout 2005 and beyond.
Additionally, the Company's capital requirements will
depend on many factors, including the success of the
Company's research and development efforts, payments
received under contractual agreements with other parties, if
any, and the status of competitive products. The Company plans
to continue financing operations with the cash received from the
additional private placement of Series B Preferred Stock
(see Note 14) and the Company plans to seek additional
sources of funding in 2006. The Company's failure to
F-9
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
raise additional capital as and when needed could have a
negative impact on the financial condition and the ability of
the Company to execute its business strategy.
Basis of presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All
inter-company balances and transactions have been eliminated.
The accompanying consolidated financial statements are prepared
in accordance with accounting principles generally accepted in
the United States of America.
Interim financial data
The unaudited interim consolidated financial statements as of
and for the nine months ended September 30, 2004 and 2005
have been prepared in accordance with generally accepted
accounting principles for interim information. Accordingly, they
do not contain all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. However, in the opinion of management, all
adjustments, consisting of normal, recurring adjustments
considered necessary for a fair statement of the results of the
interim periods have been included.
The results for the nine months ended September 30, 2005
are not necessarily indicative of the results to be expected for
the year ending December 31, 2005. Certain information in
footnote disclosures normally included in annual financial
statements has been condensed or omitted for the interim periods
presented, in accordance with the rules and regulation of the
Securities and Exchange Commission (the "SEC") for
interim financial statements.
2.      Summary of significant
accounting policies
Cash and cash equivalents
For purposes of the consolidated balance sheet and consolidated
statement of cash flows, cash equivalents represent all
highly-liquid investments with an original maturity date of
three months or less. At September 30, 2005, the Company
maintained all of its cash and cash equivalents in two financial
institutions. Deposits held with these institutions may exceed
the amount of insurance provided on such deposits. Generally,
these deposits may be redeemed upon demand, and the Company
believes there is minimal risk of losses on such cash balances.
Short-term investments
The Company maintained highly-liquid investments throughout the
period ending September 30, 2005, which were classified as
available-for-sale because they can be utilized for current
operations. The Company's investment policy requires the
selection of high-quality issuers, with bond ratings of AAA to
A1+/ P1. The Company's objective is to maintain its
investment portfolio at an average duration of approximately one
year. Interest income is recorded when earned and included in
interest income. As of December 31, 2003 and 2004 and
September 30, 2005, the Company did not hold any short-term
investments.
F-10
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
Concentrations of credit risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of
cash and cash equivalents and short-term investments. The
Company places its cash and cash equivalents and short-term
investments with highly-rated financial institutions.
Fair value of financial instruments
The carrying amounts of the Company's financial
instruments, which include cash and cash equivalents, short term
investments, and accounts payable, approximate their fair values
due to their short maturities. The fair value of the long term
debt approximates its carrying value based on the variable
nature of interest rates and current market rates available to
the Company.
Property and equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation of property and
equipment is provided on a straight-line basis over the
estimated useful lives of the assets, generally three to seven
years. Amortization of leasehold improvements is provided on a
straight-line basis over the shorter of their estimated useful
life or the lease term. The costs of additions and betterments
are capitalized, and repairs and maintenance costs are charged
to operations in the period incurred.
Upon retirement or disposition of property and equipment, the
cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in general and
administrative expenses for that period.
Impairment of long-lived assets
The Company assesses the recoverability of its long-lived assets
by determining whether the carrying value of such assets can be
recovered through undiscounted future operating cash flows. If
impairment is indicated, the Company measures the amount of such
impairment by comparing the fair value to the carrying value.
There have been no indicators of impairment through
September 30, 2005.
Restricted cash
During 2005, in conjunction with the lease of the office and
laboratory space building, the Company provided the landlord
with a letter of credit, which was collateralized with a
restricted cash deposit in the amount of $430,230 (see
Note 6). These deposits are recorded as non-current
restricted cash at September 30, 2005.
Deferred grant revenue
Vanda Singapore entered into an agreement with the Economic
Development Board of Singapore ("EDB") to provide a
grant for a Development Project. During 2005, the Company
submitted its first asset-related claim with the EDB and
received a cash payment of $127,866.
F-11
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
Given that the Company has not met the conditions attached to
the grant, the payment has been recorded as deferred grant
revenue on the balance sheet at September 30, 2005.
Management expects that a resolution is likely to be reached
with the EDB in the near future.
Translation of foreign currency
The functional currency of the Company's wholly-owned
foreign subsidiary located in Singapore is the local currency.
Assets and liabilities of the Company's foreign subsidiary
are translated to United States dollars based on exchange rates
at the end of the reporting period. Income and expense items are
translated at weighted average exchange rates prevailing during
the reporting period. Translation adjustments are accumulated in
a separate component of stockholder's equity. Translation
gains or losses are included in the determination of operating
results.
Other comprehensive income (loss)
SFAS No. 130,
"Reporting Comprehensive
Income,"
requires a full set of general-purpose
financial statements to include the reporting of
"comprehensive income." Other comprehensive loss is
composed of two components, net income and other comprehensive
income. For the period from March 13, 2003
(inception) to December 31, 2003 and year ended
December 31, 2004, other comprehensive loss of $2,315 and
$2,576, respectively, consists of cumulative translation
adjustments due to foreign currency. For the nine month periods
ended September 30, 2004 and 2005, other comprehensive loss
of $3,809 and $23,299, respectively, consists of cumulative
translation adjustments due to foreign currency.
Revenue recognition
Revenue is recognized upon delivery of products to customers.
Revenue earned under research and development contracts are
recognized in accordance with the proportional performance
method outlined in Staff Accounting Bulletin No. 104
whereby the extent of progress toward completion is measured on
the
cost-to
-cost basis;
however, revenue recognized at any point will not exceed the
cash received. When the current estimates of total contract
revenue and contract cost indicate a loss, a provision for the
entire loss on the contract is made in the period which it
becomes probable. All costs related to these agreements are
expensed as incurred. Revenue is derived principally from
consulting agreements the Company entered into during its
start-up
phase to
defray research costs. Vanda completed its obligations under
these agreements during the year ended December 31, 2004,
and no longer seeks such arrangements.
The Company will use the substantive milestone payment method of
revenues recognition when all milestones to be received under
contractual arrangements are determined to be substantive,
at-risk and the culmination of an earnings process. Substantive
milestones are payments that are conditioned upon an event
requiring substantive effort, when the amount of the milestone
is reasonable relative to the time, effort and risk involved in
achieving the milestones and when the milestones are reasonable
relative to each other and the amount of
F-12
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
any up-front payment. If these criteria are not met, the timing
of the recognition of revenue from the milestone payment may be
deferred.
Research and development expenses
Research and development costs are expensed as incurred and
include the cost of salaries, building costs, utilities,
allocation of indirect costs, and expenses to third parties who
conduct research and development, pursuant to development and
consulting agreements, on behalf of the Company. Costs related
to the acquisitions of intellectual property are expensed as
incurred since the underlying technology associated with these
acquisitions were made in connection with the Company's
research and development efforts and have no alternative future
use. Research and development expenses also include the costs
incurred by Vanda Singapore.
General and administrative expenses
General and administrative costs are expensed as incurred and
consist primarily of salaries and other related costs for
personnel serving executive, finance, accounting, information
technology and human resource functions. Other costs include
facility costs not otherwise included in research and
development expense and professional fees for legal and
accounting services.
Interest income and expense
Interest income consists of interest earned on the
Company's cash and cash equivalents and short-term
investments. Interest expense consists of interest incurred on
equipment debt.
Accounting for stock-based compensation
As provided by SFAS No. 123,
"Accounting for
Stock-Based Compensation"
(SFAS 123), the Company
has elected to continue to account for its stock-based
compensation programs according to the provisions of Accounting
Principles Board Opinion No. 25, (APB 25)
"Accounting for Stock Issued to Employees."
Accordingly, compensation expense has been recognized to the
extent of employee or director services rendered based on the
intrinsic value of compensatory options or shares granted under
the plans. Under APB 25, compensation expense is recognized
over the vesting period of the option to the extent that the
fair value of the stock exceeds the exercise price of the stock
at the date of grant.
Variable stock-base compensation awards are amortized and
expensed in accordance with Financial Accounting Standards Board
("FASB") Interpretation No. 28,
"Accounting for Stock Appreciation Rights and other
Variable Stock Option Plan or Award Plans,"
an
accelerated vesting model. Under this model, all stock based
employee compensation charges are amortized over the vesting
periods of the individual stock awards.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under
SFAS 123, the Company's net loss and basic and diluted
net loss
F-13
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
attributable to common stockholders per share would have been
changed to the following pro forma amounts:
Period from
March 13, 2003
Nine months ended
(inception) to
Year ended
September 30,
December 31,
December 31,
2003
2004
2004
2005
(unaudited)
(unaudited)
Net loss, attributable to common
    stockholders
$
(2,970,821
)
$
(9,474,286
)
$
(6,257,770
)
$
(35,540,429
)
Add: Stock based employee
    compensation expense included in net loss
—
38,133
20,841
4,090,301
Less: Stock-based employee
    compensation expense determined under SFAS 123
(33,160
)
(57,954
)
(27,831
)
(4,130,518
)
Pro forma net loss applicable to
    common stockholders
$
(3,003,981
)
$
(9,494,107
)
$
(6,264,760
)
$
(35,580,646
)
Net loss per share:
Basic and diluted, net loss
    attributed to common stockholders as reported
$
(297.08
)
$
(947.43
)
$
(625.78
)
$
(934.93
)
Pro forma basic and diluted, net
    loss attributed to common stockholders
$
(300.40
)
$
(949.41
)
$
(626.48
)
$
(935.99)
The weighted average fair value of an option granted during the
period from March 13, 2003 (inception) to
December 31, 2003 and year ended December 31, 2004 was
$0.32 and $1.20, respectively. The weighted average fair value
of an option granted during the nine month periods ended
September 30, 2004 and 2005 was $1.17 and $4.54,
respectively. The fair value
F-14
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following
weighted-average assumptions for each year:
Period from
March 13, 2003
Nine months ended
(inception) to
Year ended
September 30,
December 31,
December 31,
2003
2004
2004
2005
(unaudited)
(unaudited)
Expected dividend yield
0%
0%
0%
0%
Expected volatility
0%
67%
67%
67%
Expected term (years)
10
5
5
5
Risk-free interest rate
3.65%
3.42%
3.89%
3.44%
Stock warrants
The Company accounts for warrants granted to consultants and
advisors under SFAS 123 and Emerging Issues Task Force
Issue 96-18,
"Accounting for Equity Investments that are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling
Goods or Services,"
("EITF 96-18").
As such, warrants granted to non-employees are periodically
re-measured and expense is incurred during their vesting terms.
Income taxes
The Company accounts for income taxes under the liability method
in accordance with provisions of SFAS No. 109,
"Accounting for Income Taxes,"
("SFAS 109") which requires companies to account
for deferred income taxes using the asset and liability method.
Under the asset and liability method, current income tax expense
or benefit is the amount of income taxes expected to be payable
or refundable for the current year. A deferred income tax asset
or liability is recognized for future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and tax credits and loss carryforwards.
Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. Tax rate changes are reflected in income during the
period such changes are enacted. Changes in ownership may limit
the amount of net operating loss carryforwards that can be
utilized in the future to offset taxable income.
Net loss per share
Net loss attributable to common stockholders per share is
calculated in accordance with SFAS No. 128,
"Earnings per Share,"
and Staff Accounting
Bulletin ("SAB") No. 98. Basic earnings per share
("EPS") is calculated by dividing the net income or
loss attributable to common stockholders by the weighted average
number of common shares outstanding, reduced by the weighted
average unvested common shares subject to repurchase.
F-15
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
Diluted EPS is computed by dividing the net income or loss
attributable to common stockholders by the weighted average
number of other potential common stock outstanding for the
period. Other potential common stock include Series A and B
Convertible Preferred Stock, stock options and warrants but only
to the extent that their inclusion is dilutive. The Company
incurred a net loss in all periods presented, causing inclusion
of any potentially dilutive securities to have an anti-dilutive
affect, resulting in dilutive loss per share attributable to
common stockholders and basic loss per share attributable to
common stockholders being equivalent. The Company did not have
any common shares issued for nominal consideration as defined
under the terms of SAB No. 98, which would be included
in EPS calculations.
The unaudited pro forma shares used to compute basic and diluted
net loss per share is the weighted average shares of common
stock outstanding, reduced by the weighted average unvested
common shares subject to repurchase, and includes the assumed
conversion of the convertible preferred stock into shares of
common stock using the as-if converted method as of
January 1, 2004 or the actual date of issuance if later.
Period from
March 13, 2003
Nine months ended
(inception) to
Year ended
September 30,
December 31,
December 31,
2003
2004
2004
2005
(unaudited)
(unaudited)
Historical:
Numerator:
Net loss
$
(2,970,821
)
$
(9,474,286
)
$
(6,257,770
)
$
(17,040,424
)
Beneficial conversion feature—
    deemed dividend to preferred stockholders
—
—
—
(18,500,005
)
Net loss attributable to common
    stockholders
$
(2,970,821
)
$
(9,474,286
)
$
(6,257,770
)
$
(35,540,429
)
Denominator:
Weighted average common shares
    outstanding
10,000
10,000
10,000
38,872
Weighted average unvested common
    shares subject to repurchase
—
—
—
(858
)
Denominator for basic and diluted
    net loss per share
10,000
10,000
10,000
38,014
Basic and diluted net loss per
    share applicable to common stockholders
$
(297.08
)
$
(947.43
)
$
(625.78
)
$
(934.93
)
F-16
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
Period from
March 13, 2003
Nine months ended
(inception) to
Year ended
September 30,
December 31,
December 31,
2003
2004
2004
2005
(unaudited)
(unaudited)
Pro forma:
Numerator:
Pro forma net loss
$
(9,474,286
)
$
(35,540,429
)
Denominator:
Weighted average common shares
    outstanding
10,000
38,014
Pro forma adjustments to reflect
    assumed weighted average effect on conversion of preferred stock
13,903,995
25,226,342
Pro forma shares used to compute
    basic and diluted net loss per share
13,913,995
25,264,356
Basic and diluted pro forma net
    loss per share applicable to common stockholders
$
(0.68
)
$
(1.41
)
Historical outstanding
    anti-dilutive securities not included in diluted net loss per
    share calculation:
Series A and B preferred stock
10,000,000
25,040,654
25,040,654
40,081,308
Options to purchase common stock
772,100
1,042,480
1,042,480
3,783,490
Warrants to purchase common stock
45,100
166,600
166,600
166,600
10,817,200
26,249,734
26,249,734
44,031,398
Certain Risks and Uncertainties
The Company's product candidates under development require
approval from the Food and Drug Administration (FDA) or other
international regulatory agencies prior to commercial sales.
There can be no assurance our products will receive the
necessary clearance. If we are denied clearance or clearance is
delayed, it may have a material adverse impact on the Company.
The Company's products are concentrated in rapidly
changing, highly competitive markets, which are characterized by
rapid technological advances, changes in customer requirements
and evolving regulatory requirements and industry standards. Any
failure by us to anticipate or to respond adequately to
technological developments in our industry, changes in customer
requirements or changes in regulatory requirements or industry
standards, or any significant
F-17
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
delays in the development or introduction of products or
services, could have a material adverse effect on our business,
operating results and future cash flows.
The Company depends on single source suppliers for critical raw
materials for manufacturing, as well as other components
required for the administration of its product candidates. The
loss of these suppliers could delay our clinical trials or
prevent or delay commercialization of the product candidates.
Segment information
Management has determined that the Company operates in one
business segment which is the development and commercialization
of pharmaceutical products.
Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates that affect the
reported amounts of assets and liabilities at the date of the
financial statements, disclosure of contingent assets and
liabilities, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
Recent accounting pronouncements
In December 2004, the FASB issued SFAS No. 123R,
"Share-Based Payment,"
a revision of
SFAS No. 123,
"Accounting for Stock-based
Compensation."
SFAS 123R requires companies to
recognize expense associated with share-based compensation
arrangements, including employee stock options, using a fair
value-based option pricing model, and eliminates the alternative
to use APB 25's intrinsic method of accounting for
share-based payments. In accordance with the new pronouncement,
the Company plans to begin recognizing the expense associated
with its share-based payments, as determined using a
fair-value-based method, in its statements of operations
beginning on January 1, 2006. Adoption of the expense
provisions of SFAS 123R are expected to have a material
impact on the Company's results of operations and net loss
per share. The standard generally allows two alternative
transition methods in the year of adoption— modified
prospective application and retroactive application with
restatement of prior financial statements to include the same
amounts that were previously included in the pro forma
disclosures. The Company has not determined which transition to
adopt.
In order to provide implementation guidance related to
SFAS 123R, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin
("SAB") No. 107, "Share-Based Payment"
in March 2005. SAB 107 provides guidance on numerous issues
such as valuation methods (including assumptions such as
expected volatility and expected term), the classification of
compensation expense, capitalization of compensation cost
related to share-based payment arrangements, the accounting for
income tax effects of share-based payment arrangements upon
adoption of SFAS 123R, and disclosures in MD&A
subsequent to adoption of SFAS 123R.
F-18
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
SFAS No. 154, "Accounting Changes and Error
Corrections— a replacement of APB Opinion No. 20 and
FASB Statement No. 3" was issued by the FASB in May
2005. This Statement replaces APB Opinion No. 20,
"Accounting Changes", and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial
Statements", and changes the requirements for the
accounting for and reporting of a change in accounting
principle. SFAS No. 154 applies to all voluntary
changes in accounting principle and requires retrospective
application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative
effect of the change. This Statement also requires that a change
in depreciation, amortization, or depletion method for
long-lived, non-financial assets be accounted for as a change in
accounting estimate affected by a change in accounting
principle. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after
December 15, 2005. SFAS No. 154 is not expected
to have a material effect on the Company's consolidated
financial statements.
In June 2005, the FASB Staff issued FASB Staff
Position 150-5
(FSP 150-5),
"Issuer's Accounting under FASB Statement
No. 150 for Freestanding Warrants and Other Similar
Instruments on Shares that are Redeemable."
FSP 150-5
addresses whether freestanding warrants and other similar
instruments on shares that are redeemable, either puttable or
mandatorily redeemable, would be subject to the requirements of
FASB Statement No. 150,
"Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities
and Equity,"
regardless of the timing of the redemption
feature or the redemption price. The FSP is effective after
June 30, 2005. Adoption of the FSP did not have a material
effect on the Company's financial condition or results of
operations.
3.      Property and
equipment
Property and equipment— at cost:
December 31,
September 30,
2003
2004
2005
(unaudited)
Computer equipment
$
224,741
$
698,405
$
722,700
Lab equipment
636,348
681,455
705,232
Furniture and fixtures
22,063
29,309
29,254
Leasehold improvements
291,397
304,972
330,418
1,174,549
1,714,141
1,787,604
Less— accumulated depreciation
    and amortization
79,891
462,274
770,290
$
1,094,658
$
1,251,867
$
1,017,314
Depreciation and amortization expense for the period from
March 13, 2003 (inception) to December 31, 2003
and year ended December 31, 2004 was $79,891 and $376,709,
respectively. Depreciation and amortization expense for the nine
month period ended September 30, 2004 and 2005 and 2004 was
$282,621 and $316,435, respectively.
F-19
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
4.      Accrued expenses
Accrued expenses consist of the following:
December 31,
September 30,
2003
2004
2005
(unaudited)
Bonus accrual
$
334,080
$
284,143
$
284,843
Accrued professional fees
40,000
192,977
88,025
Accrued research and development
    expenses
—
172,730
1,384,405
Insurance and benefits
36,753
33,680
106,254
Other accrued expenses
21,641
5,898
5,598
Total accrued expenses
$
432,474
$
689,428
$
1,869,125
5.      Line of credit
facility
In 2003, the Company entered into a $515,147 line of credit
facility to finance the purchase of specified equipment based on
lender-approved schedules. The interest rate was fixed at
9.3% per annum. The Company has granted a security interest
in the assets purchased under the credit line. During 2003, the
full line of credit amount was drawn down. During 2004, the
Company had no draw downs under the line of credit. During 2003
and 2004, the Company repaid $45,010 and $156,446 on the line of
credit, respectively. The total indebtedness relating to this
line of credit was $470,137, $313,691 and $187,523 as of
December 31, 2003 and 2004 and September 30, 2005,
respectively.
Interest expense for the line of credit facility for the period
from March 13, 2003 (inception) to December 31,
2003 and the year ended December 31, 2004 was $3,971 and
$41,668, respectively.
The following is a schedule of remaining principal payments
under borrowings as of December 31:
2005
$
197,236
2006
148,356
345,592
Less: Portion representing interest
29,176
Current portion
173,929
Noncurrent portion
$
142,487
F-20
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
6.      Commitments
Lease agreements
In 2003, the Company entered into a five-year non-cancelable
operating lease agreement for office and laboratory space. The
lease expires in June 2008. The lease contains an option to
renew for an additional five years on the same terms and
conditions. The lease contains a 3% annual escalation.
The following is a schedule of future minimum lease payments for
capital and non-cancelable operating leases as of
December 31, 2004:
2005
$
302,057
2006
308,832
2007
239,570
2008
121,555
$
972,014
In August 2005, the Company entered into a ten-year, six-month
non-cancelable operating lease agreement for office and
laboratory space at a new office complex, which is renewable for
an additional five-year period at the end of the original term.
The lease expires in June 2016. The Company will take possession
of the lease space during 2006. The lease includes a rent
abatement and scheduled base rent increases over the term of the
lease. The total amount of the base rent payments and rent
abatement will be charged to expense on a straight-line method
over the term of the lease. In conjunction with a letter of
credit, the Company collateralized the operating lease with a
restricted cash deposit in the amount of $430,230 in September
2005, which is recorded as non-current restricted cash at
September 30, 2005.
The following is a schedule of future minimum lease payments for
capital and non-cancelable operating leases as of
September 30, 2005:
Three months ended
    December 31, 2005
$
57,252
2006
730,602
2007
673,121
2008
567,177
2009
458,034
2010
470,955
Thereafter
$
3,086,203
$
6,043,344
Capital leases
In 2004, the Company entered into a capital lease obligation at
an interest rate of 7.5 percent. The lease obligation was
payable in monthly installments of $3,312 through April 2006. The
F-21
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
Company capitalized the equipment in accordance with Statement
of Financial Accounting Standard No. 13,
"Accounting for Leases"
(SFAS 13).
SFAS 13 requires the capitalization of leases meeting
certain criteria, with the related asset being recorded in
property and equipment and an offsetting amount recorded as a
liability. During 2005, the Company repaid the capital lease
obligation in full.
Total rent expense for the period from March 13, 2003
(inception) through December 31, 2003 and the year
ended December 31, 2004 and was $143,174 and $315,241,
respectively. Total rent expense for nine month period ended
September 30, 2004 and 2005 was $235,793 and $261,471,
respectively.
License and clinical agreements
License agreements
In July 2004, the Company acquired exclusive rights to develop
and commercialize iloperidone through a sublicense agreement
with Novartis AG ("Novartis"). In consideration for
this license, the Company paid Novartis an initial license fee
of $500,000, which was immediately expensed to research and
development expenses on the Consolidated Statements of
Operations for the year ended December 31, 2004. The
Company is obligated to make future milestone payments to
Novartis of less than $100 million in the aggregate (the
majority of which are tied to sales milestones), as well as
royalty payments to Novartis which, as a percentage of net
sales, is in the mid-twenties. The Company's rights with
respect to these patents and to commercialize iloperidone may
terminate in whole or in part if the Company breaches its
royalty obligations, covenants in the sublicense regarding our
financial condition or certain restrictions in the sublicense
regarding other development activities.
In March 2004, the Company entered into a license agreement with
Bristol-Myers Squibb ("BMS") under which the Company
received an exclusive worldwide license to develop and
commercialize
VEC-162.
In consideration for the license, the Company paid BMS an
initial license fee of $500,000, which was immediately expensed
in research and development expenses on the Consolidated
Statements of Operations for the year ended December 31,
2004. The Company is obligated to make future milestone payments
to BMS of less than $40 million in the aggregate (the
majority of which are tied to sales milestones) as well as
royalty payments based on the net sales of
VEC-162
at a rate
which, as a percentage of net sales, is in the low teens. The
Company is also obligated under this agreement to pay BMS a
royalty on any upfront payments that the Company receives from a
third party in connection with any partnering arrangement, at a
rate in the mid-twenties. Either party may terminate the
agreement under certain circumstances, including a material
breach of the agreement by the other.
In July 2004, the Company entered into a license agreement with
Novartis under which the Company received an exclusive worldwide
license to develop and commercialize
VSF-173.
In
consideration for the license, the Company paid Novartis an
initial license fee of $500,000, which was immediately expensed
in research and development expenses on the Consolidated
Statements of Operations for the year ended December 31,
2004. The Company is also obligated to make future milestone
payments to Novartis of less than $50 million in the
F-22
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
aggregate (the majority of which are tied to sales milestones)
and royalty payments which, as a percentage of net sales, is in
the low to mid teens. Either party may terminate the agreement
under certain circumstances, including a material breach of the
agreement by the other.
Clinical agreements
The Company has agreements with clinical sites for the
treatments of patients under clinical protocols. In 2004, the
Company entered into an agreement with a clinical organization
to provide these services under a fee for service arrangement.
The total cost of these trial services will be unknown until the
trials are completed since the fees are based on the amount of
service and the number of patients.
In February 2005, the Company entered into a milestone-based
clinical trial agreement for approximately $416,000 which was
completed in August 2005.
7.      Related party
transactions
From time to time, the Company reimbursed Care Capital, LLC
("Care"), an affiliate of the majority shareholder of
the Company, for certain expenses paid by Care on behalf of the
Company. The Company reimbursed Care for approximately $299,000
and $54,000 for the period from March 13, 2003
(inception) through December 31, 2003 and the year
ended December 31, 2004, respectively.
The Company used the services of a Care employee and reimbursed
Care for such personnel services related to occupancy and salary
expenses incurred on behalf of the Company. Reimbursements
related to such expenses were approximately $34,000 and
approximately $49,000 for the period from March 13, 2003
(inception) through December 31, 2003 and the year
ended December 31, 2004, respectively.
There were no related party transactions during 2005.
8.      Preferred and common
stock
Series A preferred and common stock
In March 2003, the Company closed a private placement of its
securities and raised $10,004,000 in gross proceeds. The Company
sold 10,000 shares of newly issued Class A Common
Stock at a per share price of $0.40 and 10,000,000 shares
of newly-issued Series A Preferred Stock at a per share
price of $1.00 a share. Each preferred share is convertible into
one share of the Company's Common Stock, as adjusted. Each
share of Series A Preferred Stock shall entitle the holder
thereof to vote on the election and removal of the directors of
the Company and on all other matters to be voted on by the
stockholders of the Company. The holder of a share of
Series A Preferred Stock shall be entitled to such number
of votes as equal the number of shares of Common Stock into
which such shares of Series A Preferred Stock is then
convertible into at the record date of determination. The
outstanding shares of Series A Preferred Stock shall have
all other voting rights required by law and shall have
additional rights pursuant to Article IV of the
Company's Second Restated Certificate of Incorporation.
F-23
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
In September 2004, the Board of Directors approved a
100-for-1
stock split
on Common and Series A Preferred Stock. All share
information in the financial statements has been retroactively
adjusted to reflect the effect of the split as if it had
occurred at the beginning of the earliest period presented.
Series B preferred stock
In September 2004, the Company closed a private placement of
15,040,654 shares of Series B Preferred Stock for
approximately $18.5 million.
In September 2005, the Company closed an additional private
placement of 15,040,654 shares of Series B Preferred
Stock for approximately $18.5 million. In December 2005,
the Company closed an additional private placement of
12,195,129 shares of Series B Preferred Stock for
approximately $15 million (see Note 13). The issuance
costs from the issuance of the Series B Preferred Stock in
September and December 2005 were considered insignificant to
record against the Series B Preferred Stock on the balance
sheet.
Voting rights
The holders of preferred stock shall vote together with the
holders of the outstanding shares of Common Stock, and not as a
separate class or series. So long as 10,528,457 shares of
Series B Preferred Stock remain outstanding, the holders of
the outstanding shares of Series B Preferred Stock, voting
together as a class and to the exclusion of all other classes of
capital stock of the Company, shall be entitled to elect three
(3) members of the Board of Directors (the
"Series B Preferred Directors"). So long as
3,500,000 shares of Series A Preferred Stock remain
outstanding, the holders of the outstanding shares of
Series A Preferred Stock, voting together as a class and to
the exclusion of all other classes of capital stock of the
Company, shall be entitled to elect three (3) members of
the Board of Directors (the "Series A Preferred
Directors" and, together with the Series B Preferred
Directors, the "Preferred Directors"). Any remaining
directors shall be appointed upon the mutual agreement of a
majority of the Series A Preferred Directors and the
Series B Preferred Directors (the "General
Directors"), provided that one of the General Directors
shall be the chief executive officer of the Company.
Dividends
The holder of each then outstanding share of Series A
Preferred Stock and the holder of each then outstanding share of
Series B Preferred Stock shall be entitled to receive
dividends payable out of funds legally available therefore when,
as and if declared by the Board of Directors of the Company.
Such dividends shall be payable on parity with the holders of
the Common Stock and any such dividend shall be distributed
ratably among the holders of the Common Stock and the holders of
the Preferred Stock as if all such shares of Preferred Stock
were to convert into Common Stock. The right to such dividends
shall not be cumulative, and no right shall accrue to holders of
Preferred Stock. Dividends, if paid, or if declared and set
apart for payment, must be paid, or declared and set apart for
payment, on all outstanding shares of the Preferred Stock
contemporaneously.
F-24
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
Liquidation preference
In the event of any voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company (a
"Liquidation Event"), after payment or provision for
payment of the debts and other liabilities of the Company, the
holders of each share of Series A Preferred Stock and each
share of Series B Preferred Stock shall be entitled to
receive, on a pari passu basis out of the assets of the Company,
an amount equal to the liquidation preference. The liquidation
preference per share of Series A Preferred Stock as of any
particular date (the "Series A Liquidation
Preference") shall be the greater of the Original
Series A Purchase Price or the amount per share of
Series A Preferred Stock that the holder of the number of
shares of Common Stock issuable upon conversion thereof would
receive upon any such Liquidation Event. The liquidation
preference per share of Series B Preferred Stock as of any
particular date (the "Series B Liquidation
Preference" and, together with the Series A
Liquidation Preference, the "Liquidation Preference")
shall be the greater of the Original Series B Purchase
Price or the amount per share of Series B Preferred Stock
that the holder of the number of shares of Common Stock issuable
upon conversion thereof would receive upon any such Liquidation
Event.
If upon any Liquidation Event the assets of the Company
distributable among the holders of the Series A Preferred
Stock and the Series B Preferred Stock shall be
insufficient to permit the payment to them of the full
preferential amounts to which they are entitled, then the entire
assets of the Company to be distributed shall be distributed
ratably among the holders of the Series A Preferred Stock
and the Series B Preferred Stock, in proportion to the sum
of their respective per share liquidation preferences, until
payment in full of such amount per share.
Conversion
Each share of the Preferred Stock shall be convertible, at the
option of the holder, at any time after the date of the issuance
of such share, into that number of the fully paid and
nonassessable shares of common stock determined in accordance
with the following provisions:
(a)
Each share of Series A Preferred Stock shall be convertible
    into the number of shares of Common Stock which results from
    dividing the Series A Conversion Price (as defined herein)
    per share in effect at the time into the Original Series A
    Purchase Price; and
(b)
Each share of Series B Preferred Stock shall be convertible
    into the number of shares of Common Stock which results from
    dividing the Series B Conversion Price (as defined herein)
    per share in effect at the time into the Original Series B
    Purchase Price.
The conversion price per share for the Series A Preferred
Stock shall initially be $1.00. The conversion price per share
for the Series B Preferred Stock shall initially be $1.23
and shall be subject to adjustment from time to time as provided
herein.
F-25
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
Automatic conversion
Each share of Preferred Stock then outstanding shall be
automatically converted into the number of fully paid and
nonassessable shares of Common Stock determined in accordance
with the conversion features listed above upon the earlier of:
(a)
The close of business of the day immediately preceding the
    closing of the sale of its Common Stock in connection with a
    Qualified Public Offering ("IPO"); or
(b)
The consent of the holders of at least a majority of the
    outstanding shares of Preferred Stock voting or consenting
    together as a single class and to the exclusion of all other
    classes of capital stock of the Company.
Special mandatory conversion
In connection with the additional sale of Series B
Preferred Stock in September 2005, if any holder of shares of
Series B Preferred Stock fails to purchase all shares of
Series B Preferred Stock required to be purchased by such
holder at any additional closing (as defined), all of such
holder's Series B Preferred Stock shall automatically
and without further action on the part of such holder be
converted into such number of shares of Common Stock into which
such shares of Series B Preferred Stock are then
convertible. Upon conversion, the shares of Series B
Preferred Stock converted shall be canceled and not subject to
reissuance.
9.      Beneficial conversion
feature— Series B convertible preferred stock
In September 2005, the Company completed the sale of an
additional 15,040,654 shares of Series B Convertible
Preferred Stock for proceeds of approximately
$18.5 million. After evaluating the fair value of the
Company's Common Stock obtainable upon conversion by the
stockholders, the Company determined that the issuance of the
Series B Preferred Stock sold in September 2005 resulted in
a beneficial conversion feature calculated in accordance with
EITF Issue No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," as interpreted by EITF Issue
No. 00-27,
"Application of Issue
No. 98-5
to
Certain Convertible Instruments," of approximately
$18.5 million which was fully accreted in September 2005
and is recorded as a deemed dividend to preferred stockholders
for the nine month period ended September 30, 2005.
10.      Management equity
plan
In March 2003, the Company adopted the Vanda Pharmaceuticals
Inc. Management Equity Plan ("Stock Option Plan"), a
non-qualified stock option plan. The Company has reserved
5,489,714 shares of Common Stock to accommodate the
exercise of options granted under the Stock Option Plan. As of
September 30, 2005, there were a remaining
1,565,485 shares reserved for issuance under the Stock
Option Plan. The Company has issued options to purchase Common
Stock to various employees which expire 10 years from the
date of grant. The options become 100% vested on the fourth
anniversary of the date of grant.
F-26
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
Management equity plan
The Company has historically granted stock options at exercise
prices that equaled the fair value of its Common Stock at the
date of grant as estimated by its board of directors. Since
there has not been a public market for the Company's Common
Stock, the board of directors determined the fair value of its
Common Stock by considering a number of objective and subjective
factors, including the pricing of Convertible Preferred Stock,
the preferences and rights of the Company's Preferred Stock
over the Common Stock, important operational events, the risk
and non-liquid nature of the Common Stock, and underlying market
conditions. The Company has not historically obtained
contemporaneous valuations by an unrelated valuation specialist
because, at the time of the issuances of stock options, the
Company believed its estimates of the fair value of its common
stock to be reasonable based on the foregoing factors.
In connection with this proposed initial public offering, the
Company retrospectively assessed the fair value of its Common
Stock. In reassessing the fair value, the Company considered the
factors used in its historical determinations of fair value, the
likelihood of a liquidity event such as an initial public
offering, and feedback received from investment banks relating
to an initial public offering upon beginning such discussions in
November 2005. In reassessing the fair value of the Common
Stock, the Company determined that an increase in the estimated
fair value of the underlying Common Stock for options granted
after December 2003 was appropriate. As allowed by
SFAS No. 123,
Accounting for Stock Based
Compensation,
the Company accounts for its stock options
granted to employees and directors under APB 25,
Accounting for Stock Issued to Employees.
Accordingly,
deferred stock compensation is recognized to the extent that the
price of the underlying common stock, as determined in the
retrospective fair value analysis, exceeds the exercise price of
the stock options at the date of grant. Deferred stock
compensation is amortized over the vesting period of the related
options which is generally four years.
For the year ended December 31, 2004, the Company granted
332,080 stock options to employees with a weighted average
intrinsic value of $0.85 per share, resulting in deferred
stock compensation of $281,130. For the nine month period ended
September 30, 2005, the Company granted 2,899,111 stock
options to employees with a weighted average intrinsic value of
$4.52 per share, resulting in deferred stock compensation
of $13,103,916. Compensation expense relating to stock options
with the common stock fair value greater than the exercise price
granted to employees was $23,196 for the year ended
December 31, 2004, and $5,904 and $566,682 for the nine
month period ended September 30, 2004 and 2005,
respectively. Of the $23,196 of compensation expense recognized
during the year ended December 31, 2004, $2,086 was
included in research and development and $21,110 was included in
general and administrative. Of the $5,904 and $566,682 of
compensation expense recognized during the nine month period
ended September 30, 2004 and 2005, respectively, $587 and
$183,822 was included in research and development and $5,317 and
$382,860 was included in general and administrative expense.
In August 2004, the Company approved a modification to an
employee's stock option awards at time of employment
termination. The modification was to accelerate a portion of the
unvested stock options so the shares could be immediately
exercisable. According to FASB Interpretation No. 44,
"Accounting for Certain Transactions involving Stock
Compensation"
(FIN 44), the result
F-27
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
of such a modification is to remeasure the stock options that
were modified. The remeasurement of the stock options resulted
in an immediate charge of $14,937, which was included in general
and administrative expense for the year ended December 31,
2004.
In February 2005, the Board of Directors approved a modification
to all outstanding granted stock option awards, repricing the
options from its original exercise price of $0.40 to $0.10.
According to FIN 44, the result of such a modification is
to account for the modified stock option awards as variable from
the date of the modification to the date the awards are
exercised, forfeited, or cancelled. For the nine month period
ended September 30, 2005, the Company remeasured
approximately 1.1 million outstanding stock options,
resulting in an initial deferred stock compensation of
$1,550,193. Compensation expense relating to the remeasurement
of modified stock options was $3,523,619 for the nine month
period ended September 30, 2005, which includes $3,040,666
of immediate stock compensation charges for vested shares at the
time of remeasurement for the nine month period ended
September 30, 2005. Of the $3,523,619 of compensation
expense recognized during the nine month period ended
September 30, 2005, $474,249 was included in research and
development and $3,048,912 was included in general and
administrative expense.
A summary of stock option activity is as follows with the
repricing the options from its original exercise price of $0.40
to $0.10 reflected for all option activity:
Weighted
average
exercise
Number of
price at
shares
grant date
March 13, 2003 (inception)
—
$
—
Granted
772,100
0.10
Outstanding at December 31,
    2003
772,100
0.10
Granted
332,080
0.10
Cancelled or expired
(61,700
)
0.10
Outstanding at December 31,
    2004
1,042,480
0.10
Granted (unaudited)
2,899,111
0.10
Cancelled or expired (unaudited)
(17,362
)
0.10
Exercised (unaudited)
(140,739
)
0.10
Outstanding at September 30,
    2005 (unaudited)
3,783,490
0.10
Exercisable at September 30,
    2005 (unaudited)
446,743
0.10
F-28
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2004 and
September 30, 2005 (unaudited):
Options outstanding
Options exercisable
Weighted-
Weighted-
Weighted-
average
average
average
Number of
exercise
remaining
Number of
exercise
underlying
price per
contractual
underlying
price per
Exercise price
shares
share
life (years)
shares
share
December 31, 2004
$0.10
1,042,480
$
0.10
9.3
316,058
$
0.10
September 30, 2005
    (unaudited)
$0.10
3,783,490
$
0.10
9.4
446,743
$
0.10
Restricted stock
Certain of the Company's employees have entered into the
Company's standard form of stock restriction agreement as a
condition to their exercise of options to acquire common stock
pursuant to the Plan. Shares exercised prior to vesting are
subject to forfeiture in accordance with the vesting schedule of
the granted stock options. During 2005, certain of the
Company's employees exercised unvested stock options,
awarded under the Company's Stock Incentive Plan, to
acquire a total of 79,039 shares of restricted common
stock. At September 30, 2005, 53,203 shares of
restricted common stock remain unvested pursuant to awards.
11.      Stock warrants
In 2003, in connection with entering into the line of credit
facility to finance the purchase of equipment, the Company
granted to the lender a freely exercisable warrant to
purchase 45,100 shares of the Company's common
stock (the "Lender Warrant Shares") at an exercise
price of $0.40 per share. The Lender Warrant Shares were
valued using the Black Scholes option pricing model at
$0.28 per share and the aggregate value was $12,628, which
was recorded as general and administrative for the period from
March 13, 2003 through December 31, 2003.
In February 2004, the Company issued warrants to a consultant to
purchase 121,500 shares of the Company's common
stock (the "Consultant Warrant Shares") at an exercise
price of $0.40 per share. The Consultant Warrant Shares
were valued using the Black Scholes option pricing model at
$0.23 per Consultant Warrant Share and the aggregate value
was $27,945, which was recorded as general and administrative
for the year ended December 31, 2004.
F-29
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
The Company used the following assumptions to calculate the
individual warrant shares through the Black Scholes option
pricing model:
Lender
Consultant
Expected dividend yield
0%
0%
Expected volatility
67%
67%
Expected term (years)
8
5
Risk-free interest rate
3.65%
3.08%
12.      Income taxes
The tax provision or benefit for the years ended
December 31, 2004 and 2003 are as follows:
December 31,
December 31,
2003
2004
Current federal tax expense
$
—
$
—
Current state tax expense
—
—
Current foreign expense
—
4,949
Deferred tax expense
—
—
—
—
Total Tax Expense
$
—
$
4,949
Deferred tax assets consist of the following:
December 31,
December 31,
2003
2004
Deferred Tax Asset
    (Liability)
Net operating loss carryforwards
$
1,053,424
$
3,863,758
Start-up costs
107,710
869,656
Research and development credit
110,460
365,134
Depreciation and amortization
(37,222
)
(52,549
)
Amortization of warrants
—
26,878
Deferred expenses
6,818
10,083
Accrued expenses
—
64,787
Net deferred tax assets
1,241,190
5,147,747
Deferred tax asset valuation
    allowance
(1,241,190
)
(5,147,747
)
$
—
$
—
Based on the Company's limited operating history and
management's expectation of future profitability,
management believes that the Company's deferred tax assets
do not meet the "more likely than not" criteria under
SFAS No. 109. Accordingly, a valuation allowance for
the entire deferred tax asset amount has been recorded.
F-30
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
The effective tax rate differs from the U.S. federal
statutory tax rate of 34% due to the following:
December 31,
December 31,
2003
2004
Federal tax at statutory rate
34.0%
34.0%
State taxes
4.6%
4.6%
Change in valuation allowance
(42.3%
)
(42.5%
)
Research and development credit
3.7%
4.0%
Meals, entertainment and other
    nondeductable items
0.0%
(0.1%
)
Effective tax rate
0.0%
0.0%
As of December 31, 2003 and 2004, the Company had
U.S. federal and state net operating loss carryforwards of
approximately $2.7 million and $10.0 million,
respectively available to reduce future taxable income, which
will begin to expire in 2023.
Under the Tax Reform Act of 1986, the amounts of and benefits
from the operating loss carryforwards may be impaired in certain
circumstances. Events which cause limitations in the amount of
net operating losses that the Company may utilize in any one
year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period.
13.      Employee benefit
plan
The Company has a defined contribution plan (the Plan) under the
Internal Revenue Code Section 401(k). This plan covers
substantially all employees who meet minimum age and service
requirements and allows participants to defer a portion of their
annual compensation on a pre-tax basis. Currently, the Company
matches 50 percent up to the first six percent of employee
contributions. All matching contributions have been paid by the
Company. The employer match vests over a 4 year period. The
total employer match for the period from March 13, 2003
(inception) through December 31, 2003 and for the year
ended December 31, 2004 was $12,731 and $42,206,
respectively. The total employer match for nine month period
ended September 30, 2004 and 2005 was $33,037 and $40,589,
respectively.
14.      Subsequent events
In December 2005, the Company closed an additional private
placement of 12,195,129 shares of Series B preferred
stock for proceeds of approximately $15.0 million. The
Company evaluated the fair value of the Company's common
stock obtainable upon conversion by the stockholders and
determined that the issuance of the Series Preferred Stock sold
in December 2005 will result in a beneficial conversion feature
of approximately $15.0 million that will fully accrete in
December 2005 and will be recorded as a deemed dividend to
Preferred Stockholders for the year ended December 31, 2005.
F-31
Table of Contents
Vanda Pharmaceuticals Inc.
(A development stage company)
Notes to consolidated financial
statements—(continued)
When the Company takes possession of the new lease space in
January 2006, the Company will vacate the current office and
laboratory space. According to SFAS 146
"Accounting
for Costs Associated with Exit or Disposal Activities"
,
a liability for costs that will continue to be incurred under a
contract for its remaining term without economic benefit to the
Company shall be recognized and measured when the Company ceases
using the right conveyed by the lease agreement, reduced by
estimated sublease rentals that could be reasonably obtained.
The Company expects to incur a charge of approximately $260,000
at the time the Company moves from the current location to the
new office complex in January 2006.
F-32
Table of Contents
shares
Common shares
Prospectus
JPMorgan
Banc of America Securities LLC
Thomas Weisel Partners LLC
,
2006
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
are offering to sell, and seeking offers to buy, common shares
only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of our common shares.
No action is being taken in any jurisdiction outside the
United States to permit a public offering of the common shares
or possession or distribution of this prospectus in that
jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any
restrictions as to this offering and the distribution of this
prospectus applicable to that jurisdiction.
Until                     ,
2006 all dealers that buy, sell or trade in our common shares,
whether or not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
Table of Contents
Part II
information not required in prospectus
Item 13.
Other
expenses of issuance and distribution.
Estimated expenses payable in connection with the sale of the
common stock in this offering are as follows:
SEC registration fee
$
8,025.00
NASD filing fee
$
8,000.00
Nasdaq National Market listing fee
$
5,000.00
Printing and engraving expenses
$
*
Legal fees and expenses
$
*
Accounting fees and expenses
$
*
Transfer agent and registrar fees
    and expenses
$
*
Miscellaneous
$
*
Total
$
*
* To be completed by amendment.
The registrant will bear all of the expenses shown above.
Item 14.
Indemnification
of directors and officers.
The Delaware General Corporation Law and the registrant's
charter and bylaws provide for indemnification of the
registrant's directors and officers for liabilities and
expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions
taken in good faith in a manner reasonably believed to be in, or
not opposed to, the best interests of the registrant, and with
respect to any criminal action or proceeding, actions that the
indemnitee had no reasonable cause to believe were unlawful.
Reference is made to the registrant's amended and restated
certificate of incorporation filed as Exhibit 3.2 hereto
and the registrant's bylaws filed as Exhibit 3.3
hereto.
The registrant has entered into indemnification agreements with
its officers and directors, a form of which is attached as
Exhibit 10.14 hereto and incorporated herein by reference.
The Indemnification Agreements provide the registrant's
officers and directors with further indemnification to the
maximum extent permitted by the Delaware General Corporation
Law. The underwriting agreement provides that the underwriters
are obligated, under certain circumstances, to indemnify
directors, officers and controlling persons of the registrant
against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of underwriting
agreement filed as Exhibit 1.1 hereto.
The registrant currently maintains a directors' and
officers' liability insurance policy.
II-1
Table of Contents
Item 15.
Recent
sales of unregistered securities.
In the three years preceding the filing of this registration
statement, the registrant has sold the following securities that
were not registered under the Securities Act:
Common stock
In March 2003, the company issued a total of 100 shares of
its Series A Common Stock to three accredited investors at
an aggregate purchase price of $4,000. These shares were
subsequently converted into a total of 10,000 shares of
Common Stock.
In April 2005, the company issued a total of 1,838 shares
of its common stock to employees, officers and directors upon
exercises of options granted pursuant to its Management Equity
Plan, for an aggregate purchase price of $183.80.
In June 2005, the company issued a total of 61,700 shares
of its common stock to employees, officers and directors upon
exercises of options granted pursuant to its Management Equity
Plan, for an aggregate purchase price of $6,170.00.
In August 2005, the company issued a total of 3,700 shares
of its common stock to employees, officers and directors upon
exercises of options granted pursuant to its Management Equity
Plan, for an aggregate purchase price of $370.00.
In September 2005, the company issued a total of
73,501 shares of its common stock to employees, officers
and directors upon exercises of options granted pursuant to its
Management Equity Plan, for an aggregate purchase price of
$7,350.10.
In October 2005, the company issued a total of
133,796 shares of its common stock to employees, officers
and directors upon exercises of options granted pursuant to its
Management Equity Plan, for an aggregate purchase price of
$13,379.60.
In November 2005, the company issued a total of
53,939 shares of its common stock to employees, officers
and directors upon exercises of options granted pursuant to its
Management Equity Plan, for an aggregate purchase price of
$5,393.90.
No underwriters were involved in the foregoing sales of
securities. Such sales were made in reliance upon the exemption
provided by Section 4(2) of the Securities Act for
transactions not involving a public offering.
Series B preferred stock
In September 2004, the company sold an aggregate of
15,040,654 shares of its Series B Preferred Stock to
twelve accredited investors at an aggregate purchase price of
$18,500,004.42.
In September 2005, the company sold an aggregate of
15,040,654 shares of its Series B Preferred Stock to
twelve accredited investors at an aggregate purchase price of
$18,500,004.42.
In December 2005, the company sold an aggregate of
12,195,129 shares of its Series B Preferred Stock to
twelve accredited investors at an aggregate purchase price of
$15,000,008.67.
II-2
Table of Contents
No underwriters were involved in the foregoing sales of
securities. Such sales were made in reliance upon the exemption
provided by Section 4(2) of the Securities Act for
transactions not involving a public offering.
Series A preferred stock
In March 2003, the company sold an aggregate of
10,000,000 shares of its Series A Preferred Stock
(giving effect to a 100 for 1 stock split occurring after such
sale) to three accredited investors at an aggregate purchase
price of $10,000,000.
No underwriters were involved in the foregoing sales of
securities. Such sales were made in reliance upon the exemption
provided by Section 4(2) of the Securities Act for
transactions not involving a public offering.
Options
The Company has granted currently outstanding options to
purchase an aggregate of 5,026,123 shares, at prices
ranging from $0.10 to $1.43. These options have been granted to
employees, directors and consultants in accordance with the
terms of the registrant's equity compensation plans. Such
issuances were made in reliance upon the exemption provided by
Rule 701 promulgated under the Securities Act and, in the
case of certain consultants, Section 4(2) of the Securities
Act.
Warrants
In October 2003, the company granted a warrant to
purchase 451 shares of its Class A Common Stock
which, with the subsequent conversion of Class A Common
Stock to the company's common stock, has become exercisable
for 45,100 shares of the company's common stock.
In February 2004, the company granted a warrant to
purchase 1,215 shares of its Class A Common Stock
which, with the subsequent conversion of Class A Common
Stock to the company's common stock, has become exercisable
for 121,500 shares of the company's common stock.
No underwriters were involved in the foregoing sales of
securities. Such sales were made in reliance upon the exemption
provided by Section 4(2) of the Securities Act for
transactions not involving a public offering.
II-3
Table of Contents
Item 16.
Exhibits and financial statement schedules.
(a)
Exhibits:
Exhibit index
Exhibit no.
Exhibit index
1
.1*
Form of Underwriting Agreement
3
.1
Second Restated Certificate of
    Incorporation of the registrant
3
.2
Certificate of Amendment of the
    Second Restated Certificate of Incorporation of the registrant
    dated March 22, 2005
3
.3
Certificate of Amendment of the
    Second Restated Certificate of Incorporation of the registrant
    dated December 9, 2005
3
.4*
Form of Amended and Restated
    Certificate of Incorporation of the registrant effecting a
    conversion of Preferred Stock and reverse stock split to take
    effect as of the closing of the offering
3
.5
Bylaws of the registrant
3
.6*
Form of Amended and Restated Bylaws
    to take effect as of the closing of the offering
4
.1
2004 Securityholder Agreement
4
.2
Class A Common Stock Purchase
    Warrant dated February 20, 2004 issued to Investment
    Opportunities I, LLC
4
.3
Class A Common Stock Purchase
    Warrant dated October 28, 2003 issued to Oxford Finance
    Corporation
4
.4*
Specimen certificate representing
    the common stock of the registrant
5
.1*
Opinion of Gunderson Dettmer Stough
    Villeneuve Franklin & Hachigian, LLP
10
.1
Registrant's Second Amended
    and Restated Management Equity Plan
10
.2*#
Sublicense Agreement between the
    registrant and Novartis Pharma AG dated June 4, 2004
    (relating to iloperidone)
10
.3*#
Amended and Restated License,
    Development and Commercialization Agreement by and between
    Bristol-Myers Squibb Company and the registrant dated
    July 24, 2005 (relating to VEC-162)
10
.4*#
NDD-094 License Agreement between
    Novartis Pharma AG, Novartis AG and the registrant dated
    June 4, 2004 (relating to VSF-173)
10
.5*#
General Services Agreement between
    the registrant and Quintiles, Inc. dated October 13, 2005
10
.6*#
Agreement JAA01473 between the
    registrant and Quintiles, Inc. dated February 3, 2005
10
.7
Lease Agreement between the
    registrant and Red Gate III LLC dated June 25, 2003
    (lease of Rockville, MD office space)
10
.8
Amendment to Lease Agreement
    between the registrant and Red Gate III LLC dated
    September 27, 2003
10
.9
Lease Agreement between the
    registrant and MCC3 LLC (by Spaulding and Slye LLC) dated
    August 4, 2005 (for lease of space beginning
    January 1, 2006)
10
.10
Summary Plan Description provided
    for the registrant's 401(k) Profit Sharing Plan &
    Trust
10
.11
Form of Indemnification Agreement
    entered into by directors
10
.12
Employment Agreement for Mihael H.
    Polymeropoulos dated February 10, 2005
10
.13
Employment Agreement for William D.
    Clark dated February 10, 2005
10
.14
Employment Agreement for Steve
    Shallcross dated October 18, 2005
10
.15
Employment Agreement for Deepak
    Phadke dated August 15, 2005
II-4
Table of Contents
Exhibit no.
Exhibit index
10
.16
Employment Agreement for Thomas
    Copmann dated May 27, 2005
21
.1
List of Subsidiaries
23
.1*
Consent of Gunderson Dettmer Stough
    Villeneuve Franklin & Hachigian, LLP (included in
    Exhibit 5.1)
23
.2
Consent of PricewaterhouseCoopers
    LLP, Independent Registered Public Accounting Firm
24
.1
Power of Attorney (included on
    page II-6)
* To be included by amendment
# Application will be made to the Securities and Exchange
Commission to seek confidential treatment of certain provisions.
Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and
Exchange Commission.
(b)
Consolidated Financial Statements Schedules
:
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions, the required
information is disclosed in the notes to the consolidated
financial statements or the schedules are inapplicable, and
therefore have been omitted.
Item 17.
Undertakings.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to provisions
described in Item 14 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
The registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser; (2) that for purposes of
determining any liability under the Securities Act, 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
(3) that for the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
Table of Contents
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement on
Form S-1
to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Rockville, Maryland on December 29, 2005.
Vanda Pharmaceuticals Inc.
By:
/s/
Mihael H.
    Polymeropoulos, M.D.
Mihael H. Polymeropoulos, M.D.
Chief Executive Officer
Power of attorney and signatures
The undersigned officers and directors of Vanda Pharmaceuticals
Inc. hereby constitute Mihael H. Polymeropoulos, M.D., and
Steven A. Shallcross, and each of them singly, with full power
of substitution, our true and lawful
attorneys-in
-fact and
agents to take any actions to enable Vanda Pharmaceuticals Inc.
to comply with the Securities Act, and any rules, regulations
and requirements of the Securities and Exchange Commission, in
connection with this registration statement, including the power
and authority to sign for us in our names in the capacities
indicated below any and all amendments (including post-effective
amendments) to this registration statement and any other
registration statement filed pursuant to the provisions of
Rule 462 under the Securities Act and the power to file the
same, with all exhibits thereto, and all other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto each said
attorney-in
-fact and
agents full power and authority to perform each and every act in
person, hereby ratifying and confirming all that said
attorneys-in
-fact and
agents or either of them or their or his substitute or
substitutes may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
Name
Title
Date
/s/
Mihael H. Polymeropoulos,
    M.D.
Mihael
    H. Polymeropoulos, M.D.
President and Chief Executive
    Officer and Director (principal executive officer)
December 29, 2005
/s/
Steven A. Shallcross
Steven
    A. Shallcross
Senior Vice President, Chief
    Financial Officer and Treasurer (principal financial and
    accounting officer)
December 29, 2005
/s/
Argeris N. Karabelas,
    Ph.D.
Argeris
    N. Karabelas, Ph.D.
Director
December 29, 2005
II-6
Table of Contents
Name
Title
Date
/s/
Brian K.
    Halak, Ph.D.
Brian
    K. Halak, Ph.D.
Director
December 29, 2005
/s/
Wayne T.
    Hockmeyer, Ph.D.
Wayne
    T. Hockmeyer, Ph.D.
Director
December 29, 2005
/s/
David Ramsay
David
    Ramsay
Director
December 29, 2005
/s/
James B.
    Tananbaum, M.D.
James
    B. Tananbaum, M.D.
Director
December 29, 2005
/s/
Richard W. Dugan
Richard
    W. Dugan
Director
December 29, 2005
II-7
Table of Contents
Exhibit index
Exhibit no.
Exhibit index
1
.1*
Form of Underwriting Agreement
3
.1
Second Restated Certificate of
    Incorporation of the registrant
3
.2
Certificate of Amendment of the
    Second Restated Certificate of Incorporation of the registrant
    dated March 22, 2005
3
.3
Certificate of Amendment of the
    Second Restated Certificate of Incorporation of the registrant
    dated December 9, 2005
3
.4*
Form of Amended and Restated
    Certificate of Incorporation of the registrant effecting a
    conversion of Preferred Stock and reverse stock split to take
    effect as of the closing of the offering
3
.5
Bylaws of the registrant
3
.6*
Form of Amended and Restated Bylaws
    to take effect as of the closing of the offering
4
.1
2004 Securityholder Agreement
4
.2
Class A Common Stock Purchase
    Warrant dated February 20, 2004 issued to Investment
    Opportunities I, LLC
4
.3
Class A Common Stock Purchase
    Warrant dated October 28, 2003 issued to Oxford Finance
    Corporation
4
.4*
Specimen certificate representing
    the common stock of the registrant
5
.1*
Opinion of Gunderson Dettmer Stough
    Villeneuve Franklin & Hachigian, LLP
10
.1
Registrant's Second Amended
    and Restated Management Equity Plan
10
.2*#
Sublicense Agreement between the
    registrant and Novartis Pharma AG dated June 4, 2004
    (relating to iloperidone)
10
.3*#
Amended and Restated License,
    Development and Commercialization Agreement by and between
    Bristol-Myers Squibb Company and the registrant dated
    July 24, 2005 (relating to VEC-162)
10
.4*#
NDD-094 License Agreement between
    Novartis Pharma AG, Novartis AG and the registrant dated
    June 4, 2004 (relating to VSF-173)
10
.5*#
General Services Agreement between
    the registrant and Quintiles, Inc. dated October 13, 2005
10
.6*#
Agreement JAA01473 between the
    registrant and Quintiles, Inc. dated February 3, 2005
10
.7
Lease Agreement between the
    registrant and Red Gate III LLC dated June 25, 2003
    (lease of Rockville, MD office space)
10
.8
Amendment to Lease Agreement
    between the registrant and Red Gate III LLC dated
    September 27, 2003
10
.9
Lease Agreement between the
    registrant and MCC3 LLC (by Spaulding and Slye LLC) dated
    August 4, 2005 (for lease of space beginning
    January 1, 2006)
10
.10
Summary Plan Description provided
    for the registrant's 401(k) Profit Sharing Plan &
    Trust
10
.11
Form of Indemnification Agreement
    entered into by directors
10
.12
Employment Agreement for Mihael H.
    Polymeropoulos dated February 10, 2005
10
.13
Employment Agreement for William D.
    Clark dated February 10, 2005
10
.14
Employment Agreement for Steve
    Shallcross dated October 18, 2005
10
.15
Employment Agreement for Deepak
    Phadke dated August 15, 2005
Table of Contents
Exhibit no.
Exhibit index
10
.16
Employment Agreement for Thomas
    Copmann dated May 27, 2005
21
.1
List of Subsidiaries
23
.1*
Consent of Gunderson Dettmer Stough
    Villeneuve Franklin & Hachigian, LLP (included in
    Exhibit 5.1)
23
.2
Consent of PricewaterhouseCoopers
    LLP, Independent Registered Public Accounting Firm
24
.1
Power of Attorney (included on
    page II-6)
* To be included by amendment
# Application will be made to the Securities and Exchange
Commission to seek confidential treatment of certain provisions.
Omitted material for which confidential treatment has been
requested has been filed separately with the Securities and
Exchange Commission.