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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

OR

For the transition period from                      to                     

Commission file number: 0-19122

APHTON CORPORATION

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code:

(305) 374-7338

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common stock $.01 par value

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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $122.7 million as of June 30, 2003.

The number of shares outstanding of the Registrant’s common stock (as of March 9, 2004): 37,564,463 shares

Documents Incorporated By Reference

Portions of the Registrant’s definitive proxy statement for its 2004 annual meeting of shareholders, which proxy statement will be filed no later than 120 days after the close of the Registrant’s fiscal year ended December 31, 2003, are hereby incorporated by reference in Part III of this Annual Report on Form 10-K.

PART I

We are a biopharmaceutical company focused on the development and commercialization of pharmaceutical products for the treatment of cancer and gastrointestinal disease. Our research and development efforts are based on our proprietary active immunization and monoclonal antibody technologies. Our technologies are based on key discoveries made by us as well as our deep understanding of the central role of gastrin, a naturally occurring hormone, and gastrin receptors. It is well documented in scientific literature that gastrin and gastrin receptors are critical to the onset, development, growth and spread of adenocarcinomas of the gastrointestinal system, including those found in the esophagus, stomach, pancreas, liver and throughout the colon and rectum.

Our lead product candidate is an immunotherapeutic called G17DT. We have completed one Phase III clinical trial and we are in a second Phase III clinical trial for the treatment of pancreatic cancer with G17DT. We also recently completed testing of G17DT in one Phase II clinical trial for the treatment of gastric cancer and one Phase II clinical trial for the treatment of colorectal cancer. On October 30, 2003, we announced positive results from our Phase III randomized, double-blinded, placebo-controlled clinical trial of G17DT as monotherapy in patients with pancreatic cancer. Treatment with G17DT resulted in a median survival of 151 days, compared with 83 days for patients treated with placebo. We have generated additional positive data in multiple human clinical trials using G17DT. In our studies to date, virtually no systemic toxicity has been observed. By comparison, currently approved drugs for the treatment of gastric, pancreatic and colorectal cancers have significant side effects. We believe that our human data and the safety profile of G17DT support the broad applicability and corresponding commercial potential for this therapy in gastrointestinal cancer.

Our Business Strategy

The principal elements of our strategy are to:

Develop and successfully commercialize G17DT

We are seeking to develop and globally commercialize G17DT for pancreatic cancer, gastric cancer, colorectal cancer and other indications. We believe that clinical trial data suggest G17DT may be an effective and safe treatment. Accordingly, we anticipate continuing to make focused investments in G17DT.

License G17DT in non-Aventis territories and indications

We intend to license, in return for royalties, up-front fees and milestone payments: 1) G17DT to treat human cancers in markets worldwide outside of North America and Europe, especially in Japan, with a focus there on gastric cancer therapy and 2) G17DT for non-cancer therapy, to treat GERD, worldwide.

Build a diverse portfolio of gastrointestinal and oncology candidates

In addition to our internal drug discovery efforts, we intend to expand our product candidate pipeline by identifying, evaluating and acquiring rights to potential products and technologies developed by third parties that we believe fit within our overall pipeline strategy. We intend to in-license or acquire complementary products or technologies that target gastrointestinal and oncological indications. We also

intend to continue to explore strategic partnerships and acquisitions that will facilitate our development or commercialization efforts.

Advance our strong portfolio of in-house product candidates

We have a strong pipeline of product candidates in various stages of preclinical development, including monoclonal antibodies. We plan to further develop these product candidates through a combination of internal efforts and collaborations. We plan on entering into corporate collaborations and securing additional academic partners to assist us. We believe this strategy increases the likelihood that we will successfully develop commercially viable pharmaceutical products.

Leverage our core competencies

We believe that we have significant expertise in active immunization technology and monoclonal antibody technology, which we have used to establish a strong platform in gastrin-related diseases. We intend to leverage our competencies toward the goal of registering and commercializing G17DT for the treatment of these diseases.

Gastrointestinal Cancer Market Overview

Pancreatic Cancer

The American Cancer Society (ACS) estimates there will be approximately 32,000 new cases of pancreatic cancer in the U.S. in 2004. In addition, it is estimated that approximately 83,000 new cases of pancreatic cancer will be diagnosed in the seven major markets, including the U.S., Japan, France, Germany, Italy, Spain and the United Kingdom, in 2004. The prognosis for most of these patients is very poor. At the time of diagnosis, the great majority of patients have the disease in its advanced stages, which is considered incurable, and the patients have a very short survival time. Surgery, when possible, and chemotherapy are the primary treatment options currently available, but have shown only very limited benefit. In fact, the ACS estimates that there is an almost equal number of deaths from pancreatic cancer as new cases, which makes this disease the fourth largest cause of cancer mortality in the U.S.

Gastric Cancer

According to the ACS, there will be approximately 37,000 new cases of esophageal and gastric cancer, with approximately 25,000 deaths in the U.S. projected from these cancers in 2004. Furthermore, according to Globocan 2000, there are an estimated 620,000 patients with gastric cancer in the United States, Europe and Japan alone. The prognosis for the overwhelming majority of these patients is very poor. Patients diagnosed with metastatic disease have five-year survival rates of only about three percent. Currently, surgery and chemotherapy are the primary treatment options, but these regimens have shown only very limited benefit.

Other Gastrointestinal Cancers

The ACS also estimates that there will be approximately 166,000 new cases of liver and colorectal cancer, with approximately 71,000 deaths in the U.S. projected from these cancers in 2004.

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Basis of Approach

Aphton’s primary approach for the treatment of major diseases such as cancer has been to employ (anti) “hormone therapy.” Aphton’s hormone therapy involves neutralizing, or blocking, targeted hormones which play a critical role in diseases of the gastrointestinal and reproduction systems. Aphton has selected the strategy of hormone therapy because hormone therapy has proved over decades to be efficacious in the treatment of major diseases, both malignant and non-malignant. Well-documented examples of the efficacy of hormone therapy in humans are blocking histamine (Zantac, Tagamet), to reduce stomach acid. These hormone therapies treat GERD, ulcerations of the esophagus and peptic ulcers. Additional examples of hormone therapy include blocking estrogen (Tamoxifen), for breast cancer therapy and blocking the production of testosterone (Lupron, Zoladex) for prostate cancer therapy.

Anti-Gastrin Therapy

Scientific Basis for Anti-Gastrin Therapy

Our primary approach for the treatment of gastrointestinal cancers is to eliminate or significantly reduce levels of gastrin. In the normal physiological state, the gastrin family of hormones regulates the secretion of acid in the stomach, which aids in digestion. However, it is well documented in scientific literature that gastrin 17 is a central growth factor, or initiating signal, for cell growth, cell proliferation and metastasis, or spread, in pancreatic, gastric, colorectal and other gastrointestinal cancers. The signaling cascade is triggered by gastrin binding to the large numbers of gastrin receptors which appear, de novo, in the great majority of cases, on tumor cell surfaces of gastrointestinal cancers.

We have shown that neutralizing gastrin 17 inhibits cell growth, proliferation and metastasis, leading to programmed cell death (apoptosis) and reduction of tumor growth. Consequently, by inhibiting gastrin, our product G17DT is designed to reduce tumor growth and extend survival rates of patients with gastrointestinal cancers. In addition, G17DT neutralizes glycine-extended gastrin 17, a mutant form of gastrin that is produced by tumor cells, which has been shown to further fuel the growth of gastrointestinal cancers.

Based on our studies, we believe that both gastrin 17 (G-17) and the precursor gly-G-17 are able to induce specific growth responses that lead to the branching and tubular networks characteristic of angiogenesis, in a human endothelial cell system (cells responsible for the development of new blood vasculature). These studies, for which Aphton collaborators were given The Blue Ribbon Award by the 2000 American Gastroenterological Association (AGA) Meeting, showed that the angiogenic stimulus in this cell system was equal in magnitude to that caused by VEGF, which has received much attention in the scientific and drug development literature. Furthermore, the studies showed that neutralization of G-17 and gly-G-17 by Aphton’s anti-G17DT caused a strong and significant reversal of (angiogenic) effects confirming their specificity of action. The studies also demonstrated in these angiogenic cells, at both the molecular and protein level, that CCK-2, or gastrin, receptor was expressed, and that gastrin/CCK-2R in these blood vessel forming cells was of the type that had 3 times increased affinity for gly-gastrin than for G-17 (amidated) gastrin, which is characteristic of the receptors found in metastatic tumors. It was concluded that these studies presented evidence for an angiogenic role for gastrin, in addition to its widely acknowledged role as a growth factor for GI-cancer cells and its spread.

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Subsequent studies, which have been conducted by Aphton scientists and collaborators, have investigated the mechanism of action by which an Aphton monoclonal antibody (Mab) targeted against the receptor to which G-17 binds, called the CCKB/Gastrin receptor, is taken up by a liver tumor cell, enters the cell nucleus and results in cell death. Five liver cancer (hepatoma) cell lines, both human and animal, were studied. The results showed that in all five cell lines, uptake of the (Aphton) labeled anti-CCK-BR antibody was correlated with apoptosis. The study concluded that a direct relationship between the uptake of the antibody and cell death by apoptosis existed. This observation has important implications in the treatment of CCK-BR positive tumors including hepatomas where there are limited therapeutic options. A third study presented findings on the varying structure of the receptors for gastrin 17 and gly-gastrin 17 during the progression of malignancy; and a fourth study investigated the effect of Aphton’s anti-gastrin immunogen (G17DT) on human pancreatic cancer cells, concluding that gastrin inhibition increases the potency of the cytotoxic agent Gemcitabine in pancreatic cancer.

In June 2001, scientists in collaboration with Aphton published a peer-reviewed article with the new findings that the genes for both the gastrointestinal hormone gastrin and its receptor are “switched on” at the earliest stages of pre-malignancy in stomach cells, helping to fuel their progression to cancer. The article entitled: “Expression of Gastrin in Developing gastric Adenocarcinoma” appeared in the issue of British Journal of Surgery, 2001 Volume 88.

Our Product - G17DT

G17DT consists of a synthetic gastrin-like peptide, which is linked to diphtheria toxoid (DT). DT contains the structures (epitopes) that generate an immune response in the patient. When patients are injected with G17DT it causes them to create antibodies that bind to both gastrin 17 and gly-gastrin and remove them from circulation before they can bind to the cancer cells and initiate the signals that cause cancer cell growth and metastasis.

G17DT is placed in a slow-release suspension, or delivery vehicle. This combination is designed to achieve four objectives: 1) a high antibody response; 2) a durable antibody response; 3) limited systemic toxicity; and 4) long-term stability, or shelf-life. In our clinical trials, G17DT is administered by injection, with booster shots at approximately three to six-month intervals.

G17DT Clinical Trials

We currently have, in various stages, clinical trials testing G17DT in the treatment of various gastrointestinal cancers and non-cancer diseases. Given G17DT’s safety profile and mechanism of action, we believe this therapy could be used as a monotherapy or in combination with chemotherapy to treat various gastrointestinal cancers. Our clinical trials are investigating G17DT in both settings.

Pancreatic Cancer Clinical Trials

We have completed one and initiated a second randomized, controlled clinical trial in patients with advanced pancreatic cancer. On October 30, 2003, we announced positive results from our Phase III randomized, double-blinded, placebo-controlled clinical trial of G17DT as monotherapy in patients with pancreatic cancer. The Phase III trial enrolled a total of 154 treatment-naive patients with advanced pancreatic cancer from 22 sites in Europe. Patients were randomly assigned to one of two arms - one arm received G17DT alone, the other arm received placebo. Results from this clinical trial indicate that G17DT prolongs the expected survival of patients with pancreatic cancer. Specifically, treatment with G17DT in patients who had documented pancreatic cancer resulted in a median survival of 151 days, compared with 83 days for patients treated with placebo (p=0.030, log rank). Importantly, patients who

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generated anti-G17 antibodies (G17 responders) lived significantly longer than patients who did not generate anti-G17 antibodies (G17 non-responders) or patients who received placebo. Analysis of the results showed that G17 responders had a median survival of 176 days compared to 63 days for G17 non-responders and to 83 days for the placebo group.

Additionally, results from this clinical trial indicate that treatment with G17DT is safe and well tolerated. We believe the results from this trial demonstrate that G17DT could potentially provide a safe and effective alternative for the significant number of patients worldwide that have pancreatic cancer and who either cannot tolerate or refuse to take chemotherapy.

We are currently conducting a second Phase III clinical trial for advanced pancreatic cancer patients. The trial is a randomized double-blinded, clinical trial in the U.S. and foreign countries. Patients are being randomly assigned to one of two arms – one arm is receiving G17DT in combination with the chemotherapeutic gemcitabine, the other arm is receiving gemcitabine plus placebo. Gemcitabine is the standard of care for patients with metastatic pancreatic cancer. The trial has enrolled approximately 400 patients with a primary endpoint of overall survival. Data from this trial is expected in the second half of 2004. If the results from this clinical trial are favorable we believe that we could use both pancreatic cancer studies in seeking approval of G17DT for the treatment of patients with pancreatic cancer.

Gastric Cancer Clinical Trial

We have conducted one Phase II single-arm clinical trial with G17DT in combination with the chemotherapeutics cisplatin and 5-FU, in patients with advanced gastric cancer. On February 5, 2004, we announced positive results from this clinical trial. The clinical trial enrolled a total of 103 chemotherapy-naive patients with advanced gastric cancer from 42 sites in the U.S. and Europe. Patients received G17DT in combination with cisplatin and 5-FU. The median survival for all patients treated with the drug combination was 9.1 months. Specifically, G17 responders had a median survival of 10.3 months compared with 3.3 months for the G17 non-responders. Additionally, data from this clinical trial indicates that G17DT is safe and well tolerated. We believe the results from this trial demonstrate that G17DT could provide a safe and effective addition to the standard of care, cisplatin and 5-FU, for patients with gastric cancer.

GERD

We are also developing our anti-Gastrin immunogen approach for the treatment of gastroesophageal reflux disease (GERD), also known as “severe heartburn.” GERD affects more than 20% of the adult population. Prescription drugs to treat this problem have annual revenues of over $13 billion. We believe that our therapy for GERD could obviate major risks associated with current therapies while still providing their benefits, as well as providing more symptomatic relief, in this symptom-driven disease. Current therapies are largely inadequate in terms of symptomatic relief in approximately 50% of the patients. In Europe, we initiated a Phase II trial with G17DT for gastroesophageal reflux disease (GERD), or “severe heart burn” patients. However, we are not currently recruiting patients, pending funding.

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Other Clinical Trials

We have concluded a Phase II clinical trial with G17DT in combination with the chemotherapeutic irinotecan in patients with irinotecan-refractory colorectal cancer. We are no longer recruiting patients for this trial but are collecting and analyzing the data, which we expect to release in the second half of 2004.

Strategic Alliances

Aventis Pasteur

In February 1997, we entered into a strategic alliance with Aventis Pasteur, a leader in medical science and research and the world’s largest vaccine manufacturer and marketer, for all human cancer applications of our anti-gastrin immunogen product including stomach, colorectal, liver and pancreatic cancer applications. Under the terms of the twenty-year Co-Promotion Agreement and License, we are responsible for product development, clinical trials and regulatory approvals. Aventis Pasteur was granted an exclusive license to promote, market, distribute and sell the anti-gastrin immunogen product in the United States, Canada, Europe (including the Commonwealth of Independent States countries) and Mexico, subject to our right to co-promote the product either independently or in collaboration with Aventis Pasteur.

As part of this alliance, but independent of our Co-Promotion Agreement and License, we entered into a stand-alone long-term supply agreement with Aventis Pasteur providing for the supply of supply of Diphtheria Toxoid and/or Tetanus Toxoid, a key material used in the development and manufacture of several of our therapeutic vaccines, including G17DT. If, and when, our anti-gastrin product is approved for sale, Aventis would be responsible for funding and conducting the promotion, advertising, marketing, distribution and sales of this product in North American and Europe. Under the terms of the agreement, we received upfront consideration aggregating $10 million, including $1 million cash and a supply commitment (of Diphtheria Toxoid and/or Tetanus Toxoid suitable for human use) of $9 million. In addition, Aventis will pay us based on a profit sharing schedule tied to the amount of net sales and net profits whereby we would receive a royalty at all times in excess of 50% of the net profit resulting from such sales. The $10 million upfront consideration has been classified as a license payment and has been deferred and will be recognized for financial statement (accounting) purposes as revenue within the twenty-year period of the agreement. The revenue recognition will begin once regulatory agency approval to market the product has been received and will be recognized ratably over the remaining period of the contract, which ends February 13, 2017.

Either party may terminate the agreement for, among other things, uncured material breach or certain events of bankruptcy or insolvency. Aventis Pasteur has the right to terminate the agreement, following completion of Phase III clinical trials in the event that it determines that for safety and efficacy reasons it does not wish to co-promote, market or sell the product. In the event that the agreement is terminated due to a material breach by Aventis Pasteur, all rights of Aventis Pasteur granted by the agreement will be terminated. However, Aventis Pasteur’s obligations with regard to the $10 million upfront consideration, both the cash and our rights to the full $9 million in unconditional supply commitment, survive termination of the agreement. There is no provision under the agreement for the unconditional supply commitment to be satisfied by Aventis Pasteur with a cash payment. In the event that the agreement is terminated due to a material breach by us, we will, among other things, grant Aventis Pasteur a co-exclusive license, under our patents and know-how in North America and Europe and the product trademarks, to make and sell the anti-gastrin immunogen product in exchange for royalty payments to the other party at a royalty rate based on a percentage of net sales.

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GlaxoSmithKline

In June 1998, we signed a collaboration and license agreement with GlaxoSmithKline, granting it exclusive rights worldwide to our GnRH-related patents and proprietary technology. The agreement covers the diagnosis, treatment and prevention of gonadotropin, gonadal steroid hormone and GnRH-related cancers and other diseases in humans. Human cancer indications contemplated under the agreement include prostate, breast, ovarian and endometrial cancer. Additional medical indications include endometriosis, polycystic ovaries, uterine fibroids, contraception, infertility and precocious puberty.

Under terms of the agreement, we are collaborating with GlaxoSmithKline in a joint product development program, with GlaxoSmithKline responsible for worldwide marketing and distribution of approved products. Under the agreement as amended, we are responsible for the initial cost of product development prior to the acceptance of a product by both parties. Our product development work is reviewed on an ongoing basis with GlaxoSmithKline and after the acceptance of a product by both parties for development, GlaxoSmithKline is responsible for the funding of the development costs of the accepted product, clinical trials and approvals for worldwide marketing and distribution up to an agreed amount. We believe that this product could be accepted in 2004, although there can be no assurance that we will achieve our goal.

As part of the agreement, GlaxoSmithKline made an equity investment in 1998 of $5,000,000 for 237,867 shares of newly issued Aphton common stock. Either party may terminate the agreement for, among other things, uncured material breach or certain events of bankruptcy or insolvency. Under the agreement as amended, if the product has not been formally accepted by both parties, either party may terminate the agreement in 2004. Once the product has been accepted for further development, GlaxoSmithKline may only terminate the agreement for safety, efficacy or economical reasons and Aphton may terminate for the reasons stated above. During the term of the agreement, GlaxoSmithKline will have full access to all matters encompassed within our patents and know-how relating to the product. Upon termination or expiration of the agreement, GlaxoSmithKline will cease to have the right to use or sell the product, and all registrations and intellectual property rights in the product will be fully transferred to us. Until the agreement is terminated or otherwise expires, any invention or discovery made jointly by GlaxoSmithKline and us during the development program will be jointly owned, and the product trademarks and any intellectual property developed by GlaxoSmithKline will be owned by them.

Clinical Research Organizations

We contract with several clinical research organizations, or CROs, for a variety of services based on our needs from time to time which may include nonclinical studies, chemistry, manufacturing and controls, IND preparation, clinical trial preparation, clinical trial conduct, data management, statistics, clinical study reports, technology/development plans, regulatory, project coordination, software development, intellectual property ventures and business development.

Supply and Manufacturing

We rely on third parties to supply us with the various components of G17DT Immunogen and to manufacture G17DT Immunogen for our preclinical and clinical trials. Currently, we contract with various suppliers for (i) the synthetic gastrin-like peptide, (ii) Diphtheria Toxoid and/or Tetanus Toxoid, and (iii) the components of our emulsion delivery vehicle. We then contract with a third party to

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manufacture the final G17DT product, a sterile, injectable dosage of G17DT. Under our agreement with Aventis Pasteur, once G17DT Immunogen is approved for marketing, Aventis Pasteur will commercialize the product. We believe we have good relationships with our suppliers and manufacturer and that our current arrangements with them are suitable for our operations. Additionally, we believe that if any of the suppliers were to cease supplying us with any of the components of G17DT Immunogen, we would be able to find an alternative source for such component and marketing site.

Intellectual Property

INTELLECTUAL PROPERTY

We devote significant resources to protecting and expanding our intellectual property portfolio. We seek to protect our core technologies through a combination of patents, trade secrets, and know-how. As of March 11, 2004 we held 15 issued patents in the U.S. and 19 issued patents in foreign countries, and have pending patent applications and patent applications in preparation. We protect our technology through numerous United States and foreign patent filings, trademarks and trade secrets that we own or license.

We intend to continue using our scientific expertise to pursue and patent new developments with respect to uses, compositions and factors to enhance our position in the field of gastrointestinal cancer. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patent that we own or license from third parties may not provide adequate protection against competitors. Our pending patent applications, those we may file in the future, or those we may license from third parties may not result in issued patents. Also, patents may not provide us with adequate proprietary protection or advantages against competitors with similar or competing technologies. As a result of potential conflicts with the proprietary rights of others, we may in the future have to prove we are not infringing the patent rights of others or be required to obtain a license to the patent. We do not know whether such a license would be available on commercially reasonable terms, or at all.

In addition to patents, we rely on trade secrets and know-how that we seek to protect, in part, by confidentiality agreements. Our policy is to require our officers, employees, consultants, contractors, manufacturers, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality agreements. These agreements provide that all confidential information developed or made known to the individual during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties except in specific limited circumstances. We also require signed confidentiality or material transfer agreements from companies that are to receive our confidential data. In the case of employees, consultants and contractors, confidentiality agreements with them generally provide that all inventions conceived by the individual while rendering services to us shall be assigned to us as our exclusive property. However, it is possible that these parties may breach those agreements, and we may not have adequate remedies for any breach. It is also possible that our trade secrets or unpatentable know-how will otherwise become known or be independently developed by competitors.

Competition

The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. Many entities, including pharmaceutical and biotechnology companies, academic institutions and other research organizations are actively engaged in the discovery, research and development of products that could compete directly with our products under development.

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The only FDA-approved treatment currently available for pancreatic cancer is Gemcitabine, which is manufactured by Eli Lily. Our anti-Gastrin 17 (G17DT) product is intended to be used as a non-toxic monotherapy, or as a therapy administered in combination with Gemcitabine. We believe that Pharmacia & Upjohn, AstraZeneca and other pharmaceutical and biotechnology companies are also developing pancreatic cancer therapy.

There is currently no FDA-approved drug available for gastric cancer or gastro-esophageal cancer in the United States. FDA-approved chemotherapies used to treat cancer in other indications, as well as experimental cancer drugs in clinical trials, are currently being tried on patients with advanced gastric cancer or gastro-esophageal cancer. Roche Laboratories and Bristol-Myers Squibb, among others, are our competitors in this market.

Proton Pump Inhibitors are approved for treatment for GERD. Unlike G17DT, none of the products currently available a) inhibits the effects of gastrin on the lower esophageal sphincter causing abnormal transient LES relaxations typically associated with GERD, which are believed to contribute heavily to the inadequate symptomatic relief of current drugs, or b) treats hyper-gastrinemia, which results from standard of care therapy using Proton Pump Inhibitors (PPIs).

These competitors may succeed in developing and marketing cancer vaccines that are more effective than or marketed before G17DT. Other products such as chemotherapeutics, monoclonal antibodies, small molecules angiogenesis inhibitors and gene therapies are also under development and could potentially compete with G17DT or other products we may develop.

Many companies, including major pharmaceutical companies, are also developing therapies that may compete with our other potential products in the fields of gastrointestinal cancer. Many of these companies have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing. Others have partnered with large established companies to obtain access to these resources. Smaller companies may also prove to be significant competitors, particularly through the establishment of collaborative arrangements with large, established companies.

Our competitive position depends on the safety and efficacy of products, the timing of regulatory approval and commercial introduction, and the effectiveness of marketing and sales efforts. Our success also depends on our ability to form strategic alliance relationships with other companies with greater marketing resources than ours, attract and retain qualified personnel, and secure sufficient capital resources for the often substantial period between technological conception and commercial sales.

Some of our competitors have far greater financial resources, larger research staffs and more extensive physical facilities. These competitors may develop products that are more effective than ours and may be more successful than us at producing and marketing their products. In addition, many specialized biotechnology firms have formed collaborations with large, established companies to support the research, development and commercialization of products that may be competitive with ours.

Employees

As of December 31, 2003, we had approximately 51 employees, none of whom is represented by a collective bargaining agreement. We consider our employee relations to be good.

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Regulatory and Environmental Matters

Governmental authorities in the United States and other countries extensively regulate the preclinical and clinical testing, manufacturing, labeling, storage, record keeping, advertising, promotion, export, marketing and distribution, among other things, of our investigational products. In the United States, the FDA under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations, subject pharmaceutical products to rigorous review.

In order to obtain approval of a new product from the FDA, we must, among other requirements, submit proof of safety and efficacy as well as detailed information on the manufacture and composition of the product. In most cases, this proof entails extensive preclinical, clinical, and laboratory tests. The FDA may also require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approvals that could restrict the commercial applications of these products.

The first stage of the FDA approval process for a new biologic or drug involves completion of preclinical studies and the submission of the results of these studies to the FDA. Preclinical studies involve laboratory evaluation of product characteristics and animal studies to assess the efficacy and safety of the product. The FDA regulates preclinical studies under a series of regulations called the current “Good Laboratory Practices” regulations. If the sponsor violates these regulations, in some cases, the FDA may invalidate the studies and require that the sponsor replicate those studies. The results of the preclinical studies together with proposed clinical protocols, manufacturing information, analytical data and other information in an investigational new drug application, or IND, must become effective before human clinical trials may commence.

After the IND becomes effective, a sponsor may commence human clinical trials. The sponsor must submit to the FDA a clinical plan, or “protocol,” accompanied by the approval of the institution participating in the trials, prior to commencement of each clinical trial. The sponsor typically conducts human clinical trials in three sequential phases, but the phases may overlap. In Phase 1, clinical trials are conducted with a small number of subjects to determine the early safety profile and the pattern of drug distribution and metabolism. In Phase 2, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase 3, large-scale, multi-center, comparative clinical trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of efficacy and safety required by the FDA and others. In the case of products for life-threatening diseases, such as G17DT, the initial human testing is generally done in patients rather than in healthy volunteers. Since these patients are already afflicted with the target disease, it is possible that such studies may provide results traditionally obtained in Phase 2 trials. These trials are frequently referred to as “Phase 1/2A” trials. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time.

The sponsor must submit to the FDA the results of the preclinical and clinical testing, together with, among other things, detailed information on the manufacture and composition of the product, in the form of a new drug application or, in the case of a biologic, like G17DT, a biologics license application. In a process which can take a year or more, the FDA reviews this application and, when and if it decides that adequate data is available to show that the new compound is both safe and effective and that other applicable requirements have been met, approves the drug or biologic for marketing. The amount of time taken for this approval process is a function of a number of variables, including the quality of the submission and studies presented, the potential contribution that the compound will make in improving the treatment of the disease in question, and the workload at the FDA.

Congress enacted the Food and Drug Administration Modernization Act of 1997 in part to ensure the availability of safe and effective drugs, biologics, and medical devices by expediting the FDA review

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process for new products. The Modernization Act establishes a statutory program for the approval of Fast Track products, including biologics. A Fast Track product is defined as a new drug or biologic intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. Under the Fast Track program, the sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a Fast Track product at any time during the clinical development of the product. This designation assures access to FDA personnel for consultation throughout the development process as well as a six-month review of marketing applications for the designated product. We have received Fast Track designation for G17DT in combination with cisplatin and 5-FU for use in stage IV gastric cancer. We cannot predict whether these designations will impact the timing or likelihood of FDA approval of G17DT.

The Modernization Act specifies that the FDA must determine if the product qualifies for Fast Track designation within 60 days of receipt of the sponsor’s request. The FDA can base approval of a marketing application for a Fast Track product on an effect on a clinical endpoint or on another endpoint that is reasonably likely to predict clinical benefit. The FDA may subject approval of an application for a Fast Track product to:

In addition, the FDA may withdraw its approval of a Fast Track product on a number of grounds, including the sponsor’s failure to conduct any required post-approval study with due diligence.

If a preliminary review of the clinical data suggests that a Fast Track product may be effective, the FDA may initiate review of sections of a marketing application for a Fast Track product before the sponsor completes the application. This rolling review is available if the applicant provides a schedule for submission of remaining information and pays applicable user fees. However, the time periods specified under the Prescription Drug User Fee Act concerning timing goals to which the FDA has committed in reviewing an application, do not begin until the sponsor submits the application.

The Orphan Drug Program provides a mechanism for the FDA to acknowledge that a product is designed to treat a disease affecting fewer than 200,000 Americans. If a product is ultimately approved for marketing, Orphan-Drug Status confers a 7-year period of exclusive marketing rights for the approved indication, thereby protecting it from similar drugs of the same class. In addition, an Orphan Drug designation bestows certain advantages including considerations in trial size and design based on the actual patient population, and tax credits for some research and development expenses.

In July 2002, we announced that we had received official notice from the FDA granting G17DT Orphan-Drug status for treatment of gastric cancer, and adenocarcinoma of the pancreas.

The FDA may, during its review of a new drug application or biologics license application, ask for additional test data. If the FDA does ultimately approve a product, it may require post-marketing testing, including potentially expensive Phase IV studies, and surveillance to monitor the safety and effectiveness of the drug. In addition, the FDA may in some circumstances impose restrictions on the use of the drug that may be difficult and expensive to administer, and may require prior approval of promotional materials.

Before approving a new drug application or biologics license application, the FDA will inspect the facilities at which the product is manufactured and will not approve the product unless the

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manufacturing facilities are in compliance with current Good Manufacturing Practices. In order to accomplish this inspection, a local field division of the FDA is responsible for completing this inspection and providing a recommendation for or against approval. We are in close communication with the field division of the FDA regarding our manufacturing facilities. This effort is intended to assure appropriate facility and process design to avoid potentially lengthy delays in product approvals due to inspection deficiencies.

Following approval, the manufacture, holding, and distribution of a product must be in compliance with current Good Manufacturing Practices. Manufacturers must expend time, money, and effort in the area of production and quality control and record keeping and reporting to ensure full compliance with those requirements. The labeling, advertising, promotion, marketing, and distribution of a drug or biologic product must be in compliance with FDA regulatory requirements. Failure to comply with applicable requirements can lead to the FDA demanding that production and shipment cease, and, in some cases, that the manufacturer recall products, or to enforcement actions that can include seizures, injunctions, and criminal prosecution. These failures can also lead to FDA withdrawal of approval to market a product.

For clinical investigation and marketing outside the United States, the Company is or may be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country.

In January 2003, the European Commission designated G17DT as an “orphan medicinal product” for the treatment of gastric cancer and pancreatic cancer.

On December 19, 2002, we announced that we had received official notice from the Therapeutic Goods Administration (TGA), the regulatory authority in Australia equivalent to the U.S. FDA, granting its anti-gastrin G17DT Immunogen Orphan-Drug status for treatment of both pancreatic cancer and gastric (stomach) cancer. Unlike in the United States, the Australian orphan-drug designation automatically confers priority evaluation for the drug ahead of other evaluations. On December 30, 2003 we announced that we had begun submission of regulatory documentation to the Australian Therapeutic Goods Administration (ATGA) for the registration of G17DT as monotherapy in patients with advanced pancreatic cancer who are either unable to tolerate or elect not to take chemotherapy.

Glossary of Selected Terms

Below is a glossary of selected terms that may be helpful in understanding our business.

Adenocarcinoma: cancer that originates in glandular epithelial cells that line certain internal organs.

Adjuvant Treatment: an ancillary treatment that is given to patients in addition to a primary treatment to enhance the effectiveness of the primary treatment. For example, in colon cancer, chemotherapy often is given as an adjuvant treatment following surgery to remove the primary cancer from the colon.

Antibody: a protein produced by certain white blood cells as part of an immune response. These proteins, called antibodies, bind in a specific manner to a separate molecule and neutralize or inhibit its biological activity.

Antigen: any substance that can induce antibodies (B-cells) or activate T-cells, which bind to it.

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Cancer Vaccine: technically a misnomer: a large weakly-antigenic molecule derived from the surface of cancer cells, which when combined with a foreign molecule (e.g., virus) induces a stronger immune response against it and, then, where located on the surface of the cancer cells.

Control Group: the patient group (or arm) of a clinical trial that receives the placebo or a standard treatment for a disease, against which the experimental drug is compared.

Gastrin: a hormone produced in the stomach that regulates stomach acid secretion and stimulates the proliferation of gastrointestinal cells and adenocarcinomas of the gastrointestinal tract. It occurs in the body in several forms, including gastrin 17 (a 17 amino acid peptide) and gastrin 34 (a 34 amino acid peptide).

Gonadotropin Releasing Hormone (GnRH): a hormone secreted in the hypothalmus that stimulates the release of other reproductive hormones (including ultimately, testosterone, estrogen and progesterone).

Hormone: a chemical substance produced by an organ or cells of an organ in one part of the body, and carried in the blood to another organ or part of the body; and which has a specific regulatory effect on the activity of the body including growth, metabolism and reproduction.

Immune System: the complex group of organs and cells which has the ability to fight infection and disease.

Immunogen: any molecule capable of inducing the immune system to produce an antibody response against it.

Metastasis: a process by which cancer cells spread from the primary tumor to distant sites such as the lung, liver, bone, or brain. A cancer that has spread is said to be metastatic, and the distant tumors are called metastases.

Peptide: a molecule composed of amino acids that are linked to each other in a sequence.

Placebo: an inert non-drug substance that is given to the control group for comparison to a new experimental drug, usually in a randomized clinical trial.

Randomized Clinical Trial: a clinical trial with at least two arms, in which the decision as to which arm a new patient is assigned is, by design, made by chance.

Standard Treatment: a currently accepted treatment for a given disease. The drug treatment often given to one group (or arm) of patients in a clinical trial. The standard treatment can serve as the control arm, in place of a placebo, for comparison to a new experimental drug treatment.

Treatment Group: the patient group, or arm, of a clinical trial that receives the new experimental drug treatment.

Vaccine: an immunogen consisting of an attenuated or killed microorganism, administered to induce the immune system to produce antibodies to fight an infectious disease.

Vaccine - Like: an immunogen consisting of a synthetic hapten (peptide) joined together with a foreign molecule, administered to induce the immune system to produce antibodies against the peptide.

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Risks Factors

Risks Related to Our Business

We have a history of operating losses. We expect to continue to incur substantial operating losses in the next several years and we may never be profitable.

We have experienced significant operating losses since our inception in 1981 and expect to continue incurring substantial operating losses for at least the next several years. We expect losses to increase over the next several years as we continue our clinical trials, apply for regulatory approvals, and continue our research and development efforts. We also expect to experience negative operating cash flows for the foreseeable future. Our losses have adversely impacted, and will continue to adversely impact, our working capital, total assets and stockholders’ equity. Our net loss for the year ended December 31, 2002 was $40.0 million and for the year ended December 31, 2003 was $26.3 million. As of December 31, 2003, we had an accumulated deficit of approximately $166.9 million. Our ability to achieve profitability depends upon our ability, alone or through relationships with third parties, to develop successfully our technology and products, to obtain required regulatory approvals and to manufacture, market and sell such products. We may never be profitable.

We do not currently have any products which are approved for sale and we do not yet generate revenue from the sale of our products.

To date, we have not generated any revenues from product sales. All of our potential products are in various stages of product development, and some are still in research or in early development. None of them are approved for sale. All of our potential products will require expensive, extensive and time consuming clinical testing, and some may require additional research and development, prior to commercial use. Accordingly, we cannot plan on deriving revenues from these products for a number of years, if at all. These potential products may not be developed successfully into immunogens that can be administered to humans or may not prove to be safe and effective in clinical trials or cost-effective to manufacture and administer. We may encounter problems in clinical trials that will cause us to delay or suspend a clinical trial. Also, our products that are currently under development may not be completed successfully or within an acceptable time period, if at all. Further, our products may not receive regulatory approval. Finally, if any of our products do receive required regulatory approval, we may not be capable of producing those products in commercial quantities or those products may not be accepted by the marketplace.

Our success is heavily dependent on the viability of G17DT.

We currently have only one product candidate, G17DT, which is currently in, or has completed, various Phase II and Phase III clinical trials. Our other product candidates are in pre-clinical or early clinical stages. Therefore, our ability to generate revenues in the foreseeable future is dependent on our G17DT clinical trials sufficiently demonstrating the efficacy of our product, and our ability to register G17DT in various jurisdictions. An adverse development regarding G17DT would likely have a dramatic and adverse impact on the value of our common stock.

In assessing the potential of G17DT to treat cancer, we have compared some of our clinical results to the published results of other drugs from earlier trials in which we did not participate. While we think this is a useful proxy, only clinical trials in which two different drugs are compared as part of a unified protocol can yield results on which reliable comparisons can be made by the FDA or others, and investors are cautioned against relying on other comparisons.

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Our ability to successfully register G17DT may be adversely affected by the percentage of cancer patients that are non-responsive to G17DT.

G17DT operates by causing patients to produce antibodies that bind to both gastrin 17 and gly-gastrin and remove them from circulation before they can bind to cancer cells and promote tumor development and proliferation. If a patient does not, after treatment, produce antibodies to G17DT, then G17DT will not have the intended effect on the tumor or the patient’s survival. The results of our clinical studies have shown that approximately 20% to 35% of these cancer patients do not respond to G17DT and as a result do not create antibodies. While we have tried, and will continue to try, to identify an explanation for the non-responsiveness to G17DT of these patients, we may be unable to identify an explanation or develop a solution. This phenomenon tends to make it more difficult to establish, with statistical significance, efficacy, which in turn will make it more difficult to obtain regulatory approvals. It may also impair this product candidate’s acceptance in the marketplace, should we ultimately obtain regulatory approval.

Without additional financing we may not have enough liquidity to fund our research and development program.

Developing our technology and products requires a commitment of substantial funds to conduct the costly and time-consuming research and clinical trials necessary for such development. On December 31, 2003, as adjusted for the receipt of the proceeds from the offering of our common stock in March 2004, we had approximately $67.2 million in cash and current investments. We expect this amount of cash and current investments will enable us to maintain a range of operations into 2006.

However, we do not anticipate having any of our products ready for commercialization prior to this time. Consequently, if we do not obtain additional financing we may be required to:

Our operating costs, particularly future research and development costs, may be significantly higher than we anticipate, and we may need additional capital to fund these costs. It is extremely difficult to estimate the amount of research and development costs that may be required before a product is ready to be commercialized. The amount of research and development costs that we will be required to incur will depend on many other factors, including:

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If we are unable to commence or complete, or experience delays in, any of our present or planned clinical trials, it would delay or prohibit our ability to commercialize our products and therefore our ability to generate product revenues.

Clinical trials are very costly and time-consuming. The length of time required to complete a clinical trial depends on several factors, including the criteria for determining which patients are eligible to join the clinical trial, the size of the patient population and the patients’ ability to get to the clinical trial site. Our commencement and rate of completion of clinical trials also may be delayed by many other factors, including the following:

If we are unable to commence or complete, or experience delays in, any of our present or planned clinical trials, it would delay or prohibit our ability to commercialize our products and therefore our ability to generate revenues. Our development costs will increase if we experience any delays in our clinical trials or if we need to perform more or larger clinical trials than planned.

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Our reliance on third parties such as manufacturers and clinical research organizations may result in delays in completing, or a failure to complete, clinical trials if they fail to perform under our agreements with them.

As an integral component of our product development, we engage manufacturers and clinical research organizations, or CROs, to manufacture and distribute the product candidates, to conduct and manage clinical studies and to assist us in guiding products through the U.S. Food and Drug Administration, or FDA, review and approval process. Because we presently engage and intend to continue to engage manufacturers and CROs to help us obtain market approval for our products, many key aspects of this process have been and will be out of our direct control. If the manufacturers and CROs fail to manufacture and distribute the product candidates and to perform clinical trials in a satisfactory manner, or fail to perform their obligations under our agreements with them, we may face delays in completing our clinical trials, as well as commercialization of our products. In addition, the loss of any of our current contracts or delay in obtaining new contracts with such entities may also delay the completion of our clinical trials and the market approval of our products.

Our ability to commercialize our products could be materially and adversely affected if we cannot obtain the needed quantities of our raw materials for our products.

Diphtheria Toxoid (DT) is a key material used in the development and manufacture of G17DT. We do not currently manufacture DT and large quantities of DT suitable for human use are not readily obtainable in the open market. We currently have a supply agreement with Aventis Pasteur, one of the few manufacturers of DT in the world, for this material. If the supply of DT from Aventis Pasteur is disrupted for any reason, including a breach under the supply agreement, we may be unable to obtain sufficient quantities of DT on a timely and cost-effective basis, if at all. This could result in increased

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costs, delayed development or ultimately unsuccessful clinical trials which could materially and adversely affect our ability to commercialize our products.

Our dependence on strategic alliances with Aventis Pasteur and GlaxoSmithKline and our failure to enter into future strategic alliances could adversely affect our business, financial condition and future prospects.

We currently depend on strategic alliances with Aventis Pasteur and GlaxoSmithKline. Aventis Pasteur is responsible for conducting and funding the promotion, advertisement, marketing, distribution and sales of our anti-gastrin product in North America and Europe. Our ability to develop, commercialize and market G17DT is highly dependent on our strategic alliance with Aventis Pasteur. Aventis Pasteur is currently the subject of a hostile takeover bid. Aventis Pasteur’s current management will likely have to devote significant resources and time to fight off the hostile takeover bid as well as explore alternatives for the company in the near future. This may result in Aventis Pasteur choosing not to devote the same amount of time or resources to our strategic alliance. If the hostile takeover bid is successful, the new management of Aventis Pasteur could choose not to devote the same level of resources or priority to our strategic alliance or may choose to terminate our strategic alliance.

Under the terms of our strategic alliance with GlaxoSmithKline, GlaxoSmithKline is responsible for phase III clinical trials, regulatory approvals, world-wide marketing and distribution of our GnRH Pharmaccine. Under the terms of our strategic alliance with GlaxoSmithKline, either party may terminate the strategic alliance upon mutual agreement, upon material breaches by the other party that remain uncured after 60 days’ written notice, or upon certain bankruptcy events by either party. Additionally, GlaxoSmithKline may terminate the strategic alliance effective as of September 30, 2004 if, prior to that date, the agreement has not been extended.

As a result of our strategic alliances, we will not completely control the nature, timing or cost of bringing these products to market. Aventis Pasteur and GlaxoSmithKline could choose not to devote resources to these arrangements or, under certain circumstances, may terminate these arrangements early. Aventis Pasteur and GlaxoSmithKline, outside of their arrangements with us, may develop technologies or products that are competitive with those that we are developing. From time to time, we may also become involved in disputes with Aventis Pasteur and GlaxoSmithKline. As a result of these factors, our strategic alliances may not yield successful products or revenues. In addition, we may be unable to enter into new strategic alliances or enter into new strategic alliances on favorable terms.

Our products under development are based on an approach to disease therapy and prevention, that has not yet been approved and may prove to be unsuccessful.

Our products under development are based on an approach to disease therapy and prevention that has not yet been approved. Our approach may ultimately prove to be unsuccessful since:

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Undesirable and unintended side effects or unfavorable publicity concerning any of our products or other products incorporating a similar approach could limit or curtail commercial use of our products and could have an adverse effect on our ability to obtain regulatory approvals and to achieve physician and patient acceptance.

Our dependence on others for manufacturing and marketing may adversely affect the manufacture, marketing and sale of our products.

We have no manufacturing facilities for commercial production of our products under development and have no experience in marketing, sales or distribution. We intend to continue establishing arrangements with and relying on third parties, including large pharmaceutical companies, to manufacture, market, sell and distribute any product we develop. Although we believe that parties to any future arrangements will have an economic incentive to perform their contractual responsibilities successfully, the amount and timing of resources to be allocated to these activities will not be within our control. These parties may not perform their obligations as expected, we may not derive any revenues from such arrangements and our reliance on others for manufacturing products may result in unforeseen problems with product supply. Should we encounter delays or difficulties in establishing relationships with manufacturers to produce, package and distribute any product we develop, market introduction and subsequent sales of such product would be adversely affected. Moreover, contract manufacturers that we may use must adhere to current good manufacturing practice regulations enforced by the FDA through its facilities inspection program. If these facilities cannot pass a pre-approval plant inspection, any FDA pre-market approval of our potential products would be adversely affected. Additionally, these manufacturers are subject to continual review and periodic inspections by the FDA and discovery of previously unknown problems with a manufacturer or facility may result in FDA restrictions which could adversely affect the manufacture, marketing, sales or distribution of our products.

We may not have sufficient liquidity to make periodic interest payments under our outstanding notes and debenture.

We have material amounts of indebtedness outstanding as a result of the $20 million senior convertible notes issued to certain institutional investors and the $3 million convertible debenture issued to Aventis Pharmaceuticals, Inc. We are required to make quarterly interest payments on the $20 million senior convertible notes in cash or stock, at our option, and annual interest payments on the $3 million convertible debenture in cash. At any time after March 31, 2006, the holders of the senior convertible notes have the right to require that we redeem all or any portion of the notes.

We are not currently in default under the terms of our outstanding senior convertible notes and debenture and we believe we will have the resources to make all required interest payments. If, however, we at any time default on any of our payment obligations or other obligations under the terms of our outstanding senior convertible notes and debenture, the applicable holders will have all rights available to them under the terms of our outstanding senior convertible notes and debenture, as applicable, including the forced redemption of the entire principal of the instrument plus accrued interest for cash, and, in the case of the senior convertible notes, 110% of the principal amount plus accrued interest. The senior convertible notes also have certain qualified cross-default provisions, particularly for acceleration of indebtedness under the notes. Under such circumstances, our cash position and liquidity would be severely impacted, and it is possible we would not be able to pay our debts as they come due.

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Our existing debt obligations impose operating restrictions on us, which may prevent us from taking certain corporate actions.

The terms of the agreements governing our senior convertible notes and the Aventis debenture impose operating restrictions on us. These restrictions limit, among other things, our ability to:

Under the terms of both our senior convertible notes and the Aventis debenture, in the event of a change of control of us, including a sale of all or substantially all of our assets, the surviving entity would be obligated to assume our outstanding debt obligations. In the event of a change of control, the holders of our outstanding senior convertible notes and debenture would have the right to require us to redeem the entire principal of the debt securities plus accrued interest for cash, and, in the case of the senior convertible notes, 110% of the principal amount plus accrued interest. Additionally, we may be required to redeem the Aventis debenture, in cash or common stock at Aventis’ option, if we sell, license, pledge or transfer certain of our projects or products to an entity other than Aventis or its affiliates.

In addition, for a period of 18 months from June 12, 2003, the date we closed on the second tranche of the $20 million financing, we are, subject to certain limited exceptions, restricted from issuing, selling or exchanging our equity or debt securities or options, warrants or other rights to acquire such securities, unless in each case we shall have first offered to sell such securities on the same terms to the holders of our senior convertible notes. We are also required to maintain the effectiveness of the registration statement relating to the resale of our common stock issuable upon conversion of these securities for certain specified periods.

We cannot assure you that these covenants will not adversely affect our ability to:

A breach of any of these covenants could result in a default in respect of our outstanding senior convertible notes and/or debenture. If a default occurs, the holders could elect to declare all amounts, together with accrued interest, to be immediately due and payable in cash, and, in the case of the senior convertible notes, at a price equal to 110% of the amount due.

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We may not have sufficient infrastructure or personnel to manage our growth.

We allocate significantly all of our financial and other resources to research and development activities. Additionally, we rely in large part on a variety of third parties, including manufacturers and clinical research organizations instead of supporting a large employee base. Consequently, we may lack the necessary personnel and information technology to support our growing operations.

We are dependent on our senior management and scientific staff, and the loss of this personnel or the failure to attract additional qualified personnel could adversely affect our ability to achieve our business objectives.

We depend upon the services of our senior management and scientific staff. Our lean infrastructure or personnel could make us vulnerable to disruption if we were unable to retain our current key personnel. We have not insured against the loss, due to death or disability, of any key personnel. The quality and reputation of our scientists and other technical personnel, and their success in performing their responsibilities, are a basis on which we attract potential funding sources and strategic partners. The loss of the services of any key personnel or the failure to recruit necessary additional or replacement personnel could have an adverse affect on our ability to achieve our business objectives. There is intense competition for qualified personnel in the pharmaceutical and biotechnology industries, including from other companies, universities, government entities and public and private research institutions, and there can be no assurance that we will be able to attract and retain the qualified personnel nec