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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES AND EXCHANGE ACT OF 1934

(Mark One)

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2002

Or

| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________.

Commission file number 000-30929

KERYX BIOPHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 13-4087132
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

750 LEXINGTON AVENUE
New York, New York 10022
(Address of Principal Executive Offices)

Registrant's Telephone Number, Including Area Code: 212-531-5965

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $0.001 PER SHARE



Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes |X| No | |

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Annual Report on Form 10-K. | |

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes | | No |X|

The aggregate market value of the Common Stock held by non-affiliates of the
registrant is $27,621,850.32. Such aggregate market value was computed by
multiplying the number of shares of the Common Stock held by non-affiliates of
the registrant as of March 21, 2003 (12,168,216), by the closing sale price of
the Common Stock as reported on the National Market segment of The Nasdaq Stock
Market as of June 28, 2002 ($2.27), the last business day of the registrant's
most recently completed second fiscal quarter. For purposes of making this
calculation only, the registrant has defined affiliates as including all
directors, executive officers and 10% stockholders of the Company.

As of March 21, 2003, there were 20,076,885 shares of the registrant's
Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement for the registrant's 2003 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Annual Report
on Form 10-K.


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TABLE OF CONTENTS

PART I

PAGE
ITEM 1. Business ....................................................... 4

ITEM 2. Properties ..................................................... 22

ITEM 3. Legal Proceedings .............................................. 22

ITEM 4. Submission of Matters to a Vote of Security Holders ............ 22

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters ........................................................ 23

ITEM 6. Selected Financial Data ........................................ 24

ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 25

ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk ...... 33

ITEM 8. Financial Statements and Supplementary Data .................... 33

ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures ...................................... 34

PART III

ITEM 10. Directors and Executive Officers of the Company ................ 35

ITEM 11. Executive Compensation ......................................... 35

ITEM 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................ 35

ITEM 13. Certain Relationships and Related Transactions ................. 36

ITEM 14. Controls and Procedures ........................................ 36

PART IV

ITEM 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ....................................................... 36

This Form 10-K contains trademarks and trade names of Keryx Biopharmaceuticals,
Inc., including our name, logo and the KinAce mark. This Form 10-K may also
include trademarks and trade names of other companies.


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PART I

ITEM 1. BUSINESS.

Overview

We are a biopharmaceutical company engaged in the acquisition, development and
commercialization of novel pharmaceutical products for the treatment of serious,
life-threatening diseases, including diabetes and cancer. In August of 2002, we
commenced a corporate restructuring that has resulted in an approximate 70%
reduction in staff and a re-focus of our efforts primarily on the development of
our lead compound, KRX-101, which has completed a European Phase 2 trial, and on
the acquisition of additional clinical stage compounds.

Our lead compound under development is sulodexide, or KRX-101, to which we have
an exclusive license in North America, Japan and other markets. In 2001, KRX-101
was granted Fast-Track designation for the treatment of diabetic nephropathy
and, in 2002, we announced that the FDA had agreed, in principle, to permit us
to avail ourselves of the accelerated approval process under subpart H of the
FDA's regulations governing applications for the approval to market a new drug.

To date, we have not received approval for the sale of any of our drug
candidates in any market.

Our Strategy

Since the restructuring, we have modified our business plan. Under our new
strategy, we are currently planning to:

o advance KRX-101 into a United States-based clinical trial for the
treatment of diabetic nephropathy; and

o seek to in-license additional compounds.

Additionally, we also plan to seek partners for the further development of our
KinAce and other early-stage programs.

Corporate Information

We were incorporated as a Delaware corporation in October 1998. Although we
started operating our business in November 1999, many of our principal
technologies and drug candidates were developed by our predecessor company,
Partec Ltd., and its subsidiaries during the period January 1997 to November
1999. Consequently, in this report, "we", "us" and "our" refer to Keryx
Biopharmaceuticals, Inc., its predecessor company and its or our respective
subsidiaries unless the context requires otherwise. Our executive offices are
located at 750 Lexington Avenue, New York, New York 10022. Our telephone number
is 212-531-5965 and our e-mail address is info@keryx.com. We also maintain
offices at 101 Main Street, Cambridge, Massachusetts 02142 and 7 Hartom Street,
Har Hotzvim, Jerusalem, 91236, Israel.

We maintain a website with the address www.keryx.com. We are not including the
information contained on our website as part of, or incorporating it by
reference into, this Annual Report on Form 10-K. We make available free of
charge through our website our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, and any amendments to these reports,
as soon as reasonably practicable after we electronically file such material
with, or furnish such material to, the Securities and Exchange Commission.

Development Stage Products

KRX-101

Overview

We have obtained a license to develop sulodexide, or KRX-101, to treat diabetic
nephropathy and other conditions. Sulodexide is a glycosaminoglycan compound
with structural similarities to the broad family of marketed heparins and low
molecular


4


weight heparins. Specifically, sulodexide is comprised of heparan sulfate, also
referred to as fast-moving heparin, and dermatan sulfate. This drug has been
marketed in a number of European, Asian and South American countries for many
years by our licensor for certain cardiovascular conditions and has a
well-established safety profile for such indications. Additionally, in Phase 2
studies conducted in Europe, sulodexide has demonstrated significant activity in
the treatment of diabetic nephropathy, a serious and life-threatening kidney
disease caused by diabetes. We plan to develop sulodexide in the United States
and possibly other countries for the treatment of diabetic nephropathy and
potentially for other indications.

Market Opportunity

There are in excess of 10 million diagnosed diabetics in the United States, of
whom approximately 90% have been diagnosed with Type II diabetes, or DM2. DM2
results from the combination of insulin deficiency and the body's relative
insensitivity to the insulin present, as opposed to Type I diabetes, or DM1, in
which severe insulin deficiency results from destruction of the pancreas'
insulin producing beta cells. In January 2003, the American Diabetes
Association, or ADA, estimated that between 20-30% of diagnosed individuals with
DM2 and DM1 develop evidence of nephropathy. These figures suggest that
approximately two to three million diagnosed diabetics in the United States have
nephropathy. Diabetes is now the most common cause of End Stage Renal Disease,
or ESRD, in the US and in many other developed nations, and represents 44% of
all new cases of ESRD in the US. Despite advances in clinical care, including
improvements in glycemic (blood sugar) control and blood pressure control, the
number of DM related cases of ESRD continues to rise. In particular, the
incidence of DM2-related ESRD is rapidly increasing. Less than 20% of diabetics
on dialysis in the US survive for five years, making the mortality of end-stage
renal failure in this group higher than most forms of cancer. Unfortunately,
renal transplantation is an option for less than 20% of diabetics with end-stage
renal disease (as compared to 40-50% of non-diabetics), principally due to age
and concomitant vascular disease. Thus, despite recent advances, diabetic
nephropathy remains a potentially catastrophic illness for which partial, but
insufficient treatment is available today. We believe that the estimated
potential annual market for KRX-101 in the United States alone for the treatment
of diabetic nephropathy is in excess of $1 billion.

Scientific Background

Both DM1 and DM2 are characterized by insufficient insulin effect upon
insulin-requiring tissues. As insulin is required for normal metabolism of
glucose (sugar), fat (triglycerides and free fatty acids) and protein (amino
acids), diabetes is accompanied by abnormal blood levels of these substances. In
the short term, hyperglycemia (elevated blood glucose) causes the classic
symptoms of diabetes: excessive thirst, frequent urination and weight loss. In
the long term, hyperglycemia (as well as other effects resulting from
insufficient insulin effect) can progressively damage critical anatomic
structures resulting in chronic diabetic complications. We are developing
sulodexide (KRX-101) for the treatment of diabetic nephropathy, a long-term
complication of diabetes in which the kidneys are progressively damaged. This
progressive damage results in diminished kidney function progressing to
end-stage renal disease, or ESRD, which, in turn, leads to death unless treated
by dialysis and/or renal transplant.

The kidney can be depicted as being comprised of two anatomically and
functionally distinct components placed in serial configuration. The first
component is the glomerulus, which performs the critical filtering function of
the kidney. Blood is passed through delicate microscopic glomerular capillary
loops, which, acting as sieves, allow waste chemicals and excess water to pass
through (into the "glomerular filtrate") while retaining desirable components,
such as blood cells and albumin, within the blood. One of the key components of
the glomerular capillary filtering membrane is highly anionic (negatively
charged) glycosaminoglycan molecules that are very similar to the chemical
components of sulodexide. The glomerular filtrate, which is the precursor of
what will eventually be excreted as urine, flows into the next serial component,
the tubular interstitial structure. In the tubules, further water is extracted
from the filtrate and minerals and other body chemicals are absorbed from or
secreted into the filtrate.

In diabetic nephropathy, it is the delicate glomerular loops that first sustain
damage as a result of the diabetic state. These include:


5


o The glomerular loops' delicate filtering membranes thicken and their
crucial anionic glycosaminoglycan molecules are either depleted or
altered (they lose some or all of their negative charge). As the
glycosaminoglycan negative charge provides normal filtering
selectivity to the glomerular membranes, their loss results in the
release of protein (usually albumin) from the blood into the
filtrate and urine. This effect of protein in the urine is called
"proteinuria" or "albuminuria", when the specific protein being
referred to is albumin.

o In addition, hyperglycemia induced overproduction of TGF beta (a
regulatory protein) by the kidney induces scar formation in the area
surrounding the glomerular capillaries. The extrinsic pressure of
this scar tissue, over time, causes collapse of individual glomeruli
with their resultant total functional loss and this too causes the
release of albumin into the filtrate and urine.

In normally functioning kidneys, interstitial structures are not exposed to
albumin. This exposure in turn leads to a potent inflammatory and eventually
scarring response (also mediated in part by TGF beta) both in the tubules
themselves and in the surrounding interstitial tissues. This scarring results in
progressive diminution in kidney function. As might be expected, increasing
urinary albumin excretion closely parallels this drop in kidney function. In
ESRD, kidney function declines to the point where dialysis or transplantation
becomes necessary to sustain life.

Sulodexide, or KRX-101, belongs to a proposed new class of nephroprotective
(kidney protecting) drugs, the glycosaminoglycans. A variety of members of this
chemical family have been shown to decrease pathological albumin excretion in
diabetic nephropathy in man. These include the following approved drugs:
standard heparin, low molecular weight heparin and danaparoid. However, these
agents all require therapy by injection and are all potent anticoagulants, which
are blood thinners capable of inducing bleeding. Sulodexide, on the other hand,
is given orally and, in this form, has demonstrated little, if any,
anticoagulant effects to date.

Preclinical and clinical data

In preclinical trials, glycosaminoglycan components similar or identical to
those that make up sulodexide have been evaluated using well-accepted rodent
models of diabetic nephropathy, in both preventive protocols where the drug was
given at time diabetes was induced and prior to kidney damage, and treatment
protocols, where the drug was given where diabetic kidney damage was already
present. These glycosaminoglycans diminished the thickening of glomerular
capillary filtering membranes, replenished the crucial anionic, or albumin
repelling, charge, lowered urinary albumin leakage and decreased kidney
expression of the specific scar protein collagen IV, both in the preventive and
the treatment protocols, returning these parameters nearly to their normal
levels. In addition, data demonstrate that sulodexide suppresses the
hyperglycemia-, or high glucose-, induced overproduction of TGF beta, one of the
most specific inducers of kidney scarring in diabetic and other kidney diseases.
Thus glycosaminoglycans similar or identical to the components of sulodexide
have prevented or reversed the hallmark "upstream" pathological abnormalities
that drive the engine of progressive kidney dysfunction.

There have been more than 20 studies published in leading medical journals
assessing the safety and efficacy of KRX-101 in humans. KRX-101 has been
administered to more than 3,000 patients in clinical trials conducted in Europe
for the treatment of certain diabetic and non-diabetic conditions and, to our
knowledge, has not demonstrated any significant side effects for those uses.

The licensor of KRX-101 conducted a Phase 2 study of the use of sulodexide to
treat diabetic nephropathy in 223 patients in Europe between 1996 and 1999. The
trial, known as the DiNAS study, was a four-month dose response trial that
showed clear reductions in pathological urinary albumin excretion rates. In this
study, the higher the dose administered daily, the greater the demonstrated
decrease in albumin excretion. Treatment with KRX-101 yielded additional
declines in albumin excretion beyond those already achieved by treatment with
Angiotensin Converting Enzyme, or ACE, inhibitors, the then current accepted
therapy. Moreover, at the highest dose of KRX-101 (200 mg. per day), albumin
excretion rates remained lowered for at least four months after the patients
ceased receiving KRX-101. The DiNAS study was published in 2002 in the


6


Journal of the American Society of Nephrology.

Development Status

In June 2000, we filed an investigational new drug application, or IND, with the
FDA for permission to conduct a clinical trial for diabetic nephropathy in
patients with DM2. In 2001, KRX-101 was granted Fast-Track designation for the
treatment of diabetic nephropathy and in 2002, we announced that the FDA had
agreed, in principle, to permit us to avail ourselves of the accelerated
approval process under subpart H of the FDA's regulations governing applications
for the approval to market a new drug. Generally, subpart H allows for the use
of surrogate endpoints in Phase 3 trials to support the approval of a New Drug
Application, or NDA, with confirmatory studies completed post-approval, and
could greatly reduce the development time to market.

KRX-101 has been tested in a randomized placebo-controlled Phase 2 clinical
trial, the DiNAS study, in Europe for the treatment of diabetic nephropathy. We
are currently designing our U.S.-based clinical development plan for the
treatment of diabetic nephropathy in collaboration with our Medical Advisory
Board, or MAB. Our current plan is to conduct a randomized placebo-controlled
study, which should confirm the significant efficacy results found in the DiNAS
study under FDA mandated Good Clinical Practice, or GCP, guidelines. We believe
that such study will provide us with well-controlled efficacy data and
additional safety data regarding sulodexide and should be useful as part of our
regulatory filing for FDA approval of sulodexide.

While conducting this study, we plan to continue to work with the FDA to
finalize the specific requirements for approval of KRX-101 in the U.S.

The ultimate clinical timeline, and consequent cost, for further development of
KRX-101 will depend, in part, on reaching agreement with the FDA on the
specifics of our accelerated approval approach and meeting their conditions for
use of such program.

Additional Indications

We believe KRX-101 may have significant potential to treat other diseases. These
conditions include, but are not limited to, pre-eclampsia, a dangerous
complication of pregnancy, and nephrotic syndrome. Nephrotic syndrome is the
common term ascribed to the more advanced stage of a variety of different kidney
diseases, characterized by massive amounts of albuminuria and proteinuria.
Although the inciting pathological mechanisms of the various causes of nephrotic
syndrome may differ from those seen in diabetic nephropathy, the final common
pathway is the same. Albumin in glomerular filtrate "poisons" tubular cells
leading to tubular interstitial inflammation and fibrosis and, ultimately, ESRD.
We believe that the therapeutic mechanism of sulodexide cited above may be
effective in nephrotic syndrome. In addition, we have filed patent applications
to cover the use of KRX-101 for the treatment of inflammatory bowel disease,
HIV-associated nephropathy, or HIVAN, and other indications.

Kinace Drug Discovery Platform and the SIB Technology

We are seeking partners to further the preclinical and clinical development of
several of our KinAce product candidates as well as partners for the KinAce
platform, which we believe can help other companies identify drug leads for
kinase targets, and for the SIB technology, a technology used for the conversion
of peptide drug candidates into small molecule drug candidates.

Protein kinases play a key role in the way cells communicate. When protein
kinases give an inappropriate signal, the result is often a disease or other
unwanted medical condition. Our KinAce platform uses a proprietary algorithm to
identify unique regulatory regions within each kinase. Once this unique
regulatory region is identified, we can duplicate it to form the basis of a
compound that can potentially inhibit or stimulate the signal transduction
pathway associated with that kinase.

Competition

KRX-101

ACE inhibitors or angiotensin 2 receptor blockers, or ARB, are the current
standard of


7


care recommended by the American Diabetes Association for the treatment of
diabetic nephropathy. Both of these classes of anti-hypertensive drugs are
marketed by a number of companies, including, with respect to ACE inhibitors,
Bristol Meyers (Monopril), AstraZeneca (Zestril), Merck (Cozaar)and Novartis
Pharma AG (Diovan). Recently the FDA approved the first ARB for the treatment of
diabetic nephropathy in DM2 and the Cardio-Renal Advisory committee has recently
recommended the approval of another ARB for diabetic nephropathy. Although these
two classes of drugs are the current standard of care, for most patients they
provide only modest benefit in delaying the progression of their disease.
Therefore, we believe there is a critical need for new drugs that can halt or
materially slow this progression.

Moreover, we do not believe that KRX-101 will directly compete with ACE
inhibitors or ARB drugs but rather will be used concomitantly in patients with
nephropathy. As with many life-threatening diseases, such as HIV/AIDS and
cancer, we believe a cocktail approach utilizing drugs with distinct mechanisms
of action will be needed to treat diabetic nephropathy. Preliminary clinical
evidence suggests that the albuminuria-reducing effects of KRX-101 may be
additive to those achieved by ACE inhibitors for nephropathy of both DM1 and
DM2.

Other companies are developing drugs designed to treat diabetic complications,
including Exocell, Inc., which has a compound aimed at nephropathy in a Phase 3
clinical trial, and Biostratum AB, which is currently testing its compound in a
Phase 2 trial.

KinAce Platform

Several biotechnology and pharmaceutical companies are active in the field of
signal transduction, including Sugen, Inc. (a subsidiary of Pharmacia-Upjohn),
Ariad Pharmaceuticals Inc., Tularik, Inc., Ligand Pharmaceuticals Inc. and ICOS
Corporation. In addition, Vertex Pharmaceuticals, Inc. and Novartis Pharma AG
have formed an alliance to discover eight kinase inhibitors.

Intellectual Property

General

Patents and other proprietary rights are very important to the development of
our business. We will be able to protect our proprietary technologies from
unauthorized use by third parties only to the extent that our proprietary rights
are covered by valid and enforceable patents or are effectively maintained as
trade secrets. It is our intention to seek and maintain patent and trade secret
protection for our drug candidates and our proprietary technologies.

KRX-101

Pursuant to our license for KRX-101, we have the rights to eight families of
patents and applications. These patent families include at least ten patents
issued in various countries, of which four are issued in the United States. The
licensed patent families cover the use of KRX-101 to treat diabetic nephropathy
and retinopathy, including novel formulations containing KRX-101 for use in all
indications and novel dosage levels of KRX-101 for use in the treatment of
diabetic nephropathy, and the use of related compounds to treat diabetic
nephropathy, neuropathy and retinopathy. These patents and applications are
being maintained throughout the territories in which they were filed. In March
2003, we returned the rights to seven other families of patents to Alfa
Wassermann, the licensor of KRX-101, after determining that these seven families
were not necessary to provide KRX-101 with intellectual property protection. In
addition, as part of our effort to expand the indications and patent coverage
for KRX-101, we have filed three new patent application families for novel
indications for KRX-101 such as pre-eclampsia of pregnancy, inflammatory bowel
disease and HIV-associated nephropathy. The key KRX-101 related patents and
applications, if issued, expire at various times between 2012 and 2022.
Currently, the use of KRX-101 to treat diabetic nephropathy is covered by a use
patent that expires in 2014. However, based on provisions of the Patent Term
Extension Act, we believe that we would qualify for a patent extension of at
least three years, thereby extending the effective life of our principal patent
through 2017. In addition, we have filed a patent application protecting the
dosage form of KRX-101 that we believe will be most efficacious in the treatment
of diabetic nephropathy and other conditions. Should this patent issue, we


8


believe that we will have effective patent protection through at least 2022. We
therefore believe that we will have sufficient time to commercially exploit the
inventions covered by the patents during the effective lives of the inventions.

KinAce Platform

We have an exclusive worldwide license to the KinAce technology, which includes
one issued patent in the United States, one issued in Australia, and seventeen
families of patent applications associated with our KinAce platform, which have
been filed in various countries, including the United States, all the countries
of the European Patent Convention, Japan, Canada, Australia, China and Israel.
The issued patents and the applications identify and claim large classes of
peptides that modulate the activity of protein kinases, which encompass our lead
drug candidates. In addition, the applications describe a wide variety of
therapeutic uses for these classes of peptides, including the treatment of
various cancers, diabetes, septic shock, multiple sclerosis and autoimmune
diseases. The applications also identify and claim specific regions of these
protein kinases upon which the selection of peptide drug candidates is based.
The KinAce-related patents and patent applications, if such issue, will expire
at various times between 2017 and 2022.

The SIB Technology

The SIB technology, to which we have an exclusive, worldwide license, is covered
by a patent application, filed in the United States in 2002, which protects both
the chemical structure of the SIB, the combinatorial library produced, and its
usage in the modulation of protein activity. This patent application, if issued,
will expire in 2023.

Other Intellectual Property Rights

We depend upon trademarks, trade secrets, know-how and continuing technological
advances to develop and maintain our competitive position. To maintain the
confidentiality of trade secrets and proprietary information, we require our
employees, scientific advisors, consultants and collaborators, upon commencement
of a relationship with us, to execute confidentiality agreements and, in the
case of parties other than our research and development collaborators, to agree
to assign their inventions to us. These agreements are designed to protect our
proprietary information and to grant us ownership of technologies that are
developed in connection with their relationship with us. These agreements may
not, however, provide protection for our trade secrets in the event of
unauthorized disclosure of such information.

Agreements

KRX-101

License Agreement. Our license with Alfa Wassermann SpA grants us the exclusive
rights to KRX-101 for diabetic nephropathy, diabetic retinopathy and diabetic
neuropathy in the United States, Canada, Japan, Australia, New Zealand, South
Africa and Israel. The license entitles Alfa Wassermann to annual license fees,
which, by the end of the license period, could total up to $900,000 and fixed
milestone payments of up to $2,950,000. To date, we have paid $450,000 in annual
license fees and milestone payments. The license includes rights to at least 54
patents that have been registered in the above countries, rights in additional
patent applications, and grants us exclusive, worldwide ownership of any novel
indication for KRX-101 that we develop. Under the license, we must use our
reasonable best efforts to commercialize and market KRX-101. Alfa Wassermann
must pay us a royalty to the extent that it or its sub-licensees receive
revenues from products that incorporate information or know-how developed by us.
Alfa Wassermann must share a portion of the costs of data or intellectual
property developed by us that it decides to utilize. Unless terminated for
reason of breach or other customary termination provisions, the license
terminates upon the later of the expiration of all underlying patent rights or
ten years from the first commercial sale of KRX-101 by us. The most recent
patent application was filed in June 2001, and, if granted, will expire in June
2022, subject to any extensions that may be granted.


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KinAce Platform

License Agreement. Pursuant to a license with Children's Medical Center
Corporation, referred to as CMCC, we have the exclusive worldwide right to
commercialize the KinAce platform and practice the claims contained in the
patents and patent applications owned by CMCC. The license gives us the right to
develop, produce, manufacture, market and sublicense products based on the
patents and patent applications licensed to us by CMCC, any subsequently issued
patents and future patent applications. Unless terminated for breach or other
customary termination provisions, the license terminates upon the later of
November 2014 or the expiration of the last patent covered by the license. The
most recent patent application was filed in February 2002 and, if granted, will
expire in February 2022, subject to the granting of any extensions.

Under the license, we must use our reasonable best efforts to commercialize and
market one or more products based upon the KinAce technology. The license
contains certain financing and development milestones. To date, we have met all
of our milestones under this agreement. According to the remaining development
milestones, we must file an IND application for a licensed product with the FDA
(or a foreign equivalent) by December 31, 2003, and we must file an NDA, with
the FDA, or a foreign equivalent, within six years from our first filing of an
IND application. Should CMCC reasonably determine that we failed to meet any of
the development milestones that remain to be fulfilled because we did not devote
diligent efforts and adequate resources, the license could be terminated.

The SIB Technology

License Agreement. In January 2002, we obtained an exclusive worldwide license
from the Yissum Research & Development Company of the Hebrew University of
Jerusalem, or Yissum, covering patent applications and know-how underlying the
SIB technology for the conversion of peptides and other existing drugs into
small molecules that have the potential for oral delivery. The license gives us
the right to develop, produce, manufacture, market and sublicense products based
on Yissum's know-how and current and future patent applications and any
subsequently issued patents. Unless terminated for breach or other customary
termination provisions, the license continues in effect until the later of (i)
the expiration of all valid claims of any licensed patent rights and research
patent rights, or (ii) 13 years after the first commercial sale of a product.

Under the license, we must use commercially reasonable efforts to commercialize
and market one or more products based upon the SIB technology. If we fail to
devote such efforts to the development and commercialization of products based
upon the SIB technology, the license could be terminated.

Sponsored Research Agreement. In January 2003, we terminated the Sponsored
Research Agreement with Yissum and, accordingly, ceased making payments, after
determining that the goals of that agreement were not being met as expected. We
also terminated a related consulting agreement with Prof. Haim Gilon.

Manufacturing & Raw Materials

We have no manufacturing capabilities and do not currently intend to establish
such capabilities. We have established a contract manufacturing relationship for
KRX-101 but we do not believe that this relationship will be sufficient to meet
our needs for clinical and commercial supplies. Accordingly, we are currently
seeking to establish an alternative contract manufacturing relationship which we
believe will be adequate to satisfy our current clinical and commercial supply
needs. We expect to similarly rely on contract manufacturing relationships for
any products that we may in-license in the future. However, there can be no
assurance that we will be able to successfully contract with such manufacturers
on terms acceptable to us, or at all. Additionally, as we seek to transition our
manufacturing of KRX-101 to a new contract manufacturer, we will need to create
a reproducible manufacturing process that will ensure consistent manufacture of
KRX-101 across multiple batches and sources. As with all heparin-like compounds,
the end product is highly sensitive to the manufacturing process utilized.
Slight changes in process will often result in a different end product.
Accordingly, the creation of a reproducible process will be required for the
successful commercialization of KRX-101. There can be no assurance that we will
be


10


successful in this endeavor.

The creation of a reproducible process will also be important if we choose to
multi-source KRX-101. It is generally regarded as good practice to engage a
back-up manufacturer to ensure uninterrupted supply of a product. We have
discussed the issue of multi-sourcing with the FDA and they have indicated that
they would likely permit such multi-sourcing provided the manufacturing process
used by multiple manufacturers remains uniform.

Once we have secured one or more contract manufacturers for KRX-101 and for any
products we may in-license in the future, we expect that we will rely on such
contract manufacturers to produce our product candidates under current Good
Manufacturing Practice regulations, or cGMP. We expect that our third-party
manufacturers will have limited numbers of facilities in which our product
candidates can be produced and will have limited experience in manufacturing our
product candidates in quantities sufficient for conducting clinical trials or
for commercialization.

Contract manufacturers are subject to ongoing periodic, unannounced inspection
by the FDA, the Drug Enforcement Agency and corresponding state agencies to
ensure strict compliance with cGMP, in addition to other governmental
regulations and corresponding foreign manufacturing standards and government
regulations. We do not have control over third party manufacturers' compliance
with these regulations and standards, other than through contractual
obligations.

If we need to change manufacturers, the FDA and corresponding foreign regulatory
agencies must approve these new manufacturers in advance, which will involve
testing and additional inspections to ensure compliance with FDA regulations and
standards. Further, switching manufacturers may be difficult because the number
of potential manufacturers is limited. It may be difficult or impossible for us
to find a replacement manufacturer quickly or on terms acceptable to us, or at
all.

Source materials for sulodexide, like all heparin-like compounds, are derived
from porcine intestines. Long-term supplies for sulodexide could be affected by
limitations in the supply of porcine intestines. Additionally, diseases
affecting the world supply of pigs could have an actual or perceived negative
impact on our ability to source, make or sell sulodexide, which could materially
adversely affect the commercial success of KRX-101.

Employees

We currently have 24 employees. None of our employees are represented by a
collective bargaining agreement, and we have never experienced a work stoppage.
We consider our relations with our employees and consultants to be good.

Research and Development

Company-sponsored research and development expenses totaled $6,686,000 in 2000,
$7,399,000 in 2001, and $8,141,000 in 2002, respectively.

Government Regulation

Numerous governmental authorities in the United States and other countries
regulate the manufacture and marketing of our drug candidates and our ongoing
research and development activities. None of our drug candidates have been
approved for sale in any market in which we have marketing rights. Before
marketing in the United States, any drug developed by us must undergo rigorous
preclinical testing and clinical trials and an extensive regulatory approval
process implemented by the FDA under the Federal Food, Drug and Cosmetic Act.
The FDA regulates, among other things, the preclinical and clinical testing,
safety, efficacy, approval, manufacturing, record keeping, adverse event
reporting, packaging, labeling, storage, advertising, promotion, export, sale
and distribution of biopharmaceutical products.

The regulatory review and approval process is lengthy, expensive and uncertain.
We will have to submit extensive preclinical and clinical data and supporting
information to the FDA for each indication or use to establish a drug
candidate's safety and efficacy before we can secure FDA approval. The approval
process takes many years, requires the expenditure of substantial resources and
may involve ongoing requirements for post-marketing studies or surveillance.
Before commencing clinical trials in


11


humans, we must submit an IND to the FDA containing, among other things,
preclinical data, chemistry, manufacturing and control information, and an
investigative plan, and the FDA must allow the IND to become effective.

The FDA may permit expedited development, evaluation, and marketing of new
therapies intended to treat persons with serious or life-threatening conditions
for which there is an unmet medical need under its Fast Track Drug Development
Program. A sponsor can apply for fast track designation at the time of
submission of an IND, or at any time prior to receiving marketing approval of
the New Drug Application, or NDA. To receive fast track designation, an
applicant must demonstrate:

o that the drug is intended to treat a serious or life-threatening
condition;

o that the drug is intended to treat a serious aspect of the
condition; and

o that the drug has the potential to address unmet medical needs, and
this potential is being evaluated in the planned drug development
program.

The FDA must respond to a request for fast track designation within 60 calendar
days of receipt of the request. Over the course of drug development, a product
in a fast track development program must continue to meet the criteria for fast
track designation. Sponsors of products in fast track drug development programs
must be in regular contact with the reviewing division of the FDA to ensure that
the evidence necessary to support marketing approval will be developed and
presented in a format conducive to an efficient review. Sponsors of products in
fast track drug development programs ordinarily are eligible for priority review
and also may be permitted to submit portions of an NDA to the FDA for review
before the complete application is submitted. In 2001, KRX-101 received the fast
track designation.

Sponsors of drugs designated as fast track also may seek approval under the
FDA's accelerated approval regulations, which permits the FDA to grant
accelerated approval based on a determination by the FDA that the effect on a
surrogate endpoint is reasonably likely to predict clinical benefit. A surrogate
endpoint is defined as a laboratory or physical sign that is used in therapeutic
trials as a substitute for a clinically meaningful endpoint and that is expected
to predict the effect of the therapy. However, requirements for submitting
"substantial evidence" to demonstrate efficacy and for payment of user fees must
still be met under accelerated approval regulations. Further, fast track and/or
accelerated approvals will ordinarily be conditioned on post-market studies to
verify the drug's clinical benefit and the relationship of the surrogate
endpoint to clinical benefit. Approval of a fast track drug may be withdrawn in
an expedited manner if, among other reasons, a post approval study fails to
verify clinical benefit. In November of 2002, we announced that the FDA had
agreed, in principle, to permit us to avail ourselves of the accelerated
approval process. In essence, subject to any safety issues that might arise, the
FDA conceptually agreed that KRX-101 could be approved upon showing substantial
evidence of efficacy on a surrogate endpoint (proteinuria) in a single Phase 3
study, to be confirmed by a Phase 4 study. However, we have not reached an
agreement with the FDA on the specific details of such approach and no assurance
can be given that we will ever reach such agreement. Additionally, the subpart H
process is complex and requires flawless execution. Many companies who have been
granted the right to utilize an accelerated approval approach have failed to
obtain approval.

Clinical testing must meet requirements for institutional review board
oversight, informed consent and good clinical practices, and must be conducted
pursuant to an IND, unless exempted.

Clinical trials are typically conducted in sequential phases. In Phase 1, the
drug is administered to a small group of humans, either healthy volunteers or
patients, to test for safety, dosage tolerance, absorption, metabolism,
excretion, and clinical pharmacology. In Phase 2, a somewhat larger number of
patients are studied to assess the efficacy of the product, to ascertain dose
tolerance and the optimal dose range, and to gather additional data relating to
safety and potential adverse events. In Phase 3, studies establish safety and
efficacy in an expanded patient population. The FDA may require Phase 4
post-marketing studies to gather additional evidence of safety and efficacy.


12


The length of time necessary to complete clinical trials varies significantly
and may be difficult to predict. Clinical results are frequently susceptible to
varying interpretations that may delay, limit or prevent regulatory approvals.
Additional factors that can cause delay or termination of our clinical trials,
or that may increase the costs of these trials, include:

o slow patient enrollment due to the nature of the clinical trial
plan, the proximity of patients to clinical sites, the eligibility
criteria for participation in the study or other factors;

o inadequately trained or insufficient personnel at the study site to
assist in overseeing and monitoring clinical trials or delays in
approvals from a study site's review board;

o longer treatment time required to demonstrate efficacy or determine
the appropriate product dose;

o insufficient supplies of the drug candidate;

o adverse medical events or side effects in treated patients; and

o ineffectiveness of the drug candidate.

In addition, the FDA may place a clinical trial on hold or terminate it if it
concludes that subjects are being exposed to an unacceptable health risk. Any
drug is likely to produce some toxicity or undesirable side effects in animals
and in humans when administered at sufficiently high doses and/or for a
sufficiently long period of time. Unacceptable toxicity or side effects may
occur at any dose level at any time in the course of studies in animals designed
to identify unacceptable effects of a drug candidate, known as toxicological
studies, or clinical trials of drug candidates. The appearance of any
unacceptable toxicity or side effect could cause us or regulatory authorities to
interrupt, limit, delay or abort the development of any of our drug candidates
and could ultimately prevent approval by the FDA or foreign regulatory
authorities for any or all targeted indications.

Before receiving FDA approval to market a product, we must demonstrate that the
product is safe and effective for its intended use by submitting to the FDA an
NDA containing the preclinical and clinical data that have been accumulated,
together with chemistry and manufacturing and controls specifications and
information, and proposed labeling, among other things. The FDA may refuse to
accept a NDA for filing if certain content criteria are not met and, even after
accepting a NDA, the FDA may often require additional information, including
clinical data, before approval.

As part of the approval process, the FDA must inspect and approve each
manufacturing facility. Among the conditions of approval is the requirement that
a manufacturer's quality control and manufacturing procedures conform to current
Good Manufacturing Practices, or cGMP. Manufacturers must expend time, money and
effort to ensure compliance with cGMP, and the FDA conducts periodic inspections
to certify compliance. It may be difficult for our manufacturers or us to comply
with the applicable cGMP and other FDA regulatory requirements. If we or our
contract manufacturers fail to comply, then the FDA will not allow us to market
products that have been affected by the failure.

If the FDA grants approval, the approval will be limited to those disease
states, conditions and patient populations for which the product is safe and
effective, as demonstrated through clinical studies. Further, a product may be
marketed only in those dosage forms and for those indications approved in the
NDA. Certain changes to an approved NDA, including, with certain exceptions, any
changes to labeling, require approved supplemental applications before the drug
may be marketed as changed. We will have a continuing obligation to comply with
all conditions of approval and other regulatory requirements such as cGMP and
adverse event reporting requirements. The nature of marketing claims that the
FDA will permit us to make in the labeling and advertising of our products will
be limited to those specified in an FDA approval, and the advertising of our
products will be subject to comprehensive regulation by the FDA. Claims
exceeding those that are approved will constitute a violation of the Federal
Food, Drug, and Cosmetics Act. Violations of the Federal Food, Drug, and


13


Cosmetics Act or regulatory requirements at any time during the product
development process, approval process, or after approval may result in agency
enforcement actions, including withdrawal of approval, recall, seizure of
products, injunctions, fines and/or civil or criminal penalties. Any agency
enforcement action could have a material adverse effect on us.

Should we wish to market our products outside the United States, we must receive
marketing authorization from the appropriate regulatory authorities. The
requirements governing the conduct of clinical trials, marketing authorization,
pricing and reimbursement vary widely from country to country. At present,
foreign marketing authorizations are applied for at a national level, although
within the European Union, or EU, registration procedures are available to
companies wishing to market a product in more than one EU member state. If the
regulatory authority is satisfied that adequate evidence of safety, quality and
efficacy has been presented, a marketing authorization will be granted. This
foreign regulatory approval process involves all of the risks associated with
FDA approval discussed above.

Failure to comply with applicable federal, state and foreign laws and
regulations would likely have a material adverse effect on our business. In
addition, federal, state and foreign laws and regulations regarding the
manufacture and sale of new drugs are subject to future changes. We cannot
predict what effect, if any, such changes might have on our business, but such
changes could have a material adverse effect.

FORWARD-LOOKING STATEMENTS

Some of the statements in this Form 10-K and the Exhibits attached hereto
contain forward-looking statements within Section 21E of the Securities Exchange
Act of 1934, as amended. When used in this Form 10-K and the Exhibits, the words
"anticipate," "believe," "estimate," "may," "expect" and similar expressions are
generally intended to identify forward-looking statements. These forward-looking
statements include, but are not limited to, statements about our:

o expectations for increases in expenses;

o expectations for increases in research and development and general
and administrative expenses in order to develop new products and
manufacture commercial quantities of products;

o expectations for the development, manufacturing, and approval of
KRX-101 or any other products we may acquire or in-license;

o expectations for incurring additional capital expenditures to expand
our research and development capabilities;

o expectations for generating revenue or becoming profitable on a
sustained basis;

o ability to enter into marketing and other partnership agreements;

o ability to enter into product acquisition and in-licensing
transactions;

o estimate of the sufficiency of our existing cash and cash
equivalents and investments to finance our operating and capital
requirements;

o expected losses; and

o expectations for future capital requirements.

Our actual results could differ materially from those results expressed in, or
implied by, these forward-looking statements. Potential risks and uncertainties
that could affect our actual results include those discussed below under the
heading "Risk Factors." Such risks and uncertainties also include the
possibility that we may fail to establish and correctly apply our critical
accounting policies and estimates to our financial statements. The list of
factors that may affect future performance and the accuracy of forward-looking
statements is illustrative, but by no means exhaustive.


14


Accordingly, all forward looking-statements should be evaluated with the
understanding of their inherent uncertainty.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements. We do not assume responsibility for the
accuracy and completeness of the forward-looking statements.

We do not intend to update any of the forward-looking statements after the date
of this Form 10-K to conform them to actual results.

RISK FACTORS

You should carefully consider the following risks and uncertainties. If any of
the following occurs, our business, financial condition or operating results
could be materially harmed. This could cause the trading price of our common
stock to decline and you to lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

WE HAVE A LIMITED OPERATING HISTORY AND HAVE INCURRED SUBSTANTIAL OPERATING
LOSSES SINCE OUR INCEPTION. WE EXPECT TO CONTINUE TO INCUR LOSSES IN THE FUTURE
AND MAY NEVER BECOME PROFITABLE.

We have a limited operating history. You should consider our prospects in light
of the risks and difficulties frequently encountered by early stage companies.
In addition, we have incurred operating losses since our inception, expect to
continue to incur operating losses for the foreseeable future and may never
become profitable. As of December 31, 2002, we had an accumulated deficit of
approximately $45.5 million. As we expand our research and development efforts,
we will incur increasing losses. We may continue to incur substantial operating
losses even if we begin to generate revenues from our drug candidates or
technologies.

We have not yet commercialized any products or technologies and cannot be sure
we will ever be able to do so. Even if we commercialize one or more of our drug
candidates or technologies we may not become profitable. Our ability to achieve
profitability depends on a number of factors, including our ability to complete
our development efforts, obtain regulatory approval for our drug candidates and
successfully commercialize our drug candidates and technologies.

IF WE ARE UNABLE TO SUCCESSFULLY BEGIN OR COMPLETE OUR CLINICAL TRIALS OF
KRX-101, OUR ABILITY TO ACHIEVE OUR CURRENT BUSINESS STRATEGY WILL BE ADVERSELY
AFFECTED.

Whether or not and how quickly we complete clinical trials is dependent in part
upon the rate at which we are able to engage clinical trial sites and,
thereafter, the rate of enrollment of patients. Patient enrollment is a function
of many factors, including the size of the patient population, the proximity of
patients to clinical sites, the eligibility criteria for the study and the
existence of competitive clinical trials. If we experience delays in
identifying and contracting with sites and/or in patient enrollment in our
clinical trial program, we may incur additional costs and delay our development
program for KRX-101.

Additionally, we have submitted a subpart H clinical development plan to the FDA
for the clinical development of KRX-101 for diabetic nephropathy. A final
agreement on the specifics of our clinical program for that development plan has
not been agreed to with the FDA and we cannot give any assurance that an
acceptable final agreement on the specifics of such clinical program will ever
be reached with the FDA. In fact, based on the FDA's comments to our most recent
submission, we believe that additional discussions with the FDA will be required
prior to final agreement on the specifics of our subpart H accelerated approval
clinical program. We cannot assure you that those discussions will take place
or, if they do take place, the timing of such discussions or that the results of
such discussions will be satisfactory to us. Additionally, the FDA has stated
that based on the novelty of the approach that we have discussed with them, they
would want to refer our proposed approach to the Cardio-Renal Advisory
Committee.

Moreover, even if we are able to reach final agreement with the FDA regarding
the specifics of an accelerated approval approach, no assurance can be given
that we will be able to meet the requirements set forth in such agreement. The
subpart H-process is complex and requires flawless execution. Many companies who
have been granted the right to utilize an accelerated approval approach have
failed to obtain approval. The clinical timeline, scope and consequent cost for
the development of KRX-101 will depend, in part, on the final outcome of our
discussions with the FDA. Moreover, negative or inconclusive results from the
clinical trials we hope to conduct or adverse medical events could cause us to
have to repeat or terminate the clinical trials. Accordingly, we may not be able
to complete the clinical trials within an acceptable time frame, if at all.


15


OUR DRUG CANDIDATES ARE IN EARLY STAGES OF DEVELOPMENT AND MAY NEVER RECEIVE THE
NECESSARY REGULATORY APPROVALS.

Our drug candidates are in early stages of development. We have not received,
and may never receive, regulatory approval for clinical trials for any of our
drug candidates. We will need to conduct significant additional research and
human testing before we can apply for product approval with the FDA or with
regulatory authorities of other countries. Preclinical testing and clinical
development are long, expensive and uncertain processes. Satisfaction of
regulatory requirements typically depends on the nature, complexity and novelty
of the product and requires the expenditure of substantial resources. Data
obtained from preclinical and clinical tests can be interpreted in different
ways, which could delay, limit or prevent regulatory approval. It may take us
many years to complete the testing of our drug candidates and failure can occur
at any stage of this process. Negative or inconclusive results or medical events
during a clinical trial could cause us to delay or terminate our development
efforts.

Clinical trials also have a high risk of failure. A number of companies in the
pharmaceutical industry, including biotechnology companies, have suffered
significant setbacks in advanced clinical trials, even after achieving promising
results in earlier trials. If we experience delays in the testing or approval
process or if we need to perform more or larger clinical trials than originally
planned, our financial results and the commercial prospects for our drug
candidates may be materially impaired. In addition, we have limited experience
in conducting and managing the clinical trials necessary to obtain regulatory
approval in the United States and abroad and, accordingly, may encounter
unforeseen problems and delays in the approval process.

BECAUSE WE LICENSE OUR PROPRIETARY TECHNOLOGIES, TERMINATION OF THESE AGREEMENTS
WOULD PREVENT US FROM DEVELOPING OUR DRUG CANDIDATES.

We do not own KRX-101, our KinAce platform, or the SIB technology. We have
licensed these technologies from others. These license agreements require us to
meet development or financing milestones and impose development and
commercialization due diligence on us. In addition, under these agreements we
must pay royalties on sales of products resulting from licensed technologies and
pay the patent filing, prosecution and maintenance costs related to the
licenses. If we do not meet our obligations in a timely manner or otherwise
breach the terms of our agreements, our licensors could terminate the agreements
and we would lose the rights to KRX-101 and the KinAce and SIB technologies.

BECAUSE OUR REVISED BUSINESS MODEL IS BASED, IN PART, ON THE ACQUISITION OR
IN-LICENSING OF ADDITIONAL CLINICAL PRODUCT CANDIDATES, IF WE FAIL TO ACQUIRE OR
IN-LICENSE SUCH CLINICAL PRODUCT CANDIDATES, OUR LONG TERM BUSINESS PROSPECTS
WILL BE SUBSTANTIALLY IMPAIRED.

As a major part of our new business strategy, we plan to acquire or in-license
clinical stage product candidates. If we fail to acquire or in-license such
product candidates, we may not achieve expectations of our future performance.
Because we do not intend to engage in significant discovery research, we must
rely on third parties to sell or license new product opportunities to us. Other
companies, including some with substantially greater financial, development,
marketing and sales resources, are competing with us to acquire or in-license
such products or product candidates. We may not be able to acquire or in-license
rights to additional products or product candidates on acceptable terms, if at
all.

IF WE DO NOT ESTABLISH OR MAINTAIN DRUG DEVELOPMENT AND MARKETING ARRANGEMENTS
WITH THIRD PARTIES, WE MAY BE UNABLE TO COMMERCIALIZE OUR TECHNOLOGIES INTO
PRODUCTS.

We are an emerging company and do not possess all of the capabilities to fully
commercialize our product candidates on our own. From time to time, we may need
to contract with third parties to:


16


o assist us in developing, testing and obtaining regulatory approval
for and commercializing some of our compounds and technologies; and

o market and distribute our drug candidates.

For example, we are currently seeking third party partners to conduct further
preclinical development of the KinAce platform and other early stage programs.
There can be no assurance that we will be able to successfully enter into
agreements with such partners on terms that are acceptable to us. If we are
unable to successfully contract with third parties for these services when
needed, or if existing arrangements for these services are terminated, whether
or not through our actions, or if such third parties do not fully perform under
these arrangements, we may have to delay, scale back or end one or more of our
drug development programs or seek to develop or commercialize our technologies
independently, which could result in delays. Further, such failure could result
in the termination of license rights to one or more of our technologies.
Moreover, if these development or marketing agreements take the form of a
partnership or strategic alliance, such arrangements may provide our
collaborators with significant discretion in determining the efforts and
resources that they will apply to the development and commercialization of
products based on our technologies. Accordingly, to the extent that we rely on
third parties to research, develop or commercialize products based on our
technologies, we are unable to control whether such products will be
scientifically or commercially successful.

WE RELY ON THIRD PARTIES TO MANUFACTURE OUR PRODUCTS. IF THESE THIRD PARTIES DO
NOT SUCCESSFULLY MANUFACTURE OUR PRODUCTS OUR BUSINESS WILL BE HARMED.

We have no experience in manufacturing products for clinical or commercial
purposes and do not have any manufacturing facilities. We intend to use third
parties to manufacture our products for use in clinical trials and for future
sales. We may not be able to enter into third party contract manufacturing
agreements on acceptable terms, if at all.

Contract manufacturers often encounter difficulties in scaling up production,
including problems involving production yields, quality control and assurance,
shortage of qualified personnel, compliance with FDA and foreign regulations,
production costs and development of advanced manufacturing techniques and
process controls. Our third party manufacturers may not perform as agreed or may
not remain in the contract manufacturing business for the time required by us to
successfully produce and market our drug candidates. In addition, our contract
manufacturers will be subject to ongoing periodic, unannounced inspections by
the FDA and corresponding foreign governmental agencies to ensure strict
compliance with, among other things, current good manufacturing practices, in
addition to other governmental regulations and corresponding foreign standards.
We will not have control over, other than by contract, third party
manufacturers' compliance with these regulations and standards. Switching or
engaging multiple manufacturers may be difficult because the number of potential
manufacturers is limited and, particularly in the case of KRX-101, the process
by which multiple manufacturers make the drug substance must be identical at
each manufacturing facility. It may be difficult for us to find and engage
replacement or multiple manufacturers quickly and on terms acceptable to us if
at all. Moreover, if we need to change manufacturers, the FDA and corresponding
foreign regulatory agencies must approve these manufacturers in advance, which
will involve testing and additional inspections to ensure compliance with these
regulations and standards.

If third-party manufacturers fail to deliver the required quantities of our drug
candidates on a timely basis and at commercially reasonable prices, and if we
fail to find replacement or multiple manufacturers on acceptable terms, our
ability to develop and deliver products on a timely and competitive basis may be
adversely impacted and our business, financial condition or results of
operations will be materially harmed.

In the event that we are unable to obtain or retain third party manufacturers,
we will not be able to commercialize our products as planned. The manufacture of
our products for clinical trials and commercial purposes is subject to FDA and
foreign regulations. No assurance can be given that our third party
manufacturers will comply with these regulations or other regulatory
requirements now or in the future.


17


While we currently have a contract manufacturing relationship for KRX-101, we do
not believe that this relationship will be sufficient to meet our needs for
clinical and commercial supplies. Accordingly, we are currently seeking to
establish an alternative contract manufacturing relationship which we believe
will be adequate to satisfy our current clinical and commercial supply needs. As
we seek to transition our manufacturing of KRX-101 to a new contract
manufacturer, we will need to create a reproducible manufacturing process that
will ensure consistent manufacture of KRX-101 across multiple batches and
sources. As with all heparin-like compounds, the end product is highly sensitive
to the manufacturing process utilized. Slight changes in process will often
result in a different end product. Accordingly, the creation of a reproducible
process will be required for the successful commercialization of KRX-101. There
can be no assurance that we will be successful in this endeavor.

IF WE ARE NOT ABLE TO OBTAIN THE RAW MATERIAL REQUIRED FOR THE MANUFACTURE OF
OUR LEAD PRODUCT CANDIDATE, KRX-101, OUR ABILITY TO DEVELOP AND MARKET THIS
PRODUCT CANDIDATE WILL BE SUBSTANTIALLY HARMED.

Source materials for KRX-101, our lead product candidate, are derived from
porcine intestines. Long-term supplies for KRX-101 could be affected by
limitations in the supply of porcine intestines, over which we will have no
control. Additionally, diseases affecting the world supply of pigs could have an
actual or perceived negative impact on our ability, or the ability of our
contract manufacturers, to source, make and/or sell KRX-101. Such negative
impact could materially adversely affect the commercial success of KRX-101.

IF OUR COMPETITORS DEVELOP AND MARKET PRODUCTS THAT ARE MORE EFFECTIVE THAN
OURS, OUR COMMERCIAL OPPORTUNITY MAY BE REDUCED OR ELIMINATED.

Our commercial opportunity will be reduced or eliminated if our competitors
develop and market products that are more effective, have fewer side effects or
are less expensive than our drug candidates. Other companies have products or
drug candidates in various stages of preclinical or clinical development to
treat diseases for which we are seeking to discover and develop drug candidates.
Some of these potential competing drugs are further advanced in development than
our drug candidates and may be commercialized earlier. Even if we are successful
in developing effective drugs, our products may not compete successfully with
products produced by our competitors.

Our competitors include pharmaceutical companies and biotechnology companies, as
well as universities and public and private research institutions. In addition,
companies active in different but related fields represent substantial
competition for us. Many of our competitors have significantly greater capital
resources, larger research and development staffs and facilities and greater
experience in drug development, regulation, manufacturing and marketing than we
do. These organizations also compete with us to recruit qualified personnel,
attract partners for joint ventures or other collaborations, and license
technologies that are competitive with ours. As a result, our competitors may be
able to more easily develop technologies and products that would render our
technologies or our drug candidates obsolete or noncompetitive.

IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR OPERATIONS COULD BE DISRUPTED AND OUR BUSINESS COULD BE HARMED.

Subsequent to the reorganization initiated in 2002, we currently have 24 full
and part-time employees and several other persons working under research
agreements or consulting agreements. To successfully develop our drug
candidates, we must be able to attract and retain highly skilled personnel. In
addition, if we lose the services of our current personnel, in particular,
Michael S. Weiss, our Chairman and Chief Executive Officer, our ability to
continue to develop our lead drug candidates could be materially impaired. In
addition, while we have employment agreements with Mr. Weiss and our other key
executives, these agreements would not prevent any of them from terminating
their employment with us.

ANY ACQUISITIONS WE MAKE MAY NOT BE SCIENTIFICALLY OR COMMERCIALLY SUCCESSFUL.

As part of our business strategy, we may effect acquisitions to obtain
additional businesses, products, technologies, capabilities and personnel. If we
make one or more significant acquisitions in which the consideration includes
stock or other securities, your equity in us may be significantly diluted. If we
make one or more


18


significant acquisitions in which the consideration includes cash, we may be
required to use a substantial portion of our available cash.

Acquisitions involve a number of operational risks, including:

o difficulty and expense of assimilating the operations, technology
and personnel of the acquired business;

o inability to retain the management, key personnel and other
employees of the acquired business;

o inability to maintain the acquired company's relationship with key
third parties, such as alliance partners;

o exposure to legal claims for activities of the acquired business
prior to acquisition;

o diversion of management attention; and

o potential impairment of substantial goodwill and write-off of
in-process research and development costs, adversely affecting our
reported results of operations.

RISKS RELATED TO OUR FINANCIAL CONDITION

IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS ON TERMS FAVORABLE TO US, OR AT ALL,
OUR BUSINESS WOULD BE HARMED.

We expect to use rather than generate funds from operations for the foreseeable
future. Based on our current plans, we believe our existing cash and cash
equivalents will be sufficient to fund our operating expenses and capital
requirements for at least the next two years. However, the actual amount of
funds that we will need prior to or after that date will be determined by many
factors, some of which are beyond our control. As a result, we may need funds
sooner or in different amounts than we currently anticipate. These factors
include:

o the progress of our development activities;

o the progress of our research activities;

o the number and scope of our research programs;

o our ability to establish and maintain current and new research and
development and licensing arrangements;

o our ability to achieve our milestones under our licensing
arrangements;

o the costs involved in enforcing patent claims and other intellectual
property rights; and

o the costs and timing of regulatory approvals.

If our capital resources are insufficient to meet future capital requirements,
we will have to raise additional funds. If we are unable to obtain additional
funds on terms favorable to us or at all, we may be required to cease or reduce
our operating activities or sell or license to third parties some or all of our
technology. If we raise additional funds by selling additional shares of our
capital stock, the ownership interests of our stockholders will be diluted. If
we raise additional funds through the sale or license of our technology, we may
be unable to do so on terms favorable to us.


19


OUR STRATEGIC REORGANIZATION MAY NOT ACHIEVE THE RESULTS WE INTEND AND MAY HARM
OUR BUSINESS.

In 2002, we implemented a reorganization plan, which included an approximate 70%
reduction in headcount. Our workforce reduction consisted principally of
research personnel primarily involved in early-stage projects, along with
certain managerial and administrative staff. The implementation of our strategic
reorganization has placed, and may continue to place, a significant strain on
our managerial, operational, financial and other resources. If we are unable to
implement our reorganization effectively, we may not successfully achieve our
business strategy or reduce our costs. Moreover, we may be required to further
reduce our headcount and/or program-specific expenditures, which could require
us to further scale back or abandon any of our research and product development
activities, or license to others products or technologies we would otherwise
have sought to commercialize ourselves.

DUE TO THE RECENT REDUCTIONS IN STAFF AND ACTIVITY AT OUR RESEARCH AND
DEVELOPMENT SUBSIDIARY LOCATED IN ISRAEL, CERTAIN TAX BENEFITS WE HAD RECEIVED
FROM THE ISRAELI GOVERNMENT MAY BE REVOKED AND WE MAY BE REQUIRED TO REPAY SOME
OR ALL OF SUCH TAX BENEFITS PREVIOUSLY RECEIVED.

In September 2001, one of our Israeli subsidiaries received the status of an
"Approved Enterprise," a status which grants certain tax benefits in Israel in
accordance with Paragraph 51 of the "Law for the Encouragement of Capital
Investments, 1959". Through December 31, 2002, our Israeli subsidiary will have
received tax benefits of approximately $731,000 as a result of our subsidiary's
status as an "Approved Enterprise." As a result of recent cost reductions, the
staff and activity of this subsidiary have been materially reduced. In January
2003, the subsidiary notified the Israeli governmental authority of such
reductions and requested that the program instituted prior to the cost
reductions be approved. In February 2003, the Israeli governmental authority
informed the subsidiary that it may be in non-compliance with the conditions of
its Approved Enterprise program because of the indicated reductions.
Nevertheless, the Israeli governmental authority wrote that any decision in
connection with the subsidiary's Approved Enterprise program has been frozen
until December 31, 2003, pending receipt of the subsidiary's future plans. In
the event that our subsidiary's program is not approved as a result of these
cost reductions, we may be liable to repay some or all of the tax benefits
received to date, which could adversely affect our cash flow and results of
operations.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY THIRD PARTIES
MAY BE ABLE TO USE OUR TECHNOLOGY, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
COMPETE IN THE MARKET.

Our commercial success will depend in part on our ability and the ability of our
licensors to obtain and maintain patent protection on our drug products and
technologies and successfully defend these patents and technologies against
third-party challenges. The patent positions of pharmaceutical and biotechnology
companies can be highly uncertain and involve complex legal and factual
questions. No consistent policy regarding the breadth of claims allowed in
biotechnology patents has emerged to date. Accordingly, the patents we use may
not be sufficiently broad to prevent others from practicing our technologies or
from developing competing products. Furthermore, others may independently
develop similar or alternative technologies or design around our patented
technologies. The patents we use may be challenged, invalidated or fail to
provide us with any competitive advantage.

We rely on trade secrets to protect technology where we believe patent
protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require our employees, collaborators and
consultants to enter into confidentiality agreements, this may not be sufficient
to adequately protect our trade secrets or other proprietary information. In
addition, we share ownership and publication rights to data relating to some of
our drug candidates with our research collaborators and scientific advisors. If
we cannot maintain the confidentiality of this information, our ability to
receive patent protection or protect our proprietary information will be at
risk.


20


LITIGATION OR THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD
REQUIRE US TO SPEND SUBSTANTIAL TIME AND MONEY DEFENDING SUCH CLAIMS AND
ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.

Third parties may assert that we are using their proprietary technology without
authorization. In addition, third parties may have or obtain patents in the
future and claim that our technologies infringe their patents. If we are
required to defend against patent suits brought by third parties, or if we sue
third parties to protect our patent rights, we may be required to pay
substantial litigation costs, and our management's attention may be diverted
from operating our business. In addition, any legal action against our licensors
or us that seeks damages or an injunction of our commercial activities relating
to the affected technologies could subject us to monetary liability and require
our licensors or us to obtain a license to continue to use the affected
technologies. We cannot predict whether our licensors or we would prevail in any
of these types of actions or that any required license would be made available
on commercially acceptable terms, if at all.

RISKS RELATED TO OUR COMMON STOCK

CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK AMONG OUR EXISTING EXECUTIVE
OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT NEW INVESTORS FROM
INFLUENCING SIGNIFICANT CORPORATE DECISIONS.

As of December 31, 2002, our executive officers, directors and principal
stockholders (including their affiliates) beneficially own, in the aggregate,
approximately 43% of our outstanding common stock, including, for this purpose,
currently exercisable options and warrants held by our executive officers,
directors and principal stockholders. As a result, these persons, acting
together, may have the ability to effectively determine the outcome of all
matters submitted to our stockholders for approval, including the election and
removal of directors and any merger, consolidation or sale of all or
substantially all of our assets. In addition, such persons, acting together, may
have the ability to effectively control our management and affairs. Accordingly,
this concentration of ownership may harm the market price of our common stock by
discouraging a potential acquirer from attempting to acquire us.

OUR STOCK PRICE COULD BE VOLATILE AND YOUR INVESTMENT COULD DECLINE IN VALUE.

The trading price of our common stock is likely to be highly volatile and
subject to wide fluctuations in price in response to various factors, many of
which are beyond our control. These factors include:

o developments concerning our drug candidates;

o announcements of technological innovations by us or our competitors;

o new products introduced or announced by us or our competitors;

o changes in financial estimates by securities analysts;

o actual or anticipated variations in quarterly operating results;

o expiration or termination of licenses, research contracts or other
collaboration agreements;

o conditions or trends in the regulatory climate and the
biotechnology, pharmaceutical and genomics industries;

o changes in the market valuations of similar companies; and

o additions or departures of key personnel.

In addition, equity markets in general, and the market for biotechnology and
life sciences companies in particular, have experienced extreme price and volume


21


fluctuations that have often been unrelated or disproportionate to the operating
performance of companies traded in those markets. These broad market and
industry factors may materially affect the market price of our common stock,
regardless of our development and operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company. Such
litigation, if instituted against us, could cause us to incur substantial costs
to defend such claims and divert management's attention and resources, which
could seriously harm our business.

THE GENERAL BUSINESS CLIMATE IS UNCERTAIN AND WE DO NOT KNOW HOW THIS WILL
IMPACT OUR BUSINESS OR OUR STOCK PRICE.

Over the past several years, there have been dramatic changes in economic
conditions, and the general business climate has been negatively impacted.
Indices of the U.S. stock markets have fallen significantly and consumer
confidence has waned. Compounding the general unease about the current business
climate are the still unknown economic and political impacts of the September
11, 2001 terrorist attacks and hostilities abroad. We are unable to predict how
any of these factors may affect our business or stock price.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD MAKE A
THIRD-PARTY ACQUISITION OF US DIFFICULT. THIS COULD LIMIT THE PRICE INVESTORS
MIGHT BE WILLING TO PAY IN THE FUTURE FOR OUR COMMON STOCK.

Provisions in our certificate of incorporation and bylaws could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, or control us. These provisions could
limit the price that certain investors might be willing to pay in the future for
shares of our common stock. Our certificate of incorporation allows us to issue
preferred stock with rights senior to those of the common stock without any
further vote or action by the stockholders and our bylaws eliminate the right of
stockholders to call a special meeting of stockholders, which could make it more
difficult for stockholders to effect certain corporate actions. These provisions
could also have the effect of delaying or preventing a change in control. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to the holders of our common stock or could adversely
affect the rights and powers, including voting rights, of such holders. In
certain circumstances, such issuance could have the effect of decreasing the
market price of our common stock.

ITEM 2. PROPERTIES.

We currently occupy space in New York, New York, Cambridge, Massachusetts, and
Jerusalem, Israel. Our facilities in the United States consist of approximately
2,700 square feet of space at 750 Lexington Avenue, New York, New York 10022,
where our executive offices are located, which we occupy pursuant to a space and
expense sharing agreement with ACCESS Oncology, Inc., and 2,915 square feet of
leased space at 101 Main Street, Cambridge, Massachusetts 02142, where our
personnel who are responsible for coordinating our clinical development
functions are located. Our research and development facilities located in Israel
consist of 19,000 square feet of leased space in Jerusalem's primary high
technology park, Har Hotzvim, Jerusalem, Israel 91236. Although we anticipate
that our current facilities will be sufficient for our needs during the next
several years, we expect additional space will be available for future expansion
as necessary.

ITEM 3. LEGAL PROCEEDINGS.

We are not a party to any material legal or arbitration proceedings nor are we
aware of any that are pending or threatened.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

We did not submit any matters to a vote of our security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2002.


22


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Our common stock is listed on the Nasdaq National Market under the symbol
"KERX". The following table sets forth the high and low closing sale prices of
our common stock for the periods indicated.

Common Stock Price
---------------------------------
High Low
-------- -------
YEAR ENDED DECEMBER 31, 2002

Fourth Quarter ........................ $ 1.7600 $1.0300
Third Quarter ......................... $ 2.3000 $1.3000
Second Quarter ........................ $ 5.2000 $1.9500
First Quarter ......................... $ 8.0000 $4.7600

Common Stock Price
---------------------------------
High Low
-------- -------
YEAR ENDED DECEMBER 31, 2001

Fourth Quarter ........................ $ 8.1000 $4.8600
Third Quarter ......................... $ 9.9500 $5.6400
Second Quarter ........................ $10.5900 $6.6875
First Quarter ......................... $10.6875 $6.3750

As of December 31, 2002, there were 73 record holders of our common stock. We
have never declared or paid any cash dividends on our common stock. We currently
intend to retain any future earnings to fund the development and growth of our
business. Therefore, we do not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay dividends will be at the
discretion of our board of directors.

USE OF PROCEEDS

On August 2, 2000, we completed an initial public offering of 4,600,000 shares
of common stock at $10.00 per share. The managing underwriters in the offering
were WestLB Panmure Ltd. (in the United Kingdom) and Roth Capital Partners, Inc.
(in the United States). The shares of common stock sold in the offering were
registered under the Securities Act of 1933 on a Registration Statement on Form
S-1 (Registration No. 333-37402) that was declared effective by the Securities
and Exchange Commission on July 28, 2000. The proceeds to us from the offering,
including the over-allotment option of 600,000 shares, after deducting
underwriting discounts and commissions of approximately $3.6 million and other
offering expenses of approximately $2.1 million, were approximately $46.3
million. Of the net offering proceeds, through December 31, 2002, we have used
the proceeds of our initial public offering as follows:

o approximately $5.4 million to fund clinical development for KRX-101
for diabetic nephropathy and other indications;

o approximately $3.5 million to fund preclinical development for
KRX-123 for hormone-resistant prostate cancer;

o approximately $10.2 million to fund expansion of our KinAce platform
and to further develop the compounds we have generated with it; and

o approximately $13.4 million to use as working capital and for
general corporate purposes.

We intend to continue using the net proceeds of this offering to fund these
ongoing activities, as appropriate. The timing and amounts of our actual
expenditures will depend on several factors, many of which are outside our
control, including the timing of our entry into collaboration agreements, the
progress of our clinical trials, the

23


progress of our research and development programs, the results of other
preclinical and clinical studies and the timing and costs of regulatory
approvals.

Until we use the net proceeds, we intend to invest the funds in short and
long-term, investment-grade, interest-bearing instruments.

ITEM 6. SELECTED FINANCIAL DATA.

The following Statement of Operations Data for the years ended December 31,
2002, 2001, 2000, 1999 and 1998 and the Balance Sheet Data as of December 31,
2002, 2001, 2000, 1999 and 1998, are derived from our consolidated financial
statements that have been audited by KPMG Somekh Chaikin, a member firm of KPMG
International, independent certified public accountants. The financial data set
forth below of Keryx Biopharmaceuticals, Inc. (a development stage company) and
its predecessor company should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements and notes included elsewhere in this Form 10-K.



Years Ended December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(in thousands, except per share data)

Statements of Operations Data:

Management fees from related party $ -- $ -- $ -- $ -- $ 66

Operating expenses:
Research and development:
Non-cash compensation (1,382) (17) 3,186 5,426 --
Other research and development 9,523 7,416 3,500 1,497 1,407
-------- --------- --------- --------- ---------
Total research and development 8,141 7,399 6,686 6,923 1,407

General and administrative:
Non-cash compensation (4) 139 2,668 588 --
Other general and administrative 4,108 4,302 3,232 1,225 1,011
-------- --------- --------- --------- ---------
Total general and administrative 4,104 4,441 5,900 1,813 1,011
-------- --------- --------- --------- ---------
Total operating expenses 12,245 11,840 12,586 8,736 2,418
-------- --------- --------- --------- ---------
Operating loss (12,245) (11,840) (12,586) (8,736) (2,352)

Other income (expense):
Financing income (expense), net 513 2,231 1,317 (257) (157)
Taxes on Income (51) (197) (220) (10) (30)
-------- --------- --------- --------- ---------
Net loss $(11,783) $ (9,806) $(11,489) $ (9,003) $ (2,539)
======== ========= ========= ========= =========

Basic and diluted loss
per common share $ (0.59) $ (0.50) $ (0.89) $ (1.11) $ (0.31)
======== ========= ========= ========= =========



24




As of December 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(in thousands)

Balance Sheet Data:

Cash and cash equivalents,
interest receivable and
investment securities $ 24,131 $ 37,856 $ 48,900 $ 4,127 $ 128

Working capital (deficiency) 22,350 35,235 37,908 3,984 (157)

Total assets 29,103 43,067 50,264 4,948 620

Long-term obligations 256 766 304 118 527

Total stockholders' equity
(deficit) 26,330 39,215 48,867 4,436 (241)


We have never declared or paid any cash dividends on our common stock and do not
currently anticipate paying cash dividends in the foreseeable future.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion should be read in conjunction with our financial
statements and related notes included in this Form 10-K.

OVERVIEW

We were incorporated as a Delaware corporation in October 1998. We commenced
operations in November 1999, following our acquisition of substantially all of
the assets and certain of the liabilities of Partec Ltd., our predecessor
company that began its operations in January 1997. Since commencing operations,
our activities have been primarily devoted to developing our technologies,
raising capital, purchasing assets for our corporate offices and laboratory
facilities and recruiting personnel. We are a development stage company and have
no product sales to date. Our major sources of working capital have been
proceeds from various private placements of equity securities and from our
initial public offering of 5,200,000 shares of common stock at $10 per share. We
have two wholly owned operating subsidiaries, Keryx Biomedical Technologies Ltd.
and Keryx (Israel) Ltd., which engage in research and development activities and
administrative activities in Israel.

Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for
laboratory development, facilities-related and other expenses relating to the
design, development, testing, and enhancement of our product candidates, as well
as expenses related to in-licensing or acquisition of new product candidates. We
expense our research and development costs as they are incurred.

General and administrative expenses consist primarily of salaries and related
expenses for executive, finance and other administrative personnel, recruitment
expenses, professional fees and other corporate expenses, including business
development, general legal activities and facilities related expenses.

Our results of operations include non-cash compensation expense as a result of
the grants of stock, stock options and warrants. Compensation expense for
options and warrants granted represents the intrinsic value (the difference
between the stock price of the common stock and the exercise price of the
options or warrants) of the options and warrants at the date of grant, as well
as the difference between the stock price at reporting date and the exercise
price, in the case where a measurement date has not been reached. We account for
stock-based employee and director compensation arrangements in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and FASB issued Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation," as allowed by Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), and comply with the disclosure provisions of SFAS
No. 123 and SFAS No. 148. Compensation for options and warrants granted to
consultants and


25


other third-parties has been determined in accordance with SFAS No. 123, as the
fair value of the equity instruments issued, and according to the guidelines set
forth in EITF 96-18, "Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." The compensation cost is recorded over the respective vesting periods
of the individual stock options and warrants. The expense is included in the
respective categories of expense in the statement of operations. We expect to
record additional non-cash compensation expense in the future, which may be
significant. However, because some of the options and warrants issued to
employees, consultants and other third-parties either do not vest immediately or
vest upon the achievement of certain milestones, the total expense is uncertain.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations
are based upon 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 amount of assets and
liabilities and related disclosure of contingent assets and liabilities at the
date of our financial statements and the reported amounts of revenues and
expenses during the applicable period. Actual results may differ from these
estimates under different assumptions or conditions.

We define critical accounting policies as those that are reflective of
significant judgments and uncertainties, and may potentially result in
materially different results under different assumptions and conditions. In
applying these critical accounting policies, our management uses its judgment to
determine the appropriate assumptions to be used in making certain estimates.
These estimates are subject to an inherent degree of uncertainty. Our critical
accounting policies include the following:

Foreign Currency Translation. In preparing our consolidated financial
statements, we translate non-US dollar amounts in the financial statements of
our Israeli subsidiaries into US dollars. Under the relevant accounting guidance
the treatment of any gains or losses resulting from this translation is
dependent upon management's determination of the functional currency. The
functional currency is determined based on management's judgment and involves
consideration of all relevant economic facts and circumstances affecting the
subsidiaries. Generally, the currency in which a subsidiary transacts a majority
of its transactions, including billings, financing, payroll and other
expenditures would be considered the functional currency. However, any
dependency upon the parent and the nature of the subsidiary's operations must
also be considered. If any subsidiary's functional currency is deemed to be the
local currency, then any gain or loss associated with the translation of that
subsidiary's financial statements would be included as a separate part of our
stockholders' equity under the caption "cumulative translation adjustment."
However, if the functional currency of the subsidiary is deemed to be the US
dollar then any gain or loss associated with the translation of these financial
statements would be included within our statement of operations. Based on our
assessment of the factors discussed above, we consider the US dollar to be the
functional currency for each of our Israeli subsidiaries because the majority of
the transactions of each subsidiary, including billings, payroll, taxes and
other major obligations, are conducted using the US dollar. Therefore all gains
and losses from translations are recorded in our statement of operations. Had we
used the Israeli currency as the functional currency of our subsidiaries,
exchange gains and losses would have been treated as other comprehensive income,
included in a statement of comprehensive income. We believe that the amount of
such comprehensive income in 2002 would not have been material.

Accounting For Income Taxes. As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
management estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and, to the extent we believe that recovery is not likely,
we must establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must


26


include an expense within the tax provision in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have fully offset our
US deferred tax asset with a valuation allowance. Our lack of earnings history
and the uncertainty surrounding our ability to generate taxable income prior to
the expiration of such deferred tax assets were the primary factors considered
by management in establishing the valuation allowance. The deferred tax asset in
our financial statements relates to our wholly owned Israeli subsidiaries. These
subsidiaries continue to generate taxable income in respect of services provided
within the group, and therefore we believe that the deferred tax asset relating
to the Israeli subsidiaries will be realized. In the event that our
subsidiaries' services would not generate such taxable income, we would need to
write off the deferred tax asset as an expense in the statement of operations.
It should be noted that as the income is derived from companies within the
consolidated group, it is eliminated upon consolidation.

In September 2001, one of our Israeli subsidiaries received the status of an
"Approved Enterprise" which grants certain tax benefits in Israel in accordance
with Paragraph 51 of the "Law for the Encouragement of Capital Investments,
1959". Through December 31, 2002, this Israeli subsidiary will have received tax
benefits of approximately $731,000 as a result of the subsidiary's status as an
"Approved Enterprise." In June 2002, the subsidiary received formal temporary
notification that it had met the requirements for implementation of the benefits
under this program. In January 2003, the subsidiary notified the Israeli
governmental authority of reductions in its staff and operations that had formed
the basis of its Approved Enterprise program, and requested that the program
instituted prior to the cost reductions be approved. In February 2003, the
Israeli governmental authority informed this subsidiary that it may be in
non-compliance with the conditions of its Approved Enterprise program because of
the indicated reductions. Nevertheless, the Israeli governmental authority
indicated that it will defer any decision in connection with the subsidiary's
Approved Enterprise program until December 31, 2003, and will allow it until
such date to meet the objectives of its original program. In the event that the
subsidiary's program is not approved as a result of these cost reductions, we
may be liable to repay some or all of the tax benefits received to date, which
could adversely affect our cash flow and results of operations. The Company is
of the opinion that the reduction of its activity should not have a bearing on
benefits received as of December 31, 2002.

Stock Compensation. During historical periods, we have granted options to
employees, directors and consultants, as well as warrants to other third
parties. In applying SFAS No. 123, we use the Black-Scholes pricing model to
calculate the fair market value of our options and warrants. The Black-Scholes
model takes into account volatility in the price of our stock, the risk-free
interest rate, the estimated life of the option or warrant, the closing market
price of our stock and the exercise price. We have assumed for the purposes of
the Black-Scholes calculation that an option will be exercised one year after it
fully vests. We base our estimates of our stock price volatility on the
volatility during the year prior to the grant of the option or warrant. However,
this estimate is neither predictive nor indicative of the future performance of
our stock. For purposes of the calculation, it was assumed that no dividends
will be paid during the life of the options and warrants.

In accordance with EITF 96-18, "Accounting for Equity Instruments that are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services," total compensation expense for options issued to consultants
is determined at the "measurement date." The expense is recognized over the
vesting period for the options. Until the measurement date is reached, the total
amount of compensation expense remains uncertain. We record option compensation
based on the fair value of the options at the reporting date. These options are
then revalued, or the total compensation is recalculated based on the then
current fair value, at each subsequent reporting date. This results in a change
to the amount previously recorded in respect of the option grant and additional
expense or a negative expense may be recorded in subsequent periods based on
changes in the assumptions used to calculate fair value, such as changes in
market price, until the measurement date is reached and the compensation expense
is determined.

Impairment Of Long-Lived Assets And Long-Lived Assets To Be Disposed Of. We have
adopted SFAS No. 144 from January 1, 2002, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). This Statement requires that
long-lived assets


27


be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future cash flows expected to be generated by the asset or used in
its disposal. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge is recognized. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
We have conducted such a review in light of our restructuring in 2002. We
believe that based upon this review of our future net cash flow estimates for
each of drug candidates and our continued use of our assets, there is no need to
record an impairment charge as of December 31, 2002.

Notwithstanding this conclusion, as a result of additional restructuring of our
activities in our Jerusalem laboratory facility in March 2003, we believe that
we will need to record an impairment charge during the first quarter of 2003,
although the amount of this impairment charge and other costs associated with
the cessation of our Jerusalem laboratory activities cannot be determined at
this time. At December 31, 2002, the carrying value of the assets, including
fixed assets and patents, that could be impaired, thus resulting in a non-cash
write down, totaled approximately $3,755,000. We do not believe at this time
that we will have to write down such assets completely.

RESTRUCTURING

We implemented a strategic reorganization, initiated in August 2002 and
continuing through year's end. The reorganization included staff reductions and
pay cuts of 5-10%. The program was designed to substantially reduce our early
stage research expenditures so that we could focus primarily on our lead product
candidate KRX-101 for the treatment of diabetic nephropathy, as well as to
provide us with the resources to potentially in-license additional product
candidates. The reorganization included a 46 person, or approximate 70%,
reduction in our work force, including senior management, administrative staff,
and research personnel involved in early stage projects. As of December 31,
2002, 25 employees had left under our restructuring plan. As part of our focus
on the core indication of our lead product, we also announced that we had
terminated our AIDS-related kidney disease (HIVAN) clinical trial of KRX-101.

Through December 31, 2002, we had total accumulated expenses of approximately
$1,114,000 for severance benefits for employees terminated under our
reorganization. Consequently, we took a charge of approximately $228,000
approximately $149,000, of which was included in general and administrative
expenses and approximately $79,000 of which was included in research and
development expenses. The remaining amount of approximately $886,000 had been
expensed as part of our ongoing accrual for employee severance benefits in
accordance with Israeli law.

As of December 31, 2002, 25 employees have left under our restructuring plan and
approximately $158,000 of severance benefits have been paid.

As of December 31, 2002, approximately $956,000 in severance obligations related
to our restructuring is included in accrued compensation and related
liabilities. A portion of this amount was formerly included in liability in
respect of employee severance obligations and was reclassified to current
liabilities after it became short-term in nature. With respect to this
liability, we funded deposits in respect to employee severance obligations of
approximately $299,000 that was reclassified to current assets as it will be
redeemed in the short term.

In March 2003, we gave notice of termination to an additional 5 employees, all
based in our Jerusalem laboratory facility. As a result, we may also incur other
costs related to the further restructuring of our research activities. The
portion of our lease obligations relating to the Jerusalem laboratory facility
amounts to approximately $792,000 through the end of 2005. Costs of severance
benefits for the employees who received notice of termination in March 2003 are
accrued to balance sheet date as part of the liability in respect of employee
severance benefits in accordance with Israeli law.


28


RESULTS OF OPERATIONS

Years Ended December 31, 2002 and 2001

Revenue. We did not have any revenue for the years ended December 31, 2002 and
December 31, 2001.

Research and Development Expenses. Research and development expenses, including
non-cash compensation expense related to stock option grants and warrant
issuances, increased by $742,000 to $8,141,000 for the year ended December 31,
2002, as compared to expenses of $7,399,000 for the year ended December 31,
2001. The increase in research and development expenses was due primarily to
increased licensing costs for the in-licensing of Small Integrated
Building-blocks ("SIB") technology as well as for the in-licensing of the
worldwide rights for the manufacturing process of KRX-101, increased personnel
and related costs, increased facilities-related costs and increased
non-manufacturing clinical development costs associated with KRX-101. These
increases were partially offset by a decline in manufacturing expenses
associated with the KRX-101 clinical trial materials as well as a result of the
implementation of cost control measures initiated in August 2002.

We expect our research and development costs to decrease over the next year as
the result of the implementation of our strategic reorganization.

Non-cash compensation expense related to stock option grants and warrant
issuances was negative $1,382,000 for the year ended December 31, 2002 as
compared to negative $17,000 for the year ended December 31, 2001. This negative
non-cash compensation expense was primarily due to the revaluation of previously
issued options and warrants to consultants and other third parties as a result
of the decline in our stock price pursuant to the provisions of SFAS No. 123 and
EITF 96-18.

General and Administrative Expenses. General and administrative expenses,
including non-cash compensation expense related to stock option grants and
warrant issuances, decreased by $337,000 to $4,104,000 for the year ended
December 31, 2002, as compared to expenses of $4,441,000 for the year ended
December 31, 2001. The decrease in general and administrative expenses was due
primarily to a reduction in outside consulting service costs and as a result of
the implementation of cost control measures initiated in August 2002, partially
offset by increased severance expenses.

We expect our general and administrative expenses to decrease over the next year
as the result of the implementation of our strategic reorganization initiated in
August 2002.

Non-cash compensation expense related to stock option grants was negative $4,000
for the year ended December 31, 2002 as compared to $139,000 for year ended
December 31, 2001. This decrease in non-cash compensation expense was primarily
due to the revaluation of previously issued options and warrants to consultants
and other third parties as a result of the decline in our stock price pursuant
to SFAS No. 123 and EITF 96-18.

Interest Income (Expense), Net. Interest income, net, decreased by $1,718,000 to
$513,000 for the year ended December 31, 2002, as compared to income of
$2,231,000 for the year ended December 31, 2001. The decrease during the year
resulted from a lower level of invested funds and the general decline in market
interest rates when compared to last year.

Income Taxes. Income tax expense decreased by $146,000 to $51,000 for the year
ended December 31, 2002, as compared to an expense of $197,000 for year ended
December 31, 2001. The decrease in income tax expense is attributable to the
lower income tax rate used for one of our subsidiaries that attained Israeli
Approved Enterprise status (see Note 9 to our audited Consolidated Financial
Statements). In addition, pursuant to receiving formal temporary notification
that it met the requirements for implementation of benefits under the Approved
Enterprise, the subsidiary reversed an income tax liability recorded prior to
having received this notification. As of December 31, 2002, we have recorded a
deferred tax asset, arising from "book" and "tax" timing differences, and a
deferred tax liability against income taxes for the period then ended arising
from the potential distribution by the subsidiary of a cash dividend out of
retained earnings which were tax exempt due to the Approved Enterprise


29


status. Income tax expense is attributable to taxable income from the continuing
operations of our subsidiaries in Israel. This income is eliminated upon
consolidation of our financial statements.

Impact of Inflation. The effects of inflation and changing prices on our
operations were not significant during the periods presented.

Years Ended December 31, 2001 and 2000

Revenue. We did not have any revenue for the years ended December 31, 2001 and
December 31, 2000.

Research and Development Expenses. Research and development expenses increased
by $713,000 to $7,399,000 for the year ended December 31, 2001, as compared to
expenses of $6,686,000 for the year ended December 31, 2000. This increase in
research and development expenses was primarily due to growth in personnel,
manufacturing expenses associated with KRX-101 clinical trial inventory and
increased preclinical work to advance our KinAce platform. Non-cash compensation
expense related to stock option grants was negative $17,000 for the year ended
December 31, 2001 as compared to $3,186,000 for the year ended December 31,
2000. This negative non-cash compensation expense was primarily due to the
revaluation of previously issued options to consultants pursuant to the
provisions of SFAS No. 123 and EITF 96-18.

General and Administrative Expenses. General and administrative expenses
decreased by $1,459,000 to $4,441,000 for the year ended December 31, 2001, as
compared to expenses of $5,900,000 for the year ended December 31, 2000. This
decrease in general and administrative expenses was primarily due to a decrease
in non-cash compensation offset by increased personnel and management expenses,
and increased investments in business development and facilities required to
support our growth. Non-cash compensation expense related to stock option grants
was $139,000 for the year ended December 31, 2001 as compared to $2,668,000 for
the year ended December 31, 2000.

Interest Income (Expense), Net. Interest income, net, increased by $914,000 to
$2,231,000 for the year ended December 31, 2001, as compared to income of
$1,317,000 for the year ended December 31, 2000. The increase resulted from a
higher level of invested funds due primarily to proceeds from our initial public
offering that closed in August 2000, that were invested for a full year in 2001.

Income Taxes. Income tax expense decreased by $23,000 to $197,000 for the year
ended December 31, 2001, as compared to an expense of $220,000 for the year
ended December 31, 2000. Income tax expense is attributable to taxable income
from the continuing operations of our subsidiaries in Israel. As of December 31,
2001, we have recorded a deferred tax asset against income taxes, arising from
"book" and "tax" timing differences, for the period then ended. Income taxes are
related to the taxable income of our Israeli subsidiaries. This income is
eliminated upon consolidation of our financial statements.

Impact of Inflation. The effects of inflation and changing prices on our
operations were not significant during the periods presented.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations from inception primarily through various private
and public financings. As of December 31, 2002, we had received net proceeds of
$46.3 million from our initial public offering, and $11.6 million from private
placement issuances of common and preferred stock, including $2.9 million raised
through the contribution by holders of their notes issued by our predecessor
company.

As of December 31, 2002, we had $24.1 million in cash, cash equivalents,
interest receivable and short-term securities, a decrease of $13.8 million from
December 31, 2001. Cash used in operating activities for the year ended December
31, 2002 was $12.3 million as compared to $7.3 million for the year ended
December 31, 2001. This increase in cash used in operating activities was due
primarily to increased expenses associated with the expansion of our business.
Net cash provided by investing


30


activities was $2.4 million for the year ended December 31, 2002. Cash provided
by investing activities was primarily the result of the maturity of short-term
securities, partially offset by capital expenditures.

We have incurred negative cash flow from operations since our inception. We
anticipate incurring negative cash flow from operations for the foreseeable
future. We have spent, and expect to continue to spend, substantial amounts in
connection with implementing our business strategy, including our planned
product development efforts and our clinical trials.

As of December 31, 2002, we have known contractual obligations, commitments and
contingencies of $2,901,000. Of this amount, $1,684,000 relates to research and
development agreements, of which $1,184,000 is due during 2003, a total of
$500,000 is due during 2004 and 2005, and $50,000 relates to other agreements
due during 2003. The additional $1,167,000 relates to operating lease
obligations, of which $407,000 is due during 2003, with the remaining $760,000
due during 2004 and 2005.



Payments Due by Period
-------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
- ---------------------------------- ------------- ----------------- ------------- ------------- -------------

Research & development agreements $ 1,684,000 $ 1,184,000 $ 500,000 -- --

Other agreements 50,000 50,000 -- -- --

Operating leases 1,167,000 407,000 760,000 -- --

Total contractual cash obligations $ 2,901,000 $ 1,641,000 $ 1,260,000 -- --


In January 2003, we terminated several sponsored research agreements. As a
result of such terminations, we have reduced our future research and development
commitments by approximately $948,000.

Additionally, we have undertaken to make contingent milestone payments to
certain of our licensors of up to approximately $5.0 million over the life of
the licenses, which expire from 2017 to 2023. In certain cases, such payments
will reduce any royalties due on sales of related products. In the event that
the milestones are not achieved, we remain obligated to pay one licensor $50,000
annually until the license expires.

We believe that our $24.1 million in cash, cash equivalents, interest receivable
and short-term securities as of December 31, 2002 will be sufficient to enable
us to meet our planned operating needs and capital expenditures for at least the
next 24 months. Our cash and cash equivalents as of December 31, 2002 are
invested in highly liquid investments such as cash, money market accounts and
short-term US corporate debt securities. As of December 31, 2002, we are unaware
of any known trends or any known demands, commitments, events, or uncertainties
that will, or that are reasonably likely to, result in a material increase or
decrease in our required liquidity. We expect that our liquidity needs
throughout 2003 will continue to be funded from existing cash, cash equivalents,
and short-term securities.

Our forecast of the period of time through which our cash, cash equivalents and
short-term securities will be adequate to support our operations is a
forward-looking statement that involves risks and uncertainties. The actual
amount of funds we will need to operate is subject to many factors, some of
which are beyond our control.

These factors include the following:

o the timing of expenses associated with product development of our
proprietary product candidates, especially KRX-101, and including
those expected to be in-licensed, partnered or acquired;


31


o the timing of the in-licensing, partnering and acquisition of new
product opportunities;

o the progress of the development efforts of parties with whom we have
entered into research and development agreements;

o our ability to achieve our milestones under licensing arrangements;

o the costs involved in prosecuting and enforcing patent claims and
other intellectual property rights; and

o the amount of any funds expended to repurchase our common stock.

We have based our estimate on assumptions that may prove to be wrong. We may
need to obtain additional funds sooner or in greater amounts than we currently
anticipate. Potential sources of financing include strategic relationships,
public or private sales of our stock or debt and other sources. We may seek to
access the public or private equity markets when conditions are favorable due to
our long-term capital requirements. We do not have any committed sources of
financing at this time, and it is uncertain whether additional funding will be
available when we need it on terms that will be acceptable to us, or at all. If
we raise funds by selling additional shares of common stock or other securities
convertible into common stock, the ownership interest of our existing
stockholders will be diluted. If we are not able to obtain financing when
needed, we may be unable to carry out our business plan. As a result, we may
have to significantly limit our operations and our business, financial condition
and results of operations would be materially harmed.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 nullifies EITF
94-3. According to SFAS 146, commitment to a plan to exit an activity or dispose
of long-lived assets will no longer be enough to record a one-time charge for
most anticipated costs. Instead, companies will record exit or disposal costs
when they are "incurred" and can be measured at fair value, and they will
subsequently adjust the recorded liability for changes in estimated cash flows.
SFAS No. 146 revises accounting for specified employee and contract terminations
that are part of restructuring activities. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002, however earlier adoption
is encouraged. We are required to adopt SFAS No. 146 on January 1, 2003. We
believe that the adoption of SFAS No. 146 will not have a significant impact on
our consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB statement No.
123" ("SFAS No. 148"). SAFS No. 148 permits two additional transition methods
for entities that adopt the fair value based method of accounting for
stock-based employee compensation. The Statement also requires new disclosures
about the ramp-up effect of stock-based employee compensation on reported
results. The Statement also requires that those effects be disclosed more
prominently by specifying the form, content, and location of those disclosures.
The transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. We have adopted the
disclosure requirements applicable to fiscal years ending after December 15,
2002, and are considering our position with regard to the adoption of SFAS No.
148.

In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (hereinafter the
Interpretation), which addresses, among other things, the disclosure to be made
by a guarantor in its interim and annual financial statements about its
obligations under guarantees. These disclosure requirements are included in Note
10 to the consolidated financial statements. The Interpretation also requires
the recognition of a liability by a guarantor at the inception of certain
guarantees. The Interpretation requires the guarantor to recognize a liability
for the non-contingent component of the guarantee, which is the obligation to
stand ready to perform in the event that specified


32


triggering events or conditions occur. The initial measurement of this liability
is the fair value of the guarantee at inception. The recognition of the
liability is required even if it is not probable that payments will be required
under the guarantee or if the guarantee was issued with a premium payment or as
part of a transaction with multiple elements. We are evaluating the anticipated
effect of the recognition provisions of FIN 45 on our consolidated financial
statements.

As noted above, we have adopted the disclosure requirements of the
Interpretation (see Note 10) and will apply the recognition and measurement
provisions for all guarantees entered into or modified after December 31, 2002.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Interest Rate Risk. The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities
that we invest in may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. We maintain our
portfolio in cash equivalents and short- and long-term interest bearing
securities, including corporate debt, money market funds and government debt
securities. The average duration of all of our investments in 2002 was less than
one year. Due to the short-term nature of these investments, we believe we have
no material exposure to interest rate risk arising from our investments.
Therefore, no quantitative tabular disclosure is required.

Foreign Currency Rate Fluctuations. While our Israeli subsidiaries transact
business in New Israel Shekels or NIS, most operating expenses and commitments
are linked to the US dollar. As a result, there is currently minimal exposure to
foreign currency rate fluctuations. Any foreign currency revenues and expenses
are translated using the daily average exchange rates prevailing during the year
and any transaction gains and losses are included in net income. In the future,
our subsidiaries may enter into NIS-based commitments that may expose us to
foreign currency rate fluctuations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our Consolidated Financial Statements as of December 31, 2002 are presented
beginning on page F-1 of this Annual Report on Form 10-K. The following table
sets forth unaudited selected operating results for each of the four fiscal
quarters in the years ended December 31, 2002 and December 31, 2001. We believe
that the following selected quarterly information includes all adjustments,
consisting only of normal, recurring adjustments, that we consider necessary to
present this information fairly. You should read this financial information in
conjunction with the financial statements and related notes appearing elsewhere
in this Annual Report on Form 10-K. Our results of operations have fluctuated in
the past and are likely to continue to fluctuate greatly from quarter to quarter
in the future. Therefore, results of operations for any previous periods are not
necessarily indicative of results of operations to be recorded in the future.


33




2002
--------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(in thousands except per share data)

Operating expenses:
Research and development:
Non-cash compensation $ (580) $ (764) $ (195) $ 157
Other research and development 2,943 2,316 2,306 1,958
-------- -------- -------- --------
Total research and development 2,363 1,552 2,111 2,115

General and administrative:
Non-cash compensation (6) (2) 2 2
Other general and administrative 1,310 1,082 952 764
-------- -------- -------- --------
Total general and administrative 1,304 1,080 954 766
-------- -------- -------- --------
Total operating expenses 3,667 2,632 3,065 2,881
-------- -------- -------- --------
Operating loss (3,667) (2,632) (3,065) (2,881)

Other income (expense)
Financing income, net 174 160 69 110
Taxes on income (50) 61 (36) (26)
-------- -------- -------- --------
Net loss $ (3,543) $ (2,411) $ (3,032) $ (2,797)
======== ======== ======== ========
Basic and diluted loss
per common share $ (0.18) $ (0.12) $ (0.15) $ (0.14)
======== ======== ======== ========




2001
--------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(in thousands except per share data)

Operating expenses:
Research and development:
Non-cash compensation $ 353 $ 646 $ (1,285) $ 269
Other research and development 1,678 2,065 2,009 1,664
-------- -------- -------- --------
Total research and development 2,031 2,711 724 1,933

General and administrative:
Non-cash compensation 48 35 23 33
Other general and administrative 1,069 1,240 1,086 907
-------- -------- -------- --------
Total general and administrative 1,117 1,275 1,109 940
-------- -------- -------- --------
Total operating expenses 3,148 3,986 1,833 2,873
-------- -------- -------- --------
Operating loss (3,148) (3,986) (1,833) (2,873)

Other income (expense)
Financing income, net 870 549 582 230
Taxes on income (110) (10) (59) (18)
-------- -------- -------- --------
Net loss $ (2,388) $ (3,447) $ (1,310) $ (2,661)
======== ======== ======== ========
Basic and diluted loss
per common share $ (0.12) $ (0.17) $ (0.07) $ (0.13)
======== ======== ======== ========


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.


34


Part III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

The information required by this item is incorporated herein by reference to our
Proxy Statement for our 2003 Annual Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is incorporated herein by reference to our
Proxy Statement for our 2003 Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

The information required by this item regarding the security ownership of
certain of our beneficial owners and our management is incorporated herein by
reference to our Proxy Statement for our 2003 Annual Meeting of Stockholders.

The following table provides information as of December 31, 2002, about the
securities authorized for issuance under our equity compensation plans,
consisting of our 1999 Share Option Plan, as amended, our 2000 Share Option
Plan, as amended, and our 2002 CEO Incentive Plan.



Equity Compensation Plan Information

(a) (b) (c)
Number of securities
remaining available for
Number of securities to be Weighted-average future issuance under equity
issued upon exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ------------- ------------------- ------------------- ------------------------

Equity compensation plans
approved by security
holders................. 7,147,370 $1.6051 1,366,130

Equity compensation plans
not approved by
security holders........ 2,197,657 $1.2139 22,500

Total......... 9,345,027 $1.5128 1,388,630


2002 CEO Incentive Plan

In December 2002, our board of directors adopted the 2002 CEO Incentive
Plan, pursuant to which it granted our newly-appointed Chief Executive Officer,
Michael S. Weiss, an option to purchase up to 2,002,657 shares of authorized but
unissued common stock. The option has a term of no more than ten (10) years plus
one day from the date of the grant, unless otherwise authorized by our board of
directors. The option granted to Mr. Weiss was part of a total grant of options
issued pursuant to the 1999 and 2000 Plans and the 2002 CEO Incentive Plan, to
purchase a total of 4,050,000 shares of our common stock. Of these options,
one-third (or 1,350,000) vest over a three-year period and two-thirds (or
2,700,000) vest upon the earlier of the achievement of certain performance-based
milestones or December 23, 2012. In addition,


35


in the event of a merger, acquisition or other change of control or in the event
that we terminate Mr. Weiss' employment, either without cause or as a result of
his death or disability, or he terminates his employment for good reason, the
exercisability of any of the options described in this paragraph that are
unexercisable at the time of such event or termination shall accelerate and the
time period during which he shall be allowed to exercise such options shall be
extended to the shorter of two years from the date of the termination of his
employment or December 24, 2012. Additionally, our board of directors shall have
the discretion to accelerate all or a portion of these options at any time.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated herein by reference to our
Proxy Statement for our 2003 Annual Meeting of Stockholders.

ITEM 14. CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures. Based on their evaluations as
of a date within 90 days of the filing date of this report, our principal
executive officer and principal financial officer, with the participation of our
full management team, have concluded that our disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act)
are effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC.

Changes in internal controls. There were no significant changes in our internal
controls or in other factors that could significantly affect these internal
controls subsequent to the date of their most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)

1. Financial Statements.

Our Consolidated Financial Statements listed in the accompanying Index to
Consolidated Financial Statements at page F-1 are filed as part of this Form
10-K.

2. Financial Statement Schedules.

All schedules are omitted as the information required is inapplicable or the
information is presented in the consolidated financial statements or the related
notes.

3. Exhibits.

See Section (c) below.

(b) Reports on Form 8-K.

On December 23, 2003, we filed an 8-K (Item 5) announcing the appointment of
Michael S. Weiss as our Chairman and Chief Executive Officer, replacing Dr.
Benjamin Corn, who resigned his position as Chief Executive Officer and
President, effective as of that date. On the same date, we also announced that
Dr. Morris Laster, our Executive Chairman, resigned to pursue other activities.


36


(c) Exhibits

Listed below are the exhibits that are filed as part of this Form 10-K
(according to the number assigned to them in Item 601 of Regulation S-K). Each
exhibit marked by the number:

(1) is incorporated by reference to our Registration Statement on Form
S-1 (File No. 333-37402) filed on May 19, 2000;

(2) is incorporated by reference to the First Amendment to our
Registration Statement on Form S-1 (File No. 333-37402) filed on
June 30, 2000;

(3) is incorporated by reference to our Annual Report on Form 10-K (File
No. 000-30929) filed on March 30, 2001;

(4) is incorporated by reference to our Quarterly Report on Form 10-Q
(File No. 30929) filed on November 13, 2001;

(5) is incorporated by reference to our Annual Report on Form 10-K (File
No. 30929) filed on March 26, 2002; and

(6) is incorporated by reference to our Quarterly Report on Form 10-Q
(File No. 30929) filed on November 12, 2002.

Portions of each exhibit marked with a (!) have been redacted and filed
separately with the Commission pursuant to a request for confidential treatment.

Each exhibit marked (+) is a management contract or compensatory plan or
arrangement filed as an exhibit to this Form 10-K pursuant to Items 14(a) and
14(c) of Form 10-K.

Exhibit
Number Description
- ------- -----------
2.1(1) --Asset Purchase Agreement between Partec Ltd. (a predecessor
company of Keryx Biopharmaceuticals, Inc.) and B.R.T.
Biopharmaceuticals Ltd., dated as of November 11, 1999.

2.2(1) --Asset Purchase Agreement between Partec Ltd. and Keryx
Biopharmaceuticals, Inc. (f/k/a Lakaro Biopharmaceuticals, Inc.),
dated as of November 18, 1999.

3.1(1) --Certificate of Incorporation of Keryx Biopharmaceuticals, Inc., as
amended.

3.2(5) --Amended and Restated Bylaws of Keryx Biopharmaceuticals, Inc.

4.1(2) --Specimen Common Stock Certificate.

4.2(1) --Form of Stock Purchase Agreement for the purchase of shares of
Common Stock.

4.4(1) --Form of Contribution Agreement between Keryx Biopharmaceuticals,
Inc. and the holders of 12% Convertible Notes of Partec Ltd.

4.5 --Warrant No. 5 for the Purchase of Shares of Common Stock between
Yissum Research and Development Company of the Hebrew University of
Jerusalem and Keryx Biopharmaceuticals, Inc., dated December 12, 2001.

4.6 --Warrant No. 6 for the Purchase of Shares of Common Stock between
Yissum Research and Development Company of the Hebrew University of
Jerusalem and Keryx Biopharmaceuticals, Inc., dated December 12, 2001.

4.7 --Warrant No. 7 for the Purchase of Shares of Common Stock between
Children's Medical Center Corporation and Keryx Biopharmaceuticals,
Inc., dated March 3, 2002.

4.8 --Warrant No. 8 for the Purchase of Shares of Common Stock between
Children's Medical Center Corporation and Keryx Biopharmaceuticals,
Inc., dated March 3, 2002.


37


4.9 --Warrant No. 9 for the Purchase of Shares of Common Stock between
Shmuel Ben Sasson and Keryx Biopharmaceuticals,
Inc., dated March 3, 2003.

4.10 --Warrant No. 10 for the Purchase of Shares of Common Stock between
Shmuel Ben Sasson and Keryx Biopharmaceuticals,
Inc., dated March 3, 2003.

4.11 --Form of Warrant for the Purchase of Shares of Common Stock between
Yissum Research and Development Company of the Hebrew University of
Jerusalem and Keryx Biopharmaceuticals, Inc., dated January 10, 2002.

4.12(1) --Form of Warrant for the Purchase of Shares of Common Stock between
certain holders of Series A Preferred Stock and Keryx
Biopharmaceuticals, Inc., dated as of December 14, 1999.

10.1+ --Severance Agreement between Morris Laster, M.D. and Keryx
Biopharmaceuticals, Inc., dated February 27, 2003.

10.2+ --Severance Agreement between Benjamin Corn, M.D. and Keryx
Biopharmaceuticals Inc., dated February 23, 2003.

10.3(6)+ --Severance Agreement between Robert Gallahue, Jr. and Keryx
Biopharmaceuticals, Inc., dated August 15, 2002.

10.4(6)+ --Agreement between Ira Weinstein and Keryx Biopharmaceuticals, Inc.,
dated August 15, 2002, concerning a reduction in compensation.

10.5(1)! --Exclusive License Agreement between the Children's Medical Center
Corporation and Keryx Biopharmaceuticals, Inc., dated as of November
18, 1999.

10.6(1)! --License Agreement between Alfa Wassermann S.p.A. and Partec Ltd.,
dated as of November 12, 1998.

10.7(5)! --License Agreement between Yissum Research & Development Company of
the Hebrew University of Jerusalem and Keryx Biopharmaceuticals, Inc.,
dated as of January 10, 2002.

10.8(6)! --License Agreement between Opocrin S.p.A. and Keryx
Biopharmaceuticals, Inc., dated September 25, 2002.

10.9(1) --Management Services Agreement between Keryx Biopharmaceuticals, Inc.
and B.R.T. Biopharmaceuticals Ltd. (now Keryx Biopharmaceuticals
Ltd.), dated as of November 30, 1999.

10.10(1) --Form of KRX-101 Scientific Advisory Board Agreement.

10.11(1) --Form of KinAce Scientific Advisory Board Agreement between Keryx
Biopharmaceuticals, Inc. and Dr. James Broach.

10.12(2) --Form of KinAce Scientific Advisory Board Agreement between Moshe
Oren, Ph.D. and Keryx Biopharmaceuticals, Inc.

10.13(3)+ --Employment Agreement between Keryx Biopharmaceuticals, Inc. and Ira
Weinstein, dated as of November 19, 1999.

10.14(3)+ --Employment Agreement between Keryx (Israel) Ltd. and Ira Weinstein,
dated as of November 19, 1999.

10.15(3)+ --Employment Agreement between Keryx Biopharmaceuticals, Inc. and Bob
Trachtenberg, dated as of November 19, 1999.


38


10.16(3)+ --Employment Agreement between Keryx (Israel) Ltd. and Bob
Trachtenberg, dated as of November 19, 1999.

10.17(3) --Lease Agreement between RMPA Nechasim, Ltd. and Keryx (Israel) Ltd.,
dated as of December 21, 2000.

10.18 --Amendment, dated as of March 25, 2003, to the Exclusive License
Agreement between the Children's Medical Center Corporation and Keryx
Biopharmaceuticals, Inc., dated as of November 18, 1999.

10.19(4)+ --Employment Agreement between Barry Cohen and Keryx
Biopharmaceuticals, Inc., dated as of September 24, 2001.

10.20(5)+ --Employment Agreement between Thomas J. Humphries, M.D. and Keryx
Biopharmaceuticals, Inc., dated as of November 9, 2001.

10.21(5) --Amended Management Services Agreement between Keryx
Biopharmaceuticals, Inc. and Keryx Biomedical Technologies Ltd., dated
as of November 1, 2001.

10.22(5) --Sub-lease Agreement between Keryx Biopharmaceuticals, Inc. and Zero
Stage Capital, Inc., dated June 20, 2001.

10.23(4)+ --Agreement between Bob Trachtenberg and Keryx Biopharmaceuticals,
Inc., dated August 15, 2002, concerning a reduction in compensation.

10.24(4)+ --Agreement between Thomas J. Humphries, M.D. and Keryx
Biopharmaceuticals, Inc., dated August 15, 2002, concerning a
reduction in compensation.

10.25(4)+ --Agreement between Barry Cohen and Keryx Biopharmaceuticals, Inc.,
dated August 15, 2002, concerning a reduction in compensation.

21.1 --List of subsidiaries of Keryx Biopharmaceuticals, Inc.

23.1 --Consent of KPMG.

99.1 -- Certifications Pursuant to 18 U.S.C. Section 1350


39


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, we have duly caused this report to be signed on our behalf by the
undersigned, thereunto duly authorized.

KERYX BIOPHARMACEUTICALS, INC.

By: /s/ Michael S. Weiss
-----------------------------
Michael S. Weiss
Chairman & Chief Executive Officer

Date: March 31, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons have signed this report below on behalf of Keryx and in the
capacities and on the dates indicated.




Signature Title

/s/ Michael S. Weiss March 31, 2003
- --------------------------------------
Chairman and Chief Executive Officer
Michael S. Weiss
(Principal Executive Officer)


/s/ Ira Weinstein. March 31, 2003
- --------------------------------------
Ira Weinstein Interim Chief Financial
Officer and Treasurer (Principal Financial
and Accounting Officer)


/s/ Francis J. T. Fildes Director March 31, 2003
- --------------------------------------
Francis J. T. Fildes


Director March 31, 2003
- -------------------------------------
Malcolm Hoenlein


/s/ Peter M. Kash Vice Chairman March 31, 2003
- -------------------------------------
Peter M. Kash


Director March 31, 2003
- -------------------------------------
Mark H. Rachesky, M.D.


/s/ Lindsay A. Rosenwald, M.D. Director March 31, 2003
- -------------------------------------
Lindsay A. Rosenwald, M.D.


Director March 31, 2003
- -------------------------------------
Wayne Rothbaum



40


CERTIFICATIONS

I, Michael S. Weiss, certify that:

1. I have reviewed this annual report on Form 10-K of Keryx
Biopharmaceuticals, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Keryx Biopharmaceuticals, Inc. as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Keryx
Biopharmaceuticals, Inc. and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;

b) evaluated the effectiveness of the disclosure controls and
procedures of Keryx Biopharmaceuticals, Inc. as of a date within 90
days prior to the filing date of this annual report (the "Evaluation
Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the auditors of Keryx Biopharmaceuticals,
Inc. and the audit committee of the board of directors (or persons
performing the equivalent functions) of Keryx Biopharmaceuticals, Inc.:

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the ability of Keryx
Biopharmaceuticals, Inc. to record, process, summarize and report
financial data and have identified for such auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the internal controls
of Keryx Biopharmaceuticals, Inc.; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ Michael S. Weiss
--------------------------------------
Michael S. Weiss
Chief Executive Officer
Dated: March 31, 2003 (Principal Executive Officer)


41


I, Ira Weinstein, certify that:

1. I have reviewed this annual report on Form 10-K of Keryx
Biopharmaceuticals, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Keryx Biopharmaceuticals, Inc. as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Keryx
Biopharmaceuticals, Inc. and have;

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;

b) evaluated the effectiveness of the disclosure controls and
procedures of Keryx Biopharmaceuticals, Inc. as of a date within 90
days prior to the filing date of this annual report (the "Evaluation
Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the auditors of Keryx Biopharmaceuticals,
Inc. and the audit committee of the board of directors (or persons
performing the equivalent functions) of Keryx Biopharmaceuticals, Inc.:

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the ability of Keryx
Biopharmaceuticals, Inc. to record, process, summarize and report
financial data and have identified for the such auditors any
material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the internal controls
of Keryx Biopharmaceuticals, Inc.; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ Ira Weinstein
--------------------------------------------
Ira Weinstein
Interim Chief Financial Officer
Dated: March 31, 2003 (Principal Financial and Accounting Officer)


42


Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Consolidated Financial Statements as of December 31, 2002
- --------------------------------------------------------------------------------

Contents

Page
- ----

Independent Auditor's Report F-2

Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3

Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 F-4

Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000 F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-10

Notes to Consolidated Financial Statements F-12


F-1



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)
Consolidated Financial Statements as of December 31, 2002
- --------------------------------------------------------------------------------

Independent Auditor's Report

To the Board of Directors and Shareholders of
Keryx Biopharmaceuticals, Inc.:

We have audited the accompanying consolidated balance sheets of Keryx
Biopharmaceuticals, Inc. (the "Company"), a development stage company, and its
subsidiaries, as of December 31, 2002 and 2001 and the related consolidated
statements of operations, statements of changes in stockholders' equity and
consolidated statements of cash flows for each of the years in the three-year
period ended December 31, 2002, and for the development stage period. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company, a development stage company, and its subsidiaries, at December 31, 2002
and 2001 and the results of their operations, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2002, and for the development stage period, in conformity with accounting
principles generally accepted in the United States.


Somekh Chaikin

Certified Public Accountants (Isr.)
A member firm of KPMG International

Jerusalem, Israel
March 26, 2003


F-2



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)

Consolidated Balance Sheets as of December 31
- ----------------------------------------------------------------------------
(in thousands, except share amounts)



2002 2001
-------- --------

Assets

Current assets

Cash and cash equivalents (Note 2) $ 13,350 $ 23,345
Investment securities, held-to-maturity (Note 3) 10,575 14,308
Deposits in respect of employee severance
obligations (current portion) (Note 6) 299 --
Accrued interest receivable 206 203
Deferred tax asset (Note 9) 170 --
Other receivables and prepaid expenses 267 465
-------- --------
Total current assets 24,867 38,321
-------- --------

Deposits in respect of employee severance obligations (Note 6) 117 291

Property, plant and equipment, net (Note 4) 3,031 3,338

Deferred tax asset (Note 9) -- 115
Other assets (primarily intangible assets), net (Note 5) 1,088 1,002
-------- --------

Total assets $ 29,103 $ 43,067
======== ========

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable and accrued expenses $ 920 $ 2,099
Income taxes payable (Note 9) 177 277
Accrued compensation and related liabilities 1,420 710
-------- --------
Total current liabilities 2,517 3,086
-------- --------
Liability in respect of employee severance obligations (Note 6) 188 766
Deferred tax liability, net (Note 9) 68 --
-------- --------
Total liabilities 2,773 3,852
-------- --------

Commitments and contingencies

Stockholders' equity (Note 7)

Common stock, $0.001 par value per share (40,000,000 and
40,000,000 shares authorized, 19,913,185 and 19,846,694
shares issued, 19,866,885 and 19,846,694
shares outstanding at December 31, 2002 and 2001, respectively) 20 19
Additional paid-in capital 72,067 74,025
Treasury stock, at cost, 46,300 shares at December 31, 2002 (77) --
Unearned compensation (178) (1,110)
Deficit accumulated during the development stage (45,502) (33,719)
-------- --------
Total stockholders' equity 26,330 39,215
-------- --------
Total liabilities and stockholders' equity $ 29,103 $ 43,067
======== ========


The accompanying notes are an integral part of the consolidated financial
statements.

F-3



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)

Consolidated Statements of Operations for the Year Ended December 31
- ----------------------------------------------------------------------------
(in thousands, except share and per share amounts)



Amounts
accumulated
during the
development
2002 2001 2000 stage
------------ ------------ ------------ ------------

Management fees from related party $ -- $ -- $ -- $ 300
------------ ------------ ------------ ------------

Operating expenses
Research and development:
Non-cash compensation $ (1,382) $ (17) $ 3,186 $ 7,213
Other research and development 9,523 7,416 3,500 23,911
------------ ------------ ------------ ------------
Total research and development expenses 8,141 7,399 6,686 31,124
------------ ------------ ------------ ------------
General and administrative:
Non-cash compensation (4) 139 2,668 3,391
Other general and administrative 4,108 4,302 3,232 14,405
------------ ------------ ------------ ------------
Total general and administrative expenses 4,104 4,441 5,900 17,796
------------ ------------ ------------ ------------
Total operating expenses 12,245 11,840 12,586 48,920
------------ ------------ ------------ ------------
Operating loss (12,245) (11,840) (12,586) (48,620)

Interest income 582 2,316 1,368 4,291

Interest expense and other bank charges (69) (85) (51) (656)
------------ ------------ ------------ ------------
Net loss before income taxes (11,732) (9,609) (11,269) (44,985)

Income taxes (Note 9) 51 197 220 517
------------ ------------ ------------ ------------
Net loss $ (11,783) $ (9,806) $ (11,489) $ (45,502)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.59) $ (0.50) $ (0.89) $ (3.55)
============ ============ ============ ============

Weighted average shares used in computing
basic and diluted net loss per common share 19,897,939 19,699,542 12,929,643 12,808,738


The accompanying notes are an integral part of the consolidated financial
statements.


F-4



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)

Statement of Changes in Stockholders' Equity
- -----------------------------------------------------------------------------
(in thousands, except share amounts)



Series A convertible
preferred stock Common stock Additional
--------------------------- ------------------------- paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------

Balance at December 31, 1999 79,465 $ --* 1,208,306 $ 1 $ 19,713
Changes during the year:
Issuance of Series A convertible preferred
stock to investors at $100 per share for
cash (net of issuance expenses of $271) 39,180 --* -- -- 3,647
Receipt on account of shares issued in
prior years -- -- 6,900,000 7 --
Conversion of Series A convertible
preferred stock to common stock (118,645) --* 6,114,962 6 (6)
Issuance of common stock in initial public
offering, including exercise of overallotment
(net of issuance expenses of $5,702) -- -- 5,200,000 5 46,293
Exercise of warrants -- -- 109,504 --* 1
Compensation in respect of options
granted to employees, directors and
consultants -- -- -- -- 3,734
Compensation in respect of warrants for
common stock issued to technology licensor -- -- -- -- 3,070
Warrants of common stock issued to related
party as finder's fee in private placement -- -- -- -- 114
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 -- $ --* 19,532,772 $ 19 $ 76,566
=========== =========== =========== =========== ===========



Deficit
accumulated
Treasury stock during the
---------------------------- Unearned development
Shares Amount compensation stage Total
------------ ------------ ------------ ------------ ------------

Balance at December 31, 1999 -- $ -- $ (2,854) $ (12,424) $ 4,436
Changes during the year:
Issuance of Series A convertible preferred
stock to investors at $100 per share for
cash (net of issuance expenses of $271) -- -- -- -- 3,647
Receipt on account of shares issued in
prior years -- -- -- -- 7
Conversion of Series A convertible
preferred stock to common stock -- -- -- -- --
Issuance of common stock in initial public
offering, including exercise of overallotment
(net of issuance expenses of $5,702) -- -- -- -- 46,298
Exercise of warrants -- -- -- -- 1
Compensation in respect of options
granted to employees, directors and
consultants -- -- 431 -- 4,165
Compensation in respect of warrants for
common stock issued to technology licensor -- -- (1,382) -- 1,688
Warrants of common stock issued to related
party as finder's fee in private placement -- -- -- -- 114
Net loss -- -- -- (11,489) (11,489)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 -- $ -- $ (3,805) $ (23,913) $ 48,867
============ ============ ============ ============ ============


* Amount less than $1,000

The accompanying notes are an integral part of the consolidated financial
statements.


F-5



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)

Statement of Changes in Stockholders' Equity (continued)
- -----------------------------------------------------------------------------
(in thousands, except share amounts)



Series A convertible
preferred stock Common stock Additional
----------------------- ------------------------- paid-in
Shares Amount Shares Amount capital
--------- ----------- ----------- ---------- ----------

Balance at December 31, 2000 -- $ --* 19,532,772 $ 19 $ 76,566
Changes during the year:
Exercise of warrants -- -- 137,922 --* 10
Exercise of options -- -- 176,000 --* 23
Compensation in respect of options
granted to employees, directors and
consultants -- -- -- -- (1,514)
Compensation in respect of warrants for
common stock issued to technology licensor -- -- -- -- (1,060)
Net loss -- -- -- -- --
--------- ----------- ----------- ---------- ---------
Balance at December 31, 2001 -- $ --* 19,846,694 $ 19 $ 74,025
========= =========== =========== ========== =========



Deficit
accumulated
Treasury stock during the
----------------------- Unearned development
Shares Amount compensation stage Total
-------- ----------- ------------ ----------- ----------

Balance at December 31, 2000 -- $ -- $ (3,805) $ (23,913) $ 48,867
Changes during the year:
Exercise of warrants -- -- -- -- 10
Exercise of options -- -- -- -- 23
Compensation in respect of options
granted to employees, directors and
consultants -- -- 1,738 -- 18
Compensation in respect of warrants for
common stock issued to technology licensor -- -- 957 -- 103
Net loss -- -- -- (9,806) (9,806)
-------- ----------- ------------ ---------- ---------
Balance at December 31, 2001 -- $ -- $ (1,110) $ (33,719) $ 39,215
======== =========== ============ ========== =========


* Amount less than $1,000

The accompanying notes are an integral part of the consolidated financial
statements.


F-6



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)

Statement of Changes in Stockholders' Equity (continued)
- -----------------------------------------------------------------------------
(in thousands, except share amounts)



Series A convertible
preferred stock Common stock Additional
------------------------ ------------------------- paid-in
Shares Amount Shares Amount capital
--------- ----------- ------------ ----------- ----------

Balance at December 31, 2001 -- $ --* 19,846,694 $ 19 $ 74,025
Changes during the year:
Issuance of common stock to technology
licensors for technology license -- -- 48,491 1 358
Purchase of common stock -- -- -- -- --
Exercise of warrants -- -- -- -- --
Exercise of options -- -- 18,000 --* 2
Compensation in respect of options
granted to employees, directors and
consultants -- -- -- -- (173)
Compensation in respect of warrants for
common stock issued to technology licensor -- -- -- -- (2,145)
Net loss -- -- -- -- --
-------- ----------- ----------- ---------- ---------
Balance at December 31, 2002 -- $ --* 19,913,185 $ 20 $ 72,067
======== =========== =========== ========== =========



Deficit
accumulated
Treasury stock during the
------------------------ Unearned development
Shares Amount compensation stage Total
--------- ------------ ------------ ----------- ----------

Balance at December 31, 2001 -- $ -- $ (1,110) $ (33,719) $ 39,215
Changes during the year:
Issuance of common stock to technology
licensors for technology license -- -- -- -- 359
Purchase of common stock 46,300 (77) -- -- (77)
Exercise of warrants -- -- -- -- --
Exercise of options -- -- -- -- 2
Compensation in respect of options
granted to employees, directors and
consultants -- -- 145 -- (28)
Compensation in respect of warrants for
common stock issued to technology licensor -- -- 787 -- (1,358)
Net loss -- -- -- (11,783) (11,783)
-------- ----------- ----------- ---------- ---------
Balance at December 31, 2002 46,300 $ (77) $ (178) $ (45,502) $ 26,330
======== =========== =========== ========== =========


* Amount less than $1,000

The accompanying notes are an integral part of the consolidated financial
statements.


F-7



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)

Statement of Changes in Stockholders' Equity (continued)
- -----------------------------------------------------------------------------
(in thousands, except share amounts)



Series A convertible
preferred stock Common stock Additional
------------------------- ------------------------- paid-in
Shares Amount Shares Amount capital
---------- ------------- ------------ ----------- ----------

Amounts accumulated during the development stage:
Contributed capital -- $ -- -- $ -- $ 3,181
Conversion of convertible notes of Partec
into stock in Keryx -- -- -- -- 2,973
Issuance of Series A convertible preferred
stock to investors at $100 per share for
cash (net of issuance expenses of $552) 89,180 --* -- -- 8,338
Issuance of Series A convertible preferred
stock at $0.001 par value to noteholders
in exchange for note of predecessor 29,465 --* -- -- --
Issuance of common stock to technology
licensors for technology license -- -- 1,256,797 2 358
Receipt on account of shares issued in
prior years -- -- 6,900,000 7 --
Conversion of Series A convertible
preferred stock to common stock (118,645) --* 6,114,962 6 (6)
Issuance of common stock in initial public
offering, including exercise of overallotment
(net of issuance expenses of $5,702) -- -- 5,200,000 5 46,293
Purchase of common stock -- -- -- -- --
Exercise of warrants -- -- 247,426 --* 11
Exercise of options -- -- 194,000 --* 25
Compensation in respect of options
granted to employees, directors
and consultants -- -- -- -- 8,542
Compensation in respect of warrants for
common stock issued to technology licensor -- -- -- -- 1,650
Warrants of common stock issued to related
party as finder's fee in private placement -- -- -- -- 114
Warrants for common stock issued to
noteholders in exchange for note of predecessor -- -- -- -- 588
Net loss -- -- -- -- --
--------- ------------ ----------- ---------- ---------
-- $ --* 19,913,185 $ 20 $ 72,067
========= ============ =========== ========== =========


* Amount less than $1,000

The accompanying notes are an integral part of the consolidated financial
statements.


F-8



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)

Statement of Changes in Stockholders' Equity (continued)
- -----------------------------------------------------------------------------
(in thousands, except share amounts)



Deficit
accumulated
Treasury stock during the
------------------------ Unearned development
Shares Amount compensation stage Total
--------- ------------ ------------ ----------- ----------

Amounts accumulated during the development stage:
Contributed capital -- $ -- $ -- $ -- $ 3,181
Conversion of convertible notes of Partec
into stock in Keryx -- -- -- -- 2,973
Issuance of Series A convertible preferred
stock to investors at $100 per share for
cash (net of issuance expenses of $552) -- -- -- -- 8,338
Issuance of Series A convertible preferred
stock at $0.001 par value to noteholders
in exchange for note of predecessor -- -- -- -- --
Issuance of common stock to technology
licensors for technology license -- -- -- -- 360
Receipt on account of shares issued in
prior years -- -- -- -- 7
Conversion of Series A convertible
preferred stock to common stock -- -- -- -- --
Issuance of common stock in initial public
offering, including exercise of overallotment
(net of issuance expenses of $5,702) -- -- -- -- 46,298
Purchase of common stock 46,300 (77) -- -- (77)
Exercise of warrants -- -- -- -- 11
Exercise of options -- -- -- -- 25
Compensation in respect of options
granted to employees, directors
and consultants -- -- 1,142 -- 9,684
Compensation in respect of Warrants for
common stock issued to technology licensor -- -- (1,320) -- 330
Warrants of common stock issued to related
party as finder's fee in private placement -- -- -- -- 114
Warrants for common stock issued to
noteholders in exchange for note of predecessor -- -- -- -- 588
Net loss -- -- -- (45,502) (45,502)
-------- ----------- ---------- ---------- ---------
46,300 $ (77) $ (178) $ (45,502) $ 26,330
======== =========== ========== ========== =========


* Amount less than $1,000

The accompanying notes are an integral part of the consolidated financial
statements.


F-9



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)

Consolidated Statements of Cash Flows for the Year Ended December 31
- -----------------------------------------------------------------------------
(in thousands)



Amounts
accumulated
during the
development
2002 2001 2000 stage
-------- -------- -------- ------------

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss $(11,783) $ (9,806) $(11,489) $ (45,502)

Adjustments to reconcile cash flows used in operating activities:
Revenues and expenses not involving cash flows:
Employee stock compensation expense 104 335 3,556 8,960
Consultants' and third party stock compensation
expense (negative expense) (1,490) (213) 2,297 1,644
Issuance of common stock to technology licensor 359 -- -- 359
Interest on convertible notes settled
through issuance of preferred shares -- -- -- 253
Provision for employee severance obligations (578) 462 187 188
Depreciation and amortization 953 250 47 1,326
Loss on disposal of property, plant and equipment 56 28 -- 84
Exchange rate differences 26 62 3 84
Changes in assets and liabilities:
Decrease (increase) in other receivables
and prepaid expenses 198 (260) 47 (262)
Decrease (increase) in accrued interest
receivable (3) 392 (595) (206)
Changes in deferred tax provisions 13 (115) -- (102)
Decrease in amounts due to related party -- -- (141) --
(Decrease) increase in accounts payable
and accrued expenses (750) 730 763 870
(Decrease) increase in income taxes payable (100) 252 15 177
Increase in accrued compensation
and related liabilities 710 536 62 1,420
-------- -------- -------- ------------
Net cash used in operating activities (12,285) (7,347) (5,248) (30,707)
-------- -------- -------- ------------

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property, plant and equipment (1,155) (2,808) (199) (4,400)
Proceeds from disposals of property,
plant and equipment 37 -- -- 37
Investment in other assets (99) (313) (366) (1,123)
Proceeds from (additions to) deposits in
respect of employee severance obligations 174 (155) (72) (117)
Proceeds from sale and maturity of
(investment in) short-term securities 3,733 1,185 (15,494) (10,575)
Proceeds from sale and maturity of
(investment in) long-term securities -- 10,104 (10,104) --
Deposits in respect of employee severance
obligations (current portion) (299) -- -- (299)
-------- -------- -------- ------------
Net cash provided by (used in)
investing activities $ 2,391 $ 8,013 $(26,235) $ (16,477)
-------- -------- -------- ------------


* Amount less than $1,000

The accompanying notes are an integral part of the consolidated financial
statements.


F-10



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)

Consolidated Statements of Cash Flows for the Year Ended December 31
(continued)
- -----------------------------------------------------------------------------
(in thousands)



Amounts
accumulated
during the
development
2002 2001 2000 stage
-------- -------- -------- ------------

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from short-term loans $ -- $ -- $ -- $ 500
Proceeds from long-term loans -- -- -- 3,251
Issuance of convertible note, net -- -- -- 2,150
Issuance of preferred shares, net and
contributed capital -- -- 3,761 8,453
Receipts on account of shares previously
issued -- -- 7 7
Proceeds from initial public offering, net -- -- 46,298 46,298
Proceeds from exercise of options and warrants 2 33 1 36
Purchase of treasury stock (77) -- -- (77)
-------- -------- -------- ------------
Net cash provided by (used in)
financing activities (75) 33 50,067 60,618
-------- -------- -------- ------------
Effect of exchange rate on cash (26) (62) (3) (84)
-------- -------- -------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (9,995) 637 18,581 13,350

Cash and cash equivalents at beginning
of year 23,345 22,708 4,127 --
-------- -------- -------- ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,350 $ 23,345 $ 22,708 $ 13,350
======== ======== ======== ============

NON - CASH TRANSACTIONS
Conversion of short-term loans into
contributed capital $ -- $ -- $ -- $ 500
Conversion of long-term loans into
contributed capital -- -- -- 2,681
Conversion of long-term loans into
convertible notes of Partec -- -- -- 570
Conversion of convertible notes of Partec
and accrued interest into stock in Keryx -- -- -- 2,973
Issuance of warrants to related party
as finder's fee in private placement -- -- 114 114
Declaration of stock dividend -- -- 3 3
Conversion of Series A preferred stock to
common stock -- -- --* --
Purchase of property, plant and equipment
and other assets on credit 47 475 -- 47

SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ --* $ 1 $ 3 $ 139
Cash paid for income taxes 132 120 118 371


* Amount less than $1,000

The accompanying notes are an integral part of the consolidated financial
statements.


F-11



Keryx Biopharmaceuticals, Inc. (A Development Stage Company)

Notes to the Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Keryx Biopharmaceuticals, Inc. (the "Company") is a biopharmaceutical company
engaged in the research and development of novel pharmaceutical products for the
treatment of serious, life-threatening diseases, including diabetes and cancer.
Keryx was incorporated in Delaware in October 1998 (under the name Paramount
Pharmaceuticals, Inc., which was later changed to Lakaro Biopharmaceuticals,
Inc. in November 1999, and finally to Keryx Biopharmaceuticals, Inc. in January
2000). The Company commenced activities in November 1999, and since then has
operated in one segment of operations, namely the development and
commercialization of clinical compounds and core technologies for the life
sciences. The Company has not had revenues from its planned principal operations
and is dependent upon significant financing to fund the working capital
necessary to execute its business development plan. There can be no assurance
that the Company will be able to obtain additional financing.

Until November 1999, most of the Company's activities were carried out by Partec
Limited, an Israeli corporation formed in December 1996, and its subsidiaries
SignalSite Inc. (85% owned) and its subsidiary, SignalSite Israel Ltd. (wholly
owned), and Vectagen Inc. (87.25% owned) and its subsidiary, Vectagen Israel
Ltd. (wholly owned) (hereinafter collectively referred to as "Partec"). In
November 1999, the Company acquired substantially all of the assets and
liabilities of Partec and, as of that date, the activities formerly carried out
by Partec are now performed by the Company. At the date of the acquisition,
Keryx and Partec were entities under common control (the controlling interest
owned approximately 79.7% of Keryx and approximately 76% of Partec) and
accordingly, the assets and liabilities were recorded at their historical cost
basis by means of an "as if" pooling and Partec is being presented as a
predecessor company. Consequently, these financial statements include the
activities performed in previous periods by Partec by aggregating the relevant
historical financial information with the financial statements of the Company as
if they had formed a discrete operation under common management for the entire
development stage.

The Company owns a 100% interest in Keryx (Israel) Ltd., incorporated in Israel,
Keryx Biomedical Technologies Ltd., incorporated in Israel, and Keryx Securities
Corp., a U.S. corporation organized in Massachusetts. Through December 31, 2002
substantially all of the biopharmaceutical research and development activities
were conducted in Israel, and therefore, the Company has one geographical
segment.

The Company implemented a strategic reorganization, initiated in August 2002 and
continuing through year's end. The program was designed to substantially reduce
its early stage research expenditures so it could focus primarily on the
development of its lead product candidate KRX-101 for the treatment of diabetic
nephropathy and on the acquisition of additional clinical stage compounds. For
further details see Note 11.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the financial statements of the
Company, its subsidiaries and the operations detailed above. Intercompany
transactions and balances have been eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.


F-12



NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FOREIGN CURRENCY TRANSLATION

The financial statements of the Israeli subsidiaries have been prepared using
the U.S. dollar as the functional currency. Transactions in foreign currency
(primarily in New Israeli Shekels - "NIS") are recorded at the representative
exchange rate as of the transaction date, except for activities relating to
balance sheet items, which are recorded at the appropriate exchange rate of the
corresponding balance sheet item. Monetary assets and liabilities in foreign
currency are stated on the basis of the representative rate of exchange at the
balance sheet date. Non-monetary assets and liabilities in foreign currency are
stated at historical exchange rates. All exchange gains and losses from
remeasurement of monetary balance sheet items denominated in non-dollar
currencies are reflected in the statement of operations as they arise.

CASH AND CASH EQUIVALENTS

The Company considers all highly-liquid investments with original maturities of
three months or less to be cash equivalents.

INVESTMENT SECURITIES

Investment securities at December 31, 2002 consist of corporate debt securities.
The Company classifies its debt securities as held-to-maturity. Held-to-maturity
securities are those securities in which the Company has the ability and intent
to hold the security until maturity.

Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts.

A decline in the market value of any held-to-maturity security below cost, that
is deemed to be other than temporary, results in a reduction in the carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. Premiums and discounts are amortized or
accreted over the life of the related held-to-maturity security as an adjustment
to yield using the effective interest method. Dividend and interest income are
recognized when earned.

DEPOSITS IN RESPECT OF EMPLOYEE SEVERANCE OBLIGATIONS

Deposits in respect of employee severance obligations are recorded at its
current redemption value.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets at the following annual rates:

%
-----
Office furniture and equipment 6-15
Laboratory equipment 20
Computers, software and related equipment 20-33

Leasehold improvements are amortized over the remaining term of the lease
exclusive of renewal options.

INTANGIBLE ASSETS

Acquired patents and intangible assets are recorded at cost and are amortized
over the remaining useful lives of these assets. The Company continually
evaluates whether events and circumstances warrant the recognition of a
reduction of carrying amounts.


F-13



NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

Revenues accumulated during the development stage arose from provision of
management services to a related company and were recognized ratably over the
period for which the services were provided.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred.

INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. If the likelihood of realizing the deferred tax assets or liability is
less than "more likely than not," a valuation allowance is then created.

STOCK - BASED COMPENSATION

The Company applies the intrinsic value-based method of accounting prescribed by
the Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, to account for stock option
plans for employees and directors, as allowed by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based Compensation"
(SFAS No. 123). As such, compensation expense would be recorded on the
measurement date only if current market price of the underlying stock exceeded
the exercise price. SFAS No. 123 is applied to stock options and warrants
granted to other than employees and directors. The Company has adopted the
disclosure requirements of SFAS No. 123 and SFAS No. 148 for awards to its
directors and employees.

Had the compensation expenses for stock options granted under the Company's
stock option plans been determined based on fair value at the grant dates
consistent with the method of SFAS 123, the Company's net income and earnings
per share would have reduced to the pro forma amount below:



Amounts
Accumulated
For the year ended December 31 During the
---------------------------------- Development
2002 2001 2000 Stage
-------- -------- -------- ------------

Net loss, as reported $(11,783) $ (9,806) $(11,489) $ (45,502)
Add: Stock-based compensation expense
to employees and directors
determined included in reported net
loss, net of related tax effects 104 335 3,556 8,960
Deduct: Total stock-based compensation expense
to employees and directors
determined under fair value based
method for all awards, net of
related tax effects (1,282) (1,181) (3,569) (11,043)
-------- -------- -------- ------------
Pro forma net loss $(12,961) $(10,652) $(11,502) $ (47,585)

Losses per common share, Basic and diluted:
As reported $ (0.59) $ (0.50) $ (0.89) $ (3.55)
Pro forma $ (0.65) $ (0.54) $ (0.89) $ (3.72)



F-14



NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company adopted SFAS No. 144 from January 1, 2002, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). This Statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future cash flows expected to
be generated by the asset or used in its disposal. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.

NET LOSS PER SHARE

Basic net loss per share is computed by dividing the losses allocable to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted net loss per share does not reflect the effect of common shares
to be issued upon exercise of stock options and warrants, as their inclusion
would be anti-dilutive. The common stock equivalent of anti-dilutive securities
not included in the computation of net loss per share amounts was 10,389,828 for
the year ended December 31, 2002 (5,730,897 in 2001 and 5,224,150 in 2000).

CONCENTRATIONS OF CREDIT RISK

The Company does not have significant off-balance-sheet risk or credit risk
concentrations. The Company maintains its cash and cash equivalents with
multiple financial institutions and invests in investment-grade securities with
maturities of less than twenty-four months.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 nullifies EITF
94-3. According to SFAS No. 146, commitment to a plan to exit an activity or
dispose of long-lived assets will no longer be enough to record a one-time
charge for most anticipated costs. Instead, companies will record exit or
disposal costs when they are "incurred" and can be measured at fair value, and
they will subsequently adjust the recorded liability for changes in estimated
cash flows. SFAS No. 146 revises accounting for specified employee and contract
terminations that are part of restructuring activities. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002,
however earlier adoption is encouraged. The Company is required to adopt SFAS
No. 146 on January 1, 2003. The Company believes that the adoption of SFAS No.
146 will not have a significant impact on the Company's consolidated financial
statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123" ("SFAS No. 148"). SFAS No. 148 permits two additional transition methods
for entities that adopt the fair value based method of accounting for
stock-based employee compensation. The Statement also requires new disclosures
about the ramp-up effect of stock-based employee compensation on reported
results. The Statement also requires that those effects be disclosed more
prominently by specifying the form, content, and location of those disclosures.
The transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The Company has adopted
the disclosure requirements applicable to fiscal years ending after December
15,2002 and is considering its position with regard to the adoption of the
remaining provisions of SFAS No. 148.


F-15



NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (hereinafter the
Interpretation), which addresses, among other things, the disclosure to be made
by a guarantor in its interim and annual financial statements about its
obligations under guarantees. These disclosure requirements are included in Note
10 to the consolidated financial statements. The Interpretation also requires
the recognition of a liability by a guarantor at the inception of certain
guarantees. The Interpretation requires the guarantor to recognize a liability
for the non-contingent component of the guarantee, this is the obligation to
stand ready to perform in the event that specified triggering events or
conditions occur. The initial measurement of this liability is the fair value of
the guarantee at inception. The recognition of the liability is required even if
it is not probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements.

As noted above the Company has adopted the disclosure requirements of the
Interpretation (see Note 10) and will apply the recognition and measurement
provisions for all guarantees entered into or modified after December 31, 2002.
The Company is evaluating the anticipated effect of the recognition provisions
of FIN 45 on its consolidated financial statements.

NOTE 2 - CASH AND CASH EQUIVALENTS (IN THOUSANDS)

December 31, December 31,
2002 2001
----------- -----------
In or linked to US dollars:
Money market funds $ 12,104 $ 20,338
Cash* 998 2,402
----------- -----------
13,102 22,740

In Israeli currency 248 605
----------- ----------
$ 13,350 $ 23,345
=========== ===========

* Of this amount, approximately $212 at December 31, 2002 and $243 at
December 31, 2001 is dedicated in connection with bank guarantees, as
described in Note 10.


F-16



NOTE 3 - INVESTMENT SECURITIES (IN THOUSANDS)

The following tables summarize the Company's investment securities at December
31, 2002 and December 31, 2001 (regarding assumptions used for estimated fair
value see Note 8):



December 31, 2002
--------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Amortized Cost Holding Gains Holding Losses Fair Value
--------------- --------------- --------------- ---------------

Short-term investments:
US corporate debt securities
(mature between
January and June 2003) $ 10,575 $ 5 $ (3) $ 10,577
=============== =============== =============== ===============



December 31, 2001
-------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Amortized Cost Holding Gains Holding Losses Fair Value
--------------- --------------- --------------- ---------------

Short-term investments:
Obligations of domestic
governmental agencies
(mature between January
and June 2002) $ 3,720 $ 3 $ -- $ 3,723

US corporate debt securities
(mature between
January and September 2002) 10,588 51 (7) 10,632
--------------- --------------- --------------- ---------------
$ 14,308 $ 54 $ (7) $ 14,355
=============== =============== =============== ===============


NOTE 4 - PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS)

December 31, December 31,
2002 2001
------------ ------------

Cost

Office furniture and equipment $ 332 $ 391
Laboratory equipment 1,093 624
Computers, software and related equipment 355 305
Leasehold improvements 2,297 2,212
---------- ----------
4,077 3,532
Accumulated depreciation and amortization (1,046) (194)
---------- ----------
Net book value $ 3,031 $ 3,338
========== ==========


F-17



NOTE 5 - OTHER ASSETS (IN THOUSANDS)

December 31, December 31,
2002 2001
------------ ------------

Patents and other intangible assets $ 1,157 $ 979
Long-term deposits 12 45
---------- -----------
1,169 1,024
Accumulated patent amortization (81) (22)
---------- ----------
$ 1,088 $ 1,002
========== ==========

NOTE 6 - LIABILITY IN RESPECT OF EMPLOYEE SEVERANCE OBLIGATIONS (IN THOUSANDS)

Under Israeli law, employers are required to make severance payments to
dismissed employees and employees leaving employment in certain other
circumstances, on the basis of the latest monthly salary for each year of
service. This liability is provided for by payments of premiums to insurance
companies under approved plans and by a provision in these financial statements.

For the year ended December 31, 2002, total current and long-term severance
obligations recorded amounted to approximately $1,144 (2001 - $766) an increase
of approximately $378. For the year ended December 31, 2002, the current portion
of $956 is included in current liabilities.

At December 31, 2002, current and long-term deposits in respect of employee
severance obligations amounted to approximately $416 (2001 - $291) an increase
of approximately $125.

NOTE 7 - STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

PREFERRED STOCK

The Board of Directors has the authority to issue, at any time, without further
stockholder approval, up to 4,830,000 shares of "blank check" preferred stock,
$0.001 par value per share, and to determine the price, rights, privileges, and
preferences of those shares.

COMMON STOCK

The Company completed its initial public offering of 4.6 million shares of its
common stock at $10 per share pursuant to a Registration Statement on Form S-1
(Registration no. 333-37402), which was effective on July 28, 2000.
Additionally, the underwriters exercised their over-allotment option and
purchased an additional 600,000 shares of the Company's common stock, at $10 per
share, on August 30, 2000. Total proceeds of this offering, including the
exercise of the over-allotment option, were approximately $46.3 million, net of
underwriting fees and offering expenses of approximately $5.7 million.

During 2002, the Company issued a total of 48,491 unregistered shares of its
common stock with a weighted average fair value at grant date of approximately
$7.40 per share to third parties.

The Company repurchased 46,300 shares of its common stock at an aggregate cost
of approximately $77 during the year ended December 31, 2002 pursuant to the
stock repurchase program approved by the Company's Board of Directors in
November 2002. Under its stock repurchase program the Company was authorized to
repurchase up to 2,453,700 additional Keryx shares as of December 31, 2002.


F-18



NOTE 7 - STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)

STOCK OPTION PLANS

The Company has in effect the following stock option plans.

a. The "1999 plan" adopted in November 1999, pursuant to which the Company's
board of directors could grant stock-based awards to directors, consultants and
employees. The plan authorizes grants to purchase up to 4,230,000 shares of
authorized but unissued common stock at a 1:1 ratio. The plan limits the term of
each option, to a term of no more than twenty-five (25) years from the date of
the grant, unless authorized by the board. The plan is administered by the board
of directors or a committee appointed by the Board, which has the authority, in
its discretion, to determine the terms and conditions of any option granted to a
Company service provider, including the vesting schedule.

b. The "2000 plan" adopted in June 2000, pursuant to which the compensation
committee of the Company's board of directors could grant stock-based awards to
directors, consultants and employees. The 2000 plan authorizes grants to
purchase up to 4,455,000 shares of authorized but unissued common stock at a 1:1
ratio. The plan limits the term of each option, to a term of no more than ten
(10) years from the date of the grant, unless authorized by the board.

c. The "Non-plan" adopted in February 2000, pursuant to which the Company's
board of directors granted options, which are not part of any plan, to
non-employee directors of the Company to purchase up to 240,000 shares of
authorized but unissued common stock at a 1:1 ratio. The options issued by the
board of directors pursuant to the Non-plan have a life of ten (10) years from
the date of their grant.

d. The "2002 CEO Incentive Plan" adopted in December 2002, pursuant to which the
Company's board of directors granted an option to the newly-appointed Chief
Executive Officer of the Company to purchase up to 2,002,657 shares of
authorized but unissued common stock at a 1:1 ratio. The option has a term of no
more than ten (10) years plus one day from the date of the grant, unless
otherwise authorized by the Company's board of directors. The option granted to
the newly appointed Chief Executive Officer was part of a total grant of options
issued pursuant to the 1999 and 2000 Plans and the 2002 CEO Incentive Plan, to
purchase a total of 4,050,000 shares of our common stock. Of these options,
one-third (or 1,350,000) vest over a three-year period and two-thirds (or
2,700,000) vest upon the earlier of the achievement of certain performance-based
milestones or December 23, 2012. In addition, in the event of a merger,
acquisition or other change of control or in the event that the Company
terminates the Chief Executive Officer's employment, either without cause or as
a result of his death or disability, or he terminates his employment for good
reason, the exercisability of any of the options described in this paragraph
that are unexercisable at the time of such event or termination shall accelerate
and the time period during which he shall be allowed to exercise such options
shall be extended to the shorter of two years from the date of the termination
of his employment or December 24, 2012. Additionally, the Company's board of
directors shall have the discretion to accelerate all or a portion of these
options at any time.

The following table summarizes stock options authorized by the Company as of
December 31, 2002.



Stock Exercise Price Available
Options Per Share Authorized Outstanding Exercised Exercisable For Grant
- --------- -------------- ---------- ----------- --------- ----------- ----------

1999 plan $0.10-$ 1.30 4,230,000 4,058,500 171,500 3,666,157 --
2000 plan $1.07-$19.00 4,455,000 3,088,870 -- 605,455 1,366,130
2002 CEO
Incentive $1.30 2,002,657 2,002,657 -- -- --
Non-plan $0.33 240,000 195,000 22,500 195,000 22,500
---------- ----------- --------- ----------- ----------
Totals 10,927,657 9,345,027 194,000 4,466,612 1,388,630
========== =========== ========= =========== ==========



F-19



NOTE 7 - STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)

A summary of the status of the Company's stock options as of December 31, 2002,
2001, 2000, and changes during the years then ended is presented in the tables
below.

Outstanding Stock Options
-------------------------
Weighted-
Average
Shares Number of Exercise
Available Shares Price
----------- ------------ -----------
Balance, December 31, 1999 127,968 4,102,032 $ 0.10
Authorized 4,695,000
Granted (526,700) 526,700 $ 5.53
Exercised -- -- $ --
Canceled 90,000 (90,000) $ 0.23
---------- -----------
Balance, December 31, 2000 4,386,268 4,538,732 $ 0.73
Granted (996,696) 996,696 $ 6.26
Exercised -- (176,000) $ 0.13
Canceled 173,332 (173,332) $ 2.14
---------- -----------
Balance, December 31, 2001 3,562,904 5,186,096 $ 1.76
Authorized 2,002,657
Granted (4,398,884) 4,398,884 $ 1.40
Exercised -- (18,000) $ 0.10
Canceled 221,953 (221,953) $ 5.15
---------- -----------
Balance, December 31, 2002 1,388,630 9,345,027 $ 1.51
========== ===========

Exercisable at December 31, 2000 3,640,157 $ 0.13
===========
Exercisable at December 31, 2001 4,090,983 $ 0.53
===========
Exercisable at December 31, 2002 4,466,612 $ 1.12
===========



For the year ended December 31
----------------------------------------
2002 2001 2000
---------- ---------- ----------

Weighted-average fair value of options granted
during the period at an exercise price equal
to market price at issue date $ 1.02 $ 3.09 $ 6.52

Weighted-average exercise price of options granted
during the period at an exercise price equal
to market price at issue date $ 1.38 $ 6.26 $ 5.53

Weighted-average fair value of options granted
during the period at an exercise price greater
than market price at issue date $ 1.48 $ NA $ NA

Weighted-average exercise price of options granted
during the period at an exercise price greater
than market price at issue date $ 1.97 $ NA $ NA



F-20



NOTE 7 - STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)

The following table summarizes information about stock options outstanding at
December 31, 2002:


Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ----------------- ----------- ------------ --------- ----------- ----------
$ 0.10 3,698,032 15.6 $ 0.10 3,653,032 $ 0.10
$ 0.11 - $ 0.50 210,000 7.1 $ 0.34 208,125 $ 0.34
$ 0.51 - $ 3.00 4,298,984 9.9 $ 1.32 35,000 $ 1.70
$ 3.01 - $ 5.75 645,936 8.8 $ 5.19 250,754 $ 5.17
$ 5.76 - $10.00 319,975 8.2 $ 8.14 188,298 $ 8.91
$10.01 - $19.00 172,100 7.9 $ 11.91 131,403 $ 11.78
---------- ----------
9,345,027 4,466,612
========== ==========

At December 31, 2002, 134,000 options issued to directors and employees and
60,000 options issued to consultants have been exercised. The terms of the
outstanding options at December 31, 2002 are as follows:

TO DIRECTORS AND EMPLOYEES

Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ----------------- ----------- ------------ --------- ----------- ----------
$ 0.10 3,487,120 16.4 $ 0.10 3,487,120 $ 0.10
$ 0.11 - $ 0.50 210,000 7.1 $ 0.34 208,125 $ 0.34
$ 0.51 - $ 3.00 4,198,984 10.0 $ 1.31 35,000 $ 1.70
$ 3.01 - $ 5.75 645,936 8.8 $ 5.19 250,754 $ 5.17
$ 5.76 - $10.00 280,975 8.2 $ 8.22 170,048 $ 9.01
$10.01 - $19.00 162,100 7.9 $ 11.86 121,403 $ 11.71
---------- ----------
8,985,115 4,272,450
========== ==========

As of December 31, 2002, 2,715,000 options issued to directors and employees are
milestone-based.

TO CONSULTANTS

Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ----------------- ----------- ------------ --------- ----------- ----------
$ 0.10 210,912 14.4 $ 0.10 165,912 $ 0.10
$ 0.11 - $ 0.50 -- -- $ -- -- $ --
$ 0.51 - $ 3.00 100,000 4.9 $ 1.97 -- $ 1.97
$ 3.01 - $ 5.75 -- -- $ -- -- $ --
$ 5.76 - $10.00 39,000 8.7 $ 7.95 18,250 $ 7.58
$10.01 - $19.00 10,000 7.6 $ 12.64 10,000 $ 12.64
---------- ----------
359,912 194,162
========== ==========


F-21



NOTE 7 - STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)

As of December 31, 2002, 145,000 options issued to consultants are
milestone-based.

The Company applies APB Opinion No. 25 in accounting for its options granted to
directors and employees. For the years ended December 31, 2002, 2001 and 2000,
the Company has recorded non-cash compensation expense of $105, $335 and $3,556,
respectively, and non-cash compensation expense of $1, $13 and $348,
respectively, in regard to these options has been deferred. No stock-based
employee compensation cost is reflected in net loss for the year, as all options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.

Had the compensation expenses for stock options granted to employees and
directors under the Company's stock option plans been determined based on fair
value at the grant dates consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have reduced to the pro forma
amount below:



Amounts
Accumulated
For the year ended December 31 During the
---------------------------------------- Development
2002 2001 2000 Stage
---------- ---------- ---------- -----------

Net loss, as reported $ (11,783) $ (9,806) $ (11,489) $ (45,502)
Add: Stock-based compensation expense
to employees and directors
determined included in reported net
loss, net of related tax effects 104 335 3,556 8,960
Deduct: Total stock-based compensation expense
to employees and directors
determined under fair value based
method for all awards, net of
related tax effects (1,282) (1,181) (3,569) (11,043)
---------- --------- --------- ----------
Pro forma net loss $ (12,961) $ (10,652) $ (11,502) $ (47,585)

Losses per common share, Basic and diluted:
As reported $ (0.59) $ (0.50) $ (0.89) $ (3.55)
Pro forma $ (0.65) $ (0.54) $ (0.89) $ (3.72)


The value of these options has been estimated using the Black-Scholes model. The
assumptions used in the calculation of the fair value for compensation expense
during the year ended December 31, 2002 were a weighted average expected life of
1-4 years, an expected volatility rate of 78.65-83.09% and a risk-free interest
rate of 1.5%-3.5%. The assumptions used in the calculation of the fair value for
compensation expense during the year ended December 31, 2001 were a weighted
average expected life of 1-3 years, an expected volatility rate of 70%-98% and a
risk-free interest rate of 2%-7%. The assumptions used in the calculation of the
fair value for compensation expense during the year ended December 31, 2000 were
a weighted average expected life of 3 years, an expected volatility rate of
70-75% and a risk-free interest rate of 5-6%.

The Company applies EITF 96-18 "Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services," in accounting for its options granted to consultants. For
the years ended December 31, 2002, 2001 and 2000, the Company recorded non-cash
compensation expense of negative $132, negative $316 and $592, respectively, and
non-cash compensation expense of $20, $153 and $1,350, respectively, in regard
to these options which have been deferred. Unvested options are revalued at
every reporting period over the vesting period in order to determine the
compensation expense. The value of these options has been estimated using the
Black-Scholes model under the assumptions stated above.


F-22



NOTE 7 - STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)

WARRANTS

A summary of the status of the Company's warrants issued as of December 31,
2002, 2001, 2000, and changes during the years then ended is presented in the
tables below.

Weighted Average
Warrants Exercise Price
----------- -----------------
Balance, December 31, 1999 678,832 $ 0.0067
Issued 116,090 $ 1.94
Exercised (109,504) $ 0.0067
Canceled -- $ --
----------
Balance, December 31, 2000 685,418 $ 0.33
Issued -- $ --
Exercised (137,918) $ 0.0067
Canceled (2,699) $ 0.0067
----------
Balance, December 31, 2001 544,801 $ 0.42
Issued 500,000 $ 6.19
Exercised -- $ --
Canceled -- $ --
---------- ----------
Balance, December 31, 2002 1,044,801 $ 3.18
========== ==========



For the year ended December 31
----------------------------------------
2002 2001 2000
---------- ---------- ----------

Weighted-average fair value of warrants granted
during the period at an exercise price equal
to market price at issue date $ 2.33 $ -- $ 0.98

Weighted-average exercise price of warrants granted
during the period at an exercise price equal
to market price at issue date $ 6.19 $ -- $ 1.94


At December 31, 2002, 247,422 warrants have been exercised and 2,699 warrants
have been were cancelled as part of cashless exercises. The terms of outstanding
warrants December 31, 2002 are as follows:

Warrants Outstanding Warrants Exercisable
-------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ----------------- ----------- ------------ --------- ----------- ----------
$ 0.0067-$ 0.10 447,564 6.9 $ 0.0067 72,564 $ 0.0067
$ 0.11 - $ 0.50 -- -- $ -- -- $ --
$ 0.51 - $ 3.00 97,237 0.1 $ 1.94 97,237 $ 1.94
$ 3.01 - $ 5.75 -- -- $ -- -- $ --
$ 5.76 - $10.00 500,000 9.0 $ 6.19 -- $ 6.19
$10.01 - $19.00 -- -- $ -- -- $ --
---------- ----------
1,044,801 169,801
========== ==========

As of December 31, 2002, 875,000 warrants issued to licensors are
milestone-based.


F-23



NOTE 7 - STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)

In January 2000, the board of directors granted warrants to a related party to
purchase 116,090 shares of common stock as a finder's fee in connection with the
private placement. The costs of $114 were recorded against proceeds from the
private placement.

In January 2002, the board of directors granted warrants exercisable for 500,000
shares of the Company's common stock, to Yissum Research and Development Company
of the Hebrew University of Jerusalem in partial consideration for the grant by
Yissum of an exclusive license to technology relevant to the Company's core
business. The warrants vest, in up to four tranches, only upon the achievement
of specified research and development milestones.

The Company applies EITF 96-18 in accounting for its warrants granted to
investors and others (non-employees and non-directors). For the years ended
December 31, 2002, 2001 and 2000, the Company recorded non-cash compensation
expense of ($1,358), $103 and 1,704, respectively, and non-cash compensation
expense of $157, $944 and $2,107, respectively, in regard to these options have
been deferred. Unvested warrants are revalued at every reporting period over the
vesting period in order to determine the compensation expense.

The value of these warrants has been estimated using the Black-Scholes model.
The assumptions used in the calculation of the fair value for compensation
expense during the year ended December 31, 2002 were a weighted average expected
life of 0-3 years, an expected volatility rate of 78.65-83.09% and a risk-free
interest rate of 1.5%-3.5%. The assumptions used in the calculation of the fair
value for compensation expense during the year ended December 31, 2001 were a
weighted average expected life of 0-3 years, an expected volatility rate of
78.85% and a risk-free interest rate of 2%. The assumptions used in the
calculation of the fair value for compensation expense during the year ended
December 31, 2000 were a weighted average expected life of 3-5 years, an
expected volatility rate of 70-75% and a risk-free interest rate of 5-6%.

NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments at December 31, 2002 and 2001 consisted of
cash and cash equivalents, investment securities, accrued interest receivable,
other receivables and prepaid expenses, deposits in respect of employee
severance obligations, accounts payable and accrued expenses, accrued
compensation and related liabilities and liability in respect of employee
severance obligations. The carrying amounts of all financial instruments other
than investment securities approximates their fair value for all years
presented. The difference between the carrying value and fair value of
investment securities held-to-maturity is set forth in Note 3 above.

The following methods and assumptions were used to estimate fair value of each
class of financial instruments:

Cash and cash equivalents, accrued interest receivable, other receivables and
prepaid expenses, deposits in respect of employee severance obligations,
accounts payable and accrued expenses, and accrued compensation and related
liabilities: the carrying amounts approximate fair value because of the
relatively short maturity of these instruments.

Investment securities: the fair values of debt securities (held-to-maturity) are
based on quoted market prices for these investments at the reporting date.

Liability in respect of employee severance obligations: the carrying amount
reflects the approximate fair value inclusive of future salary adjustments.


F-24



NOTE 9 - TAXES ON INCOME (IN THOUSANDS, UNLESS OTHERWISE NOTED)

At December 31, 2002, for U.S. income tax purposes, the Company had
approximately $10.5 million of net operating loss carryforwards from November
1999 through December 31, 2002. Such net operating loss carryforwards begin
expiring in 2019. Deferred tax assets of Partec were lost upon assumption of
operations by Keryx (see Note 1).

Because of the Company's lack of earnings history, the US deferred tax assets
have been fully offset by a valuation allowance. Deferred tax assets in the
financial statements relate to the Israeli subsidiaries, which have taxable
income that is eliminated upon consolidation. The valuation allowance for
deferred tax assets was $18.3 million as of December 31, 2002.

The Israeli subsidiaries are subject to the Income Tax Regulations (Guidelines
for Management of the Books and Records of Companies with Foreign Investment and
of Certain Partnerships and Determination of Taxable Income), 1986, which state
that the Israeli subsidiaries income may be calculated on the basis of their
results in dollars.

In September 2001, one of the Company's Israeli subsidiaries received the status
of an "Approved Enterprise" which grants certain tax benefits in Israel in
accordance with Paragraph 51 of the "Law for the Encouragement of Capital
Investments, 1959". In June 2002, the subsidiary received formal temporary
notification that it had met the requirements for implementation of the benefits
under this program.

Because of this "Approved Enterprise" status, income arising from the
subsidiary's approved activities is subject to zero tax under the "Alternative
Benefit Method" for a period of ten years. In the event of distribution by the
subsidiary of a cash dividend out of retained earnings which were tax exempt due
to the Approved Enterprise status, the subsidiary would have to pay a 10%
corporate tax on the amount distributed, and the recipient would have to pay a
15% tax (to be withheld at source) on the amounts of such distribution received.
Should the subsidiary derive income from sources other than the Approved
Enterprise during the relevant period of benefits, such income will be taxable
at the tax rate in effect at that time (currently 36%).

Under its Approved Enterprise status, the subsidiary must maintain certain
conditions and submit periodic reports. Failure to comply with the conditions of
the Approved Enterprise status could cause the subsidiary to lose previously
accumulated tax benefits. Through December 31, 2002, our subsidiary will have
received tax benefits of approximately $731. As a result of recent cost
reductions, as described in Note 11, the staff and activity of this subsidiary
have been materially reduced. In January 2003, the subsidiary notified the
Israeli governmental authority of such reductions and requested that the program
instituted prior to the cost reductions be approved. In February 2003, the
Israeli governmental authority informed the subsidiary that it may be in
non-compliance with the conditions of its Approved Enterprise program because of
the indicated reductions. Nevertheless, the Israeli governmental authority wrote
that any decision in connection with the subsidiary's Approved Enterprise
program has been frozen until December 31, 2003, pending receipt of the
subsidiary's future plans. The Company is of the opinion that the reduction of
its activity should not have a bearing on benefits received as of December 31,
2002. (See Note 12 regarding subsequent events.)

The tax expense reported in the consolidated financial statements relates to the
subsidiaries in Israel. Income tax expense attributable to income from
continuing operations was $51, $197 and $220 for the years ended December 31,
2002, 2001 and 2000, respectively, and differed from amounts computed by
applying the US federal income tax rate of 35% to pretax income from continuing
operations as a result of the following:


F-25



NOTE 9 - TAXES ON INCOME (IN THOUSANDS, UNLESS OTHERWISE NOTED) (CONTINUED)



For the year ended December 31,
----------------------------------
2002 2001 2000
-------- -------- --------

Losses before taxes on income,
as reported in the consolidated statements
of operations $(11,732) $ (9,609) $(11,269)
-------- -------- --------

Computed "expected" tax benefit $ (4,106) $ (3,363) $ (3,944)

Increase (decrease) in income taxes resulting from:

Expected benefit from state & local taxes (1,115) (913) (1,673)

Change in the balance of the valuation
allowance for deferred tax assets
allocated to income tax expense 5,960 4,429 5,711

Permanent differences (107) (70) --

Effect of foreign operations (581) 114 126

-------- -------- --------
$ 51 $ 197 $ 220
======== ======== ========


The significant components of deferred income tax expense (benefit) attributable
to income from continuing operations are as follows:



For the year ended December 31,
----------------------------------
2002 2001 2000
-------- -------- --------

Deferred tax expense (benefit) $ (5,947) $ (4,544) $ (5,711)

Increase in the valuation
allowance for deferred tax assets 5,960 4,429 5,711
-------- -------- --------
$ 13 $ (115) $ --
======== ======== ========



F-26



NOTE 9 - TAXES ON INCOME (IN THOUSANDS, UNLESS OTHERWISE NOTED) (CONTINUED)

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2002 and
2001 are presented below.

December 31, December 31,
2002 2001
------------ ------------
Deferred tax assets:

Net operating loss $ 4,655 $ 2,589

Timing differences (primarily
relating to compensation and
expenses capitalized for tax) 13,651 9,757

Foreign timing differences
(primarily relating to compensation) 102 115
----------- -----------
Total gross deferred assets 18,408 12,461

Less valuation allowance (18,306) (12,346)
----------- -----------
Net deferred tax assets $ 102 $ 115
=========== ===========

NOTE 10 - COMMITMENTS AND CONTINGENCIES (IN THOUSANDS, UNLESS OTHERWISE NOTED)

LICENSE AGREEMENTS

The Company entered into a license agreement with Alfa Wassermann SpA, which
grants it the exclusive rights to KRX-101 for the treatment of various
conditions, including, but not limited to, diabetic nephropathy, diabetic
retinopathy and diabetic neuropathy in the United States, Canada, Japan,
Australia, New Zealand, South Africa and Israel, and entitles Alfa Wassermann to
ongoing royalties and fixed milestone payments. The license also requires Alfa
Wassermann to pay the Company a royalty to the extent that Alfa Wasserman or its
sub-licensees receive revenues from products that incorporate information or
know-how developed by the Company and commits Alfa Wassermann to participate in
the costs incurred by the Company in the development of data or intellectual
property that Alfa Wasserman decides to utilize. Unless terminated for reason of
breach or other customary termination provisions, the license terminates upon
the later of the expiration of all underlying patent rights or ten years from
the first commercial sale of KRX-101 by the Company. In addition, the Company
has authorization from Alfa Wassermann to negotiate European and other
territorial rights for KRX-101 on its behalf.

Pursuant to a license with Opocrin, SpA, a private drug manufacturer, the
Company has a non-exclusive worldwide license to the manufacturing process of
KRX-101 (Sulodexide) for a period of twelve years from the date of the first
commercial sale of the product. Notwithstanding this right, Opocrin shall have
the right to terminate the agreement on 60 days' notice in the event that the
Company has not submitted an NDA to the FDA by December 31, 2007.

Pursuant to a license with Children's Medical Center Corporation, (CMCC), the
Company has the exclusive right to commercialize the KinAce platform and
practice the claims contained in one granted patent and ten patent applications
owned by them. Unless terminated for breach or other customary termination
provisions, the license terminates upon the later of November 2014 or the
expiration of the last patent covered by the license.


F-27



NOTE 10 - COMMITMENTS AND CONTINGENCIES (IN THOUSANDS, UNLESS OTHERWISE NOTED)
(CONTINUED)

The license obligates the Company to meet certain financing and development
milestones. To date, the Company has met all of its milestones under this
agreement. Should CMCC reasonably believe that the Company failed to meet any of
the development milestones that remain to be fulfilled because it did not devote
diligent efforts and adequate resources, the license could be terminated, which
could materially affect the Company's operations. During 2003, an amendment to
the license agreement was signed, whereby the date for meeting one of the
development milestones was extended to December 31, 2003.

The Company entered into a license agreement with Yissum Research and
Development Company of the Hebrew University of Jerusalem ("Yissum"). The
agreement provides the Company with an exclusive worldwide license to a novel
technology known as Small Integrated Building-blocks ("SIB"), for the conversion
of peptides and other existing drugs into small molecules that have the
potential for oral delivery. The Company has the right to terminate the
agreement on 60 days' notice. The license obligates it to use its reasonable
best efforts to commercialize and market the technology, and contains certain
development and financing milestones. Unless terminated for breach or other
customary termination provisions, the license terminates upon the later of (i)
the expiration of all valid claims of any licensed patent rights and research
patent rights, or (ii) thirteen (13) years after the first commercial sale of a
product.

The Company has undertaken to make milestone payments to its licensors,
contingent upon attaining certain goals, of up to approximately $5 million. In
certain cases, such payments will reduce any royalties to be paid on sales of
related products. In the event that the milestones are not achieved, the Company
remains obligated to pay one licensor $50 annually thereafter until the licenses
expire. As of December 31, 2002, the Company has recorded a total of $1,209 in
license and milestone payments in regard to these license agreements.

RESEARCH & DEVELOPMENT AND OTHER AGREEMENTS

The Company has entered into various research & development and other agreements
under which it is obligated to make payments of approximately $1,734 through
December 2005.

As further discussed in Note 12, in January 2003, approximately $948 of these
agreements have been subsequently terminated.

LEASES

The Company leases its laboratory and office space under two separate operating
lease agreements that expire through 2005. Certain of the facility leases
provide the Company with the option to renew its lease for an extended period.
Total rental expense is approximately $511, $567 and $76 for the years ended
December 31, 2002, 2001, and 2000, respectively.

Future minimum lease commitments as of December 31, 2002 are approximately as
follows:

2003 $407
2004 $380
2005 $380

At December 31, 2002 the Company has provided bank guarantees of approximately
$212 in connection with its leases.


F-28



NOTE 11 - RESTRUCTURING (IN THOUSANDS, UNLESS OTHERWISE NOTED)

The Company implemented a strategic reorganization, initiated in August 2002 and
continuing through year's end. The reorganization included staff reductions and
pay cuts of 5-10%. The program was designed to substantially reduce its early
stage research expenditures so it could focus primarily on the development of
its lead product candidate KRX-101 for the treatment of diabetic nephropathy and
on the acquisition of additional clinical stage compounds. The reorganization
included a 46 person, or approximate 70%, reduction in the Company's work force,
including senior management, administrative staff, and research personnel
involved in early stage projects. As of December 31, 2002, 25 employees had left
under the Company's restructuring plan. As part of its focus on the core
indication of its lead product, the Company also announced that it had
terminated the AIDS-related kidney disease (HIVAN) clinical trial of KRX-101.

Through December 31, 2002, the Company had total accumulated expenses of
approximately $1,114 for severance benefits for employees terminated under the
Company's reorganization. Consequently, the Company took a charge of
approximately $228, approximately $149 of which was included in general &
administrative expenses and approximately $79 of which was included in research
& development expenses. The remaining amount of approximately $886 had been
expensed as part of the Company's ongoing accrual for employee severance
benefits in accordance with Israeli law.

As of December 31, 2002, 25 employees have left under the Company's
restructuring plan and approximately $158 of severance benefits have been paid.

As of December 31, 2002, approximately $956 in severance obligations related to
the restructuring is included in accrued compensation and related liabilities. A
portion of this amount was formerly included in liability in respect of employee
severance obligations and was reclassified to current liabilities after it
became short-term in nature. With respect to this liability, the Company had
funded deposits in respect to employee severance obligations of approximately
$299 that was reclassified to current assets, as it will be redeemed in the
short-term.

NOTE 12 - SUBSEQUENT EVENTS (IN THOUSANDS, UNLESS OTHERWISE NOTED)

Sponsored Research Agreements: In January 2003, the Company terminated several
sponsored research agreements with Yissum, including the agreement pursuant to
which it had sponsored research at the Hebrew University in connection with the
development of the SIB technology. As a result of such terminations, the Company
has reduced approximately $948 of future research and development commitments.

Rent Sharing Agreement: In February 2003, the Company executed a one-year Rent
Sharing Agreement with ACCESS Oncology, Inc. ("Access") pursuant to which the
Company gained access to space and services at its New York headquarters. The
Company expects to incur approximately $185 in expenses pursuant to this
agreement, although the amount is subject to renegotiation during its term.
Moreover, as this agreement is considered a related party transaction, it has
been reviewed by the Company's board of directors and approved by a majority of
the Company's disinterested directors.

Further Restructuring: In March 2003, the Company gave notice of termination to
an additional 5 employees, all based in its Jerusalem laboratory facility. As a
result of these actions, the Company believes it will need to record an asset
impairment charge during the first quarter of 2003, although the amount of this
impairment charge and other costs associated with the cessation of its Jerusalem
laboratory activities cannot be determined at this time. The carrying value of
the assets that could be impaired, thus resulting in a non-cash write down,
including fixed assets and patents, totals approximately $3,755. The Company may
also incur other costs related to the restructuring of its research activities.
The portion of the Company's lease obligations relating to the Jerusalem
laboratory facility amounts to approximately $792 through the end of 2005. Costs
of severance benefits for the employees who received notice of termination in
March 2003 are accrued to balance sheet date as part of the liability in respect
of employee severance benefits in accordance with Israeli law (see Note 6
above). (See Note 9 with regard to potential liability in respect of tax
benefits received by a subsidiary of the Company as an Approved Enterprise.)


F-29