S-1/A

As filed with the Securities and Exchange Commission on October 14, 2005

Registration No. 333-128059

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1

to

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

SGX Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	2834	06-1523147
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

10505 Roselle Street

San Diego, CA 92121

(858) 558-4850

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Michael Grey

President and CEO

SGX Pharmaceuticals, Inc.

10505 Roselle Street

San Diego, CA 92121

(858) 558-4850

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

Copies to:

Frederick T. Muto, Esq.
J. Patrick Loofbourrow, Esq.
Charles S. Kim, Esq.
Cooley Godward LLP
4401 Eastgate Mall
San Diego, CA 92121
(858) 550-6000 Annette North, Esq.
Vice President, Legal Affairs and
Corporate Secretary
SGX Pharmaceuticals, Inc.
10505 Roselle Street
San Diego, CA 92121
(858) 558-4850 Ora T. Fisher, Esq.
Cheston J. Larson, Esq.
Latham & Watkins LLP
135 Commonwealth Drive
Menlo Park, CA 94025
(650) 328-4600

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.     o

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o                     

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o                     

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.     o                     

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.     o

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED OCTOBER 14, 2005

                             Shares

Common Stock

      This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $          and $           per share.

      We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol “SGXP.”

      Investing in our common stock involves risks. See “Risk Factors” beginning on page 8.

	Per Share	Total
Initial public offering price	$	$
Underwriting discount	$	$
Proceeds, before expenses, to SGX	$	$

      The underwriters may also purchase up to an additional                 shares from us at the initial public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments.

      The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this preliminary prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

      The underwriters expect to deliver the shares against payment in New York, New York on                     , 2005.

CIBC World Markets Piper Jaffray

JMP Securities

Table of Contents

	Page
Prospectus Summary		1
Risk Factors		8
Forward-Looking Statements		31
Use of Proceeds		32
Dividend Policy		32
Capitalization		33
Dilution		34
Selected Consolidated Financial Data		36
Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Business		50
Management		71
Related Party Transactions		92
Principal Stockholders		96
Description of Capital Stock		99
Shares Eligible for Future Sale		104
Underwriting		106
Legal Matters		109
Experts		109
Where You Can Find More Information		109
Index to Financial Statements		F-1
EXHIBIT 10.32
EXHIBIT 10.33
EXHIBIT 10.34
EXHIBIT 23.1

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. Our business, financial condition, results of operations and prospectus may have changed since that date.

In this prospectus “we,” “us,” “our” and “SGX” refer to SGX Pharmaceuticals, Inc. and its subsidiaries, unless explicitly noted otherwise.

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Prospectus Summary

This summary highlights information contained in other parts of this prospectus. It does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, especially “Risk Factors,” before deciding to invest in our common stock.

SGX Pharmaceuticals, Inc.

We are a biotechnology company focused on the discovery, development and commercialization of innovative cancer therapeutics. We are developing Troxatyl, a novel compound which is currently in a pivotal Phase II/ III clinical trial for the third-line treatment of Acute Myelogenous Leukemia, or AML, a blood cancer. Third-line treatment refers to the treatment of patients who have already received two regimens of chemotherapy with the goal of remission. There is no approved therapy or standard of care for the third-line treatment of AML. If the results of our ongoing Phase II/ III clinical trial are positive, we expect to submit a New Drug Application, or NDA, to the U.S. Food and Drug Administration, or FDA, in late 2006 or early 2007, leading to a potential product launch during 2007. We also plan to develop Troxatyl in combination with cytarabine, a generic compound often known as Ara-C, for the second-line treatment of AML. Second-line treatment refers to the treatment of patients who have already received one regimen of chemotherapy with the goal of remission. In addition, we are developing Troxatyl for the treatment of various solid tumors and are planning on developing Troxatyl for the treatment of Myelodysplastic Syndromes, or MDS, a group of precancerous conditions in which bone marrow does not produce enough mature, healthy blood cells. We licensed exclusive worldwide rights to Troxatyl from Shire BioChem Inc. in July 2004.

We are also building an internal oncology product pipeline and generating lead compounds, which are drug-like small molecules with characteristics that have the potential to be appropriate for treatment of disease, for multiple partners through the application of our proprietary approach to drug discovery that is based upon the use of small fragments of drug-like molecules, known as Fragments of Active Structures, or FAST. We have successfully applied FAST to generate novel, potent and selective small molecule compounds in a matter of months for many proteins, or drug targets, that have been implicated in cancers and other diseases. Our first lead compound discovered using FAST is an inhibitor of an enzyme known as BCR-ABL. Based on industry experience and the preclinical status of our BCR-ABL program to date, we anticipate selecting a development candidate in early 2006 and filing an Investigational New Drug, or IND, application within approximately eight to ten months thereafter. We designed and are developing a lead compound as a treatment for Chronic Myelogenous Leukemia, or CML, a cancer of the bone marrow, which is resistant to treatment with the current standard of care, Gleevec® (imatinib mesylate) marketed by Novartis Pharmaceuticals Corporation. An additional internal program is at the lead optimization stage and is focused on the targets MET and RON, two closely related proteins that control cell growth and division, implicated in a range of solid tumors. Lead optimization is the stage at which lead compounds are further modified to improve their potency, specificity and in vivo efficacy and reduce their toxicity. Based on our experience with FAST to date, our current portfolio of oncology drug targets, and the status of our active discovery programs, and assuming allocation of additional resources for research and development, we believe that FAST is capable of producing at least one new IND candidate per year, starting in 2006 with our BCR-ABL program candidate. Based on FAST and related technologies, we generated aggregate revenues from collaborations, commercial agreements and grants of approximately $55.2 million in 2003, 2004 and the first six months of 2005.

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The chart below summarizes the status of our most advanced ongoing and currently planned clinical and preclinical development programs:

Program/ Indication			Status
Troxatyl
	•	Third-line AML	Pivotal Phase II/III trial ongoing (data expected second half of 2006)
	•	Second-line AML	Phase I Ara-C combination trial (initiate first half of 2006)
			Phase III Ara-C combination trial (initiate end of 2006)
	•	MDS	Phase I/II trial (initiate 2006)
	•	Solid tumors	Phase I trial ongoing (data expected end of 2005)
BCR-ABL
	•	Gleevec-resistant CML	Preclinical development (IND expected end of 2006)
MET and RON
	•	Solid tumors	Lead optimization
AurA, Hsp90, K-RAS and PDK-1
	•	Various cancers	Lead optimization

Troxatyl

Troxatyl is a novel analog of cytidine, one of the four nucleosides that are the building blocks of deoxyribonucleic acid, or DNA. Nucleoside analogs such as Troxatyl inhibit synthesis of DNA in dividing cells, thereby causing those cells to die. Based on preclinical studies and clinical trials, we believe Troxatyl has a number of unique properties and advantages for the treatment of various cancers. More than 700 patients were enrolled in Phase I and Phase II clinical trials conducted by Shire, in which Troxatyl was administered in the majority of cases by bolus intravenous, or IV, injection, to treat blood cancers and solid tumors. However, based on our recent clinical trials and preclinical studies, we now believe that neither the dose nor the bolus IV injection mode of administration utilized in those trials was optimal. Bolus IV injection involves administering the drug or potential drug as a single dose over a short period of time. In May 2005, we completed a Phase I/ II AML clinical trial in which Troxatyl was administered by continuous IV infusion over several days. Based on data from this trial, we believe Troxatyl is more active when administered by continuous IV infusion compared to bolus IV injection, and we believe we have identified the optimal dose of Troxatyl for the single-agent treatment of AML.

     Acute Myelogenous Leukemia

We are initially developing Troxatyl for the treatment of AML, a blood cancer that increases in incidence with age. According to the American Cancer Society, in the United States, approximately 16,000 adult patients have AML with approximately 12,000 new patients diagnosed each year. Long-term survival rates are less than 20%. Approximately 8,000 patients per year are eligible to receive second-line treatment for this disease. The vast majority of these patients are either non-responsive or relapse within six months. There is no approved therapy or standard of care for the third-line treatment of AML and, based on a recent M. D. Anderson Cancer Center study, the historical response rate for patients we are targeting in our current pivotal Phase II/III clinical trial is less than 5%.

Phase I/ II Trial by Continuous IV Infusion. We completed our first clinical trial evaluating Troxatyl dosing by continuous IV infusion in the second quarter of 2005. In this 48 patient trial, five patients achieved a complete response of their disease and four patients achieved a complete response with partial platelet recovery for an overall response rate of 19%. For the 15 patients who met the enrollment criteria for our current pivotal Phase II/ III trial and received Troxatyl for at least four days, the overall response rate was 27%. Importantly, the low-level toxicities we observed were not age-related. The duration of response has ranged from one to over 12 months. Several patients remain in active remission and median survival time was seven months. On the basis of these results, we have concluded the safety and

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response data in these patients compare favorably to the M. D. Anderson Cancer Center historical data and support further development of Troxatyl for the treatment of AML.

Current Phase II/ III Clinical Trial. In July 2005, we initiated a pivotal Phase II/ III clinical trial of Troxatyl for the third-line treatment of AML, with targeted enrollment of 211 patients. Following discussions with the FDA in connection with our End-of-Phase II Meeting in May 2005, we designed this trial with complete response as the primary clinical endpoint, or patient response on which a judgement will be made for FDA approval, and complete response with partial platelet recovery and duration of response as secondary endpoints. Because there is currently no approved therapy or standard of care for this patient population, we will compare the results of this trial to historical results observed at M. D. Anderson Cancer Center in similar patients. The clinical trial has been designed to enroll a sufficient number of patients to reliably detect a doubling of the historical complete response rate of 4.7% derived from the M. D. Anderson Cancer Center database. The Phase II/ III patient population is similar to that studied in our recently completed Phase I/ II Troxatyl clinical trial. Clinical response will be measured up to approximately 60 days after dosing in each patient. We expect to complete enrollment in the trial in the third quarter of 2006 and announce the results shortly thereafter. If the results of this trial are positive, we intend to submit an NDA to the FDA in late 2006 or early 2007. We have recently been granted fast track designation for Troxatyl for the third-line treatment of AML, which may qualify us for a six-month review period by the FDA. Fast track designation means that the FDA has determined that the drug is intended to treat a serious or life-threatening condition for which there is no adequate therapy currently available. This designation also means that the FDA can take actions to expedite the development and review of a potential NDA.

Market Expansion Trials for AML. We are initially developing Troxatyl for the third-line treatment of AML because we believe this indication will provide the fastest route to market. However, we also plan to develop Troxatyl for the second-line treatment of AML. Additionally, we plan to evaluate Troxatyl in combination with the cancer drugs daunorubicin or mitoxantrone for the potential first-line treatment of AML.

Other Indications

Based on bolus IV injection Troxatyl data obtained by Shire, we are investigating Troxatyl as a potential product candidate for treatment of other cancers. Troxatyl administered by bolus IV injection has shown promising activity in various Phase I and Phase II clinical trials against MDS, and solid tumors such as pancreatic cancer and renal cell carcinoma, the most common form of kidney cancer.

MDS represents a group of cancers in which bone marrow does not make enough mature, healthy blood cells. In 2006, we plan to initiate a single-arm, open-label Phase I/ II clinical trial of Troxatyl by continuous IV infusion in MDS patients who have failed Vidaza® (azacitidine), marketed by Pharmion Corporation, the only approved drug for this disease.

We are conducting a Phase I dose ranging clinical trial of Troxatyl by continuous IV infusion in patients with refractory solid tumors. No new or unexpected toxicities have been observed at exposure levels that now exceed those achieved in the previous Troxatyl trials dosed by bolus IV injection. We expect to complete this trial by the end of 2005. We plan to initiate Phase I/II clinical trials in 2006 of Troxatyl dosing by continuous IV infusion for one or more solid tumor indications, including liver cancer.

Research Programs

We are also building an internal oncology product pipeline and generating lead compounds for multiple partners through application of our drug discovery platform, FAST. We are focusing on targets where we believe FAST could provide a distinct advantage over conventional methods of lead discovery, and we have identified a portfolio of approximately 20 oncology targets that we believe are clearly implicated in cancers using our FAST platform. Our principal areas of focus in oncology drug discovery are on protein and enzyme targets that have been implicated in cancers and other diseases, including BCR-ABL, MET and RON, AurA, Hsp90, K-RAS and PDK-1.

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Our Strategy

Our goal is to create a leading biotechnology company that discovers, develops and commercializes novel cancer drugs. Key elements of our strategy are to:

•  obtain regulatory approval of Troxatyl for AML;

•  develop Troxatyl for other cancer indications;

•  develop and expand our cancer pipeline;

•  continue to generate revenue through strategic partnering;

•  develop sales and marketing capabilities; and

•  expand our portfolio of product candidates through acquisitions and in-licensing.

Risks Related to Our Business

We are a relatively early stage biotechnology company and our business and our ability to execute on our business strategy is subject to a number of risks that you should be aware of before you decide to buy our common stock. In particular, Troxatyl is our only product candidate in clinical development. To date, we have not obtained regulatory approval of any product candidate. All of our other compounds or potential product candidates are in preclinical development or the discovery stage. Positive results from preclinical studies and early clinical trials should not be relied upon as evidence that later-stage or larger-scale clinical trials will succeed. Although the FDA has recently granted us fast track designation for Troxatyl for the third-line treatment of AML, this designation may not actually lead to a faster development or regulatory review or approval process. Our expected timeline for a NDA submission and obtaining regulatory approval could be delayed for several years. Troxatyl and any other product candidate that we may develop may never receive regulatory approval or be successfully commercialized. The technologies on which we rely are unproven and may not result in the discovery or development of commercially viable products. There are currently no drugs on the market and no drug candidates in clinical development that have been discovered or developed using our proprietary technologies. While we have received revenue from our existing collaborations and commercial agreements and research grants, we have not generated any revenue to date from product sales. As of June 30, 2005, we had an accumulated deficit of approximately $118.8 million, and we expect to continue to incur substantial losses for the foreseeable future. These risks are discussed more fully in “Risk Factors” beginning on page 8.

Corporate Information

We were incorporated in Delaware in July 1998, and our principal executive offices are located at 10505 Roselle Street, San Diego, California 92121. We changed our name to SGX Pharmaceuticals, Inc. from Structural GenomiX, Inc. in August 2005. Our telephone number is (858) 558-4850 and website address is http://www.sgxpharma.com. Information contained in, or accessible through, our website does not constitute a part of this prospectus.

Troxatyl® is a U.S. registered trademark owned by Shire Biochem Inc., a company within Shire Pharmaceuticals Group plc, for the anti-cancer agent troxacitabine. Both troxacitabine and the Troxatyl® trademark are licensed to our company. FAST^tm is our trademark for our proprietary fragment-based drug discovery platform. We have applied for registration of our SGX Pharmaceuticals logo with the United States Patent and Trademark Office and have applications to register our SGX trademark in the United States, Australia, Canada, the European Union, Japan, Mexico and Switzerland. This prospectus also contains trademarks and tradenames of other companies, and those trademarks and tradenames are the property of their respective owners.

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The Offering

Common stock offered by SGX Pharmaceuticals, Inc.	shares
Common stock to be outstanding after this offering	shares
Use of proceeds	We intend to use the net proceeds from this offering for the clinical development of Troxatyl; further development of our research programs and initial clinical development stemming from our internal programs; working capital and general corporate purposes; and potential acquisition and in-licensing activities. See “Use of Proceeds.”
Proposed Nasdaq National Market symbol	SGXP

The number of shares of common stock that will be outstanding after this offering is based upon 1,198,514 shares outstanding as of June 30, 2005, and excludes the following:

•  2,391,843 shares of common stock subject to outstanding options under our 2000 equity incentive plan, with a weighted average exercise price of $1.15 per share;

•  414,633 shares of common stock reserved for future issuance under our 2000 equity incentive plan;

•  2,400,000 shares of common stock reserved for future issuance under our 2005 equity incentive plan, 2005 non-employee directors’ stock option plan and 2005 employee stock purchase plan, each of which will become effective upon the completion of this offering; and

•  266,726 shares of common stock subject to outstanding warrants, with a weighted average exercise price of $2.31 per share.

Unless otherwise stated, information in this prospectus assumes:

•  the conversion of all our outstanding shares of preferred stock into 15,192,354 shares of common stock upon the completion of this offering;

•  the automatic issuance of                     shares of our common stock upon the completion of this offering under a $6.0 million convertible note; and

•  no exercise of the over-allotment option granted to the underwriters.

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Summary Consolidated Financial Data

The following tables present our summary consolidated financial data and should be read together with our consolidated financial statements and accompanying notes, “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The summary consolidated financial data for the years ended December 31, 2002, 2003 and 2004 are derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The summary consolidated financial data for the years ended December 31, 2000 and 2001 are derived from our audited consolidated financial statements, which are not included in this prospectus. The summary consolidated financial data at June 30, 2005 and for the six months ended June 30, 2004 and 2005 are derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results. The pro forma as adjusted balance sheet data reflects the balance sheet data at June 30, 2005 as adjusted for the sale of                      shares of our common stock in this offering at an assumed initial public offering price of $           per share, after deducting the underwriting discount and estimated offering expenses payable by us and the automatic conversion of all preferred stock into an aggregate of 15,192,354 shares of common stock upon the completion of this offering.

																	Six Months Ended
		Years Ended December 31,															June 30,
		2000			2001			2002			2003			2004			2004			2005
																	(unaudited)
		(in thousands, except per share data)
Statement of Operations Data:
Revenue:
	Grants	$	–		$	–		$	350		$	3,344		$	6,380		$	1,742		$	429
	Grants — subcontractor reimbursements		–			–			–			4,599			4,976			1,520			2,666
	Collaborations and commercial agreements		–			1,338			2,986			10,135			15,941			8,597			6,763
Total revenue			–			1,338			3,336			18,078			27,297			11,859			9,858
Expenses:
	Research and development		6,616			17,831			25,573			28,587			31,444			15,255			16,742
	General and administrative		4,053			7,682			10,122			7,353			6,719			3,337			4,749
	In-process technology		–			1,500			–			–			4,000			–			–
Total operating expenses			10,669			27,013			35,695			35,940			42,163			18,592			21,491
Loss from operations			(10,669	)		(25,675	)		(32,359	)		(17,862	)		(14,866	)		(6,733	)		(11,633	)
Interest income			2,424			2,729			622			320			175			44			115
Interest expense			(126	)		(302	)		(932	)		(1,219	)		(669	)		(382	)		(190	)
Interest expense associated with debenture			–			–			–			–			(3,392	)		–			(1,188	)
Net loss			(8,371	)		(23,248	)		(32,669	)		(18,761	)		(18,752	)		(7,071	)		(12,896	)
Accretion to redemption value of redeemable convertible preferred stock			(274	)		(329	)		(329	)		(329	)		(329	)		(165	)		(165	)
Net loss attributable to common stockholders		$	(8,645	)	$	(23,577	)	$	(32,998	)	$	(19,090	)	$	(19,081	)	$	(7,236	)	$	(13,061	)
Basic and diluted net loss attributable to common stockholders per share(1):
	Historical	$	(32.38	)	$	(42.95	)	$	(39.42	)	$	(22.43	)	$	(19.91	)	$	(8.34	)	$	(12.39	)
	Pro forma (unaudited)													$	(6.61	)				$	(1.17	)
Shares used to compute basic and diluted net loss attributable to common stockholders per share(1):
	Historical		267			549			837			851			958			867			1,054
	Pro forma (unaudited)														2,887						11,157

(1) Please see Note 1 to our consolidated financial statements for an explanation of the method used to calculate the historical and pro forma net loss per share and the number of shares used in the computation of the per share amounts.

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	As of June 30, 2005
				Pro Forma
	Actual			As Adjusted
	(unaudited)
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	10,428
Working capital		4,689
Total assets		25,272
Long-term debt obligations (including current portion)		8,372
Redeemable preferred stock		40,200
Accumulated deficit		(118,826	)
Total stockholders’ deficit		(32,458	)

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Risk Factors

An investment in shares of our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this prospectus, before deciding to invest in our common stock. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

Risks Relating to Our Business

We are dependent on the success of our product candidate, Troxatyl, and we cannot give any assurance that it will receive regulatory approval or be successfully commercialized.

Troxatyl, which is our only product candidate in clinical development, is in a pivotal Phase II/III clinical trial for the third-line treatment of Acute Myelogenous Leukemia, or AML. We are conducting or planning additional clinical trials of Troxatyl for other indications. All of our other compounds or potential product candidates are in preclinical development or the discovery stage. Troxatyl may never receive regulatory approval or be successfully commercialized. In July 2004, we in-licensed worldwide rights to Troxatyl from Shire BioChem Inc. Shire has conducted substantially all of the preclinical and clinical development of Troxatyl to date. However, Troxatyl will require additional clinical trials and regulatory clearances which may never be obtained. Our clinical development program for Troxatyl may not lead to a commercial drug either because we fail to demonstrate that it is safe and effective in clinical trials and we therefore fail to obtain necessary approvals from the U.S. Food and Drug Administration, or FDA, and similar foreign regulatory agencies, or because we have inadequate financial or other resources to advance this product candidate through the clinical trial process. Any failure to obtain approval of Troxatyl would have a material and adverse impact on our business.

The clinical trial protocol and design for our ongoing pivotal Phase II/III clinical trial of Troxatyl for the third-line treatment of AML may not be sufficient to allow us to submit an NDA for Troxatyl or demonstrate efficacy at the level required by the FDA for product approval.

The clinical trial protocol and design for our pivotal Phase II/III clinical trial of Troxatyl for the third-line treatment of AML may prove to be insufficient for product approval. We discussed our clinical development plan and the details of the Phase II/III clinical trial protocol with the FDA in connection with an End-of-Phase II Meeting following our recently concluded Phase I/ II clinical trial. We posed specific questions regarding the proposed design, conduct and data analysis approach for our Phase II/III clinical trial to the FDA and received answers to each question and additional comments on other aspects of the protocol design. For example, the FDA suggested that we consider a randomized trial design rather than a single-arm trial design. However, we have decided to conduct the single-arm, open-label clinical trial as originally proposed and discussed with the FDA. We believe that a more traditional prospective, randomized, double-blind, controlled clinical trial is not viable because there currently is no standard of care for the third-line treatment of AML. We intend to compare the data from our single-arm clinical trial design to a selected group of 422 patients described in the M. D. Anderson Cancer Center’s recently published analysis of its experience with third-line treatment of 594 adult AML patients utilizing a variety of cancer drugs. The FDA has indicated that the results of our Phase II/III clinical trial and the published results from M. D. Anderson cannot be directly compared due to differences in the populations enrolled, but that the adequacy of the M. D. Anderson data and other literature to serve as a historical control will be considered during review of the New Drug Application, or NDA, for Troxatyl, if one is submitted. In addition, even if we achieve our desired endpoints for the trial, the results may not be sufficient to demonstrate compelling efficacy to the level required by the FDA for product approval.

The FDA also suggested that we submit a Special Protocol Assessment, or SPA, which drug development companies sometimes use to obtain an agreement with the FDA concerning the design and size of a clinical

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trial intended to form the primary basis of an effectiveness claim. However, we have not submitted and do not plan to submit an SPA for our ongoing Phase II/III clinical trial in part because a complete draft of our Phase II/III clinical protocol was submitted to and discussed with the FDA as part of the End-of-Phase II Meeting. However, without the FDA’s concurrence on an SPA, we cannot be certain that the design, conduct and data analysis approach for our ongoing Phase II/III clinical trial will be sufficient to allow us to submit or receive approval of an NDA for Troxatyl. We are currently in the process of enrolling patients in our Troxatyl Phase II/III clinical trial with targeted enrollment of approximately 211 third-line AML patients. If the FDA requires, or we otherwise determine, to amend our protocol, change our clinical trial design, increase enrollment targets or conduct additional clinical trials, our ability to obtain regulatory approval on the timeline we have projected would be jeopardized and we could be required to make significant additional expenditures related to clinical development. Any failure to obtain approval for Troxatyl would have a material and adverse impact on our business.

While we may seek to take advantage of various regulatory mechanisms intended to accelerate drug development and approval for Troxatyl for the third-line treatment for AML, we may not be able to submit an NDA for Troxatyl until the third quarter of 2009, at the earliest.

If the results of our ongoing pivotal Phase II/ III clinical trial of Troxatyl are positive, we plan to file an NDA for Troxatyl on the basis of this single study and seek FDA review under the accelerated approval regulations. Accelerated approval provides the opportunity for regulatory approval based on additional endpoints. However, there is no guarantee that we will successfully complete this Phase II/III clinical trial. Even if the Phase II/III trial is successfully completed, there are no assurances that the FDA will accept an NDA on the basis of a single Phase II/III study or review the NDA under the accelerated approval regulations. Failure to obtain review on the basis of a single study or accelerated approval could require us to complete additional and more extensive clinical trials, which would be costly and time consuming and delay potential FDA approval of Troxatyl for several years. If we do not obtain FDA agreement on these matters, we would not be able to submit an NDA for Troxatyl until the third quarter of 2009, at the earliest. Any failure to obtain accelerated approval of Troxatyl would have a material and adverse impact on our business. Even if we are able to obtain accelerated approval of Troxatyl from the FDA, the FDA still may not grant Troxatyl full approval for commercial sale. The FDA will likely require that we conduct additional post-approval clinical studies as a condition of any approval.

If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address an unmet medical need for this condition, the drug sponsor may apply for FDA fast track designation. In addition to the benefits of accelerated approval, fast track designation may lead to a shorter FDA review period, which can be as short as six months, and the ability to submit portions of an NDA as they become available for required FDA review. Although the FDA has recently granted us fast track designation for Troxatyl for the third-line treatment of AML, this designation may not actually lead to a faster development or regulatory review or approval process. Any fast track designation we may obtain may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data from our clinical development program or if a competitor’s product is approved for the indication we are seeking. Any fast track designation we may obtain will not guarantee that we will qualify for or be able to take advantage of the priority review procedures following the submission of an NDA. Additionally, if fast track designation were to be withdrawn for any product for which we obtain such designation, our ability to receive FDA approval could be delayed considerably.

Because the results of preclinical studies and early clinical trials are not necessarily predictive of future results, Troxatyl or any other product candidate we advance into clinical trials may not have favorable results in later clinical trials, if any, or receive regulatory approval.

Positive results from preclinical studies and early clinical trials should not be relied upon as evidence that later-stage or large-scale clinical trials will succeed. We will be required to demonstrate through clinical trials that our product candidates are safe and effective for use in a diverse population before we can seek

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regulatory approvals for their commercial sale. Success in preclinical testing and early clinical trials does not mean that later clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy despite having progressed through initial clinical testing. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. In addition, there is typically an extremely high rate of attrition from the failure of drug candidates proceeding through clinical trials.

Our ongoing pivotal Phase II/III clinical trial of Troxatyl may not be successful for a variety of reasons, including the clinical trial design, the failure to enroll a sufficient number of patients, safety concerns and inability to demonstrate sufficient efficacy. In clinical trials to date, Troxatyl has been studied in more than 730 patients. However, most of the patients studied were enrolled in trials conducted by Shire under different dosing regimens and with different clinical endpoints than those we have conducted. Since licensing rights to Troxatyl from Shire in July 2004, we have completed only one Phase I/II clinical trial, which was completed in the second quarter of 2005, in which we administered by continuous intravenous, or IV, infusion doses of Troxatyl to 48 relapsed AML patients. This represents only a portion of the number of patients that will need to be studied to gain regulatory approval of Troxatyl for the third-line treatment of AML. We are currently in the process of enrolling patients in our pivotal Troxatyl Phase II/III clinical trial, with targeted enrollment of approximately 211 third-line AML patients. The data collected from clinical trials with larger patient populations may not demonstrate sufficient safety and efficacy to support regulatory approval of Troxatyl or any other product candidate we advance into clinical trials. If Troxatyl or any other product candidate we advance into clinical trials fails to demonstrate sufficient safety and efficacy in any clinical trial we are able to undertake, we would experience potentially significant delays in, or be required to abandon, development of that product candidate.

Troxatyl or any other product candidate we advance into clinical trials may cause undesirable side effects that could delay or prevent its regulatory approval or commercialization.

Common side effects resulting from dosing of Troxatyl by continuous IV infusion include the inflammation of mucus membranes inside the mouth, known as mucositis, hand and foot syndrome, and rash, and Troxatyl can also result in prolonged suppression of blood cell production by the bone marrow, a condition known as aplasia, and overwhelming infection, known as sepsis, often leading to death. Because Troxatyl has been tested in relatively small populations under our current continuous IV infusion dosing regime, additional side effects may be observed as its development progresses.

Undesirable side effects caused by Troxatyl or any other product candidate we advance into clinical trials could interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications. This, in turn, could prevent us from commercializing Troxatyl or any other product candidate we advance into clinical trials and generating revenues from its sale. In addition, if Troxatyl or any other product candidate receives marketing approval and we or others later identify undesirable side effects caused by the product:

•  regulatory authorities may withdraw their approval of the product;

•  we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product; or

•  our reputation may suffer.

Any one or a combination of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from the sale of the product.

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Delays in the commencement or completion of clinical testing could result in increased costs to us and delay our ability to generate significant revenues.

Delays in the commencement or completion of clinical testing could significantly impact our product development costs. We do not know whether planned clinical trials will begin on time or be completed on schedule, if at all. The commencement of clinical trials can be delayed for a variety of reasons, including delays in:

•  obtaining regulatory approval to commence a clinical trial;

•  reaching agreement on acceptable terms with prospective contract research organizations and trial sites;

•  manufacturing sufficient quantities of a product candidate;

•  obtaining institutional review board approval to conduct a clinical trial at a prospective site; and

•  recruiting and enrolling patients to participate in a clinical trial.

In addition, once a clinical trial has begun, patient recruitment and enrollment may be slower than we anticipate. Further, a clinical trial may be suspended or terminated by us, our collaborators, the FDA or other regulatory authorities due to a number of factors, including:

•  failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

•  inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;

•  unforeseen safety issues; or

•  lack of adequate funding to continue the clinical trial.

If we experience delays in the completion of, or termination of, any clinical trial of Troxatyl or any other product candidate we advance into clinical trials, the commercial prospects for product candidates we may develop will be harmed, and our ability to generate product revenues from any product candidate we may develop will be delayed. In addition, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. Even if we are able to ultimately commercialize Troxatyl or any other product candidates, other therapies for the same indications may have been introduced to the market during the period we have been delayed and such therapies may have established a competitive advantage over our products.

We rely on third parties to conduct our clinical trials, including our ongoing pivotal Phase II/III clinical trial for Troxatyl. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates.

The targeted enrollment for our recently initiated pivotal Phase II/ III Troxatyl clinical trial is 211 patients, and we expect to conduct this clinical trial in approximately 40 trial centers in the United States and Europe. We intend to rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct this clinical trial and clinical trials for any other product candidate that we advance into clinical trials. We may not be able to control the amount and timing of resources that third parties devote to our Phase II/III Troxatyl clinical trial. In the event that we are unable to maintain our relationship with any of our selected clinical trial sites, or elect to terminate the participation of any of these clinical trial sites, we may experience the loss of follow-up information on patients enrolled in our ongoing clinical trial unless we are able to transfer the care of those patients to another qualified clinical trial site. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be jeopardized. Moreover, for Troxatyl, we rely on third parties to transport bone marrow samples to the control laboratory and conduct sample evaluation. If these third parties do not successfully carry out their contractual duties or obligations or

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meet expected deadlines, or if the quality or accuracy of the clinical data obtained by the control laboratory is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates.

Troxatyl and any other product candidates we advance into clinical trials are subject to extensive regulation, which can be costly and time consuming, cause unanticipated delays or prevent the receipt of the required approvals to commercialize our product candidates.

The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing and distribution of Troxatyl or any other product candidates we advance into clinical trials are subject to extensive regulation by the FDA in the United States and by comparable governmental authorities in foreign markets. In the United States, neither we nor our collaborators are permitted to market our product candidates until we or our collaborators receive approval of a New Drug Application, or NDA, from the FDA. The process of obtaining NDA approval is expensive, often takes many years, and can vary substantially based upon the type, complexity and novelty of the products involved. Approval policies or regulations may change. In addition, as a company, we have not previously filed an NDA with the FDA. This lack of experience may impede our ability to obtain FDA approval in a timely manner, if at all, for our product candidates for which development and commercialization is our responsibility. Despite the time and expense invested, regulatory approval is never guaranteed. In addition, we expect to conduct a portion of the pivotal Phase II/III clinical trial for Troxatyl in Italy, France and Germany. As a result, we are subject to regulation by the European Medicines Agency, as well as the regulatory agencies in Italy, France and Germany, and have established a legal representative in the European Union, or E.U., to assist us in our interactions with these regulatory bodies. The FDA or any of the applicable European regulatory bodies can delay, limit or deny approval of a product candidate for many reasons, including:

•  a product candidate may not be safe and effective;

•  regulatory agencies may not find the data from preclinical testing and clinical trials to be sufficient;

•  regulatory agencies may not approve of our third party manufacturers’ processes or facilities; or

•  regulatory agencies may change their approval policies or adopt new regulations.

Also, recent events implicating questions about the safety of marketed drugs, including those pertaining to the lack of adequate labeling, may result in increased cautiousness by the FDA in reviewing new drugs based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent us from commercializing our product candidates.

Even if Troxatyl or any other product candidate we advance into clinical trials receives regulatory approval, our product candidates may still face future development and regulatory difficulties.

If Troxatyl or any other product candidate we advance into clinical trials receives U.S. regulatory approval, the FDA may still impose significant restrictions on the indicated uses or marketing of the product candidate or impose ongoing requirements for potentially costly post-approval studies. In addition, regulatory agencies subject a product, its manufacturer and the manufacturer’s facilities to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, our collaborators or us, including requiring withdrawal of the product from the market. Our product candidates will also be subject to ongoing FDA requirements for the labeling, packaging, storage, advertising, promotion, record-keeping and submission

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of safety and other post-market information on the drug. If our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

•  issue warning letters;

•  impose civil or criminal penalties;

•  withdraw regulatory approval;

•  suspend any ongoing clinical trials;

•  refuse to approve pending applications or supplements to approved applications filed by us or our collaborators;

•  impose restrictions on operations, including costly new manufacturing requirements; or

•  seize or detain products or require a product recall.

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

If we or our collaborators fail to comply with applicable domestic or foreign regulatory requirements, we and our collaborators may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.

Because we exclusively licensed our product candidate, Troxatyl, from Shire and our rights are subject to certain licenses to Shire from third parties, any dispute with Shire or between Shire and any of these third parties may adversely affect our ability to develop and commercialize Troxatyl.

In late July 2004, we licensed exclusive worldwide rights to our product candidate, Troxatyl, from Shire. If there is any dispute between us and Shire regarding our rights under the license agreement, our ability to develop and commercialize Troxatyl may be adversely affected. In addition, our exclusive license to Troxatyl is subject to the terms and conditions of a license from Yale University and the University of Georgia Research Foundation, Inc. to Shire. If Shire breaches the terms or conditions of any of these underlying licenses to Shire or otherwise is engaged in a dispute with any of these third party licensors, such breaches by Shire or disputes with Shire could result in a loss of, or other material adverse impact on, our rights under our exclusive license agreement with Shire. Any loss of our rights from Shire or through Shire from these third parties could delay or completely terminate our product development efforts for Troxatyl.

Our drug discovery approach and technologies are unproven and may not allow us to establish or maintain a clinical development pipeline or successful collaborations or result in the discovery or development of commercially viable products.

The technologies on which we rely are unproven and may not result in the discovery or development of commercially viable products. There are currently no drugs on the market and no drug candidates in clinical

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development that have been discovered or developed using our proprietary technologies. We have only recently transitioned our business strategy from focusing on our protein structure determination capabilities and developing our technology infrastructure, to focusing on drug discovery and development activities in the field of oncology. Our goal is to internally develop oncology product candidates and to leverage our approach to drug discovery that is based upon the use of small fragments of drug-like molecules, known as Fragments of Active Structures, or FAST, and related technologies, to form lead generation collaborations. Our most advanced development program based on our internal development efforts using FAST is at the preclinical development stage. The process of successfully discovering product candidates is expensive, time-consuming and unpredictable, and the historical rate of failure for drug candidates is extremely high. Research programs to identify product candidates require a substantial amount of our technical, financial and human resources even if no product candidates are identified. Data from our current research programs may not support the clinical development of our lead compounds or other compounds from these programs, and we may not identify any compounds suitable for recommendation for clinical development. Moreover, any compounds we recommend for clinical development may not be effective or safe for their designated use, which would prevent their advancement into clinical trials and impede our ability to maintain or expand our clinical development pipeline. If we are unable to identify new product candidates or advance our lead compounds into clinical development, we may not be able to establish or maintain a clinical development pipeline or generate product revenue. Our ability to identify new compounds and advance them into clinical development also depends upon our ability to fund our research and development operations, and we cannot be certain that additional funding will be available on acceptable terms, or at all. There is no guarantee that we will be able to successfully develop any product candidate we advance into clinical trials for commercial sale, attract the personnel and expertise required to be engaged in drug development or secure new lead generation collaborations.

If we fail to establish new collaborations and other commercial agreements, we may have to reduce or limit our internal drug discovery and development efforts.

Revenue generation utilizing our FAST drug discovery platform and related technologies will continue to be important to us in the near term by providing us with funds for reinvestment in our internal drug discovery and development. If we fail to establish a sufficient number of additional collaborations or commercial agreements on acceptable terms, we may not generate sufficient revenue to support our internal discovery efforts. In addition, since our existing collaborations and commercial agreements are generally not long-term contracts, we cannot be sure we will be able to continue to derive comparable revenues from these or other collaborations or commercial agreements in the future. Even if we successfully establish collaborations, these relationships may never result in the successful development or commercialization of any product candidates or the generation of sales or royalty revenue. Under our commercial arrangements with other pharmaceutical and biotechnology companies, such as under all of our beamline services agreements, we are providing specific services for fees and milestone payments without any interest in future product sales or profits. While we believe these commercial arrangements help to offset the expenses associated with our drug discovery efforts, we may under some circumstances find it necessary to divert valuable resources from our own development efforts in order to fulfill our contractual obligations.

We are dependent on our collaborations, and events involving these collaborations or any future collaborations could prevent us from developing or commercializing product candidates.

The success of our current business strategy and our near and long-term viability will depend in part on our ability to successfully establish new strategic collaborations. Since we do not currently possess the resources necessary to independently develop and commercialize all of the product candidates that may be discovered through our drug discovery platform, including lead compounds in our BCR-ABL program and other preclinical programs, we may need to enter into additional collaborative agreements to assist in the development and commercialization of some of these product candidates or in certain markets for a particular product candidate. Establishing strategic collaborations is difficult and time-consuming. Potential collaborators may reject collaborations based upon their assessment of our financial, regulatory or intellectual property

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position. And our discussions with potential collaborators may not lead to the establishment of new collaborations on acceptable terms.

We have a collaboration with Pierre Fabre Médicament for the development and commercialization of small molecule inhibitors in our solid tumor program targeting MET and RON, two closely related receptor tyrosine kinases, and have entered into other drug discovery collaborations with the Cystic Fibrosis Foundation, F. Hoffmann-La Roche Ltd. and Serono International S.A. With the exception of Pierre Fabre Médicament, where we have agreed to share costs of development, our collaborators have agreed to finance the clinical trials for product candidates resulting from these collaborations and, if they are approved, manufacture and market them. Accordingly, we are dependent on our collaborators to gain regulatory approval of, and to commercialize, product candidates resulting from most of our collaborations.

We have limited control over the amount and timing of resources that our other current collaborators or any future collaborators devote to our programs or potential products. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may not develop products that arise out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of these products.

We and our present and future collaborators may fail to develop or effectively commercialize products covered by our present and future collaborations if:

•  we do not achieve our objectives under our collaboration agreements;

•  we or our collaborators are unable to obtain patent protection for the product candidates or proprietary technologies we discover in our collaborations;

•  we are unable to manage multiple simultaneous product discovery and development collaborations;

•  our potential collaborators are less willing to expend their resources on our programs due to their focus on other programs or as a result of general market conditions;

•  our collaborators become competitors of ours or enter into agreements with our competitors;

•  we or our collaborators encounter regulatory hurdles that prevent commercialization of our product candidates; or

•  we develop products and processes or enter into additional collaborations that conflict with the business objectives of our other collaborators.

If we or our collaborators are unable to develop or commercialize products as a result of the occurrence of any of these events, we will be prevented from developing and commercializing product candidates.

Conflicts may arise between us and our collaborators that could delay or prevent the development or commercialization of our product candidates.

Conflicts may arise between our collaborators and us, such as conflicts concerning the interpretation of clinical data, the achievement of milestones, the interpretation of financial provisions or the ownership of intellectual property developed during the collaboration. If any conflicts arise with existing or future collaborators, they may act in their self-interest, which may be adverse to our best interests. Any such disagreement between us and a collaborator could result in one or more of the following, each of which could delay or prevent the development or commercialization of our product candidates, and in turn prevent us from generating sufficient revenues to achieve or maintain profitability:

•  disagreements regarding the payment of research funding, milestone payments, royalties or other payments we believe are due to us under our collaboration agreements or from us under our licensing agreements;

•  uncertainty regarding ownership of intellectual property rights arising from our collaborative activities, which could prevent us from entering into additional collaborations;

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•  actions taken by a collaborator inside or outside a collaboration which could negatively impact our rights under or benefits from such collaboration;

•  unwillingness on the part of a collaborator to keep us informed regarding the progress of its development and commercialization activities or to permit public disclosure of the results of those activities; or

•  slowing or cessation of a collaborator’s development or commercialization efforts with respect to our product candidates.

Our drug discovery efforts are dependent on continued access to and use of our beamline facility, which is subject to various governmental regulations and policies and a user agreement with the University of Chicago and the U.S. Department of Energy. If we are unable to continue the use of our beamline facility, we may be required to delay, reduce the scope of or abandon some of our drug discovery efforts, and may fail to perform under our collaborations, commercial agreements and grants, which would result in a material reduction in our current primary source of revenue.

We generate protein structures through our beamline facility, housed at the Advanced Photon Source at the Argonne National Laboratory, a national synchrotron-radiation facility funded by the U.S. Department of Energy, Office of Science, and Office of Basic Energy Sciences, located in Argonne, Illinois. Accordingly, our access to and use of the facility is subject to various government regulations and policies. In addition, our access to the beamline facility is subject to a user agreement with the University of Chicago and the U.S. Department of Energy with an initial five year term expiring in January 1, 2009. Although the term of our user agreement automatically renews for successive one-year periods, the University of Chicago may terminate the agreement and our access to the beamline facility by providing 60 days’ notice prior to the beginning of each renewal period. In addition, the University of Chicago may terminate the agreement for our breach, subject to our ability to cure the breach within 30 days. In the event our access to or use of the facility is restricted or terminated, we would be forced to seek access to alternate beamline facilities. There are currently only three alternate beamline facilities in the U.S. and two outside the U.S., which are comparable to ours. To obtain equivalent access at a single alternate beamline facility would likely require us building out a new beamline at such facility which could take over two years and would involve significant expense. However, we cannot be certain that we would be able to obtain equivalent access to such a facility on acceptable terms or at all. In the interim period, we would have to obtain beamlime access at a combination of facilities, and there is no guarantee that we would be able to obtain sufficient time on acceptable terms or at all. However, we cannot be certain that additional beamline facilities will be available on acceptable terms, or at all. If alternate beamline facilities are not available, we may be required to delay, reduce the scope of or abandon some of our early drug discovery efforts. We may also be deemed to be in breach of certain of our commercial agreements. Even if alternate beamline facilities are available, we cannot be certain that the quality of or access to the alternate facilities will be adequate and comparable to those of our current facility. Failure to maintain adequate access to and use of beamline facilities may materially adversely affect our ability to pursue our own discovery efforts and perform under our collaborations, commercial agreements and grants, which are our current primary source of revenue.

If our competitors develop drug discovery technologies that are more advanced than ours, our ability to generate revenue from collaborations, commercial arrangements or grants may be reduced or eliminated.

The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies, and private and public research institutions. There is also intense competition for fragment-based lead discovery collaborations. In addition, we understand that many large pharmaceutical companies are exploring the internal development of fragment-based drug discovery methods. And due to the high demand for treatments for AML, CML and other oncology therapeutic areas, research is intense and new technologies to enhance the rapid discovery and development of potential treatments are being sought out and developed by our competitors. If our competitors develop drug discovery technologies that are more advanced or more

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cost efficient or effective than ours, our revenue from collaborations, commercial arrangements and grants may be substantially reduced or eliminated.

If our competitors develop treatments for AML, CML or any other therapeutic area that are approved more quickly, marketed more effectively or demonstrated to be more effective than our current or future product candidates, our ability to generate product revenue will be reduced or eliminated.

Most cancer indications for which we are developing products have a number of established therapies with which our candidates will compete. Most major pharmaceutical companies and many biotechnology companies are aggressively pursuing new cancer development programs, including both therapies with traditional as well as novel mechanisms of action.

We are aware of competitive products in each of the markets we target. These competitive products include approved and marketed products as well as products in development. We expect Troxatyl, if approved for the treatment of AML, to compete with: cytarabine, a generic compound often known as Ara-C, which is also used in combination with the anthracycline agents daunorubicin, idarubicin, and mitoxantrone; Mylotarg® (gemtuzumab ozogamicin), marketed by Wyeth Pharmaceuticals Inc.; and Clolar^tm (clofarabine), marketed by Genzyme Corporation in the United States and under regulatory review in the E.U. In addition, we are aware of a number of other potential competing products, including: cloretazine (VNP40101M), which is being developed by Vion Pharmaceuticals, Inc. and is currently in a Phase III clinical trial in AML patients; Zarnestra® (tipifarnib), under development by Johnson & Johnson Pharmaceutical Research and Development, LLC; Vidaza® (azacitidine), under development for this indication by Pharmion Corporation; and Dacogen^tm (decitabine), under development by MGI Pharma, Inc. and SuperGen, Inc. Numerous other potential competing products are in clinical treatment and preclinical development. Significant competitors in the area of fragment-based drug discovery include Astex Therapeutics Limited, Plexxikon Inc., Evotec AG and Sunesis Pharmaceuticals, Inc.

Many of our competitors have significantly greater financial, product development, manufacturing and marketing resources than us. Large pharmaceutical companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. These companies also have significantly greater research capabilities than us. In addition, many universities and private and public research institutes are active in cancer research, some in direct competition with us. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

Our competitors may succeed in developing products for the treatment of AML, CML or other diseases in oncology therapeutic areas in which our drug discovery programs are focused that are more effective, better tolerated or less costly than any which we may offer or develop. Our competitors may succeed in obtaining approvals from the FDA and foreign regulatory authorities for their product candidates sooner than we do for ours. We will also face competition from these third parties in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, and in acquiring and in-licensing technologies and products complementary to our programs or advantageous to our business.

We have limited experience in identifying, acquiring or in-licensing, and integrating third parties’ products, businesses and technologies into our current infrastructure. If we determine that future acquisition or in-licensing opportunities are desirable and do not successfully execute on and integrate such targets, we may incur costs and disruptions to our business.

An important part of our business strategy is to continue to develop a broad pipeline of product candidates. These efforts include potential licensing and acquisition transactions. For example, our product candidate, Troxatyl, was initially developed by Shire and licensed to us in July 2004. Although we are not currently a party to any other agreements or commitments and we have no understandings with respect to any such opportunities other than our agreement with Shire, in addition to our internal drug development efforts, we may seek to expand our product pipeline and technologies, at the appropriate time and as resources allow, by acquiring or in-licensing products, businesses or technologies that we believe are a strategic fit with our

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business and complement our existing product candidates, research programs and technologies. Future acquisitions, however, may entail numerous operational and financial risks including:

•  exposure to unknown liabilities;

•  disruption of our business and diversion of our management’s time and attention to the development of acquired products or technologies;

•  incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions;

•  higher than expected acquisition and integration costs;

•  increased amortization expenses;

•  difficulties in and costs of combining the operations and personnel of any acquired businesses with our operations and personnel;

•  impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and

•  inability to retain key employees of any acquired businesses.

Finally, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed or fail to realize the anticipated benefits of such efforts.

We do not have internal manufacturing capabilities, and if we fail to develop and maintain supply relationships with collaborators or other third party manufacturers, we may be unable to develop or commercialize our products.

All of our manufacturing is outsourced to third parties with oversight by our internal managers. For Troxatyl, we currently rely on Raylo Chemicals Inc., a third party supplier for clinical trial quantities of troxacitabine, the active pharmaceutical ingredient in Troxatyl. In addition, the final pharmaceutical presentation of Troxatyl in the form of vials is manufactured by Ben Venue Laboratories, Inc., with whom we have an agreement covering immediate clinical trial needs. We currently do not have long-term supply arrangements with either of these suppliers. We intend to continue this practice of outsourcing our manufacturing services to third parties for any future clinical trials and large-scale commercialization of Troxatyl, and for any other product candidate we advance into clinical trials.

Our ability to develop and commercialize Troxatyl and any other products depends in part on our ability to arrange for collaborators or other third parties to manufacture our products at a competitive cost, in accordance with regulatory requirements and in sufficient quantities for clinical testing and eventual commercialization. We have not manufactured commercial batches of Troxatyl. These collaborators and third-party manufacturers may encounter difficulties with the small- and large-scale formulation and manufacturing processes required to manufacture Troxatyl or any other product candidate we advance into clinical trials. Such difficulties could result in delays in our clinical trials and regulatory submissions, in the commercialization of Troxatyl or another product candidate or, if Troxatyl or any other product candidate is approved, in the recall or withdrawal of the product from the market. Further, development of large-scale manufacturing processes may require additional validation studies, which the FDA must review and approve. Our inability to enter into or maintain agreements with collaborators or capable third party manufacturers on acceptable terms, including our current efforts relating to the production of Troxatyl, could delay or prevent the commercialization of our products, which would adversely affect our ability to generate revenues and could prevent us from achieving or maintaining profitability. Even if we are able to establish additional or replacement manufacturers, the effort to identify these sources and enter into definitive supply agreements may take a substantial amount of time and may not be available on acceptable economic terms.

In addition, we, our collaborators or other third party manufacturers of our products must comply with current good manufacturing practice, or cGMP, requirements enforced by the FDA through its facilities inspection program. These requirements include quality control, quality assurance and the maintenance of records and documentation. We, our collaborators or other third party manufacturers of our products may be

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unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over third party manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied by third-parties is compromised due to their failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize Troxatyl or any other product candidates that we may develop.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell any products we may develop, we may not be able to generate product revenue.

We do not currently have a sales organization for the sales, marketing and distribution of pharmaceutical products. In order to commercialize any products, we must build our sales, marketing, distribution, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. In North America, we currently expect to commercialize our product candidate, Troxatyl, if it is approved, and certain other potential product candidates for other indications that are of strategic interest to us, and plan to establish internal sales and marketing capabilities for those product candidates. We plan to seek third party partners for indications and in territories, such as outside North America, which may require more extensive sales and marketing capabilities. The establishment and development of our own sales force to market any products we may develop in North America will be expensive and time consuming and could delay any product launch, and we cannot be certain that we would be able to successfully develop this capacity. If we are unable to establish our sales and marketing capability or any other non-technical capabilities necessary to commercialize any products we may develop, we will need to contract with third parties to market and sell any products we may develop in North America. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue and may not become profitable.

The commercial success of Troxatyl or any other product that we may develop depends upon market acceptance among physicians, patients, health care payors and the medical community.

Even if Troxatyl or any other product we may develop obtains regulatory approval, our products, if any, may not gain market acceptance among physicians, patients, health care payors and the medical community. The degree of market acceptance of any of our approved products will depend on a number of factors, including:

•  our ability to provide acceptable evidence of safety and efficacy;

•  relative convenience and ease of administration;

•  the prevalence and severity of any adverse side effects;

•  availability of alternative treatments;

•  pricing and cost effectiveness;

•  effectiveness of our or our collaborators’ sales and marketing strategies; and

•  our ability to obtain sufficient third party coverage or reimbursement.

If Troxatyl or any of our other product candidates is approved but does not achieve an adequate level of acceptance by physicians, healthcare payors and patients, we may not generate sufficient revenue from these products and we may not become profitable. Furthermore, to the extent Troxatyl fails to gain market acceptance for its initial proposed indication, the third-line treatment of AML, it may be more difficult for us to generate sufficient credibility with physicians and patients to commercialize Troxatyl for other indications.

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We are subject to uncertainty relating to health care reform measures and reimbursement policies which, if not favorable to our product candidates, could hinder or prevent our product candidates’ commercial success.

The continuing efforts of the government, insurance companies, managed care organizations and other payors of health care costs to contain or reduce costs of health care may adversely affect:

•  our ability to set a price we believe is fair for our products;

•  our ability to generate revenues and achieve profitability;

•  the future revenues and profitability of our potential customers, suppliers and collaborators; and

•  the availability of capital.

In certain foreign markets, the pricing of prescription drugs is subject to government control and reimbursement may in some cases be unavailable. In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription drugs and the reform of the Medicare and Medicaid systems. For example, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides a new Medicare prescription drug benefit beginning in 2006 and mandates other reforms. While we cannot predict the full outcome of the implementation of this legislation, it is possible that the new Medicare prescription drug benefit, which will be managed by private health insurers and other managed care organizations, will result in decreased reimbursement for prescription drugs, which may further exacerbate industry-wide pressure to reduce prescription drug prices. This could harm our ability to market our products and generate revenues. It is also possible that other similar proposals will be adopted.

Our ability to commercialize our product candidates successfully will depend in part on the extent to which governmental authorities, private health insurers and other organizations establish appropriate coverage and reimbursement levels for the cost of our products and related treatments. Third party payors are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States, which could significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may result in lower prices for our product candidates or exclusion of our product candidates from coverage and reimbursement programs. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could significantly reduce our revenues from the sale of any approved product.

We will need to increase the size of our organization, and we may experience difficulties in managing growth.

As of June 30, 2005, we had 105 full-time employees. In the future, we will need to expand our managerial, operational, financial and other resources in order to manage and fund our operations and clinical trials, continue our research and development and collaborative activities, and commercialize our product candidates. It is possible that our management and scientific personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires that we:

•  manage our clinical trials effectively;

•  manage our internal research and development efforts effectively while carrying out our contractual obligations to collaborators and other third-parties;

•  continue to improve our operational, financial and management controls, reporting systems and procedures; and

•  attract and retain sufficient numbers of talented employees.

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We may be unable to successfully implement these tasks on a larger scale and, accordingly, may not achieve our research, development and commercialization goals.

If we fail to attract and keep key management and scientific personnel, we may be unable to successfully develop or commercialize our product candidates.

We will need to expand and effectively manage our managerial, operational, financial and other resources in order to successfully pursue our research, development and commercialization efforts for Troxatyl and our future product candidates. Our success depends on our continued ability to attract, retain and motivate highly qualified management and chemists, biologists, and preclinical and clinical personnel. The loss of the services of any of our senior management, particularly Michael Grey, our President and Chief Executive Officer, or Stephen Burley, our Chief Scientific Officer and Senior Vice President, Research, could delay or prevent the commercialization of our product candidates. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. We employ these individuals on an at-will basis and their employment can be terminated by us or them at any time, for any reason and with or without notice. We will need to hire additional personnel as we continue to expand our manufacturing, research and development activities.

We have scientific and clinical advisors who assist us in formulating our research, development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with ours.

We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Diego, California area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly the achievement of our research and development objectives, our ability to raise additional capital and our ability to implement our business strategy. In particular, if we lose any members of our senior management team, we may not be able to find suitable replacements and our business may be harmed as a result.

Risks Relating to our Finances and Capital Requirements

We expect our net operating losses to continue for at least several years, and we are unable to predict the extent of future losses or when we will become profitable, if ever.

We have incurred substantial net operating losses since our inception. For the year ended December 31, 2004, we had a net loss attributable to common stockholders of $19.1 million. For the six months ended June 30, 2005, we had a net loss attributable to common stockholders of $13.1 million. As of June 30, 2005, we had an accumulated deficit of approximately $118.8 million. We expect our annual net operating losses to increase over the next several years as we expand our research and development activities, and incur significant preclinical and clinical development costs. In particular, we expect our research and development expenses to increase substantially in connection with the further clinical development of Troxatyl. Because of the numerous risks and uncertainties associated with our research and development efforts and other factors, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We will need to obtain regulatory approval and successfully commercialize Troxatyl or another future product candidate before we can generate revenues which would have the potential to lead to profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis.

We currently lack a significant continuing revenue source and may not become profitable.

Our ability to become profitable depends upon our ability to generate significant continuing revenues. To obtain significant continuing revenues, we must succeed, either alone or with others, in developing, obtaining

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regulatory approval for, and manufacturing and marketing Troxatyl or any other product candidates with significant market potential. We have received revenues from collaborations, commercial agreements and grants totaling $9.9 million and $11.9 million for the six months ended June 30, 2005 and 2004, respectively, and revenues from collaborations, commercial agreements and grants totaling $27.3 million, $18.1 million, and $3.3 million, for the years ended December 31, 2004, 2003, and 2002, respectively. Though we anticipate that our collaborations, commercial agreements and grants will continue to be our primary source of revenues for the next several years, we do not expect these revenues alone to be sufficient to lead to profitability.

Our ability to generate continuing revenues depends on a number of factors, including:

•  obtaining new collaborations and commercial agreements;

•  performing under current and future collaborations, commercial agreements and grants, including achieving milestones;

•  successful completion of clinical trials for Troxatyl and any other product candidate we advance into clinical trials;

•  achievement of regulatory approval for Troxatyl and any other product candidate we advance into clinical trials; and

•  successful sales, manufacturing, distribution and marketing of our future products, if any.

If we are unable to generate significant continuing revenues, we will not become profitable, and we may be unable to continue our operations.

We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce or eliminate our research and development programs or commercialization efforts.

We believe that our existing cash, cash equivalents and short-term investments, together with the net proceeds from this offering, will be sufficient to meet our projected operating requirements at least through mid-2007. Because we do not anticipate that we will generate significant continuing revenues for several years, if at all, we will need to raise substantial additional capital to finance our operations in the future. Our additional funding requirements will depend on, and could increase significantly as a result of, many factors, including the:

•  terms and timing of any collaborative, licensing and other arrangements that we may establish;

•  rate of progress and cost of our clinical trials and other research and development activities;

•  scope, prioritization and number of clinical development and research programs we pursue;

•  costs and timing of regulatory approval;

•  costs of establishing or contracting for sales and marketing capabilities;

•  costs of manufacturing;

•  extent to which we acquire or in-license new products, technologies or businesses;

•  effect of competing technological and market developments; and

•  costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

Until we can generate significant continuing revenues, if ever, we expect to satisfy our future cash needs through public or private equity offerings, debt financings, or collaborations, commercial agreements and grants. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or more of our research and development programs or our commercialization efforts.

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Raising additional funds by issuing securities or through licensing arrangements may cause dilution to existing stockholders, restrict our operations or require us to relinquish proprietary rights.

We may raise additional funds through public or private equity offerings, debt financings or licensing arrangements. To the extent that we raise additional capital by issuing equity securities, our existing stockholders’ ownership will be diluted. Any debt financing we enter into may involve covenants that restrict our operations. These restrictive covenants may include limitations on additional borrowing, specific restrictions on the use of our assets as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments. In addition, if we raise additional funds through licensing arrangements, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.

Our quarterly operating results may fluctuate significantly.

We expect our operating results to be subject to quarterly fluctuations. The revenues we generate, if any, and our operating results will be affected by numerous factors, including:

•  our addition or termination of research programs or funding support;

•  variations in the level of expenses related to our product candidates or research programs;

•  our execution of collaborative, licensing or other arrangements, and the timing of payments we may make or receive under these arrangements;

•  any intellectual property infringement lawsuit in which we may become involved; and

•  changes in accounting principles.

Quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

We may incur substantial liabilities from any product liability claims if our insurance coverage for those claims is inadequate.

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials, and will face an even greater risk if we sell our product candidates commercially. An individual may bring a liability claim against us if one of our product candidates causes, or merely appears to have caused, an injury. If we cannot successfully defend ourselves against the product liability claim, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

•  decreased demand for our product candidates;

•  injury to our reputation;

•  withdrawal of clinical trial participants;

•  costs of related litigation;

•  substantial monetary awards to patients or other claimants;

•  loss of revenues; and

•  the inability to commercialize our product candidates.

We have product liability insurance that covers our clinical trials, up to an annual aggregate limit of $3.0 million in the United States, and other amounts in other jurisdictions. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for any of our product candidates. However, insurance coverage is increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise.

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We use biological and hazardous materials, and any claims relating to improper handling, storage or disposal of these materials could be time consuming or costly.

We use hazardous materials, including chemicals, biological agents and radioactive isotopes and compounds, that could be dangerous to human health and safety or the environment. Our operations also produce hazardous waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may impair our drug development efforts.

In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. If one of our employees was accidentally injured from the use, storage, handling or disposal of these materials or wastes, the medical costs related to his or her treatment would be covered by our workers’ compensation insurance policy. However, we do not carry specific biological or hazardous waste insurance coverage and our property and casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.

Risks Relating to our Intellectual Property

Our success depends upon our ability to protect our intellectual property and our proprietary technologies.

Our commercial success depends on obtaining and maintaining patent protection and trade secret protection for our product candidates, proprietary technologies and their uses, as well as successfully defending these patents against third party challenges. There can be no assurance that our patent applications will result in additional patents being issued or that issued patents will afford protection against competitors with similar technology, nor can there be any assurance that the patents issued will not be infringed, designed around, or invalidated by third parties. Even issued patents may later be found unenforceable, or be modified or revoked in proceedings instituted by third parties before various patent offices or in courts.

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Changes in either the patent laws or in the interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third party patents.

The degree of future protection for our proprietary rights is uncertain. Only limited protection may be available and may not adequately protect our rights or permit us to gain or keep any competitive advantage. For example:

•  we might not have been the first to file patent applications for these inventions;

•  we might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;

•  others may independently develop similar or alternative technologies or duplicate any of our technologies;

•  the patents of others may have an adverse effect on our business;

•  it is possible that none of our pending patent applications will result in issued patents;

•  our issued patents may not encompass commercially viable products, may not provide us with any competitive advantages, or may be challenged by third parties;

•  our issued patents may not be valid or enforceable; or

•  we may not develop additional proprietary technologies that are patentable.

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Proprietary trade secrets and unpatented know-how are also very important to our business. Although we have taken steps to protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties, and confidential information and inventions agreements with employees, consultants and advisors, third parties may still obtain this information or we may be unable to protect our rights. Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secret information. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how, and we would not be able to prevent their use.

The intellectual property protection for Troxatyl is dependent primarily on third parties and our long term protection is primarily focused on methods of manufacturing and use and formulations.

With respect to Troxatyl, Shire retains the right to prosecute and maintain patents covering composition of matter, methods of manufacturing, specific methods of use, formulations, intermediates and modes of administration for this product candidate, while the University of Georgia Research Foundation, Inc. and Yale University are responsible for the patent portfolio related to methods of use for Troxatyl. We only have the right to comment on the patent prosecution. If Shire fails to appropriately prosecute and maintain patent protection for Troxatyl, or the University of Georgia Research Foundation, Inc. and Yale University fail to protect methods of use for Troxatyl, our ability to develop and commercialize Troxatyl may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products. This failure to properly protect the intellectual property rights relating to Troxatyl could have a material adverse effect on our financial condition and results of operation.

Various patent applications and patents are directed to Troxatyl and its methods of manufacturing and use, along with Troxatyl formulations, intermediates and modes of administration. For example, one U.S. patent claims Troxatyl itself as a composition of matter. This U.S. composition of matter patent is due to expire in 2008 and there are corresponding applications pending in various other countries, as well as a granted European and Japanese patent. Additional U.S. patents encompass methods of treating cancer using Troxatyl, and, for example, methods of treating CML or AML with Troxatyl in patients previously treated with Ara-C, which patents are due to expire in 2015 and 2020, respectively.

We cannot guarantee that lack of composition of matter protection after 2008 will not adversely impact our collection of patents with respect to Troxatyl or that any of these patents will be found valid and enforceable, or that third parties will be found to infringe any of our issued patent claims. There can be no assurance that any of the patent applications will issue in any jurisdiction. Moreover, we cannot predict the breadth of claims that may be allowed or the actual enforceable scope of the Troxatyl patents.

If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.

Our commercial success also depends upon our ability and the ability of our collaborators to develop, manufacture, market and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our collaborators are developing products. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates or proprietary technologies may infringe.

We may be exposed to, or threatened with, future litigation by third parties having patent, trademark or other intellectual property rights alleging that we are infringing their intellectual property rights. If one of these patents was found to cover our product candidates, proprietary technologies or their uses, or one of these trademarks was found to be infringed, we or our collaborators could be required to pay damages and could be

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unable to commercialize our product candidates or use our proprietary technologies unless we or they obtain a license to the patent or trademark, as applicable. A license may not be available to us or our collaborators on acceptable terms, if at all. In addition, during litigation, the patent or trademark holder could obtain a preliminary injunction or other equitable right which could prohibit us from making, using or selling our products, technologies or methods. In addition, we or our collaborators could be required to designate a different trademark name for our producers, which could result in a delay in selling those products.

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including, but not limited to:

•  infringement and other intellectual property claims which, with or without merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;

•  substantial damages for infringement, including treble damages and attorneys’ fees, which we may have to pay if a court decides that the product or proprietary technology at issue infringes on or violates the third party’s rights;

•  a court prohibiting us from selling or licensing the product or using the proprietary technology unless the third party licenses its technology to us, which it is not required to do;

•  if a license is available from the third party, we may have to pay substantial royalties, fees and/or grant cross licenses to our technology; and

•  redesigning our products or processes so they do not infringe, which may not be possible or may require substantial funds and time.

We have not conducted an extensive search of patents issued to third parties, and no assurance can be given that third party patents containing claims covering our products, technology or methods do not exist, have not been filed, or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas or fields, we believe there is a significant risk that third parties may allege they have patent rights encompassing our products, technology or methods. In addition, we have not conducted an extensive search of third party trademarks, so no assurance can be given that such third party trademarks do not exist, have not been filed, could not be filed, or issued, or could not exist under common trademark law.

Other product candidates that we may develop, either internally or in collaboration with others, could be subject to similar risks and uncertainties.

We may not be able to obtain patent term extension/restoration or other exclusivity for our products which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenue.

Various patent applications and patents are directed to Troxatyl and its methods of manufacturing and use, along with Troxatyl formulations, intermediates and modes of administration. For example, one U.S. patent claims Troxatyl itself as a composition of matter. This U.S. composition of matter patent is due to expire in 2008, and there are corresponding applications pending in various other countries, as well as a granted European and Japanese patent. Additional U.S. patents encompass methods of treating cancer using Troxatyl, and methods of treating CML or AML with Troxatyl in patients previously treated with Ara-C, which patents are due to expire in 2015 and 2020, respectively. In some of the major territories, such as the United States, Europe and Japan, patent term extension/restoration may be available to compensate for time taken during aspects of the product’s regulatory review. However, we cannot be certain that an extension will be granted, or if granted, what the applicable time period or the scope of patent protection afforded during any extended period will be. In addition, even though some regulatory agencies may provide some other exclusivity for a product under its own laws and regulations, we may not be able to qualify the product or obtain the exclusive time period. If we are unable to obtain patent term extension/restoration or some other exclusivity, we could be subject to increased competition and our opportunity to establish or maintain product revenue could be substantially reduced or eliminated.

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Risks Relating to the Securities Markets and Investment in our Common Stock

Market volatility may affect our stock price and the value of your investment.

Following this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

•  changes in the development status of or clinical trial results for our product candidates, including the results for our ongoing pivotal Phase II/III trial of Troxatyl;

•  announcements of new products or technologies, commercial relationships or other events by us or our competitors;

•  events affecting our collaborations, commercial agreements and grants;

•  variations in our quarterly operating results;

•  changes in securities analysts’ estimates of our financial performance;

•  regulatory developments in the United States and foreign countries;

•  fluctuations in stock market prices and trading volumes of similar companies;

•  sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

•  additions or departures of key personnel;

•  discussion of us or our stock price by the financial and scientific press and in online investor communities; and

•  changes in accounting principles generally accepted in the United States.

An active public market for our common stock may not develop or be sustained after this offering. We will negotiate and determine the initial public offering price with representatives of the underwriters and this price may not be indicative of prices that will prevail in the trading market after the offering. As a result, you may not be able to sell your shares of common stock at or above the offering price. In addition, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Any such litigation brought against us could result in substantial costs and a diversion of management’s attention and resources, which could hurt our business, operating results and financial condition.

We may allocate the net proceeds from this offering in ways that you and other stockholders may not approve.

We intend to use the net proceeds from this offering for:

•  the clinical development of Troxatyl;

•  further development of our research programs and initial clinical development stemming from our internal programs;

•  working capital and general corporate purposes; and

•  potential acquisition and in-licensing activities.

Our management will, however, have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not necessarily improve our operating results or enhance the value of our common stock.

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Investors purchasing common stock in this offering will incur substantial dilution as a result of this offering and future equity issuances, and, as a result, our stock price could decline.

The initial public offering price for this offering is substantially higher than the pro forma, net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $           per share. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased certain of their shares. Investors purchasing shares of common stock in this offering will contribute approximately      % of the total amount we have raised since our inception, but will own only approximately      % of our total common stock immediately following the completion of this offering.

We believe that our existing cash, cash equivalents and short-term investments, together with the net proceeds from this offering, will be sufficient to meet our projected operating requirements through at least mid-2007. Because we will need to raise additional capital to fund our clinical development and research programs, among other things, we may conduct substantial additional equity offerings. These future equity issuances, together with the exercise of outstanding options and warrants and any additional shares issued in connection with acquisitions, will result in further dilution to investors.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and bylaws, both of which will become effective upon the completion of this offering, may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by written consent of our stockholders, and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

We may incur increased costs as a result of changes in laws and regulations relating to corporate governance matters.

Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission and by the Nasdaq Stock Market, will result in increased costs to us as we respond to their requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to these laws and regulations and cannot predict or estimate the amount or timing of additional costs we may incur to respond to their requirements.

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If our executive officers, directors and largest stockholders choose to act together, they may be able to control our operations and act in a manner that advances their best interests and not necessarily those of other stockholders.

After this offering, our executive officers, directors and holders of 5% or more of our outstanding common stock will beneficially own approximately      % of our common stock. As a result, these stockholders, acting together, will be able to control all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with our interests or the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders.

                     shares, or      %, of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to decline significantly.

After this offering, we will have outstanding                      shares of common stock. This includes the                      shares we are selling in this offering, which may be sold in the public market immediately, and the                                           shares that will be automatically issued upon completion of this offering under a $6.0 million convertible note and excludes                      shares issuable upon exercise of outstanding options and warrants. The remaining      %, or                      shares, of our total outstanding shares as well an aggregate of                      shares issuable upon exercise of outstanding options and warrants will become available for resale in the public market as shown in the chart below.

Number of Shares	Type of Securities	Date of Availability for Resale into Public Market
	Common stock	180 days after the date of this prospectus due to lock-up agreements the holders of these shares have with the underwriters. However, the underwriters can waive these restrictions and allow these stockholders to sell their shares at any time.
	$6.0 million note convertible into common stock	freely tradeable pursuant to Rule 144 under the Securities Act of 1933, as amended, subject to the 180-day lock-up referenced above.
	Options exercisable for common stock under our 2000 equity incentive plan	Upon the exercise of the options in the future, if ever, with            shares subject to the 180-day lock-up referenced above.
266,726	Warrants exercisable for common stock	Upon the exercise of the warrants in the future, if ever, with            shares subject to the 180-day lock-up referenced above.

We intend to file a registration statement under the Securities Act of 1933, as amended, or Securities Act, as promptly as possible after the effective date of this offering to register the shares of common stock issuable upon exercise of the outstanding options referenced above as well as shares that we may issue in the future under our 2005 equity incentive plan, 2005 non-employee directors’ stock option plan and 2005 employee stock purchase plan as shown in the chart below:

Plan	Number of Shares of Common Stock Reserved for Issuance
2005 equity incentive plan	1,500,000 shares plus the number of shares remaining available for future issuance under our 2000 equity incentive plan that are not covered by outstanding options as of the effective date of this offering or that would otherwise have reverted to the share reserve under the 2000 plan.
2005 non-employee directors’ stock option plan	150,000.
2005 employee stock purchase plan	750,000.

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The share reserves for our 2005 equity incentive plan, 2005 non-employee directors’ stock option plan and 2005 employee stock option plan are subject to the following increases:

•  The share reserve for our 2005 equity incentive plan is subject to an automatic annual share increase in an amount up to and including the lesser of 3.5% of the total number of shares of our common stock outstanding at the end of the fiscal year immediately preceding the increase in the share reserve or 1,000,000 shares.

•  The share reserve for our 2005 non-employee directors’ stock option plan is subject to an automatic annual share increase in an amount up to and including the aggregate number of shares subject to options granted to our non-employee directors during the fiscal year immediately preceding the increase in the share reserve.

•  The share reserve for our 2005 employee stock purchase plan is subject to an automatic annual share increase in an amount up to and including the lesser of 1.0% of the total number of shares of our common stock outstanding at the end of the fiscal year immediately preceding the increase in the share reserve or 300,000 shares.

Because each of these plans provides for automatic annual increases to its respective share reserve, such increases will not require stockholder approval. Any increase in our plan share reserves will cause dilution to existing stockholders. Once we register any new shares that we may issue under each of our plans, those shares will be freely tradeable upon issuance.

If any of these events cause a large number of our shares to be sold in the public market, the sales could reduce the trading price of our common stock and impede our ability to raise future capital. See “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

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Forward-Looking Statements

This prospectus contains forward-looking statements, including statements regarding the progress and timing of our clinical trials, the goals of our research and development activities, the safety and efficacy of our product candidates, the potential success of our existing and future collaborations and commercial agreements, our expected future revenues, operations and expenditures and our projected cash needs, that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking statements relate to future events or our future financial performance and include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and competition. Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or the negative of those terms, and similar expressions.

Forward-looking statements include, but are not limited to, statements about:

•  our ability to successfully complete preclinical and clinical development of Troxatyl and any future product candidates and demonstrate the safety and efficacy of Troxatyl and any future product candidates in clinical trials within anticipated time frames, if at all;

•  the trial design for our ongoing pivotal Phase II/III clinical trial for Troxatyl;

•  the success of the development and commercialization efforts of our existing and future collaborators and our ability to enter into new collaborations, commercial agreements and strategic alliances;

•  our ability to obtain, maintain and successfully enforce adequate patent and other intellectual property protection of any of our product candidates that may be approved for sale;

•  the content and timing of submissions to and decisions made by the FDA and other regulatory agencies;

•  our ability to manufacture, or otherwise secure the manufacture of, sufficient amounts of our product candidates for clinical trials and, if approved, products for commercialization activities;

•  our ability to develop a sufficient sales and marketing force or enter into agreements with third parties to market and sell any of our product candidates that may be approved for sale;

•  the success of our competitors; and

•  our ability to raise additional funds in the capital markets, through arrangements with collaborators or from other sources.

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. These forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. The forward-looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995.

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Use of Proceeds

We estimate that the net proceeds from the sale of the shares of common stock we are offering will be approximately $           million, based upon an assumed initial public offering price of $           per share and after deducting the underwriting discount and estimated offering expenses. If the underwriters fully exercise the over-allotment option, we estimate that our net proceeds from this offering will be approximately $           million.

We intend to use the majority of the net proceeds from this offering to fund research and development activities, including approximately 35% to 45% to fund the clinical development of Troxatyl, and approximately 15% to 25% to fund the further development of our research programs and initial clinical development stemming from our internal programs. In particular, we anticipate that approximately 20% to 30% of the net proceeds will be used to complete our pivotal Phase II/III clinical trial of Troxatyl for the third-line treatment of AML. However, due to the risks inherent in the clinical trial process and given the early stage of development of our programs, we are unable to estimate with any certainty the total costs or when we will incur these costs in the continued development of our product candidates for potential commercialization. We anticipate that the net proceeds from this offering will be sufficient to enable us to complete accelerated approval of Troxatyl for the third-line treatment of AML, assuming expedited FDA review under its fast track designation standards. In addition, we cannot forecast with any degree of certainty which drug candidates will be subject to future collaborative or licensing arrangements, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

We anticipate using the remaining approximately 35% to 45% of the net proceeds from this offering for working capital and general corporate purposes. In particular, we expect to allocate approximately 5% to 15% of the net proceeds for increased general and administrative expenses, approximately 5% to 15% for increased costs associated with potential further expansion of our employee base and facilities, up to approximately 10% to 20% to repay a portion of our debt under our debt agreement with Silicon Valley Bank and Oxford Finance Corporation, and up to 10% for additional equipment purchases and miscellaneous working capital and general corporate purposes. This debt arrangement allows us to borrow up to $8.0 million for general working capital and $2.0 million for equipment and leasehold improvements. The debt bears interest at the rate of approximately 10% per annum and is due in monthly installments over three years. We currently have $4.0 million of indebtedness outstanding under this facility which is being used for general working capital.

We may also use a portion of the net proceeds for potential acquisition and in-licensing activities. In particular, we may acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies or products. To the degree that we pursue any of these transactions, the amount of proceeds that we have available for working capital and general corporate purposes may decrease. We have no present plans or commitments relating to any of these types of transactions.

Pending the use of the net proceeds from this offering, we intend to invest these funds in short-term, interest-bearing investment-grade securities.

We believe that the net proceeds from this offering, together with our existing cash, cash equivalents and short-term investments, will be sufficient to meet our projected operating requirements through at least mid-2007.

Dividend Policy

We have never declared or paid any cash dividends on our common stock and do not expect to pay cash dividends in the foreseeable future. The payment of dividends by us on our common stock is limited by our debt agreements. Any future determination related to dividend policy will be made at the discretion of our board of directors.

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Capitalization

The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2005:

•  on an actual basis; and

•  on a pro forma as adjusted basis to give effect to (1) the filing of an amended and restated certificate of incorporation to authorize 75,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock, (2) the sale of                      shares of common stock in this offering at an assumed initial public offering price of $           per share, after deducting the underwriting discount and estimated offering expenses, (3) the conversion of all of our outstanding shares of preferred stock into 15,192,354 shares of common stock upon the completion of this offering and (4) the automatic issuance of                      shares of our common stock upon the completion of this offering under a $6.0 million convertible note.

You should read the information in this table together with our financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

				As of June 30, 2005
							Pro Forma
				Actual			As Adjusted
				(unaudited)
				(in thousands except share
				and per share amounts)
Cash and cash equivalents				$	10,428
Long-term debt obligations (including current portion)				$	8,372		$	2,372
Redeemable convertible preferred stock, $0.001 par value: 19,000,000 shares authorized and 15,192,354 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma as adjusted					40,200			–
Stockholders’ (deficit) equity:
	Preferred stock, $0.001 par value: no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized and no shares issued and outstanding, pro forma as adjusted				–			–
	Common stock, $0.001 par value: 50,000,000 shares authorized and 1,198,514 shares issued and outstanding, actual; 75,000,000 shares authorized and         shares issued and outstanding, pro forma as adjusted				1
	Notes receivable from stockholders				(67	)		(67	)
	Additional paid-in capital				94,707
	Deferred compensation				(8,273	)		(8,273	)
	Accumulated deficit				(118,826	)		(118,826	)
		Total stockholders’ deficit			(32,458	)
			Total capitalization	$	16,114		$

The number of shares of common stock to be outstanding immediately after this offering is based on the number of shares outstanding as of June 30, 2005 and excludes, as of that date:

•  2,391,843 shares of common stock subject to outstanding options under our 2000 equity incentive plan, with a weighted average exercise price of $1.15 per share;

•  414,633 shares of common stock reserved for future issuance under our 2000 equity incentive plan;

•  2,400,000 shares of common stock reserved for future issuance under our 2005 equity incentive plan, 2005 non-employee directors’ stock option plan and 2005 employee stock purchase plan, each of which will become effective upon the completion of this offering; and

•  266,726 shares of common stock subject to outstanding warrants, with a weighted average exercise price of $2.31 per share.

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Dilution

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering. The historical net tangible book deficiency of our common stock as of June 30, 2005 was approximately $(36.0) million, or approximately $(30.02) per common share, based on the number of common shares outstanding as of June 30, 2005. Historical net tangible book value per share is determined by dividing the number of outstanding shares of our common stock into our total tangible assets (total assets less intangible assets) less total liabilities. Pro forma net tangible book value of approximately $4.2 million, or $0.26 per share of our common stock, represents our 26 historical net tangible book value, taking into account the automatic conversion of our preferred stock upon completion of this offering.

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to the sale of common stock offered in this offering at an assumed initial public offering price of $           per share, and after deducting the underwriting discount and estimated offering expenses payable by us, and after giving effect to the conversion of all outstanding shares of preferred stock as of June 30, 2005 into 15,192,354 shares of common stock upon completion of this offering, and after giving effect to the automatic issuance of                      shares of our common stock upon the completion of this offering under a $6.0 million convertible note, our pro forma as adjusted net tangible book value as of June 30, 2005 would have been approximately $           million, or approximately $           per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $           per share to existing common stockholders, and an immediate dilution of $           per share to investors participating in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share				$
Historical net tangible book value per share as of June 30, 2005	$	(30.02	)
Pro forma increase in net tangible book value per share attributable to conversion of convertible preferred stock		30.28
Pro forma net tangible book value per share before this offering		0.26
Pro forma increase in net tangible book value per share attributable to investors participating in this offering, including the automatic issuance of            shares of our common stock upon the completion of this offering under a $6.0 million convertible note
Pro forma as adjusted net tangible book value per share after this offering
Pro forma dilution per share to investors participating in this offering				$

The following table summarizes, on a pro forma as adjusted basis as of June 30, 2005, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid by existing stockholders and by investors participating in this offering, the automatic issuance of                      shares of our common stock upon the completion of this offering under a $6.0 million convertible note, after deducting the underwriting discount and estimated offering expenses, at an assumed initial public offering price of $           per share:

		Shares Purchased					Total Consideration
												Average Price
		Number		Percent			Amount		Percent			Per Share
		(in thousands)
Existing stockholders before this offering			16,391			%	$	105,621			%	$	6.44
Investors participating in this offering
	Total				100	%	$			100	%

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The discussion and tables above assume no exercise of the underwriters’ over-allotment option and no exercise of any outstanding options or warrants. If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to      % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be increased to                      shares or      % of the total number of shares of common stock to be outstanding after this offering.

As of June 30, 2005, there were:

•  2,391,843 shares of common stock subject to outstanding options under our 2000 equity incentive plan, having a weighted average exercise price of $1.15 per share;

•  414,633 shares of common stock reserved for future issuance under our 2000 equity incentive plan; and

•  266,726 shares of common stock subject to outstanding warrants, having a weighted average exercise price of $2.31 per share.

Effective upon the completion of this offering, our 2000 equity incentive plan will terminate and an aggregate of 1,500,000 shares of our common stock, plus the number of shares remaining available for future issuance under our 2000 equity incentive plan that are not covered by outstanding options as of such date, will be reserved for issuance under our 2005 equity incentive plan. In addition, effective upon the completion of this offering, an aggregate of 150,000 and 750,000 shares of our common stock will be reserved for issuance under our 2005 non-employee directors’ stock option plan and our 2005 employee stock purchase plan, respectively. These share reserves will be subject to automatic annual increases in accordance with the terms of the plans. Furthermore, we may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any of these options or warrants are exercised, new options are issued under our equity incentive plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

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Selected Consolidated Financial Data

The following selected consolidated financial data should be read together with our consolidated financial statements and accompanying notes, “Selected Consolidated Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 2002, 2003 and 2004, and the selected balance sheet data as of December 31, 2003 and 2004, are derived from our audited consolidated financial statements, which are included in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 2000 and 2001, and the selected consolidated balance sheet data as of December 31, 2000, 2001 and 2002, are derived from our audited consolidated financial statements, which are not included in this prospectus. The selected consolidated statement of operations data for the six months ended June 30, 2004 and 2005, and the selected consolidated balance sheet data as of June 30, 2005, are derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results.

																	Six Months Ended
		Years Ended December 31,															June 30,
		2000			2001			2002			2003			2004			2004			2005
																	(unaudited)
		(in thousands, except per share data)
Statement of Operations Data:
Revenue:
	Grants	$	–		$	–		$	350		$	3,344		$	6,380		$	1,742		$	429
	Grants — subcontractor reimbursements		–			–			–			4,599			4,976			1,520			2,666
	Collaborations and commercial agreements		–			1,338			2,986			10,135			15,941			8,597			6,763
Total revenue			–			1,338			3,336			18,078			27,297			11,859			9,858
Expenses:
	Research and development		6,616			17,831			25,573			28,587			31,444			15,255			16,742
	General and administrative		4,053			7,682			10,122			7,353			6,719			3,337			4,749
	In-process technology		–			1,500			–			–			4,000			–			–
Total operating expenses			10,669			27,013			35,695			35,940			42,163			18,592			21,491
Loss from operations			(10,669	)		(25,675	)		(32,359	)		(17,862	)		(14,866	)		(6,733	)		(11,633	)
Interest income			2,424			2,729			622			320			175			44			115
Interest expense			(126	)		(302	)		(932	)		(1,219	)		(669	)		(382	)		(190	)
Interest expense associated with debenture			–			–			–			–			(3,392	)		–			(1,188	)
Net loss			(8,371	)		(23,248	)		(32,669	)		(18,761	)		(18,752	)		(7,071	)		(12,896	)
Accretion to redemption value of redeemable convertible preferred stock			(274	)		(329	)		(329	)		(329	)		(329	)		(165	)		(165	)
Net loss attributable to common stockholders		$	(8,645	)	$	(23,577	)	$	(32,998	)	$	(19,090	)	$	(19,081	)	$	(7,236	)	$	(13,061	)
Basic and diluted net loss attributable to common stockholders per share(1):
	Historical	$	(32.38	)	$	(42.95	)	$	(39.42	)	$	(22.43	)	$	(19.91	)	$	(8.34	)	$	(12.39	)
	Pro forma (unaudited)													$	(6.61	)				$	(1.17	)
Shares used to compute basic and diluted net loss attributable to common stockholders per share(1):
	Historical		267			549			837			851			958			867			1,054
	Pro forma (unaudited)														2,887						11,157

(1) Please see Note 1 to our consolidated financial statements for an explanation of the method used to calculate the historical and pro forma net loss per share and the number of shares used in the computation of the per share amounts.

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	As of December 31,
																As of
	2000			2001			2002			2003			2004			June 30, 2005
																(unaudited)
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	71,175		$	50,615		$	24,255		$	13,635		$	11,512		$	10,428
Working capital (deficit)		69,201			38,548			15,656			1,042			(8,634	)		4,689
Total assets		75,736			72,095			47,721			35,943			28,332			25,272
Long-term debt obligations (including current portion)		1,645			7,707			15,789			13,487			23,420			8,372
Redeemable preferred stock		82,981			87,648			87,977			88,306			74,850			40,200
Accumulated deficit		(11,019	)		(34,596	)		(67,594	)		(86,684	)		(105,765	)		(118,826	)
Total stockholders’ deficit		(10,779	)		(30,882	)		(60,237	)		(78,044	)		(78,782	)		(32,458	)

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and other parts of the prospectus may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a biotechnology company focused on the discovery, development and commercialization of innovative cancer therapeutics. We are developing Troxatyl, a novel compound which is currently in a pivotal Phase II/ III clinical trial for the third-line treatment of Acute Myelogenous Leukemia, or AML. In addition, we are developing Troxatyl for the treatment of earlier stage AML as well as for various solid tumors, and plan to develop Troxatyl for the treatment of Myelodysplastic Syndromes, or MDS. We are also building an internal cancer product pipeline and generating lead compounds for multiple partners through the application of our proprietary approach to drug discovery that is based upon the use of small fragments of drug-like molecules, known as Fragments of Active Structures, or FAST. We have successfully applied FAST to generate novel, potent and selective small molecule compounds in a matter of months for many proteins, or drug targets, that have been implicated in cancers and other diseases. Based on our experience with FAST to date, our current portfolio of oncology drug targets, and the status of our active discovery programs, and assuming some additional resources from the net proceeds of this offering, we believe that FAST is capable of producing at least one new Investigational New Drug application, or IND, candidate per year, starting in 2006.

We currently have ten active revenue-generating collaborations, commercial agreements and grants based upon FAST and related technologies with pharmaceutical and biotechnology companies, including Eli Lilly & Company, Serono International S.A., and F. Hoffmann La Roche Ltd., as well as government and other agencies. We generated approximately $9.9 million in revenues from collaborations, commercial agreements and grants during the six months ended June 30, 2005 and generated approximately $27.3 million, $18.1 million and $3.3 million in revenues from collaborations, commercial agreements and grants during the years ended December 31, 2004, 2003 and 2002, respectively. We have incurred significant losses since our inception in 1998, as we have devoted substantially all of our efforts to research and development activities, including clinical trials. As of June 30, 2005, our accumulated deficit was approximately $118.8 million. We expect to incur substantial and possibly increasing losses for the next several years as we:

•  continue the clinical trials and prepare for the commercialization of our product candidate, Troxatyl;

•  develop and expand our oncology pipeline; and

•  acquire or in-license oncology products or discovery technologies that are complementary to our own.

We were incorporated in Delaware in July 1998. To date, we have not generated any revenues from the sale of therapeutic drugs. We have financed our operations and internal growth through private placements of our preferred stock, our collaboration, commercial agreement and grant revenue, and debt financings.

Financial Operations Overview

Collaboration, Commercial Agreement and Grant Revenue

Collaboration, commercial agreement and grant revenue has primarily been a result of various collaborations, commercial agreements and grants with pharmaceutical companies and biotechnology companies, as well as government and other agencies. We also periodically receive non-refundable payments for achieving certain milestones during the term of our agreements.

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Research and Development Expense

Research and development expense consists primarily of costs associated with clinical trials of Troxatyl, compensation, including stock-based, and other expenses related to research and development personnel, facilities costs and depreciation. We charge all research and development expenses to operations as they are incurred.

Our development activities are primarily focused on the development of Troxatyl. We initiated our pivotal Phase II/III clinical trial for the third-line treatment of AML in July 2005. We expect to complete enrollment in our Phase II/III clinical trial in the third quarter of 2006 and to announce results shortly thereafter. We completed our first clinical trial evaluating Troxatyl dosing by continuous intravenous, or IV, infusion in the second quarter of 2005 and are conducting a Phase I/II dose ranging clinical trial of Troxatyl by continuous IV infusion in patients with refractory solid tumors that we expect to complete by the end of 2005.

We incurred $5.5 million, $1.8 million, and $7.3 million of expenses related to the development of Troxatyl for the year ended December 31, 2004, the six months ended June 30, 2005, and cumulatively through June 30, 2005, respectively. These expenses for 2004 and cumulatively through June 30, 2005 include $4.0 million paid to Shire BioChem Inc. to in-license exclusive worldwide rights to Troxatyl. All other research and development expenses are for various programs in the pre-clinical and research and discovery stages. For these pre-clinical programs, we use our internal resources including our employees and discovery infrastructure, across several projects, and many of our costs are not attributable to a specific project but are directed to broadly applicable research projects. Accordingly, we do not account for our internal research and development costs on a project basis.

We expect our research and development expense to increase as we advance Troxatyl and new product candidates into later stages of clinical development. We are unable to estimate with any certainty the costs we will incur in the continued development of Troxatyl and of other product candidates for commercialization. We expect to continue to expand our research and development activities relating to the clinical development and preclinical research of treatments in the oncology area.

Clinical development timelines, likelihood of success and associated costs are uncertain and therefore vary widely. Although we are currently focused primarily on Troxatyl for the treatment of AML, we anticipate that we will make determinations as to which research and development projects to pursue and how much funding to direct toward each project on an on-going basis in response to the scientific and clinical success of each product candidate and each additional indication for Troxatyl.

At this time, due to the risks inherent in the clinical trial process, development completion dates and costs vary significantly for each product candidate and are difficult to estimate. The lengthy process of seeking regulatory approvals and the subsequent compliance with applicable regulations require the expenditure of substantial additional resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals for our product candidates could cause our research and development expenditures to increase and, in turn, have a material adverse effect on our results of operations. We cannot be certain when any cash flows from our current product candidates will commence.

General and Administrative Expense

General and administrative expense consists primarily of compensation, including stock-based, and other expenses related to our corporate administrative employees, legal fees and other professional services expenses. After this offering, we anticipate increases in general and administrative expense as we add personnel, become subject to reporting obligations applicable to publicly-held companies and continue to develop and prepare for commercialization of our product candidates.

As a public company, we will operate in an increasingly demanding regulatory environment which will subject us to the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission, or SEC, expanded disclosures, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate

39

oversight and adequate internal control over financial reporting. As a result of these factors, until we are able to implement comprehensive accounting policies and procedures, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures or comply with existing or new reporting requirements.

Stock-Based Compensation Expense

Stock-based compensation expense represents the amortization of deferred compensation resulting from the difference between the exercise price and the deemed fair value, as estimated by us for financial reporting purposes, of our common stock on the date stock options were granted to employees and non-employee directors.

Interest Income

Interest income consists of interest earned on our cash and cash equivalents.

Interest Expense

Interest expense represents interest on our debt and secured promissory notes in an aggregate principal amount of $13.4 million that we issued in two tranches in a secured bridge financing in July and September 2004, which were converted into redeemable convertible preferred stock in April 2005.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. Actual results could differ from those estimates. While our significant accounting policies are described in more detail in Note 1 of the Notes to Consolidated Financial Statements included elsewhere in this prospectus, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements:

Revenue Recognition

Our collaboration agreements and commercial agreements contain multiple elements, including non-refundable upfront fees, payments for reimbursement of research costs, payments for ongoing research, payments associated with achieving specific milestones and, in the case of our collaboration agreements, development milestones and royalties based on specified percentages of net product sales, if any. We apply the revenue recognition criteria outlined in Staff Accounting Bulletin No. 104, Revenue Recognition and Emerging Issues Task Force, or EITF, Issue 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21. In applying these revenue recognition criteria, we consider a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

Cash received in advance of services being performed is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement.

When a payment is specifically tied to a separate earnings process, revenues are recognized when the specific performance obligation associated with the payment is completed. Performance obligations typically consist of significant and substantive milestones pursuant to the related agreement. Revenues from milestone payments may be considered separable from funding for research services because of the uncertainty surrounding the achievement of milestones for products in early stages of development. Accordingly, these payments could be

40

recognized as revenue if and when the performance milestone is achieved if they represent a separate earnings process as described in EITF 00-21.

In connection with certain research collaborations and commercial agreements, revenues are recognized from non-refundable upfront fees, which we do not believe are specifically tied to a separate earnings process, ratably over the term of the agreement. Research services provided under some of our collaboration agreements and commercial agreements are on a fixed fee basis. Revenues associated with long-term fixed fee contracts are recognized based on the performance requirements of the agreements and as services are performed.

Revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with grants are recorded in compliance with EITF Issue 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, and EITF Issue 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. According to the criteria established by these EITF Issues, in transactions where we act as a principal, with discretion to choose suppliers, bear credit risk and perform part of the services required in the transaction, we record revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the statements of operations.

None of the payments that we have received from collaborators to date, whether recognized as revenue or deferred, is refundable even if the related program is not successful.

     Stock-Based Compensation Expense

Stock-based compensation expense for stock options granted to employees and directors has been determined as the difference between the exercise price and the fair value of our common stock on the date of grant, as estimated by us for financial reporting purposes, on the date those options were granted. It also includes stock-based compensation for options granted to consultants that has been determined in accordance with Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, or SFAS 123, and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods and Services, as the fair value of the equity instruments issued and is periodically revalued as the options vest. Stock-based compensation expense depends on the amount of stock options and other equity compensation awards we grant to our employees, consultants and directors and the exercise price of those options.

Deferred stock compensation, which is a non-cash charge, results from employee stock option grants at exercise prices that, for financial reporting purposes, are deemed to be below the estimated fair value of the underlying common stock on the date of grant. Given the absence of an active market for our common stock through 2004, our board of directors considered, among other factors, the liquidation preferences, anti-dilution protection and voting preferences of the preferred stock over the common stock in determining the estimated fair value of the common stock for purposes of establishing the exercise prices for stock option grants.

As a result of initiating this offering, we have revised our estimate of the fair value for financial reporting purposes of our common stock for the last six months of 2004 and the six months ended June 30, 2005. This valuation was done retrospectively by management, a related party, and we did not obtain contemporaneous valuations from an independent valuation specialist. In reassessing the value of our common stock in 2004 and 2005, we considered the price we received in April 2005 for our Series B preferred stock of $4.71, since this was an arms-length transaction. Starting on July 1, 2004, we reduced the value that we originally attributed to the preferences on the preferred stock mentioned above by 10% of the price of the preferred stock. Accordingly, we estimated the fair value at 90% of the Series B preferred stock price, or $4.24 per share. We kept this value constant until April 2005 when we steadily increased the estimated fair value to $6.10 per common share based on an assessment of market considerations, including discussions with the underwriters in this offering. This valuation method was selected because we believe it reflects the change in value held by the common stockholders that will result from a successful public offering, which includes the conversion of our preferred stock into common stock and thereby eliminates the preferences and rights

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attributable to the preferred stock. Furthermore, we believe this valuation approach is consistent with valuation methodologies applied to other similar companies pursuing an initial public offering.

For stock option grants to employees and non-employee directors, we recorded deferred stock compensation, net of forfeitures, totaling $0 in 2004 and $9.9 million in the six months ended June 30, 2005, which represent the difference between the revised fair value for financial reporting purposes of our common stock and the option exercise price at the date of grant. Deferred compensation will be amortized to expense over the vesting period of the related options using an accelerated method. Based upon stock option grants through June 30, 2005, the expected future amortization expense for deferred stock compensation is $5.8 million, $3.4 million, $1.2 million, $127,000 and $4,000 for the years ending December 31, 2005, 2006, 2007, 2008, and 2009, respectively.

Deferred Tax Asset Valuation Allowance

Our estimate for the valuation allowance for deferred tax assets requires us to make significant estimates and judgments about our future operating results. Our ability to realize the deferred tax assets depends on our future taxable income as well as limitations on utilization. A deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized prior to its expiration. The projections of our operating results on which the establishment of a valuation allowance is based involve significant estimates regarding future demand for our products, competitive conditions, product development efforts, approvals of regulatory agencies and product cost. We have recorded a full valuation allowance on our net deferred tax assets as of December 31, 2003 and 2004 due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future. These deferred tax assets primarily consist of certain net operating loss carryforwards and research and development tax credits.

Results of Operations

Six Months Ended June 30, 2004 Compared to 2005

Collaboration, Commercial Agreement and Grant Revenue. Collaboration, commercial agreement and grant revenue declined from $11.9 million for the six months ended June 30, 2004 to $9.9 million for the six months ended June 30, 2005. The decrease of $2.0 million, or 16.9%, was due to the timing of revenue recognition as we were able to recognize $2.0 million of revenue under a collaborative research agreement in April 2004 due to the expiration of certain provisions within the agreement.

Research and Development Expense. Research and development expense increased from $15.3 million for the six months ended June 30, 2004 to $16.7 million for the six months ended June 30, 2005. The increase was primarily attributable to an increase in stock-based compensation. We expect our research and development costs to increase in the future as we conduct clinical development of Troxatyl for the treatment of AML and other indications, as well as advance other preclinical product candidates into clinical development.

General and Administrative. General and administrative expense increased from $3.3 million for the six months ended June 30, 2004 to $4.7 million for the six months ended June 30, 2005. The increase was primarily attributable to an increase in equity-based compensation of $2.2 million, partially offset by a decrease of $800,000 due to lower salaries and related expenses as a result of personnel reductions in 2004 and the first half of 2005. These personnel reductions were to reduce the amount of cash used in operations as we changed our business strategy to focus on oncology drug discovery and development. We expect our general and administrative expense to increase in the future due to our responsibilities as a publicly-held company and the related requirements of the Sarbanes-Oxley Act.

Amortization of Stock-Based Compensation. Deferred stock-based compensation for stock options has been determined as the difference between the exercise price as determined by our board of directors on the date of grant and the deemed fair value of our common stock for financial reporting purposes. In connection with the grant of stock options to employees and non-employee directors, we recorded deferred stock-based

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compensation of $10.5 million for the six months ended June 30, 2005. We recorded these amounts as components of stockholders’ equity and are amortizing the amounts, on a straight-line basis, as a non-cash charge to operations over the vesting period of the options. We recorded amortization of stock-based compensation of $2.2 million for the six months ended June 30, 2005. We anticipate recording additional amortization of deferred stock-based compensation related to employee stock option grants of approximately $3.6 million for the second half of 2005 and $3.4 million, $1.2 million, $127,000 and $4,000 for the years ending December 31, 2006, 2007, 2008 and 2009, respectively. In April 2005, we agreed to issue warrants to purchase 230,000 shares of our common stock to two former employees and recorded a related compensation expense of $1.3 million.

Interest Income. Interest income increased from $44,000 for the six months ended June 30, 2004 to $115,000 for the six months ended June 30, 2005. The increase was due primarily to higher cash and cash equivalent balances in the first half of 2005 compared to the first half of 2004.

Interest Expense. Interest expense (excluding interest expense associated with our bridge notes issued in July and September 2004) decreased from $382,000 for the six months ended June 30, 2004 to $190,000 for the six months ended June 30, 2005. The decrease was due primarily to the lower debt levels in 2005 versus 2004 (excluding indebtedness under our bridge notes issued in July and September 2004).

Interest Expense Associated with Bridge Notes

We also recorded interest expense of $1.2 million in the six months ended June 30, 2005 related to the bridge notes issued in July and September 2004. Included in the bridge note interest expense is the amortization of the fair value of warrants issued in connection with the bridge notes. We determined the fair value of the warrants on the grant date using the Black-Scholes pricing model. This resulted in aggregate expense of approximately $1.7 million, which is recorded against the principal balance. The remaining $363,000 was recognized as interest expense in the six months ended June 30, 2005.

Also included in the bridge note interest expense is an additional non-cash charge of approximately $1.7 million against the principal balance of the bridge notes. This amount represents the difference between the conversion price of the bridge notes and the underlying value of the stock to be issued upon conversion of the bridge notes. The remaining $363,000 of this non-cash charge was recognized as interest expense in the six months ended June 30, 2005.

Year Ended December 31, 2003 Compared to 2004

Collaboration, Commercial Agreement and Grant Revenue. Collaboration, commercial agreement and grant revenue increased from $18.1 million for the year ended December 31, 2003 to $27.3 million for the year ended December 31, 2004. The increase of $9.2 million, or 51%, was due to an increase in research grant revenue of $3.4 million and an increase in revenue from collaborations and commercial agreements of $5.8 million.

Research and Development Expense. Research and development expense increased from $28.6 million for the year ended December 31, 2003 to $31.4 million for the year ended December 31, 2004. The increase of $2.8 million, or 10%, was due primarily to expenses incurred to support increased research and development activity, commensurate with higher Troxatyl related development costs.

General and Administrative. General and administrative expense decreased from $7.4 million for the year ended December 31, 2003 to $6.7 million for the year ended December 31, 2004. The decrease of $0.7 million, or 8.6%, was due primarily to personnel reductions.

In-process Technology. In 2004, we acquired the exclusive worldwide rights to Troxatyl from Shire BioChem Inc. Under the terms of the agreement, we made an upfront payment of $3.0 million and a payment of $1.0 million on the one-year anniversary of the agreement. We are also required to make milestone payments based on successful development and approval of Troxatyl, and we will also be required to make royalty

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payments based on net sales. We recorded a one-time charge of $4.0 million for purchased in-process research and development related to the upfront and one-year anniversary payments in 2004 based on the fact that the technology acquired did not have established feasibility and had no alternative future use.

Interest Income. Interest income decreased from $320,000 for the year ended December 31, 2003 to $175,000 for the year ended December 31, 2004. The decrease was due primarily to lower average cash and cash equivalent balances in 2004 than in 2003.

Interest Expense. Interest expense (excluding interest expense associated with our bridge notes issued in July and September 2004) decreased from $1.2 million for the year ended December 31, 2003 to $669,000 for the year ended December 31, 2004. The decrease was due primarily to repayment of some of our lease lines resulting in lower debt levels in 2004 compared to 2003 (excluding indebtedness under our bridge notes issued in July and September 2004).

Interest Expense Associated with Bridge Notes

We also recorded interest expense of $3.4 million in 2004 related to the bridge notes issued in July and September 2004. Included in the bridge note interest expense is the amortization of the fair value of warrants issued in connection with the bridge notes resulting in aggregate expense of approximately $1.7 million, which was recorded against the principal balance and was being amortized over the term of the bridge notes. Of the bridge note discount, approximately $1.4 million was recognized as interest expense in 2004.

Also included in the bridge note interest expense is an additional non-cash charge of approximately $1.7 million against the principal balance of the bridge notes. This amount represents the difference between the conversion price of the bridge notes and the underlying value of the stock to be issued upon conversion of the bridge notes. Approximately $1.4 million of this non-cash charge was recognized as interest expense in 2004.

Year Ended December 31, 2002 Compared to 2003

Collaboration, Commercial Agreement and Grant Revenue. Research and development revenue increased from $3.3 million for the year ended December 31, 2002 to $18.1 million for the year ended December 31, 2003. The increase of $14.8 million, or 441.9%, was due primarily to an increase in research grant revenue of $7.6 million and an increase in revenue from collaborations and commercial agreements of $7.2 million.

Research and Development Expense. Research and development expense increased from $25.6 million for the year ended December 31, 2002 to $28.6 million for the year ended December 31, 2003. The increase of $3.0 million, or 11.8%, was due primarily to additional expenses to support higher revenue levels resulting from increased collaboration and commercial agreement activity.

General and Administrative. General and administrative expense decreased from $10.1 million for the year ended December 31, 2002 to $7.4 million for the year ended December 31, 2003. The decrease of $2.7 million, or 27.4%, was due primarily to personnel reductions.

Interest Income. Interest income decreased from $622,000 for the year ended December 31, 2002 to $320,000 for the year ended December 31, 2003. The decrease was due primarily to lower average cash and cash equivalent balances in 2003 than in 2002.

Interest Expense. Interest expense increased from $932,000 for the year ended December 31, 2002 to $1.2 million for the year ended December 31, 2003. The increase was due primarily to new lease lines.

Liquidity and Capital Resources

Sources of Liquidity

We have historically funded our operations primarily through the sale of our equity securities, funds received from our collaborations, commercial agreements and grant revenue and debt financings. For the six months

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ended June 30, 2005, we received net proceeds from the sale of Series B preferred stock of approximately $6.7 million. Certain of our existing investors have irrevocably committed to purchase on December 15, 2005 additional shares of Series B preferred stock, which will result in net proceeds of $6.8 million if the offering contemplated by this prospectus has not been completed prior to that date.

We have received revenues from collaborations, commercial agreements and grants totaling $9.9 million and $11.9 million for the six months ended June 30, 2005 and 2004, respectively, and revenues from collaborations, commercial agreements and grants totaling $27.3 million, $18.1 million, and $3.3 million, for the years ended December 31, 2004, 2003, and 2002, respectively. We anticipate existing collaborations, commercial agreements and grants will provide approximately $13.0 million of additional proceeds in 2005 and approximately $14.0 million in 2006. These additional proceeds are subject to us performing certain services and achieving certain milestones under the existing agreements. If we were to fail to perform these services or achieve these milestones, we would not receive the additional proceeds under these agreements.

During the year ended December 31, 2004, we borrowed approximately $14.1 million pursuant to the bridge notes issued in July and September 2004 and from our line of credit and notes payable. During the years ended December 31, 2003 and 2002, we borrowed approximately $1.3 million and $10.0 million from our line of credit and notes payable. We made debt repayments of $1.9 million for the six months ended June 30, 2005, and debt repayments of $3.9 million, $3.9 million, and $2.0 million for the years ended December 31, 2004, 2003, and 2002, respectively. In April 2005, the $13.4 million of indebtedness under our bridge notes issued in July and September 2004 was converted into shares of Series A-2 preferred stock. As of June 30, 2005, an aggregate of $2.4 million was outstanding under our line of credit. The debt agreements subject us to certain financial and non-financial covenants. As of June 30, 2005, we were in compliance with these covenants. These obligations are secured by our assets, excluding intellectual property, and are due in monthly installments through 2008. They bear interest at effective rates ranging from approximately 9.14% to 10.60% and include terminal payments at the end of the loans ranging from 0% to 5%.

In September 2005, we entered into a line of credit and equipment financing agreement with Silicon Valley Bank and Oxford Finance Corporation to provide $8.0 million of general purpose working capital financing and $2.0 million of equipment and leasehold improvements financing. The debt bears interest at a rate of approximately 10% per annum and is due in monthly installments over three years. One-half of the proceeds are available to us immediately under the line of credit and equipment financing agreement and the remainder becomes available in the fourth quarter of 2005 and the second quarter of 2006 assuming the funding of the additional $7.5 million of Series B proceeds described above or upon completion of the offering contemplated by this prospectus. In September 2005, we borrowed $4.0 million for general purpose working capital under this facility and issued the lenders warrants to purchase an aggregate of 40,763 shares of our Series B preferred stock, with an initial exercise price of $4.71 per share. These warrants will become exercisable for 40,763 shares of common stock upon completion of the offering contemplated by this prospectus. Additional warrants may be issued under this facility based upon future draw amounts under the facility.

Cash Flows

As of June 30, 2005, cash and cash equivalents totaled approximately $10.4 million as compared to $11.5 million at December 31, 2004, a decrease of approximately $1.1 million. The decrease resulted primarily from $5.8 million of net cash used in operations, $1.9 million of debt repayments and approximately $131,000 of purchases of property and equipment and other items, partially offset by net proceeds of $6.7 million from our Series B preferred stock financing. The net cash used in operating activities primarily funded the net loss for the six months ended June 30, 2005 of $12.9 million, partially offset by non-cash charges for depreciation and amortization of $2.3 million and stock-based compensation of $3.6 million, as well as receipt of $1.0 million in proceeds under collaborations and commercial agreements in excess of amounts recognized as revenues during that period.

As of December 31, 2004, cash and cash equivalents totaled approximately $11.5 million compared to $13.6 million as of December 31, 2003, a decrease of approximately $2.1 million. The decrease resulted

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primarily from net cash used in operations of $11.0 million and purchases of property and equipment of $1.2 million, partially offset by proceeds from debt financings, net of repayments, of approximately $10.0 million as described above. The net cash used in operating activities primarily reflected the net loss for 2004 of $18.8 million, partially offset by non-cash charges for depreciation and amortization of $5.0 million and $2.8 million of discount on warrants associated with the bridge notes.

Net cash used in operating activities was approximately $6.3 million and $29.4 million for the years ended December 31, 2003 and 2002, respectively. The net cash used in operating activities during those years was primarily to fund our operating losses, partially offset by non-cash charges for depreciation and amortization and deferred revenue.

     Funding Requirements

Our future capital uses and requirements depend on numerous factors, including but not limited to the following:

•  terms and timing of any collaborative, licensing and other arrangements that we may establish;

•  rate of progress and cost of our clinical trials and other research and development activities;

•  scope, prioritization and number of clinical development and research programs we pursue;

•  costs and timing of regulatory approval;

•  costs of establishing or contracting for sales and marketing capabilities;

•  costs of manufacturing;

•  extent to which we acquire or in-license new products, technologies or businesses;

•  effect of competing technological and market developments; and

•  costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.

We believe that the net proceeds from this offering, together with interest thereon and our existing cash and cash equivalents, will be sufficient to meet our projected operating requirements through at least mid-2007.

Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of offerings of our equity securities, our collaboration, commercial agreement and grant revenue, and debt financing. In addition, we may finance future cash needs through the sale of other equity securities, strategic collaboration agreements and debt financing. However, we may not be successful in obtaining additional collaboration agreements or commercial agreements, or in receiving milestone or royalty payments under existing agreements. In addition, we cannot be sure that our existing cash and cash equivalents will be adequate or that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Failure to obtain adequate financing may also adversely affect our ability to operate as a going concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

     Off-Balance Sheet Arrangements

As of June 30, 2005, and December 31, 2002, 2003 and 2004, we have not invested in any variable interest entities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited

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purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties other than as described in the Notes to Financial Statements included elsewhere in this prospectus.

Contractual Obligations

The following summarizes our long-term contractual obligations as of June 30, 2005, adjusted to include indebtedness incurred to date under the September 2005 debt agreement described above:

				Payments Due by Period
				Less than		1 to		4 to		More than
Contractual Obligations		Total		1 Year		3 Years		5 Years		5 Years
				(in thousands)
Long-term debt obligations(1)		$	6,458	$	2,097	$	3,460	$	901	$	–
Operating lease obligations			3,661		1,576		1,731		354		–
License obligations(2)			1,000		1,000		–		–		–
	Total	$	11,119	$	4,673	$	5,191	$	1,255	$	–

(1)

Long term obligations do not include a convertible note payable of $6 million, which can only be settled through the issuance of shares of our common stock upon an initial public offering or the sale of our business.

(2)

License obligations do not include contingent payments payable to Shire upon the completion of milestones related to the successful development and approval of Troxatyl for the third-line treatment of AML. License obligations also do not include royalties, including minimum royalty payments, or other milestone payments that may be payable in the future to Shire upon the occurrence of other specified events. Because we have not yet completed clinical development or obtained regulatory approval of Troxatyl for any indication, we are currently unable to estimate the amount or timing of any of these other potential payments.

We also enter into agreements with clinical sites that conduct our clinical trials. We make payments to sites based upon the number of patients enrolled. For the six months ended June 30, 2005 and the year ended December 31, 2004, we had made aggregate payments of $198,000 and $156,000, respectively, to clinical sites in connection with our clinical trials. At this time, due to the variability associated with these agreements, we are unable to estimate with certainty the future patient enrollment costs we will incur and therefore have excluded these costs from the above table. We do, however, anticipate that these costs will increase significantly in future periods as a result of the commencement of the pivotal Phase II/ III trial for Troxatyl in July 2005.

As of December 31, 2004, we had approximately $367,000 in restricted cash associated with our facility lease.

Related Party Transactions

For a description of our related party transactions, see “Related Party Transactions.”

Income Taxes

As of December 31, 2004, we had federal and California net operating loss carryforwards of $78.9 million and $40.4 million, respectively, which begin to expire in 2019 and 2009, respectively, if not utilized. We also had federal and California research and development tax credit carryforwards totaling $3.3 million and

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$2.3 million, respectively. The federal research and development tax credit carryforward will begin to expire in 2019, unless previously utilized.

Pursuant to Internal Revenue Code Sections 382 and 383, and similar state provisions, use of our net operating loss and tax credit carryforwards may be limited as a result of certain cumulative changes in our stock ownership. The annual limitations may result in the expiration of net operating losses and credits prior to utilization.

At December 31, 2004 and 2003, we had deferred tax assets primarily representing the benefit of net operating loss carryforwards. We did not record a benefit for the deferred tax assets because realization of the deferred tax assets was uncertain and, accordingly, a valuation allowance has been provided to completely offset the deferred tax assets.

Quantitative and Qualitative Disclosures about Market Risk

The primary objective of our cash management activities is to preserve our capital for the purpose of funding operations while at the same time maximizing the income we receive from our investments without significantly increasing risk. As of June 30, 2005, we had cash equivalents consisting primarily of money market investments. Due to the liquidity of our money market investments, a 1% movement in market interest rates would not have a significant impact on the total value of our cash equivalents. We do not have any holdings of derivative financial or commodity instruments, or any foreign currency denominated transactions.

Recently Issued Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of unallocated overhead resulting from abnormally low production (or idle capacity), freight, handling costs, and wasted material (spoilage). This statement requires that those items be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement will be effective for inventory costs during the fiscal years beginning after June 15, 2005. We do not believe that the adoption of this statement will have a material impact on our financial condition or results of operations.

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),“Share-Based Payment,” or SFAS 123R, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees or directors, including grants of employee and director stock options, to be recognized as an expense on the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123R must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt SFAS 123R on January 1, 2006.

As permitted by SFAS 123, we currently account for share-based payments to employees using the intrinsic value method under APB Opinion No. 25 and, as such, generally recognize no compensation cost for employee stock options issued at fair market value. Accordingly, the adoption of the fair value method under SFAS 123R will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net loss and loss per share in Note 1 to our consolidated financial statements.

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In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions,” or SFAS 153. SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 and is required to be adopted beginning January 1, 2006. We are currently evaluating the effect that the adoption of SFAS 153 will have on our consolidated results of operations and financial condition but do not expect it to have a material impact.

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Business

We are a biotechnology company focused on the discovery, development and commercialization of innovative cancer therapeutics. We are developing Troxatyl, a novel compound which is currently in a pivotal Phase II/III clinical trial for the third-line treatment of Acute Myelogenous Leukemia, or AML, a blood cancer. Third-line treatment refers to the treatment of patients who have already received two regimens of chemotherapy with the goal of remission. There is no approved therapy or standard of care for the third-line treatment of AML. If the results of our ongoing Phase II/III clinical trial are positive, we expect to submit a New Drug Application, or NDA, to the U.S. Food and Drug Administration, or FDA, in late 2006 or early 2007, leading a potential product launch during 2007. While Troxatyl has not been compared to other chemotherapeutic agents in head-to-head studies, based on preclinical data and clinical data gathered from more than 730 patients, we believe that Troxatyl may be superior, in terms of both efficacy and tolerability, to currently utilized therapies for the second- and third-line treatment of AML, as well as other cancers. We licensed exclusive worldwide rights to Troxatyl from Shire BioChem Inc. in July 2004.

We are also building an internal oncology product pipeline and generating lead compounds, which are drug-like small molecules with characteristics that have the potential to be appropriate for treatment of disease, for multiple partners through the application of our proprietary approach to drug discovery that is based upon the use of small fragments of drug-like molecules, known as Fragments of Active Structures, or FAST. We have successfully applied FAST to generate novel, potent and selective small molecule compounds in a matter of months for many proteins, or drug targets, that have been implicated in cancers and other diseases. Our first product candidate discovered using FAST is an inhibitor of an enzyme known as BCR-ABL. Based on industry experience and the preclinical status of our BCR-ABL program to date, we anticipate selecting a development candidate in early 2006 and filing an Investigational New Drug, or IND, application within approximately eight to ten months thereafter. We designed and are developing this product candidate as a treatment for Chronic Myelogenous Leukemia, or CML, a cancer of the bone marrow, which is resistant to treatment with the current standard of care, Gleevec® (imatinib mesylate) marketed by Novartis Pharmaceuticals Corporation. An additional internal program is focused on the targets MET and RON, two closely related proteins that control cell growth and division, implicated in a range of solid tumors, and is at the lead optimization stage, in which we seek to improve the potency, specificity and in vivo efficacy of lead compounds and reduce their toxicity. Lead optimization is the stage at which lead compounds are further modified to improve their potency, specificity and in vivo efficacy and reduce their toxicity. Based on our experience with FAST to date, our current portfolio of oncology drug targets, and the status of the our active discovery programs, and assuming allocation of additional resources for research and development, we believe that FAST is capable of producing at least one new IND candidate per year, starting in 2006 with our BCR-ABL program candidate. Based on FAST and related technologies, we have generated aggregate revenues from collaborations, commercial agreements and grants of approximately $55.2 million in 2003, 2004 and the first six months of 2005.

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The chart below summarizes the status of our most advanced ongoing and currently planned clinical and preclinical development programs:

Program/Indication		Status	Marketing Rights
Troxatyl			SGX (Worldwide)
	• Third-line AML	Pivotal Phase II/III trial ongoing (data expected second half of 2006)
	• Second-line AML	Phase I Ara-C combination trial (initiate first half of 2006) Phase III Ara-C combination trial (initiate end of 2006)
	• MDS	Phase I/II trial (initiate 2006)
	• Solid tumors	Phase I trial ongoing (data expected end of 2005)
BCR-ABL			SGX (Worldwide)
	• Gleevec-resistant CML	Preclinical development (IND expected end of 2006)
MET and RON			SGX (US/Canada/Mexico) Pierre Fabre (Europe)
	• Solid tumors	Lead optimization	Shared (Rest of World)
AurA, Hsp90, K-RAS and PDK-1			SGX (Worldwide)
	• Various cancers	Lead optimization

Troxatyl

Troxatyl is a novel analog of cytidine, one of the four nucleosides that are the building blocks of deoxyribonucleic acid, or DNA. Nucleoside analogs such as Troxatyl inhibit synthesis of DNA in dividing cells, thereby causing those cells to die. Several nucleoside analogs have been used for many years as anti-cancer and anti-viral treatments. Troxatyl has a markedly different chemical structure and different biochemical properties than the commonly used cytidine analogs Gemzar® (gemcitabine), marketed by Eli Lilly and Company, and cytarabine, a generic compound often known as Ara-C. For example, some cancer cells develop resistance to Ara-C, by using an enzyme to break it down. Troxatyl is not broken down by this enzyme. In addition, based on preclinical studies, Troxatyl is effective against cancer cells which have become resistant to other cancer drugs by rapidly pumping them out of the cell.

Based on preclinical studies and clinical trials, we believe the unique properties and advantages of Troxatyl include:

•  activity against tumors that are resistant to multiple cancer drugs, including Ara-C, anthracyclines, another class of drugs commonly used in the treatment of AML, and Gemzar, which is often used for the treatment of certain solid tumors;

•  entrance into cells by slow, passive diffusion, which is a different route than many other cancer drugs and may provide the basis for improved safety and activity profiles;

•  a more manageable and transient side effect profile, including absence of significant central nervous system and liver toxicity in patients, as compared to Ara-C; and

•  synergy in combination with Ara-C, Gemzar and Gleevec.

Based on these characteristics, we believe Troxatyl has the potential to improve overall survival rates and quality of life for patients and therefore be an effective therapy for various cancers.

More than 700 patients were enrolled in Phase I and Phase II clinical trials conducted by Shire, in which Troxatyl was administered in the majority of cases by bolus intravenous, or IV, injection to treat blood cancers and solid tumors. Promising early clinical results were observed in AML, where treatment with Troxatyl resulted in an 18% overall response rate in relapsed or refractory disease patients. Bolus IV injection involves administering the drug or potential drug as a single dose over a short period of time.

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However, based on our recent clinical trials and preclinical studies, we now believe that neither the dose nor bolus IV injection mode of administration utilized in those trials was optimal. Because Troxatyl enters cells by passive diffusion, cancer cells require longer exposure to achieve desired intracellular concentrations of Troxatyl than can be achieved by periodic IV administration. This conclusion was corroborated by preclinical studies such as one that showed the concentration of Troxatyl required to kill cancer cells was reduced by approximately ten-fold when time of exposure was increased from one to three days. These considerations provided the basis for the design of our Phase I/ II clinical trial in which Troxatyl was administered for the third-line treatment of AML by continuous IV infusion over several days. Based on data from this trial completed in May 2005, we believe Troxatyl is more active when administered by continuous IV infusion compared to IV, and we believe we have identified the optimal dose of Troxatyl for the single-agent treatment of AML.

Based on clinical experience and preclinical data, we also believe Troxatyl in combination with Ara-C for the second-line treatment of AML may provide efficacy superior to Ara-C alone, which is widely used for this indication. Second-line treatment refers to the treatment of patients who have already received one regimen of chemotherapy with the goal of remission. In addition to our ongoing pivotal Phase II/ III clinical trial of Troxatyl for the third-line treatment of patients with AML, we intend to initiate a Phase III clinical trial of Troxatyl for the second-line treatment of AML in 2006.

Troxatyl has also shown promising activity in Phase I and Phase II clinical trials in the treatment of various other cancers or precancerous conditions, such as Myelodysplastic Syndromes, or MDS, a group of precancerous conditions in which bone marrow does not produce enough mature, health blood cells, and solid tumors such as pancreatic cancer and renal cell carcinoma. Based on these results, we are conducting a Phase I clinical trial for the treatment of solid tumors, and intend to initiate clinical trials for the treatment of MDS and other solid tumor indications.

In July 2004, we licensed exclusive worldwide rights to Troxatyl from Shire. Under the terms of the agreement, we made an upfront payment of $3.0 million and a payment of $1.0 million on the one-year anniversary of the agreement. We are also required to make development-based milestone payments, sales milestone payments and royalty payments, including minimum royalty payments, based on net product sales. At the time, we received an exclusive license to issued U.S. patents, issued foreign patents, pending U.S. applications and pending foreign applications covering composition of matter, method of use and treatment, formulation and process relating to Troxatyl. Various patent applications and patents are directed to Troxatyl and its methods of manufacturing and use, along with Troxatyl formulations, intermediates and modes of administration. For example, one U.S. patent claims Troxatyl itself as a composition of matter. This U.S. composition of matter patent is due to expire in 2008 and there are corresponding applications pending in various other countries, as well as a granted European and Japanese patent. Additional U.S. patents encompass methods of treating cancer using Troxatyl, and methods of treating CML or AML with Troxatyl in patients previously treated with Ara-C, which patents are due to expire in 2015 and 2020 respectively. We believe that this intellectual property will provide the basis for patent protection of the composition of matter until 2008 in the United States and for methods of treatment combinations of Troxatyl and other compounds, methods of use and treatment, and formulation and process until at least 2015 in the United States, the E.U. and certain other jurisdictions. Certain of these patents may be eligible for extension by up to an additional five years in the United States.

Acute Myelogenous Leukemia

We are initially developing Troxatyl for the treatment of AML, a blood cancer that increases in incidence with age. According to the American Cancer Society, AML represents approximately 90% of all acute leukemias in adults. In the United States, approximately 16,000 adult patients have AML with approximately 12,000 new patients diagnosed each year. Although induction chemotherapy, typically with Ara-C and an anthracycline, another class of chemotherapy drug, such as daunorubicin or idarubicin, results in complete remission in 50% to 60% of patients, relapse is common and long-term survival rates are less than 20%. Second-line treatment of AML often involves re-treatment with high dose Ara-C, and may also involve an

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anthracycline. In addition, the FDA has approved Mylotarg® (gemtuzumab ozogamicin), marketed by Wyeth Pharmaceuticals Inc., as second-line treatment for certain AML patients. We estimate approximately 8,000 patients per year are eligible to receive second-line treatment for this disease. The vast majority of these patients are either non-responsive or relapse within six months. There is no approved therapy or standard of care for the third-line treatment of AML and, based on a recent M. D. Anderson Cancer Center study, the historical response rate for patients we are targeting in our current pivotal Phase II/ III clinical trial is less than 5%. Because of the high relapse rate and poor long-term survival of AML patients after treatment with cancer drugs, the treatment goal for healthier patients is tumor eradication for at least three months to permit time for the identification of a suitable bone marrow donor and preparation of patients for this potentially curative, life-saving procedure.

Phase I/ II Clinical Trial by Continuous IV Infusion. We completed our first clinical trial evaluating Troxatyl dosing by continuous IV infusion in May 2005. This 48 patient trial enrolled various types of relapsed AML patients, including patients who had failed two or more prior chemotherapy regimens, patients who had also failed bone marrow transplantation and patients who failed to respond to prior treatment. Eight groups of patients received varying treatment regimens, ranging from 8.4 to 14.0 mg/m²/day of Troxatyl, for two to six days. Five patients achieved a complete response of their disease and four patients achieved a complete response with partial platelet recovery for an overall response rate of 19%. Importantly, the low-level toxicities we observed were not age-related, which is significant because the incidence of AML increases with age. The toxicities of currently available therapies, such as Ara-C and the anthracyclines, are known to be age-related. The duration of response has ranged from one to over 12 months. Several patients remain in active remission and median survival time was seven months.

Results from this Phase I/ II clinical trial include:

•  at optimal dosing in this trial, the dose by continuous IV infusion of Troxatyl (12 mg/m²/day for five consecutive days, or a total dose of 60 mg/m²) is 50% higher than that obtained via consecutive daily IV dosing in a previous trial conducted by Shire (8 mg/m²/day for five consecutive days, or a total dose of 40 mg/m²); and

•  all nine patients who responded to Troxatyl achieved sustained levels of Troxatyl in the blood of approximately 80 ng/mL or higher and received dosing for greater than three days.

On the basis of these results, we have concluded that the safety and response data in these patients compare favorably to the M. D. Anderson Cancer Center historical data and support further development of Troxatyl for the treatment of AML. As part of our analysis of this Phase I/ II clinical trial to determine the optimal strategy for further clinical development, we evaluated tumor response, side effect profiles and levels of Troxatyl in the blood across the different dose groups.

Because Troxatyl is primarily removed from the body by the kidneys, we evaluated the effect of kidney function on patient tumor response and side effect profile. Patients with the lowest kidney function achieved the highest levels of Troxatyl in the blood. Conversely, patients with the best kidney function were much less likely to achieve the drug levels of 80 ng/mL that we found closely associated with overall response. Consequently, for our pivotal Phase II/ III clinical trial, we have chosen to exclude the approximately 20% of AML patients with the highest and lowest kidney function.

Summary data from our Phase I/ II clinical trial are highlighted in the table below. In this table, “Phase II/ III eligible” consists of those patients who both met our inclusion criteria for kidney function for our current

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pivotal Phase II/ III clinical trial and were patients whose duration of response to second-line therapy was less than six months.

			Dosed> 3 Days and
	All Patients	Dosed> 3 Days	Phase II/III Eligible
Patients	48	41	15
Complete Response	5 (10%)	5 (12%)	2 (13%)
Complete Response with Partial Platelet Recovery	4  (8%)	4 (10%)	2 (13%)
Overall Response	9 (19%)	9 (22%)	4 (27%)
Severe or Life-Threatening Toxicity	10 (21%)	9 (22%)	5 (33%)

In August 2005, physicians at the M. D. Anderson Cancer Center published in Cancer an analysis of their experience with the third-line treatment of 594 adult AML patients utilizing a variety of cancer drugs and therapies. This is the largest set of historical data that has been published for this patient group. To further evaluate the results of our Phase I/II clinical trial, we compared the responses of the subset of patients that would have been eligible for inclusion in our current pivotal Phase II/III clinical trial to a subset of 422 similar patients in the M. D. Anderson database to which we had been provided access in early 2005. For this subset of patients in our Phase I/II trial, we observed a complete response rate of 13% and a complete response with partial platelet recovery rate of 13%, with an overall response rate of 27%. By contrast, the historical comparison group had a complete response rate of 4.7%. The median survival time for Troxatyl treated patients who achieved either a complete response or a complete response with partial platelet recovery was seven months (with several patients remaining in active remission), which is greater than the historical data of approximately 2.1 months.

Current Phase II/ III Clinical Trial. Based on the results of our Phase I/II clinical trial, in July 2005 we initiated a pivotal Phase II/III clinical trial of Troxatyl for the third-line treatment of AML, with targeted enrollment of 211 patients. We are conducting a single-arm, open-label clinical trial. Because there is currently no approved therapy or standard of care for this patient population, we will compare the results of this trial to historical results observed at M. D. Anderson Cancer Center in similar patients. The enrollment criteria specify that patients must have received at least two previous regimens of induction chemotherapy to be considered third-line. In addition, they either must not have achieved a remission with two prior chemotherapy regimens, or must have relapsed after a first remission and failed to respond to a first salvage treatment or relapsed less than six months after a second complete response. Following discussions with the FDA in connection with our End-of-Phase II Meeting in May 2005, we designed our pivotal Phase II/III clinical trial with complete response as the primary clinical endpoint, or patient response on which a judgment will be made for FDA approval, and complete response with partial platelet recovery and duration of response as secondary endpoints. The clinical trial has been designed to enroll a sufficient number of patients to reliably detect a doubling of the historical complete response rate of 4.7% derived from the M. D. Anderson Cancer Center database.

The Phase II/III patient population is similar to that studied in our recently completed Phase I/II Troxatyl clinical trial. However, in contrast to the Phase I/II Troxatyl clinical trial, all patients will receive what we believe to be the optimal dosing by continuous IV infusion of 12 mg/m²/day for five days. Clinical response will be measured up to approximately 60 days after dosing in each patient. Our data and safety monitoring board will perform interim safety and efficacy evaluations during this trial. We expect to complete enrollment in the trial in the third quarter of 2006 and announce the results shortly thereafter.

To support the planned NDA submission and to further evaluate the relationship between kidney function and the level of Troxatyl in patients’ blood, we will carry out two parallel Phase I/II Troxatyl clinical trials dosing by continuous IV infusion. In one trial, we will target AML patients with high kidney function and, in the other, AML patients with poor kidney function, both patient groups that are being excluded from enrollment in our current pivotal Phase II/III trial. If the results of this pivotal Phase II/III trial are positive, we intend to submit an NDA to the FDA in late 2006 or early 2007. We have recently been granted fast track designation

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for Troxatyl for the third-line treatment of AML which may qualify us for a six-month review period by the FDA. Fast track designation means that the FDA has determined that the drug is intended to treat a serious or life-threatening condition for which there is no adequate therapy currently available. This designation also means that the FDA can take actions to expedite the development and review of a potential NDA.

Market Expansion Trials for AML. We are initially developing Troxatyl for the third-line treatment of AML, because we believe this indication will provide the fastest route to market. However, we also plan to develop Troxatyl for the second-line treatment of AML. In the first half of 2006, we plan to initiate a Phase I clinical trial of Troxatyl in combination with Ara-C to determine optimal combination dosing. Later in 2006, we plan to initiate a controlled Phase III clinical trial of Troxatyl in combination with Ara-C versus Ara-C alone in the second-line treatment of AML. Additionally, we plan to evaluate Troxatyl in combination with the cancer drugs daunorubicin or mitoxantrone for the potential first-line treatment of AML. We believe this clinical development path may lead to combination therapy with Troxatyl and currently utilized cancer drugs, which may be more effective than monotherapy for the treatment of earlier stage AML patients.

Myelodysplastic Syndromes

MDS represents a group of precancerous conditions in which bone marrow does not make enough mature, healthy blood cells. MDS occurs when blood cells remain in an immature stage within the bone marrow and never develop into mature cells capable of performing their necessary functions. MDS patients often need frequent blood transfusions to help fight fatigue and anemia. According to the Aplastic Anemia & MDS International Foundation, more than 80% of MDS cases occur in persons over 60 years old. Although the exact number of cases of MDS in the United States is unknown as there is no registry tracking this information, most estimates are between 12,000 and 20,000 new cases each year, with similar incidence and prevalence rates in Europe.

A commonly used classification system groups MDS patients into one of five risk groups, depending on the severity of disease, and has proven useful in identifying rates of survival and the likelihood of transformation to AML. MDS survival times range from approximately four months to six years. MDS often causes death from bleeding and infection, while transformation to AML occurs in up to 35% of patients in the two lowest risk MDS patient groups. In the three highest risk MDS patient groups, which together account for approximately 70% of the MDS population, transformation to AML is common (ranging from 40% to up to 100%) with a median survival time ranging from four to 32 months. In 2004, the FDA approved Vidaza® (azacitidine), marketed by Pharmion Corporation, the first pharmaceutical treatment approved for this disease. This drug achieved a 16% overall response rate in its pivotal trial for MDS and did not provide a statistically significant improvement in survival.

Troxatyl administered by bolus IV injection has shown promising activity against MDS in various Phase I and Phase II clinical trials conducted by Shire. For example, in a trial evaluating Troxatyl by bolus IV injection in combination with Ara-C or idarubicin, three of eight MDS patients achieved a complete response, with durations of response ranging from at least five to 14 months. In our Phase I/II AML trial dosing by continuous IV infusion that we completed earlier in 2005, the two AML patients who previously had MDS, while not achieving a complete response, are presently at 18 and 20 months survival.

In 2006, we plan to initiate a single-arm, open-label Phase I/II clinical trial of Troxatyl in MDS patients who have failed Vidaza. We will conduct a trial designed to establish appropriate dosing in an attempt to identify a Phase II Troxatyl dose by continuous IV infusion and dosing regimen for MDS. If results of this trial are positive, we would then conduct a larger Troxatyl clinical trial in high-risk patients as first-line therapy in combination with Vidaza. Specifically, following treatment with Troxatyl by continuous IV infusion, patients would be treated with Vidaza. Such a combination cancer treatment regimen would use Troxatyl to clear the patient’s bone marrow of leukemic immature stage blood cells in order to achieve a complete response, and Vidaza to stimulate bone marrow production of healthy blood cells to reduce blood transfusion frequency and potentially improve survival. We believe that combination treatment of MDS with Troxatyl by continuous IV infusion and Vidaza has the potential to delay transformation of MDS to AML,

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increase overall survival, reduce blood transfusion frequency and improve overall quality of life for these patients.

Solid Tumors

Based on bolus IV injection Troxatyl data obtained by Shire, we are investigating Troxatyl as a potential product candidate for treatment of solid tumors. Troxatyl administered by bolus IV injection has shown promising activity against pancreatic cancer and renal cell carcinoma, the most common form of kidney cancer.

Pancreatic Cancer. According to the American Cancer Society, pancreatic cancer currently ranks as the fourth leading cause of cancer death in the United States. Survival rates for pancreatic cancer are extremely low, and the American Cancer Society estimates that there will be approximately 32,180 new cases of pancreatic cancer and 31,800 deaths in 2005. The disease is often resistant to chemotherapy and radiation therapy and tends to spread quickly to other parts of the body. According to the American Cancer Society, only 4% of all patients are alive five years after a diagnosis of pancreatic cancer. Currently, Gemzar is the standard of care for the first-line treatment for patients with advanced pancreatic cancer that cannot be removed by surgery.

Troxatyl administered by bolus IV injection has demonstrated promising activity in pancreatic cancer as a single agent. Troxatyl by bolus IV injection was evaluated in a Phase I clinical trial and subsequently in two Phase II open label, single-arm clinical trials in patients with advanced pancreatic cancer. In the first Phase II clinical trial, a total of 15 patients were enrolled, nine of whom were previously treated with either Gemzar or 5-fluorouracil, a widely used cancer drug. Clinical benefit response, an index including decreased pain, weight gain and performance status following chemotherapy, was the primary endpoint and two patients attained a clinical benefit response. In this Phase II clinical trial, median survival time was 22.9 weeks for patients who had not been previously treated with cancer drugs and 18.4 weeks for patients who had been previously treated. In the second Phase II clinical trial, 55 patients with generally more advanced disease were dosed with Troxatyl by bolus IV injection. Four-week cycles of treatment were repeated until disease progression. Time to treatment failure was the primary endpoint and overall survival was the secondary endpoint. In this Phase II clinical trial, time to treatment failure was 3.5 months and median survival time was 5.6 months. We believe these results compare favorably to Gemzar. In its pivotal Phase III clinical trial for the treatment of pancreatic cancer, Gemzar showed time to treatment failure of 2.3 months and median survival time of 5.7 months.

In preclinical studies, Troxatyl has shown synergistic activity in cells and additive activity in vivo in combination with Gemzar. A Phase I clinical trial showed that Troxatyl combined well with Gemzar for treatment of various solid tumors, including pancreatic cancer showing that the two agents could be combined at close to the maximum single agent doses with no unexpected toxicities being experienced.

Renal Cell Carcinoma. According to the National Comprehensive Cancer Network, renal cell carcinoma comprises about 90% of kidney cancer. This cancer develops within the kidney’s microscopic filtering systems, the lining of tiny tubes that ultimately lead to the bladder. The American Cancer Society estimates that, in the United States in 2005, approximately 36,160 new cases of kidney cancer will be diagnosed, and an estimated 12,660 deaths will occur. According to the American Cancer Society, the overall five-year relative survival rate is 64%.

In previous clinical trials conducted by Shire, Troxatyl administered by bolus IV injection as a single agent demonstrated activity in renal cell carcinoma, for which the only approved treatment is interleukin-2. Troxatyl by bolus IV injection was studied in a Phase II open label, single-arm clinical trial in 35 patients with advanced or metastatic renal cell carcinoma. Prolonged survival was seen in both intermediate and high risk populations. In the intermediate risk group, median survival time was approximately 18 months compared with approximately ten months seen in certain historical data. In the high risk group, median survival time was approximately eight months compared with approximately four months seen in certain historical data.

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Development Plan. We are conducting a Phase I dose ranging clinical trial of Troxatyl by continuous IV infusion in patients with refractory solid tumors. No new or unexpected toxicities have been observed at exposure levels that now exceed those achieved in the previous Troxatyl trials dosed by bolus IV injection. We expect to complete this trial by the end of 2005. We plan to initiate Phase I/II clinical trials of Troxatyl by continuous IV infusion in 2006 for one or more solid tumor indications, including liver cancer. We expect to announce initial patient response data from the first of these trials in the second half of 2007 with one-year survival data being announced thereafter. In preclinical studies, Troxatyl inhibits the hepatitis B virus and has demonstrated activity against liver cancer. Because liver cancer is often associated with hepatitis B infection, we believe the combined anti-viral and anti-cancer properties of Troxatyl may provide additional benefits to these patients.

Research Programs

We are also building an internal oncology product pipeline and generating lead compounds for multiple partners through application of our drug discovery platform, FAST. We are focusing on targets where we believe FAST could provide a distinct advantage over conventional methods of lead discovery, and we have identified a portfolio of approximately 20 oncology drug targets that we believe are clearly implicated in cancers using our FAST platform. Our principal areas of focus in oncology drug discovery are on protein and enzyme targets that have been implicated in cancers and other diseases, including BCR-ABL, MET and RON, AurA, Hsp90, K-RAS and PDK-1.

BCR-ABL Kinase Inhibitor Program

Our most advanced program based upon FAST is focused on compounds that inhibit both wild type and Gleevec-resistant mutant forms of BCR-ABL tyrosine kinase, the enzyme that is responsible for CML. Treatment of CML patients with Gleevec, a drug that generated sales of over $1.6 billion in 2004, results in complete remission in greater than 95% of patients. However, we believe approximately 3% to 4% of patients develop resistance every year, and we estimate approximately 16% of CML patients are currently Gleevec-resistant. There is no approved pharmaceutical treatment for patients who develop Gleevec-resistant CML, although some patients are eligible to undergo bone marrow or stem cell transplants, which are risky and expensive compared to treatment with a targeted therapy such as an inhibitor of BCR-ABL. The goal of our BCR-ABL program is to develop a once-daily oral therapy for the treatment of both first-line and Gleevec-resistant CML.

There are four mutations in the kinase domain of BCR-ABL that represent the most common mechanisms of resistance. We have identified several novel chemical series that are inhibitors of both the wild type and the most common mutant forms of the BCR-ABL enzyme, including the T315I mutation. Currently, both Bristol-Myers Squibb, or BMS, and Novartis are conducting Phase II clinical trials with second generation BCR-ABL inhibitors. Although each of their product candidates inhibits some Gleevec-resistant BCR-ABL mutants, neither inhibits the T315I mutant, and we believe T315I resistance to the new BMS inhibitor has already been observed in a Phase I clinical trial.

We believe that new BCR-ABL inhibitors, such as the one we are developing, will be used both in combination with Gleevec in the first-line treatment of Gleevec-susceptible CML and as monotherapy or in combination with agents other than Gleevec in the second-line treatment of Gleevec-resistant CML. Based on our industry experience and the preclinical status of our BCR-ABL program to date, we plan to initiate toxicity studies at the end of 2005 and seek to identify a development candidate in early 2006 for formal pre-IND studies and file an IND application within approximately eight to ten months thereafter. We intend to begin clinical trials in 2006 in Gleevec-resistant CML patients with the T315I mutation.

MET and RON Solid Tumor Program

We have a joint drug discovery and development agreement with Pierre Fabre Médicament (successor-in-interest to UroGene, S.A. in July 2005) for discovery and clinical development of novel cancer drugs for solid

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tumors. We are applying our FAST lead discovery technology to MET and RON, two closely related proteins, known as receptor tyrosine kinases, implicated in a range of solid tumors. The primary objective of the program is to generate a single inhibitor of both targets. Under the terms of the agreement, we will jointly develop small molecule inhibitors against solid tumor targets. We will have exclusive commercialization rights in North America to drugs developed under the agreement, and Pierre Fabre will have exclusive commercialization rights in Europe. Commercialization rights in the rest of the world will be shared in a manner to be determined by the parties.

FAST—Our Drug Discovery Platform

FAST is our proprietary approach to drug discovery that is based upon the use of small fragments of drug-like molecules for rapid identification of novel, potent and selective small molecule inhibitors of drug targets. Through the application of FAST, we are building an internal oncology product pipeline and discovering lead compounds for our strategic partners. FAST can be applied to a wide range of drug discovery targets by utilizing the rapid determination of protein structures to allow both the identification and rapid optimization of small molecule fragments that bind to specific targets. FAST addresses many of the limitations of traditional approaches utilized by large pharmaceutical companies to find lead compounds, making it an attractive technology for targets that have not yielded promising leads from high-throughput screening. Unlike traditional lead discovery approaches, which require ultra high-throughput screening of large numbers of random compounds, FAST optimizes the likelihood of developing a successful drug candidate by focusing on a very small number of low molecular weight, water-soluble fragments, that once identified, can be optimized rapidly by further focused synthesis to enable the delivery of novel, potent and selective modulators of drug targets.

FAST is based upon our proprietary fragment library of approximately 1,000 structurally diverse, low molecular weight compounds. We developed FAST through the integration of a series of technology capabilities, including:

•  a high-throughput capability to generate many different crystals of a target protein in parallel;

•  the evaluation of our library of fragments and direct visualization of bound fragments utilizing X-ray crystallography; and

•  the use of novel computational design methods and iterative synthetic chemistry to optimize these fragments into drug-like lead compounds.

We have combined these technologies to generate an efficient platform for drug discovery that delivers lead compounds active against a wide range of targets, while accessing high chemical diversity and the potential for good drug-like properties.

We have invested significant resources in the development of technology to produce large numbers of protein variants and to evaluate their ability to produce high quality protein crystals. We have developed customized, robotic technologies for setup, storage, retrieval and imaging of protein crystallization experiments. Our current instrumentation supports in excess of 40,000 crystallization experiments per day. We generate protein structures through our beamline facility, housed at the Advanced Photon Source at the Argonne National Laboratory, a national synchrotron-radiation facility funded by the U.S. Department of Energy, Office of Science, and Office of Basic Energy Sciences, located in Argonne, Illinois. This facility produces an extremely intense, highly focused X-ray beam to generate high-resolution data from approximately 50 crystals per day. We believe we are the only drug discovery company with continuous access to such a high powered X-ray source.

Our FAST drug discovery platform provides us with the capacity to pursue many different targets to the early lead stage and beyond. Internally, we have identified a portfolio of approximately 20 oncology targets that we believe are clearly implicated in cancers using our FAST platform. We believe that FAST could provide a distinct advantage over conventional methods of lead discovery for these and other targets. Our most advanced programs based upon FAST are focused on compounds that inhibit BCR-ABL and MET and RON.

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We are applying FAST to generate novel and potent lead compounds for well-validated protein and enzyme targets, including AurA, Hsp90, K-RAS and PDK-1. Our goal in each of these programs is to develop small molecule drugs with improved efficacy and reduced side effect profiles compared to current therapies or development compounds. Based on our experience with FAST to date, our current portfolio of oncology drug targets, and the status of our active discovery programs, and assuming allocation of additional resources for research and development, we believe that FAST is capable of producing at least one IND candidate per year, starting in 2006 with our BCR-ABL program candidate.

Collaborations, Commercial Agreements and Grants

We currently have ten active revenue-generating collaborations, commercial agreements and grants based upon FAST and related technologies with pharmaceutical and biotechnology companies, as well as government and other agencies. We generated aggregate revenues from collaborations, commercial agreements and grants of approximately $55.2 million in 2003, 2004 and the first six months of 2005. We are using FAST to identify lead compounds for our strategic partners in their therapeutic areas of interest. Our internal drug discovery activities are focused on oncology targets. Our active agreements are summarized in the tables below:

Collaborations and Grants:

Party	Scope	Start Date	Payments to SGX
Cystic Fibrosis Foundation Therapeutics, Inc.	Drug discovery	July 2005	Upfront payment; technology access fees; research funding; milestones; royalties
F. Hoffmann-La Roche Ltd.*	Lead compounds for Roche targets	Oct. 2004	Upfront payment; research funding; milestones; royalties on sales
National Institutes of Health	Protein Structure Initiative	July 2005	Research funding
Serono International S.A.	Lead compounds for Serono targets	Mar. 2004	Upfront payment; milestones; royalties on sales

*  Currently negotiating terms of a potential extension.

Commercial Agreements:

Party	Scope	Start Date	Payments to SGX
Amgen, Inc.	Structural data on Amgen targets and compounds	Feb. 2005	Annual payments
Eli Lilly & Company	Structural data on Eli Lilly targets and compounds	Apr. 2003	Upfront payment; research funding; technology access fees
Eli Lilly & Company	Structural data on Eli Lilly targets and compounds	Dec. 2003	Upfront payment; funding
Exelixis Inc.	Structural data on Exelixis targets and compounds	Aug. 2005	Upfront payment; funding
Millennium Pharmaceuticals, Inc.	Structural data on Millennium targets and compounds	Oct. 2004	Upfront payment; funding
OSI Pharmaceuticals, Inc.	Structural data on OSI targets and compounds	Aug. 2003	Upfront payment; research funding; research milestones

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Cystic Fibrosis Foundation Therapeutics, Inc.

In July 2005, we entered into a drug discovery collaboration agreement with Cystic Fibrosis Foundation Therapeutics, Inc., or CFFT, the drug discovery and development arm of the Cystic Fibrosis Foundation. Under the collaboration, we will employ our proprietary FAST lead generation technology with the objective of generating novel small molecule therapies that function as “correctors” of the F508 deletion mutation found in the cystic fibrosis transmembrane conductance regulator, or CFTR. The F508 deletion mutation is the most commonly observed mutation in patients with cystic fibrosis. Individuals with the mutation fail to transport the CFTR protein to the cell surface, resulting in impaired function of the lung epithelium. Correctors of the mutant protein are expected to increase the amount of the mutant protein that is transported to the cell surface, resulting in more rapid clearing of lung infections and improved lung function. Over the term of the collaboration, CFFT may provide to us over $15.0 million in an upfront payment and in technology access, research payments and research milestones. CFFT will be responsible for product development and we will be eligible for clinical development milestones and royalties on product sales. The research term of this collaboration agreement continues until July 2008. Our drug discovery agreement with CFFT may be terminated earlier by either party in the event of a material breach by the other party, subject to prior notice and the opportunity to cure. In addition, CFFT has the right to terminate the drug discovery agreement without cause upon certain specified circumstances, at which time it must make a termination payment to us. Furthermore, CFFT may terminate the drug discovery agreement without cost at any time within 60 days following our failure to successfully complete a key milestone. In July 2005, CFFT paid us $1.0 million pursuant to this agreement.

F. Hoffmann-La Roche Ltd.

In August 2004, we entered into a collaboration agreement with F. Hoffmann-La Roche Ltd., or Roche, for the discovery and development of anti-viral therapeutics. Under the terms of the agreement, we will seek to discover novel small molecule inhibitors against a viral drug target using our proprietary FAST drug discovery platform. Roche will be responsible for worldwide development and commercialization of product candidates arising from the collaboration. Roche paid us an upfront fee and research funding and will be further obligated to pay us additional research funding, milestone payments upon the occurrence of specified preclinical and clinical development milestones and royalties on sales of products licensed to Roche under the agreement.

The research term of this collaboration agreement ended on October 1, 2005; however, the parties are currently negotiating the terms of a potential extension. Roche may choose to extend the term for an additional six months at its sole discretion. On a country-by-country basis and a collaboration product-by-collaboration product basis, the general terms of this collaboration agreement continue until the later of the expiration of the last to expire of the patent rights covering a collaboration product in the applicable country or ten years from the first commercial sale of a collaboration product in the applicable country, unless the agreement is earlier terminated. Either party may terminate the collaboration agreement in the event of material breach by the other party, subject to prior notice and the opportunity to cure. In addition, subject to certain provisions, Roche may terminate the agreement upon the expiration of the collaboration term by giving us 90 days’ prior written notice.

NIH Cooperative Agreement Award

In July 2005, we received a $48.5 million National Institutes of Health Cooperative Agreement Award from the National Institute of General Medical Sciences, or NIGMS. The award is part of the NIH Protein Structure Initiative, which aims to facilitate discovery of three dimensional structures of proteins to help reveal their role in disease and aid in the design of new medicines. The award provides five years of funding for a consortium administered by us. We anticipate retaining approximately 50% of the funding under the award, with the remainder being distributed to academic collaborators.

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Serono International S.A.

In March 2004, we entered into a research collaboration agreement with Serono International S.A., or Serono, for the discovery and development of novel small molecule therapeutics. Under the terms of the agreement, we apply our proprietary FAST technology to generate novel lead compounds for selected targets provided by Serono. Serono will be responsible for development and commercialization of drug candidates arising from the collaboration. The agreement includes an upfront payment and success-based research payments together with clinical development milestones and royalties. We may also receive milestone payments upon the achievement of certain research objectives and clinical development milestones and royalties on net sales generated by any products derived from the collaboration.

The research term of this collaboration agreement continues until March 2006. On a country-by-country basis, the general terms of this collaboration agreement continue until the later of the expiration in the applicable country of the last to expire of the patent rights covering technology developed under the agreement or ten years after the first commercial sale in the applicable country of a product that incorporates or is derived from certain compounds identified in the collaboration, unless the agreement is earlier terminated. Either party may terminate the collaboration agreement in the event of a material breach by the other party, subject to prior notice and the opportunity to cure.

Eli Lilly & Company

In April 2003, we entered into a research and technology agreement with Eli Lilly, which was extended in April 2005. Within this commercial agreement, we apply our target-to-structure technology to key Eli Lilly drug targets to determine their three-dimensional structures. Our researchers subsequently generate data on Eli Lilly compounds that bind to the drug targets, providing input for their lead generation and optimization efforts. In parallel with the first two years of research under the agreement, we conducted a comprehensive program of technology transfer involving installation of components of our technology in a high-throughput structural biology facility for Eli Lilly, which includes modular automation systems and process technology we developed for protein engineering, crystallization and structure determination. As of June 30, 2005, we had received a total of approximately $18.6 million under the commercial agreement in the form of research fees, technology access fees and technology installation fees. From April 2005 forward, we are entitled to receive research funding of up to approximately $4.5 million per year, approximately $1.1 million of which has been received as of June 30, 2005.

The research term of this commercial agreement continues until April 2008. The general terms of this commercial agreement continue until the later of the expiration of the last to expire of the patent rights covering technology developed under the agreement or April 2018, unless the agreement is earlier terminated. Either party may terminate the commercial agreement in the event of material breach by the other party, subject to prior notice and the opportunity to cure. In addition, Eli Lilly may terminate the agreement if certain of our key employees leaves our employment and significantly curtails participation in the project, or in the event we are acquired by one of the top 25 pharmaceutical companies ranked by worldwide sales.

In December 2003, we also expanded our research collaboration and technology agreement with Eli Lilly to provide Eli Lilly with long-term access to our beamline facility at the Advanced Photon Source in Argonne, Illinois, to support Eli Lilly drug discovery programs. Under the terms of our beamline services agreement with Eli Lilly, we generate crystal structure data on Eli Lilly drug targets and compounds in exchange for upfront access fees and maintenance fees paid by Eli Lilly. Upon execution of the agreement, we received a $2.0 million upfront access fee payment and will receive payments for annual operating costs in future years. Eli Lilly also has the option to extend the term of its access to our beamline facility in the future for additional payments. The term of this beamline agreement continues until January 2012, unless Eli Lilly exercises its option to extend the term of its access to our beamline facility or the agreement is earlier terminated. Either party may terminate the agreement in the event of a material breach by the other party, subject to prior notice and the opportunity to cure. In addition, Eli Lilly may terminate the agreement at any time, subject to prior notice.

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OSI Pharmaceuticals, Inc.

In August 2003, we entered into a commercial agreement with OSI to determine the three-dimensional structure of multiple OSI drug targets using our large-scale protein structure determination technologies and seek to generate co-crystal data to determine how OSI drug leads bind to their targets. The research term was extended in February 2005. Terms of the commercial agreement include upfront payments, research funding and success payments upon achievement of research milestones. As of June 30, 2005, we had received aggregate payments of approximately $1.9 million, consisting of upfront payments, research milestone payments and research funding.

The research term of this commercial agreement continues until February 2006. The general terms of this commercial agreement continue until the later of the expiration of the last to expire of the patent rights covering technology developed under the agreement or August 2008, unless the agreement is earlier terminated. Either party may terminate the commercial agreement in the event of a material breach by the other party, subject to prior notice and the opportunity to cure.

Beamline Services

In addition to our beamline services arrangement with Eli Lilly, we also have similar agreements with Amgen, Inc., Exelixis Inc. and Millennium Pharmaceuticals, Inc. Typically, under the terms of our beamline services agreements, we generate crystal structure data on partner drug targets and compounds. The terms of the agreement generally include upfront access fees and annual operating costs. In addition, each partner retains the option to further expand its access to our beamline facility in the future for additional payments.

The terms of the Amgen, Exelixis and Millennium beamline agreements continue until February 2010, August 2007 and March 2010, respectively, unless the agreements are earlier terminated. Amgen, Exelixis and Millennium may terminate their respective agreements at any time, subject to prior notice. In addition, all of these beamline agreements provide that either party to the agreement may terminate the agreement in the event of a material breach by the other party, subject to prior notice and the opportunity to cure.

Shire

In July 2004, we licensed exclusive worldwide rights to Troxatyl from Shire, including an exclusive sublicense under rights Shire has to certain patents and patent applications in the field of the treatment of cancer from Yale University and the University of Georgia Research Foundation. Under the terms of the agreement, we made an upfront payment of $3.0 million and a payment of $1.0 million on the one-year anniversary of the agreement. We are also required to make milestone payments based on successful development and approval of Troxatyl, and will be required to make royalty payments based on net sales. We recorded a one-time charge of $4.0 million for purchased in-process research and development related to the upfront and one-year anniversary payments in 2004.

On a country-by-country basis, the term of this license agreement continues until the later of the expiration in the applicable country of the last to expire of the patents licensed to us under the agreement or ten years from the date of first commercial sale in the applicable country, unless the agreement is earlier terminated. Either party may terminate the license agreement in the event of a material breach by the other party, subject to prior notice and the opportunity to cure. In addition, subject to certain provisions, Shire may terminate the license agreement if we fail to make any payments due under the agreement, cease to carry on our business relating to oncology products, do not take certain actions relating to the drug approval process for Troxatyl by certain dates, or, subject to certain exceptions, if we are acquired by a party that owns or licenses a product that competes with Troxatyl.

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Our Strategy

Our goal is to create a leading biotechnology company that discovers, develops and commercializes novel cancer drugs. Key elements of our strategy are to:

•  Obtain regulatory approval of Troxatyl for AML. We are currently focusing much of our resources on Troxatyl. Because there is no approved therapy and no standard of care for the third-line treatment of AML, we are initially targeting FDA approval of Troxatyl for this indication through an accelerated approval process and fast track designation. We believe that Troxatyl could be approved in 2007 on the basis of a pivotal Phase II/III clinical trial that we initiated in July 2005, with targeted enrollment of 211 patients. By early 2006, we also intend to begin clinical trials evaluating Troxatyl for use in combination therapy and in the first- and second-line treatment of AML.

•  Develop Troxatyl for other cancer indications. We have considerable clinical data which shows that Troxatyl is active against numerous cancer indications. We will continue to explore potential opportunities to further expand the market for Troxatyl in MDS and in solid tumors.

•  Develop and expand our cancer pipeline. We consider drug development for the cancer markets attractive because relatively small clinical trials of short duration can provide meaningful data on patient outcomes. We have initially targeted blood cancer indications because we believe they typically involve clear, objective response measurements that can be made within 30 to 60 days of treatment. We will seek to further enhance our pipeline by advancing our BCR-ABL and MET and RON programs into the clinic, and by applying FAST to high-value cancer targets with the objective of discovering a series of additional clinical candidates.

•  Continue to generate revenue through strategic partnering. Revenue generation utilizing our FAST drug discovery platform and related technologies will continue to be important to us in the near term by providing funds for reinvestment in internal drug discovery and development. Our business development activities will involve both strategic partnering in the oncology area and revenue generation through high-value projects focused on FAST and other elements of our technology platform. We will remain open to opportunities to apply FAST to targets outside the oncology area, particularly where there are attractive financial or strategic opportunities.

•  Develop sales and marketing capabilities. There are approximately 3,000 hematologist/oncologists and approximately 5,000 oncologists practicing in the United States. Of these physicians, a small number of opinion leaders significantly influence the types of drugs prescribed by this group. We believe that we can effectively reach hematology and oncology markets in the United States with a relatively small sales organization focused on these and other targeted opinion leaders and physicians. We will seek marketing partners for indications and in territories, such as outside North America, which may require more extensive sales and marketing capabilities. We believe our drug discovery programs will provide us with product candidates in oncology which will serve as the basis for future sales and marketing.

•  Expand our portfolio of product candidates through acquisitions and in-licensing. We may further augment our internal discovery efforts through strategic acquisitions and by in-licensing novel therapeutics. We believe this approach combined with internal drug discovery and development will enable us to accelerate the expansion of our portfolio of product candidates.

Manufacturing and Supply

All of our manufacturing is outsourced to third parties with oversight by our internal managers. We rely on third party manufacturers to produce sufficient quantities of Troxatyl for use in clinical trials. We intend to continue this practice for any future clinical trials and large-scale commercialization of Troxatyl and for any other potential products for which we retain significant development and commercialization rights. All of our current product candidates are small molecule drugs. Historically these drugs have been simpler and less expensive to manufacture than biologic drugs.

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Specifically, for Troxatyl, we currently rely on Raylo Chemicals Inc. to supply clinical trial quantities of troxacitabine, the active pharmaceutical ingredient. The final pharmaceutical presentation of Troxatyl in the form of vials is manufactured by Ben Venue Laboratories, Inc., with whom we have an agreement covering immediate clinical trial needs. For both troxacitabine and the final pharmaceutical presentation of Troxatyl, we are discussing longer term supply agreements to address future clinical trial and large-scale commercialization needs. We believe there are also alternate sources of supply that can satisfy our clinical trial requirements without significant delay or material additional costs.

Intellectual Property

Troxatyl

Overview. We have an exclusive license to 17 issued U.S. patents, at least 250 issued foreign patents, 10 pending U.S. applications and at least 90 pending foreign applications, covering composition of matter, method of use and treatment, formulation and process. Composition of matter patents claiming the chemical structure of Troxatyl, have been granted in the United States, Europe and other major territories. Method of treatment patents claiming methods of treatment for cancer have been issued in the United States and Europe, are pending in Japan and have been filed in over 50 countries. Synthesis process patents have also been issued in the United States and Europe, and have been filed in more than 40 countries. Certain patent terms may be extended up to five additional years as a result of patent term extension to compensate for time taken in review by regulatory agencies. In addition, patents and patent applications for specific applications of Troxatyl have the potential to provide for patent protection with later patent-term expiration dates.

Troxatyl Patent Portfolio. Various patent applications and patents are directed to Troxatyl and its methods of manufacturing and use, along with Troxatyl formulations, intermediates, and modes of administration. For example, one U.S. patent claims a generic class of dioxolanes, that includes Troxatyl, and another U.S. patent claims Troxatyl itself as a composition of matter. These U.S. patents are due to expire in 2008 and there are corresponding applications pending in various other countries, including a granted European and Japanese patent.

Additional U.S. patents encompass methods of treating cancer using Troxatyl, and methods of treating CML or AML with Troxatyl in patients previously treated with Ara-C, which patents are due to expire in 2015 and 2020 respectively.

We cannot be certain that our patents will be found valid and enforceable, or that third parties will be found to infringe any of our issued patent claims. There can be no assurance that any of our patent applications will issue in any jurisdiction. Moreover, we cannot predict the breadth of claims that may be allowed or the actual enforceable scope of our patents. In the United States, we may lose our patent rights if we were not the first to invent the subject matter covered by each of our issued patents or pending patent applications.

Data Exclusivity. The use of Troxatyl in the treatment of AML has been granted orphan drug status in the United States and in the E.U. Such protection typically affords seven years of market exclusivity in the United States and ten years in the E.U.

Other Intellectual Property

We intend to protect our novel lead compounds, lead scaffolds, drug discovery programs and proprietary technologies by filing appropriate patent applications. We have approximately 16 U.S. and 8 foreign pending patent applications covering compositions of matter, novel lead scaffolds, drug discovery methods and assays, protein structures and elements of our high-throughput structure determination platform. We intend to continue to file patent applications on novel lead series and novel drug discovery methods, including FAST and novel assays to support our drug discovery platform. We also intend to file applications relating to novel proprietary protein structure determination technologies. We currently have two issued U.S. patents directed to aspects of our high-throughput structure determination platform.

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Although we have taken steps to protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties, and confidential information and inventions agreements with employees, consultants and advisors, third parties may still obtain this information or we may be unable to protect our rights. Enforcing a claim that a third party illegally obtained and is using our trade secrets or unpatented know-how is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secret information. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how, and we would not be able to prevent their use.

      Patent Term Extension/Restoration

Once a product is approved, patent term extension/restoration may be available in major territories, including the United States, Europe and Japan, to compensate for time taken in review by regulatory agencies. Typically only one patent per product can be extended and we are considering our strategy for patent term extension/restoration in each territory to identify the optimal combination of breadth of coverage and length of term.

Third Party Intellectual Property

Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we and our collaborators are developing products. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates or proprietary technologies may infringe.

We may be exposed to, or threatened with, future litigation by third parties having patent or other intellectual property rights alleging that our product candidates and/or proprietary technologies infringe their intellectual property rights. If one of these patents was found to cover our product candidates, proprietary technologies or their uses, we or our collaborators could be required to pay damages and could be restricted from commercializing our product candidates or using our proprietary technologies unless we or they obtain a license to the patent. A license may not be available to us or our collaborators on acceptable terms, if at all. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable right, which could prohibit us from making, using or selling our products, technologies or methods.

There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues, including but not limited to:

•  infringement and other intellectual property claims which, with or without merit, may be expensive and time-consuming to litigate and may divert our management’s attention from our core business;

•  substantial damages for infringement, including treble damages and attorneys’ fees, which we may have to pay if a court decides that the product or proprietary technology at issue infringes on or violates the third party’s rights;

•  a court prohibiting us from selling or licensing the product or using the proprietary technology unless the third party licenses its technology to us, which it is not required to do;

•  if a license is available from the third party, we may have to pay substantial royalties, fees and/or grant cross licenses to our technology; and

•  redesigning our products or processes so they do not infringe, which may not be possible or may require substantial funds and time.

We have not conducted an extensive search of patents issued to third parties, and no assurance can be given that such patents do not exist, have not been filed, or could not be filed or issued, which contain claims covering our products, technology or methods. Because of the number of patents issued and patent applications filed in our technical areas or fields, we believe there is a significant risk that third parties may allege they have patent rights encompassing our products, technology or methods.

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Sales and Marketing

We currently have no marketing, sales or distribution capabilities. In order to commercialize any of our drug candidates, we must develop these capabilities internally or through collaborations with third parties. For Troxatyl and certain of our other product development programs, we intend to maintain all commercial rights in the United States and to build our own sales force to market these products. As there are only approximately 3,000 hematologist/oncologists and approximately 5,000 oncologists practicing in the United States, and a small number of opinion leaders significantly influence the types of drugs prescribed by this group, we believe that we can effectively reach hematology and oncology markets in the United States with a relatively small sales organization focused on these opinion leaders and other targeted physicians. For other programs, we have entered into, or intend to pursue, strategic collaborations to commercialize our product candidates.

Competition

We operate in highly competitive segments of the biotechnology and biopharmaceutical markets. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies, and private and public research institutions. There is also intense competition for fragment-based lead discovery collaborations. Many of our competitors have significantly greater financial, product development, manufacturing and marketing resources than us. Large pharmaceutical companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. These companies also have significantly greater research capabilities than us. In addition, many universities and private and public research institutes are active in cancer research, some in direct competition with us. We also compete with these organizations to recruit scientists and clinical development personnel. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

Each cancer indication for which we are developing products, other than Troxatyl for the third-line treatment of AML, has a number of established therapies with which our candidates will compete. Most major pharmaceutical companies and many biotechnology companies are aggressively pursuing new cancer development programs, including both therapies with traditional, as well as novel, mechanisms of action.

We are aware of competitive products and technologies in each of the markets we target. The competitive products include approved and marketed products as well as products in development. We expect Troxatyl, if approved for the treatment of AML, to compete with: cytarabine, a generic compound often known as Ara-C, which is also used in combination with the anthracycline agents daunorubicin, idarubicin, and mitoxantrone; Mylotarg marketed by Wyeth; and Clolar^tm (clofarabine), marketed by Genzyme Corporation in the United States and under regulatory review in the E.U. In addition, we are aware of a number of other potential competing products, including: cloretazine (VNP40101M), which is being developed by Vion Pharmaceuticals, Inc. and is currently in a Phase III clinical trial in AML patients; Zarnestra® (tipifarnib), under development by Johnson & Johnson Pharmaceutical Research and Development, LLC; Vidaza® (azacitidine), marketed by Pharmion Corporation; and Dacogen^tm (decitabine), under development by MGI Pharma, Inc. and SuperGen, Inc. Numerous other potential competing products are in clinical treatment and preclinical development.

In each of our development programs addressing indications for which there are therapies available, we intend to complete clinical trials designed to evaluate the potential advantages of our drug candidates as compared to or in conjunction with the current standard of care. Key differentiating elements affecting the success of all of our drug candidates are likely to be their efficacy, safety and side-effect profile compared to commonly used therapies.

Significant competitors in the area of fragment-based drug discovery include Astex Therapeutics Limited, Plexxikon Inc., Evotec AG and Sunesis Pharmaceuticals, Inc. In addition, many large pharmaceutical companies are exploring the internal development of fragment-based drug discovery methods.

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Government Regulation and Product Approvals

The clinical development, manufacturing and potential marketing of our products are subject to regulation by various authorities in the United States, the E.U., and other countries, including, in the United States, the FDA, and, in the E.U., the EMEA. The Federal Food, Drug, and Cosmetic Act, or FDC Act, and the Public Health Service Act in the United States, and numerous directives, regulations, local laws, and guidelines in the E.U. govern testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of our products. Product development and approval within these regulatory frameworks takes a number of years, and involves the expenditure of substantial resources.

Regulatory approval will be required in all major markets in which we, or our licensors, seek to test our products in development. At a minimum, such approval requires evaluation of data relating to quality, safety and efficacy of a product for its proposed use. The specific types of data required and the regulations relating to these data differ depending on the territory, the drug involved, the proposed indication and the stage of development.

In general, new chemical entities are tested in animals to determine whether the product is reasonably safe for initial human testing. Clinical trials for new products are typically conducted in three sequential phases that may overlap. Phase I trials typically involve the initial introduction of the pharmaceutical into healthy human volunteers and the emphasis is on testing for safety, dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. In the case of serious or life-threatening diseases, such as AIDS and refractory cancer, initial Phase I trials are often conducted in patients directly, with preliminary exploration of potential efficacy. Phase II trials involve clinical trials to evaluate the effectiveness of the drug for a particular indication or indications in patients with the disease or condition under study and to determine the common short-term side effects and risks associated with the drug. Phase II trials are typically closely monitored and conducted in a relatively small number of patients, usually involving no more than several hundred subjects. Phase III trials are generally expanded, well-controlled clinical trials. They are performed after preliminary evidence suggesting effectiveness of the drug has been obtained, and are intended to gather the additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling.

In the United States, specific preclinical data, chemical data and a proposed clinical study protocol, as described above, must be submitted to the FDA as part of an Investigational New Drug application, or IND, which, unless the FDA objects, will become effective 30 days following receipt by the FDA. Phase I trials may commence only after the IND application becomes effective. Prior regulatory approval for human healthy volunteer studies is also required in member states of the E.U. Currently, in each member state of the E.U., following successful completion of Phase I trials, data are submitted in summarized format to the applicable regulatory authority in the member state in respect of applications for the conduct of later Phase II trials. The regulatory authorities in the E.U. typically have between one and three months in which to raise any objections to the proposed clinical trial, and they often have the right to extend this review period at their discretion. In the United States, following completion of Phase I trials, further submissions to regulatory authorities are necessary in relation to Phase II and III trials to update the existing IND. Authorities may require additional data, before allowing the trials to commence and could demand discontinuation of studies at any time if there are significant safety issues. In addition to regulatory review, a clinical trial involving human subjects has to be approved by an independent body. The exact composition and responsibilities of this body differ from country to country. In the United States, for example, each clinical trial is conducted under the auspices of an Institutional Review Board at the institution at which the clinical trial is conducted. This board considers among other things, the design of the clinical trial, ethical factors, the safety of the human subjects and the possible liability risk for the institution. Equivalent rules apply in each member state of the E.U., where one or more independent ethics committees that typically operate similarly to an Institutional Review Board, will review the ethics of conducting the proposed research. Other authorities elsewhere in the world have slightly differing requirements involving both execution of clinical trials and import or export of pharmaceutical products. It is our responsibility to ensure that we conduct our business in accordance with the regulations of each relevant territory.

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Information generated in this process is susceptible to varying interpretations that could delay, limit, or prevent regulatory approval at any stage of the approval process. Failure to demonstrate adequately the quality, safety and efficacy of a therapeutic drug under development would delay or prevent regulatory approval of the product. There can be no assurance that if clinical trials are completed, either we or our collaborative partners will submit applications for required authorizations to manufacture or market potential products, including a marketing authorization application or an NDA, or that any such application will be reviewed and approved by appropriate regulatory authorities in a timely manner, if at all.

In order to gain marketing approval, we must submit a dossier to the relevant authority for review, which is known in the United States as an NDA and in the E.U. as a marketing authorization application. The format is usually specified by each authority, although in general it will include information on the quality of the chemistry, manufacturing and pharmaceutical aspects of the product and non-clinical and clinical data. The FDA undertakes such reviews for the United States. In the E.U., there is, for many products, a choice of two different authorization routes: centralized and decentralized. Under the centralized route, one marketing authorization is granted for the entire E.U., while under the decentralized route a series of national marketing authorizations are granted. In the centralized system, applications are reviewed by members of the Committee for Medicinal Products for Human Use, on behalf of the EMEA. The EMEA will, based upon the review of the Committee for Medicinal Products for Human Use, provide an opinion to the European Commission on the safety, quality and efficacy of the product. The decision to grant or refuse an authorization is made by the European Commission. In circumstances where use of the centralized route is not mandatory, we can choose to use the decentralized route, in which case the application will be reviewed by each member state’s regulatory agency. If the regulatory agency grants the authorization, other member states’ regulatory authorities are asked to “mutually recognize” the authorization granted by the first member state’s regulatory agency. Approval can take several months to several years or be denied. The approval process can be affected by a number of factors. Additional studies or clinical trials may be requested during the review and may delay marketing approval and involve unbudgeted costs. Regulatory authorities may conduct inspections of relevant facilities and review manufacturing procedures, operating systems and personnel qualifications. In addition to obtaining approval for each product, in many cases each drug manufacturing facility must be approved. Further, inspections may occur over the life of the product. An inspection of the clinical investigation sites by a competent authority may be required as part of the regulatory approval procedure. As a condition of marketing approval, the regulatory agency may require post-marketing surveillance to monitor adverse effects, or other additional studies as deemed appropriate. After approval for the initial indication, further clinical studies are usually necessary to gain approval for additional indications. The terms of any approval, including labeling content, may be more restrictive than expected and could affect product marketability.

The FDA has implemented fast track programs to facilitate the development and expedite the review of drugs intended to treat serious and life-threatening conditions so that an approved product can reach the market expeditiously. The FDA’s fast track programs, as enacted by the 1997 FDAMA, further expanded the FDA’s existing programs to facilitate development of products for serious and life threatening diseases, from 21 C.F.R. Part 312 Sub-part E, 21 C.F.R. 314 Sub-part H and priority review. We were recently granted fast track designation of Troxatyl for the third-line treatment of AML patients and we may qualify for a six-month review period by the FDA. We anticipate that if full standard approval is granted under 21 C.F.R. Part 314 for this indication, that a post-approval commitment to complete the Phase II/III clinical trial with regard to overall survival, a secondary endpoint, would be required. The FDA may also require additional studies be conducted to further determine the safety and efficacy of Troxatyl in earlier stages of the disease or other leukemias.

The FDA offers an accelerated approval procedure for certain drugs under Subpart H of the agency’s NDA approval regulations and the fast track provisions of the FDC Act. Subpart H provides for accelerated NDA approval for new drugs intended to treat serious or life-threatening diseases, where the drugs provide a meaningful therapeutic advantage over existing treatment or show the potential to address unmet medical needs. Under this accelerated approval procedure, the FDA may approve a drug based on evidence from adequate and well-controlled studies of the drug’s effect on an additional endpoint that reasonably suggests

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clinical benefit, or on evidence of the drug’s effect on a clinical endpoint other than survival or irreversible morbidity. This approval is conditioned on favorable completion of trials to establish and define the degree of patient clinical benefits. These post-approval clinical trials, known as Phase IV trials, would usually be underway when a product obtains accelerated approval. If after approval, a Phase IV trial establishes that the drug does not perform as expected, or if post-approval restrictions are not adhered to or are not adequate to ensure safe use of the drug, or other evidence demonstrates that the product is not safe or effective under its conditions of use, the FDA may withdraw approval in an expedited manner. This accelerated approval procedure for expediting the clinical evaluation and approval of certain drugs may shorten the drug development process by as much as two to three years. The E.U. rules relating to marketing authorizations permit, in “exceptional circumstances,” the regulatory authorities to grant a marketing authorization where the applicant is not able to provide the usual comprehensive set of data relating to safety and efficacy because the targeted disease state is rarely encountered or because there is a lack of scientific knowledge about the disease, or because it would be unethical to collect such data. Marketing authorizations granted on an exceptional circumstances basis are normally subject to the holder fulfilling certain obligations, such as completion by the applicant of particular clinical studies. Depending on the results of our ongoing pivotal Phase II/III clinical trial of Troxatyl, we may seek to file an NDA for Troxatyl on the basis of this single study and may seek to obtain FDA review under the accelerated approval regulations.

In many markets outside of the United States, regulations exist that permit patients to gain access to unlicensed pharmaceuticals, particularly for severely ill patients where other treatment options are limited or non-existent. Generally, the supply of pharmaceuticals under these circumstances is termed “compassionate use” or “named patient” supply. In the E.U., each member state has developed its own system under an E.U. directive that permits exemptions from traditional pharmaceutical regulation of “medicinal products supplied in response to a bona fide unsolicited order, formulated in accordance with specifications of an authorized health care professional, and for use by his individual patients on his direct personal responsibility.” Essentially, two systems operate among E.U. member states: approval can be given for “cohort” supply, meaning more than one patient can be supplied in accordance with an agreed treatment protocol; or, alternatively, as is the case in the majority of E.U. member states, supply is provided on an individual patient basis. Some countries, such as France, have developed other systems, where a Temporary Authorization of Use, involves a thorough review and approval by the regulator of a regulatory data package. In France, the company then receives an approval to supply. All E.U. member states require assurance of the quality of the product, which is usually achieved by provision of current good manufacturing practice, or cGMP, certification. In the majority of markets, the prescribing physician is responsible for use for the product and in some countries the physician in conjunction with the pharmacist must request regulator approval to use the unlicensed pharmaceutical. Outside of the E.U., many countries have developed named patient systems, similar to those prevalent in Europe. The United States and the E.U. may grant orphan drug designation to drugs intended to treat a “rare disease or condition,” which, in the United States, is generally a disease or condition that affects fewer than 200,000 individuals nationwide. In the E.U., orphan drug designation can be granted if:

•  the disease affects no more than 50 in 100,000 persons in the E.U. or the drug is intended for a life-threatening, seriously debilitating, or serious and chronic condition;

•  without incentive it is unlikely that the drug would generate sufficient return to justify the necessary investment; and

•  no satisfactory method of treatment for the condition exists or, if it does, the new drug will provide a significant benefit to those affected by the condition.

If a product that has an orphan drug designation subsequently receives the first regulatory approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, meaning that the applicable regulatory authority may not approve any other applications to market the same drug for the same indication, except in certain very limited circumstances, for a period of seven years in the United States, and ten years in the E.U. orphan drug designation does not prevent competitors from developing or marketing different drugs for an orphan indication or the same drug for a different indication. Orphan drug designation

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must be requested before submitting an NDA or marketing authorization application. After orphan drug designation is granted, the identity of the therapeutic agent and its designated orphan indication are publicly disclosed. Orphan drug designation does not convey an advantage in, or shorten the duration of, the review and approval process. The use of Troxatyl in the treatment of AML has been granted orphan drug status in the United States and similar protection is being sought in Europe.

Holders of an approved NDA are required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with certain requirements concerning advertising and promotional labeling for their products. Moreover, quality control and manufacturing procedures must continue to conform to cGMP after approval, and the FDA periodically inspects manufacturing facilities to assess cGMP compliance. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance. We continue to rely upon third party manufacturers to produce our products. We cannot be sure that those manufacturers will remain in compliance with applicable regulations, or that future FDA inspections will not identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct.

For both currently marketed and future products, failure to comply with applicable regulatory requirements after obtaining regulatory approval can, among other things, result in suspension of regulatory approval, and possible civil and criminal sanctions. Renewals in Europe may require additional data, which may result in a license being withdrawn. In the United States and the E.U., regulators have the authority to revoke, suspend or withdraw approvals of previously approved products, to prevent companies and individuals from participating in the drug-approval process, to request recalls, to seize violative products, to obtain injunctions to close manufacturing plants not operating in conformity with regulatory requirements and to stop shipments of violative products. In addition, changes in regulation could harm our financial condition and results of operation.

Legal Proceedings

We are not currently involved in any material legal proceedings. We may be subject to various claims and legal actions arising in the ordinary course of business from time to time.

Facilities

We lease approximately 60,568 square feet of laboratory and office space in San Diego, California under two lease agreements that terminate this year and a third lease agreement that terminates in September 2008. We are in the process of negotiating an extension of the two leases to our San Diego facilities that terminate this year to June 30, 2007. We also sublease approximately 10,000 square feet of laboratory and office space in San Diego, California under a sublease that terminates in September 2006. We believe that our facilities will adequately meet our present research and development needs.

Employees

As of June 30, 2005, we had 105 employees, including 43 who hold Ph.D. or M.D. degrees. We had 79 employees engaged in research and development, and our remaining employees are management or administrative staff. None of our employees is subject to a collective bargaining agreement. We believe that we have good relations with our employees.

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Management

Executive Officers, Directors and Key Employees

The following table sets forth information regarding our executive officers, key employees and directors as of June 30, 2005:

Name	Age		Position
Executive Officers and Directors
Michael Grey		52	President, Chief Executive Officer and Director
Stephen K. Burley, M.D., D.Phil.		47	Chief Scientific Officer and Senior Vice President, Research
James A. Rotherham, C.P.A.		40	Chief Financial Officer
Annette North, Esq.		39	Vice President, Legal Affairs and Corporate Secretary
Christopher S. Henney, Ph.D., D.Sc.(1)(2)		64	Director and Chairman
Louis C. Bock(3)		40	Director
Karin Eastham, C.P.A.(1)(3)		55	Director
Jean-François Formela, M.D.(2)(3)		49	Director
Vijay Lathi(1)		32	Director
Stelios Papadopoulos, Ph.D.(2)		57	Director
Key Employees
Peter Myers, Ph.D.		61	Vice President, Drug Discovery
Sean McCarthy, D.Phil.		38	Vice President, Business Development
Julie Cooke		39	Vice President, Human Resources

(1)	Member of the audit committee.
(2)	Member of the corporate governance and nominating committee.
(3)	Member of the compensation committee.

Executive Officers and Directors

Michael Grey, joined us in September 2001 as our Executive Vice President and Chief Business Officer and as a member of our board of directors. He became our President in June 2003 and our Chief Executive Officer in January 2005. Prior to joining us, Mr. Grey served as a director of Trega Biosciences, Inc., a biopharmaceutical company acquired by Lion bioscience AG in 2001, from December 1998 to March 2001. He was also the President and Chief Executive Officer of Trega from January 1999 to March 2001. Prior to joining Trega, Mr. Grey was the President of BioChem Therapeutic, Inc., the pharmaceutical operating division of BioChem Pharma Inc., from 1994 to 1998. In that role, he was responsible for all company operations including research, development, sales and marketing, finance and human resources. During 1994, Mr. Grey was the President and Chief Operating Officer for Ansan, Inc. From 1974 to 1993, Mr. Grey served in various roles with Glaxo Inc. and Glaxo Holdings, plc, culminating in his position as Vice President, Corporate Development. Mr. Grey serves as a director of Achillion Pharmaceuticals, Inc. and IDM Pharma, Inc. (formerly known as Epimmune Inc.). Mr. Grey received a B.Sc. in Chemistry from the University of Nottingham, United Kingdom.

Stephen K. Burley, M.D., D.Phil., joined us in February 2002 as our Chief Scientific Officer and Senior Vice President, Research. Dr. Burley has been an Adjunct Professor at The Rockefeller University since February 2002, where he was also the Richard M. and Isabel P. Furlaud Professor from June 1997 to January 2002. He was an Investigator at the Howard Hughes Medical Institute from September 1994 to January 2002. He was previously the Principal Investigator of the New York Structural Genomics Research Consortium. Dr. Burley is a Fellow of the Royal Society of Canada and of the New York Academy of Sciences. His research focused

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on the macromolecular machines responsible for mRNA transcription, splicing and translation in eukaryotes and on the problem of antibiotic resistance. Dr. Burley received an M.D. degree from Harvard Medical School and, as a Rhodes Scholar, he received a D.Phil. in Molecular Biophysics from Oxford University. His clinical training combined a residency in Internal Medicine at the Brigham and Women’s Hospital with postdoctoral work in protein crystallography under the direction of William N. Lipscomb at Harvard University. He received a B.Sc. in Physics from the University of Western Ontario. In 1999, Dr. Burley co-founded Prospect Genomics, Inc., a San Francisco-based drug discovery company that we acquired in May 2001.

James A. Rotherham, C.P.A., joined us as Chief Financial Officer in June 2005. Prior to joining us, Mr. Rotherham was Chief Financial Officer of Kintera, Inc., a provider of Internet solutions for nonprofit organizations, from October 2001 to May 2005. Prior to joining Kintera, he was Chief Financial Officer of Copiers Now, Inc., an Internet company, from July 2000 until October 2001. Mr. Rotherham was Chief Financial Officer of Epidemic Marketing, Inc. from 1999 to 2000. Mr. Rotherham was employed by the accounting firm Ernst & Young LLP from 1986 until 1999. Mr. Rotherham holds a B.S. from The Wharton School at the University of Pennsylvania.

Annette North, Esq., joined us in November 2000 as our Corporate Counsel and was appointed Vice President, Legal Affairs in January 2004. Prior to joining us, she was Senior Director of Operations and Legal at Axys Pharmaceuticals, Inc., a small molecule drug discovery company, from 1998 to 1999 and Legal Counsel and Director of Legal Affairs at Sequana Therapeutics, Inc., a biotechnology company, from 1995 to 1998. From 1991 to 1994, Ms. North was employed by Nabarro Nathanson plc, a national law firm in London, England, focusing primarily on commercial litigation, and from 1989 to 1990 she worked at Corrs, Chambers, Westgarth, a national law firm in Melbourne, Australia. She is a member of the State Bar of California, a Solicitor of the Supreme Court of England and Wales and a Barrister and Solicitor of the Supreme Court of Victoria, Australia. Ms. North received both her Bachelor of Commerce and her Bachelor of Laws from the University of Melbourne, Australia.

Christopher S. Henney, Ph.D., D.Sc., became our Chairman in December 2003 and has served as a member of our board of directors since May 2000. From 1995 to January 2003, he served as the Chairman and Chief Executive Officer of Dendreon Corporation, a publicly held biotechnology company. Dr. Henney co-founded ICOS Corporation, another publicly held biotechnology company, where he served as Executive Vice President, Scientific Director and a director from 1989 to 1995. He also co-founded Immunex Corporation, which was a publicly held biotechnology company until its acquisition by Amgen Corporation in May 2002, where he held various positions, including Director, Vice Chairman and Scientific Director from 1981 to 1989. Dr. Henney is also a former academic immunologist. He currently serves as chairman of Xcyte Therapies, Inc., and as a director of Biomira, Inc. and Bionomics Ltd. Dr. Henney received a D.Sc. for his contributions to Immunology, a Ph.D. in Experimental Pathology and a B.Sc. with Honors, from the University of Birmingham, United Kingdom.

Louis C. Bock has served as a member of our board of directors since September 2000. Mr. Bock is a Managing Director of BA Venture Partners, a venture capital firm. Mr. Bock joined BA Venture Partners in September 1997 from Gilead Sciences, Inc., a biopharmaceutical company, where he held positions in research, project management, business development and sales from September 1989 to September 1997. Prior to Gilead, he was a research associate at Genentech, Inc. from November 1987 to September 1989. He currently serves as a director of Ascenta Therapeutics, Cellective Therapeutics, Inc., diaDexus Inc., Orexigen Therapeutics and Somaxon Pharmaceuticals, Inc. and is responsible for BA Venture Partners’ investments in Dynavax Technologies, Seattle Genetics and Prestwick Pharmaceuticals. Mr. Bock received his B.S. in Biology from California State University, Chico and an M.B.A. from California State University, San Francisco.

Karin Eastham, C.P.A., has served as a member of our board of directors since August 2005. Since May 2004, Ms. Eastham has been Executive Vice President, Chief Operating Officer and a member of the board of trustees of The Burnham Institute, an independent not-for-profit biomedical research institution. Prior to

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joining The Burnham Institute, Ms. Eastham was senior Vice President and Chief Financial Officer of Diversa Corporation from April 1999 to May 2004. She previously held similar positions with CombiChem, Inc., Cytel Corporation, and Boehringer Mannheim Corporation. She also serves as a director of Illumina, Inc., Tercica, Inc. and Amylin Pharmaceuticals, Inc., public biotechnology companies, Cyntellect, Inc., a private biotechnology company, as well as UCSD Athena. Ms. Eastham received B.S. and M.B.A. degrees from Indiana University and is a Certified Public Accountant.

Jean-François Formela, M.D., is a Senior Partner in the life sciences sector for Atlas Venture, a venture capital firm, and has served as a member of our board of directors since June 1999. Prior to joining Atlas Venture in 1993, Dr. Formela was Senior Director, Medical Marketing and Scientific Affairs at Schering-Plough Corporation in the United States. During his tenure at Schering-Plough, he was responsible for the marketing of Intron A, Schering-Plough’s alpha-interferon. In his last position at Schering-Plough, he directed the U.S. Phase IV studies in all therapeutic areas, as well as the health economics, medical information, and biotechnology pre-marketing groups. As a medical doctor, Dr. Formela practiced emergency medicine at Necker University hospital in Paris. Since joining Atlas Venture, he has been involved in the formation of companies such as ArQule, Inc., MorphoSys, Exelixis, Inc., deCODE genetics, Inc., Nuvelo, Inc., Cellzome AG, Archemix Corp. and Aureon Biosciences Corporation. Dr. Formela currently serves as a director of Achillion Pharmaceuticals, Inc., Cellzome Inc., Compound Therapeutics, Exelixis, Inc., NxStage Medical, Inc. and Phylogix, Inc. He holds an M.D. degree from the Paris University School of Medicine and an M.B.A. from Columbia University.

Vijay Lathi has served as a member of our board of directors since May 2002. Mr. Lathi is a Managing Director at New Leaf Venture Partners, a venture capital firm focused on healthcare technology investments, which also manages the healthcare portfolio of funds invested by The Sprout Group. Prior to his position at New Leaf Venture Partners, Mr. Lathi was a Partner at The Sprout Group, where he focused on healthcare technology investments. Before joining the Sprout Group in 1998, Mr. Lathi was an analyst in the life science venture capital group at Robertson Stephens and Co. Prior to Robertson Stephens and Co., he was an analyst with Cornerstone Research, an economic consulting firm. Mr. Lathi currently serves as a director of Kalypsys, Inc., Labcyte, Inc., Illypsa, Focus Technologies, Inc. and Expression Diagnostics Inc. He received a B.S. in Chemical Engineering from M.I.T. and an M.S. in Chemical Engineering from Stanford University.

Stelios Papadopoulos, Ph.D., has served as a member of our board of directors since July 2001. Dr. Papadopoulos is a Vice Chairman of SG Cowen in the investment banking division focusing on the biotechnology and pharmaceutical sectors. Prior to joining SG Cowen in February 2000, he spent 13 years as an investment banker at PaineWebber, where he was most recently Chairman of PaineWebber Development Corp., a PaineWebber subsidiary focusing on biotechnology. He joined PaineWebber in April 1987 from Drexel Burnham Lambert where he was a vice president in the Equity Research Department covering the biotechnology industry. Prior to Drexel, he was a biotechnology analyst at Donaldson, Lufkin & Jenrette. Before coming to Wall Street in 1985, Dr. Papadopoulos was on the faculty of the Department of Cell Biology at New York University Medical Center. He continues his affiliation with NYU Medical Center as an Adjunct Associate Professor of Cell Biology. Dr. Papadopoulos is a co-founder and Chairman of the Board of Exelixis, Inc., and he is a co-founder and director of Cellzome Inc. and Anadys Pharmaceuticals, Inc. He also serves as a director of GenVec, Inc. and BG Medicine, Inc. Dr. Papadopoulos holds a Ph.D. in Biophysics and an M.B.A. in Finance, both from New York University.

Key Employees

Peter Myers, Ph.D., joined us as Vice President, Drug Discovery in January 2005. From May 2003 to January 2005, he has served as a consultant to various life sciences companies. From June 2002 to May 2003, Dr. Myers was Chief Executive Officer of Libraria, Inc. (now Eidogen-Sertanty), a drug discovery technology and development company. From February 2002 to May 2002, Dr. Myers served as Executive Vice President and Site Director of Deltagen Research Laboratories, formerly BMS/ DuPont Pharmaceuticals Research Laboratories, a provider of drug discovery tools and services to the biopharmaceutical industry. From November 1999 to February 2002, he served as the Chief Operating Officer/ Chief Scientific Officer of

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CombiChem, Inc., a biotechnology company that was acquired by DuPont in 1999. Dr. Myers also served as Vice President of Drug Discovery and Development at Onyx Pharmaceuticals, Inc. and Vice President of Chemistry Research at the Glaxo Research Institute in Research Triangle, North Carolina, where he served as Worldwide Therapeutic Head for all of Glaxo’s Inflammation Research and Deputy Chairman for Cancer Research from 1991 to 1992, and in 1993 assumed worldwide responsibility for Glaxo’s new therapeutic area of metabolic diseases (diabetes, osteoporosis and obesity). He previously served as Director of Medicinal Chemistry for Glaxo Group Research in the UK, and Director of Chemistry at G.D. Searle & Co. Ltd. in the United Kingdom. Dr. Myers also serves as the Chairman of the Queensland Biocapital Fund Science Advisory Board. Dr. Myers obtained both his B.Sc. in Chemistry and Ph.D. in Organic Chemistry from the University of Leeds, United Kingdom Dr. Myers has committed approximately fifty percent of his time to us.

Sean McCarthy, D.Phil, joined us in 2000 as Director of Business Development, and currently serves as our Vice President of Business Development. Prior to joining us, Dr. McCarthy was a senior scientist and program director at Millennium Pharmaceuticals, Inc., a biopharmaceutical company, where he managed biotherapeutic programs for the company. Prior to that, he was a post-doctoral research fellow at DNAX Research Institute, where he analyzed oncogene-related gene expression. He received a D.Phil. from St. Johns College, University of Oxford, United Kingdom and a B.Sc. in Biochemistry and Pharmacology from Kings College, University of London, United Kingdom.

Julie Cooke joined us as Vice President of Human Resources in January 2002. Prior to joining us, from January 2001 to January 2002, Ms. Cooke was director of Human Resources at Gateway Computers. From August 2000 to November 2000, she was the Vice President of Human Resources for Digital Walker West. From July 1988 to August 2000, Ms. Cooke was employed by PepsiCo/ Pepsi Bottling Group in various positions, including Director of Compensation for Pepsi Cola North America and Director of Human Resources for the Texoma Business Unit. Ms. Cooke earned her B.A. in Economics at the Colorado College.

Board Composition

Our business and affairs are organized under the direction of our board of directors, which currently consists of seven members. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. Our board of directors meets on a regular basis and additionally as required. Written board materials are distributed in advance of meetings as a general rule, and our board of directors schedules meetings with and presentations from members of our senior management on a regular basis and as required.

Our board of directors has determined that six of our seven directors, Drs. Henney, Formela and Papadopoulos, Messrs. Bock and Lathi, and Ms. Eastham are independent directors, as defined by Rule 4200(a)(15) of the National Association of Securities Dealers.

Effective upon the completion of this offering, we will divide our board of directors into three classes, as follows:

•  Class I, which will consist of Messrs. Bock, Grey and Lathi and whose term will expire at our annual meeting of stockholders to be held in 2006;

•  Class II, which will consist of Ms. Eastham and Dr. Formela, and whose term will expire at our annual meeting of stockholders to be held in 2007; and

•  Class III, which will consist of Drs. Papadopoulos and Henney, and whose term will expire at our annual meeting of stockholders to be held in 2008.

At each annual meeting of stockholders to be held after the initial classification, the successors to directors whose terms then expire will serve until the third annual meeting following their election and until their successors are duly elected and qualified. The authorized size of our board is currently seven members. The authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed between the three

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classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in our control or management. Our directors may be removed for cause by the affirmative vote of the holders of at least 66²/3% of our voting stock.

Board Committees

Our board of directors has an audit committee, a compensation committee and a corporate governance and nominating committee.

     Audit Committee

Our audit committee consists of Ms. Eastham, Dr. Henney and Mr. Lathi. Ms. Eastham chairs the audit committee. The functions of this committee include, among other things:

•  evaluating the performance and qualifications of our independent auditors and determining whether to retain our existing independent auditors or engage new independent auditors;

•  reviewing and pre-approving the engagement of our independent auditors to perform audit services and any permissible non-audit services;

•  reviewing our annual and quarterly financial statements and reports and discussing the statements and reports with our independent auditors and management;

•  monitoring the rotation of partners of our independent auditors on our engagement team as required by law;

•  reviewing with our independent auditors and management significant issues that arise regarding accounting principles and financial statement presentation, and matters concerning the scope, adequacy and effectiveness of our financial controls;

•  establishing procedures for the receipt, retention and treatment of complaints received by us regarding financial controls, accounting or auditing matters; and

•  reviewing and evaluating, at least annually, the performance of the audit committee and its members, including compliance of the audit committee with its charter.

We have appointed Ms. Eastham as our audit committee financial expert. Both our independent auditors and management periodically meet with our audit committee.

Compensation Committee

Our compensation committee consists of Mr. Bock, Ms. Eastham and Dr. Formela. Dr. Formela chairs the compensation committee. The functions of this committee include, among other things:

•  evaluating and recommending to our board of directors the compensation and other terms of employment of our executive officers and reviewing and approving corporate performance goals and objectives relevant to such compensation;

•  evaluating and recommending to our board of directors the type and amount of compensation to be paid or awarded to board members;

•  evaluating and recommending to our board of directors the equity incentive plans, compensation plans and similar programs advisable for us, as well as modification or termination of existing plans and programs;

•  administering our equity incentive plans;

•  establishing policies with respect to equity compensation arrangements;

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•  reviewing and approving the terms of any employment agreements, severance arrangements, change-in-control protections and any other compensatory arrangements for our executive officers; and

•  reviewing and evaluating, at least annually, the performance of the compensation committee.

Corporate Governance and Nominating Committee

Our corporate governance and nominating committee consists of Drs. Formela, Henney and Papadopoulos. Dr. Papadopoulos chairs the corporate governance and nominating committee. The functions of this committee include, among other things:

•  developing and maintaining a current list of the functional needs and qualifications of members of our board of directors;

•  evaluating director performance on the board and applicable committees of the board and determining whether continued service on our board is appropriate;

•  interviewing, evaluating, nominating and recommending individuals for membership on our board of directors;

•  evaluating nominations by stockholders of candidates for election to our board;

•  considering and assessing the independence of members of our board of directors;

•  developing, reviewing and amending a set of corporate governance policies and principles, including a code of ethics;

•  considering questions of possible conflicts of interest of directors as such questions arise;

•  recommending to our board of directors the establishment of such special committees as may be desirable or necessary from time to time in order to address ethical, legal, business or other matters that may arise; and

•  evaluating at least annually, the performance of the nominating and corporate governance committee.

Compensation Committee Interlocks and Insider Participation

No member of our compensation committee has ever been an executive officer or employee of ours. None of our executive officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Director Compensation

In January 2004, we entered into an agreement with Dr. Henney, under which we agreed to pay Dr. Henney $60,000 per year in consideration for his services as chairman of our board of directors. In addition, in January 2004, we granted Dr. Henney a stock option under our 2000 equity incentive plan to purchase 15,174 shares of our common stock. In May 2005, Dr. Henney was granted a restricted stock award under our 2000 equity incentive plan of 140,000 shares of our common stock. Twenty-five percent of the shares subject to the award were immediately vested as of the date of grant and the remaining shares subject to the award vest in equal monthly installments over the following two years. In May 2005, Dr. Henney was also paid a cash bonus of $60,000 for his service as chairman of our board of directors.

In April 2001, we entered into a non-employee director agreement with Dr. Papadopoulos under which we agreed to pay Dr. Papadopoulos $8,000 per year in consideration for his services as a member of our board of directors, granted him stock options under our 2000 equity incentive plan to purchase 22,761 shares of our common stock at an exercise price of $6.72 per share, and, subject to stockholder approval, offered him the opportunity to purchase 12,645 shares of our Series C convertible preferred stock at a purchase price of $66.82 per share. Dr. Papadopoulos did not purchase any shares of Series C convertible preferred stock pursuant to this agreement. Under the terms of a 2003 amendment to this agreement, we agreed to raise the

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per year consideration for Dr. Papadopoulos’ services as a member of our board of directors from $8,000 to $10,000, commencing in the fourth quarter of 2003, and also agreed to pay him $2,000 per year in consideration for his services as a member of our audit committee. In October 2005, we agreed to pay Dr. Papadopoulos an annual retainer of $25,000 for his service as a member of our board of directors, in lieu of his prior retainer for service to our board. In October 2005, we also granted Dr. Papadopoulos a stock option under our 2000 equity incentive plan to purchase 25,000 shares of our common stock at an exercise price of $0.50 per share. The option vests in equal monthly installments over three years.

In August 2005, Ms. Eastham was granted a stock option under our 2000 equity incentive plan to purchase 25,000 shares of our common stock at an exercise price of $0.50 per share. The option vests in equal monthly installments over three years. We have agreed to pay Ms. Eastham an annual retainer of $25,000 for her service as a member of our board of directors and $15,000 for her service as the chair of our audit committee.

Other than with respect to Dr. Henney, Dr. Papadopoulos and Ms. Eastham, we have not provided cash compensation to directors for their services as directors or members of committees of the board of directors. However, following the completion of this offering, we intend to provide cash compensation in the form of an annual retainer for our chairman of the board and for each other non-employee director, as well as for the chairman of our audit committee and for the other members of our audit committee and other committee members. The amount of this compensation will be determined by our board of directors prior to the completion of this offering. We have reimbursed and will continue to reimburse our non-employee directors for their reasonable expenses incurred in attending meetings of our board of directors and committees of the board of directors.

Effective upon the completion of this offering, we will adopt our 2005 non-employee directors’ stock option plan to provide for the automatic grant of options to purchase shares of common stock to our non-employee directors. In addition, following the completion of this offering, all of our directors will be eligible to participate in our 2005 equity incentive plan and our employee directors will be eligible to participate in our 2005 employee stock purchase plan. For a more detailed description of these plans, see “Employee Benefit Plans.”

Executive Compensation

The following table provides information regarding the compensation earned during the fiscal year ended December 31, 2004 by our chief executive officer and each of our other executive officers whose combined

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salary and bonus exceeded $100,000 during that fiscal year. We refer to our chief executive officer and these other executive officers as our “named executive officers” elsewhere in this prospectus.

Summary Compensation Table (1)

						Long-Term
						Compensation
		Annual Compensation
						Securities Underlying
Name and Principal Position(s)		Salary		Bonus(2)		Options(3)		All Other Compensation
Michael Grey		$	332,800	$	37,700		4,767	$	81,893	(4)
	President, Chief Executive Officer and Member of the Board of Directors
Stephen K. Burley		$	312,000	$	31,687		4,006	$	100,000	(5)
	Chief Scientific Officer and Senior Vice President, Research
Annette North		$	194,999	$	11,779		1,489	$	3,856	(4)
	Vice President, Legal Affairs and Corporate Secretary
Timothy Harris		$	351,520	$	43,940		5,556		–
	Former Chief Executive Officer(6)
Herbert Mutter		$	232,545	$	18,168		2,297	$	9,040	(4)
	Former Chief Financial Officer(7)

(1)	In accordance with the rules of the SEC, the compensation described in this table does not include medical, group life insurance or other benefits which are generally available to all of our salaried employees and certain perquisites and other personal benefits received by a named executive officer which do not exceed the lesser of $50,000 or 10% of that named executive officer’s salary and bonus disclosed in this table.
(2)	Bonuses paid in 2004 were earned by the respective named executive officer in 2003. Amounts reflect the cash portion of the bonuses awarded to the named executive officers in 2004. The named executive officers were also granted fully vested stock options at an exercise price of $1.98 per share. The stock options were fully vested as of the date of grant. See note (3) below.
(3)	Amounts reflect stock options granted in 2004 for performance in 2003. The stock options were fully vested as of the date of grant.
(4)	Represents forgiveness of indebtedness income as discussed under the heading “Note Settlement Agreements” below.
(5)	In March 2005, we paid a bonus of $100,000 to Dr. Burley.
(6)	Dr. Harris resigned as our Chief Executive Officer effective December 31, 2004.
(7)	Mr. Mutter resigned as our Chief Financial Officer on May 20, 2005.

Stock Option Grants in Last Fiscal Year

In February 2000, our board of directors adopted our 2000 equity incentive plan. All options granted prior to the closing of this offering are and will continue to be governed by the terms of the 2000 equity incentive plan. For the fiscal year ended December 31, 2004, we granted options to purchase a total of 62,320 shares of our common stock, with a weighted average exercise price of $1.98 per share, to our employees, including grants to our named executive officers. Under the terms of our 2005 equity incentive plan, any options to purchase shares of our common stock granted under our 2000 equity incentive plan that expire or are otherwise terminated in accordance with the terms of the 2000 equity incentive plan shall be added to the option pool for our 2005 equity incentive plan and become available for future grant under the 2005 equity incentive plan. Options granted under our 2000 equity incentive plan generally expire ten years from the date of grant. See “—Employee Benefits Plans—2000 Equity Incentive Plan.”

All options granted to our named executive officers are incentive stock options, to the extent permissible under the Internal Revenue Code of 1986, as amended. The exercise price per share of each option granted to our named executive officers was equal to the fair market value of our common stock as determined by our

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board of directors on the date of the grant. In determining the fair market value of our common stock granted on the grant date, our board of directors considered many factors, including:

•  the rate of progress and cost of our clinical trials and other research and development activities;

•  the terms of our collaborative, licensing and other arrangements;

•  the fact that our options involved illiquid securities in a non-public company;

•  prices of preferred stock issued by us to outside investors in arm’s-length transactions;

•  the senior rights, preferences and privileges of our preferred stock over our common stock; and

•  the likelihood that our common stock would become liquid through an initial public offering, an acquisition of us or another event.

The following table provides information regarding grants of options under our 2000 equity incentive plan to purchase shares of our common stock made to our named executive officers during the fiscal year ended December 31, 2004. No stock appreciation rights covering our common stock were granted to our named executive officers in 2004.

	Individual Grants(1)
			% of Total							Potential Realizable
			Options							Value at Assumed
	Number of		Granted to							Annual Rates of Stock
	Securities		Employees in							Price Appreciation for
	Underlying		the Year Ended							Option Term(3)
	Options		December 31,			Exercise or Base		Expiration
Name	Granted		2004(2)			Price ($/Sh)		Date		5%	10%
Michael Grey		4,767		7.6	%		1.98		1/13/2014
Stephen K. Burley		4,006		6.4	%		1.98		1/13/2014
Annette North		1,489		2.4	%		1.98		1/13/2014
Timothy Harris(4)		5,556		8.9	%		1.98		1/1/2010
Herbert Mutter(5)		2,297		3.7	%		1.98		8/20/2005

(1)	These options, which were fully vested and exercisable as of the grant date, were issued in January 2004 to each of the named executive officers as a bonus awarded to the named executive officer for performance in 2003.
(2)	Based on 62,320 options granted to employees during the fiscal year ended December 31, 2004 under our 2000 equity incentive plan, including grants to executive officers.
(3)	Potential realizable values are computed by (a) multiplying the number of shares of common stock subject to a given option by an assumed initial public offering price of $         per share, (b) assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the entire term of the option and (c) subtracting from that result the aggregate option exercise price. The 5% and 10% assumed annual rates of stock price appreciation are mandated by the rules of the SEC and do not represent our estimate or projection of future common stock prices.
(4)	Dr. Harris resigned from his position as our Chief Executive Officer effective December 31, 2004. These options remain exercisable until January 1, 2010.
(5)	Mr. Mutter resigned from his position as our Chief Financial Officer effective May 20, 2005.

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Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

No options granted under our 2000 equity incentive plan were exercised by our named executive officers during 2004. The following table provides information concerning the unexercised options held as of December 31, 2004, by each of our named executive officers.

					Number of Securities				Value of Unexercised In-the-
					Underlying Unexercised				Money Options at Fiscal
	Shares				Options at Fiscal Year-End				Year-End(1)
	Acquired on
Name	Exercise		Value Realized		Exercisable		Unexercisable		Exercisable	Unexercisable
Michael Grey		–		–		8,561		6,322	$	$
Stephen K. Burley		–		–		76,860		3,161	$	$
Timothy Harris		–		–		18,201		–	$		–
Annette North		–		–		7,139		2,567	$	$
Herbert Mutter		–		–		9,093		790	$	$

(1) The value of an unexercised in-the-money option as of December 31, 2004 is equal to the excess of an assumed initial public offering price of $        per share over the exercise price for the option, multiplied by the number of shares subject to the option, without taking into account any taxes that may be payable in connection with the transaction.

Employment, Termination of Employment and Change-in-Control Arrangements

Employment Agreements

We currently have employment agreements with Mr. Grey, our President and Chief Executive Officer, and Dr. Burley, our Chief Scientific Officer and Senior Vice President of Research. We also have a letter agreement with Mr. Rotherham, our Chief Financial Officer, relating to his employment.

In September 2001, we entered into an employment agreement with Mr. Grey, which was most recently amended and restated effective January 1, 2005. This agreement expires on January 1, 2006, but is renewable automatically for successive one-year periods unless terminated by the parties.

The employment agreement sets forth Mr. Grey’s initial base salary of $350,000 per year, subject to adjustment at his annual review, and an annual cash bonus equal to 35% of his base salary, or $122,500, payable at the discretion of our board of directors. The agreement entitles Mr. Grey to receive all customary and usual fringe benefits provided to our other executives. Mr. Grey is entitled to be reimbursed for all out-of-pocket business expenses incurred on our behalf and to participate in our incentive compensation bonus plan, the terms, amount and payment of which are determined at our discretion. Pursuant to the agreement, in May 2005, Mr. Grey was granted options to purchase an aggregate of 727,726 shares of our common shares at an exercise price of $0.50 per share, the fair market value of our common stock on the date of grant. Twenty-five percent of the shares subject to such stock options were fully vested as of the date of grant and the remaining shares subject to such options vest over three years in equal monthly installments, subject to acceleration of vesting under certain circumstances described in Mr. Grey’s employment agreement.

The agreement provides that we may terminate Mr. Grey’s employment at any time for cause and upon 30 days’ written notice without cause (as defined in the agreement). Similarly, Mr. Grey may voluntarily resign at any time on 30 days’ written notice. If we terminate his employment or he resigns, he is entitled to receive any unpaid prorated base salary along with all benefits and expense reimbursements to which he is entitled by virtue of his past employment with us. In addition, if Mr. Grey is terminated without cause, he is also entitled to a severance payment equal to 12 months of his base salary then in effect and the vesting of any of his outstanding stock options will be accelerated by 12 months (24 months if such termination occurs within one year of a change in control), provided he executes a waiver and general release in favor of us, agrees to consult for us for a period of up to 60 days with no further compensation and complies with any provisions of the agreement that survive termination.

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In January 2002, we entered into an employment agreement with Dr. Burley, our Senior Vice President of Research and Chief Scientific Officer. The term of this agreement was for three years, but renews automatically for successive one-year periods unless terminated by the parties.

The employment agreement sets forth Dr. Burley’s initial base salary of $300,000 per year, subject to adjustment at his annual review, and an annual cash bonus equal to 30% of his base salary, or $90,000 in one year, provided that he meets certain eligibility and performance objectives. Dr. Burley’s current salary is $324,500 per year. The agreement entitles Dr. Burley to receive all customary and usual fringe benefits provided to our other executives. Dr. Burley is entitled to be reimbursed for all out-of-pocket business expenses incurred on our behalf and to participate in our incentive compensation bonus plan, the terms, amount and payment of which are determined at our discretion. Pursuant to the agreement, in January 2002, Dr. Burley received a one time up front signing bonus of $100,000 and relocation benefits related to his relocation to San Diego, California. In addition, pursuant to the agreement, in January 2002, Dr. Burley was granted options to purchase an aggregate of 33,903 shares of our common stock at an exercise price of $6.72 per share, the fair market value of our common stock on the date of grant. Options to purchase 5,058 shares were vested as of the of grant. Options to purchase 6,322 shares vested on the one-year anniversary of the date of grant with options to purchase 18,968 vesting in equal monthly installments over the three years thereafter. Options to purchase 3,555 shares vested upon the completion of certain conditions described in the agreement.

The agreement provides that we may terminate Dr. Burley’s employment at any time for cause and upon 30 days’ written notice without cause (as defined in the agreement). Similarly, Dr. Burley may voluntarily resign at any time on 30 days’ written notice. If we terminate his employment or he resigns, he is entitled to receive any unpaid prorated base salary along with all benefits and expense reimbursements to which he is entitled by virtue of his past employment with us. In addition, if Dr. Burley is terminated without cause (or, within one year of a change in control, he resigns because we have substantially changed his duties or responsibilities which existed prior to the change in control), he is also entitled to a severance payment equal to 12 months of his base salary then in effect (including continuation of his benefits in accordance with our regular payroll deductions) and the vesting of any of his outstanding stock options will be accelerated by 12 months (24 months if such termination or resignation occurs within one year of a change in control), provided he executes a waiver and general release in favor of us, agrees to consult for us for a period of up to 60 days with no further compensation and complies with any provisions of the agreement that survive termination.

Pursuant to Dr. Burley’s employment agreement, in July 2002, we made an interest-free relocation loan of $300,000 to Dr. Burley pursuant to a relocation loan agreement dated as of July 29, 2002. The loan is generally payable in four equal payments of $75,000, on each of four consecutive semi-annual payment dates commencing on January 1, 2012 or immediately upon an event of default (as defined in the relocation loan agreement). The relocation loan is secured by a deed of trust on Dr. Burley’s residence. To date, Dr. Burley has repaid $75,000 of the original principal balance under this note.

In May 2001, we entered into an employment agreement with Dr. Harris, our then Chief Executive Officer, which was amended effective November 12, 2004. Pursuant to the amended agreement, Dr. Harris’ employment was terminated effective December 31, 2004 and he was entitled to receive any unpaid prorated base salary along with all benefits (including incentive pay, cash bonuses, stock options and health coverage) and expense reimbursements to which he was entitled by virtue of his past employment with us. In addition, Dr. Harris was entitled to a severance payment equal to up to 12 months of his base salary of $351,520 per year (six months guaranteed), a one-time $7,394 payment, accelerated vesting of 8,293 shares of common stock subject to outstanding options and an obligation to grant an additional stock option upon the closing of the next round of equity financing for shares representing 1% of our fully diluted capitalization on an as-converted basis at that time. Dr. Harris was paid a total of six months of severance. In July 2005, in satisfaction of this obligation to issue additional stock options to Dr. Harris, Dr. Harris was issued a warrant to purchase 200,000 shares of our common stock at an exercise price of $0.50 per share. The warrant includes a net exercise provision and has a five-year term.

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In June 2005, we entered into a letter agreement relating to Mr. Rotherham’s employment with us. The letter agreement sets forth Mr. Rotherham’s base salary of $235,000 per year and an annual cash bonus of up to 40% of his base salary, or $94,000, payable at the discretion of the Board. The agreement entitles Mr. Rotherham to receive all customary and usual fringe benefits provided to our other executives. Pursuant to the agreement, in August 2005, Mr. Rotherham was granted a stock option to purchase an aggregate of 190,000 shares of our common stock at an exercise price of $0.50 per share, the fair market value of our common stock on the date of grant. Twenty-five percent of the shares subject to such stock options will become fully vested on June 12, 2006, the first anniversary of the vesting commencement date, and the remaining shares subject to such options vest over the next three years in equal monthly installments.

The letter agreement provides that we may terminate Mr. Rotherham’s employment at any time for cause and upon 30 days’ written notice without cause, as defined in the agreement. Similarly, Mr. Rotherham may voluntarily resign at any time on 30 days’ written notice. If we terminate his employment or he resigns, he is entitled to receive any unpaid prorated base salary along with all benefits and expense reimbursements to which he is entitled by virtue of his past employment with us. In addition, following a change in control, the vesting of any of his outstanding stock options will be accelerated by 12 months (24 months if Mr. Rotherham is terminated without cause within one year of a change in control), provided he executes a waiver and general release in favor of us and complies with any provisions of the letter agreement that survive termination.

     Stock Option Agreements

In May 2005, we granted the following stock options under our 2000 equity incentive plan to purchase shares of our common stock to the following executive officers: 727,726 shares to Mr. Grey; 350,000 shares to Dr. Burley; and 100,000 shares to Ms. North. In August 2005, we granted Mr. Rotherham a stock option under our 2000 equity incentive plan to purchase 190,000 shares of common stock. The exercise price for each of the stock options was $0.50 per share, the fair market value of our common stock on the date of grant. The stock options granted to Mr. Grey, Dr. Burley and Ms. North are subject to three-year vesting with 25% of the shares subject to vesting on the grant date and the remaining shares subject to vesting in equal monthly installments for three years thereafter. Mr. Rotherham’s option is subject to four-year vesting with 25% of the shares subject to his option vesting on the one-year anniversary of his vesting commencement date and the remaining shares vesting in equal monthly installments for three years thereafter. In addition, in the event of a change in control, the vesting of any outstanding stock options held by Ms. North, Ms. Cooke, or Drs. Myers or McCarthy will be accelerated by 12 months (24 months if such individual is terminated without cause). In May 2005, Mr. Mutter was granted a fully vested option to purchase 25,000 shares of our common stock, with an exercise price of $0.50 per share. Mr. Mutter exercised this stock option in August 2005.

     Note Settlement Agreements

In August 2004, Messrs. Grey and Mutter, Dr. Harris and Ms. North entered into note settlement agreements with us pursuant to which they tendered to us 69,549 shares, 12,645 shares, 56,903 shares and 2,529 shares, respectively, of our common stock in satisfaction of outstanding indebtedness under promissory notes in the principal amounts of $466,950, $76,150, $314,300 and $16,980, respectively. These promissory notes were previously issued in connection with the early exercise of stock options granted to them in 2000 and 2001. All outstanding indebtedness under these promissory notes was repaid in full by tendering these shares to us for cancellation. We forgave a portion of the interest under the promissory notes held by Messrs. Grey and Mutter and Ms. North in the following amounts: $81,893, $17,745, and $3,836, respectively. Under all note settlement agreements entered into in August, September and November 2004 between us and our executive officers and employees, an aggregate of approximately 262,488 shares of common stock were tendered to us in satisfaction of approximately $1.8 million of indebtedness and we forgave an aggregate of approximately $131,000 of interest accrued under the promissory notes.

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     Confidential Information and Inventions Agreement

Each of our named executive officers has also entered into a standard form agreement with respect to confidential information and inventions. Among other things, this agreement obligates each named executive officer to refrain from disclosing any of our confidential information received during the course of employment and, with some exceptions, to assign to us any inventions conceived or developed during the course of employment.

Employee Benefit Plans

     2000 Equity Incentive Plan

In February 2000, our board of directors adopted our 2000 equity incentive plan, or 2000 plan. Our stockholders most recently approved an amendment of the plan in July 2005. The 2000 plan provides for the grant of the following:

•  incentive stock options, or ISOs, as defined under the Internal Revenue Code, which may be granted solely to our employees, including executive officers; and

•  nonstatutory stock options, or NSOs, stock bonuses and rights to purchase restricted stock, which may be granted to our directors, consultants or employees, including executive officers.

The 2000 plan will terminate on the effective date of this offering.

Share Reserve. As of June 30, 2005, an aggregate of 2,391,843 shares of our common stock were reserved for issuance upon exercise of outstanding options under the 2000 plan and 414,633 shares of our common stock remained available for future issuance under our 2000 plan. We expect to grant options to purchase substantially all of the remaining shares of our common stock available for issuance under our 2000 plan prior to the effective date of this offering. Following the effective date of this offering, all shares of our common stock reserved but not ultimately issued or subject to options that have expired or otherwise terminated under the 2000 plan without having been exercised in full will become available for issuance under our 2005 equity incentive plan. The 2000 plan will terminate on the effective date of this offering, and we intend to grant all future stock option awards under our 2005 equity incentive plan and 2005 non-employee directors’ stock option plan. However, all stock options outstanding on the termination of the 2000 plan will continue to be governed by the terms of the 2000 plan.

Administration. Our board of directors administers the 2000 plan, and it may in turn delegate authority to administer the plan to a committee.

At such time as our common stock becomes publicly traded, our board has the power to delegate administration of the 2000 plan to a committee that, in the Board’s discretion, may be composed of two or more outside directors. Our board will also have the power to delegate the administration of the plan to one or more directors, who are also our officers or employees.

Stock Options. Stock options are granted under the 2000 plan pursuant to option agreements. Options granted under the 2000 plan vest at the rate specified in the option agreement. The 2000 plan also allows for the early exercise of unvested options, if that right is set forth in an applicable option agreement. All remaining unvested shares of our common stock acquired through early exercised options are subject to repurchase by us.

In general, the term of stock options granted under the 2000 plan may not exceed ten years. Unless the terms of an optionholder’s option agreement provide for earlier or later termination, if an optionholder’s service relationship with us, or any affiliate of ours, ceases due to disability or death, the optionholder, or his or her beneficiary, may exercise any vested options up to 12 months, or 18 months in the event of death, after the date such service relationship ends, unless the terms of the stock option agreement provide for earlier or later termination. If an optionholder’s service relationship with us, or any affiliate of ours, ceases for any reason other than disability or death, the optionholder may exercise any vested options up to three months from

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cessation of service, unless the terms of the option agreement provide for earlier or later termination. In no event may an option be exercised after its expiration date.

Acceptable forms of consideration for the exercise of options granted under the 2000 plan are determined by our board of directors or its authorized committee and may include cash or common stock previously owned by the optionholder, or payment through a deferred payment arrangement and other legal consideration or arrangements approved by our board of directors.

Generally, an optionholder may not transfer his or her stock option other than by will or the laws of descent and distribution unless the optionholder holds a nonstatutory stock option that provides otherwise. However, an optionholder may designate a beneficiary who may exercise the option following the optionholder’s death.

Limitations. The aggregate fair market value, determined at the time of grant, of shares of our common stock subject to ISOs that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. The options or portions of options that exceed this limit are treated as NSOs. No ISO, and before our stock is publicly traded, no NSO, may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or any affiliate unless the following conditions are satisfied:

•  the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant; and

•  the term of any incentive stock option award must not exceed five years from the date of grant.

Restricted Stock Purchase Awards. Restricted stock purchase awards are granted under the 2000 plan pursuant to a restricted stock purchase agreement. Shares of our common stock awarded under the restricted stock purchase agreement may, but need not, be subject to a repurchase option in our favor in accordance with a vesting schedule determined by our board of directors or its authorized committee. In the event of termination of the service relationship between a recipient of a restricted stock purchase award and us, or any affiliate of ours, we have the right to repurchase or reacquire all of the unvested shares of our common stock held by such restricted stock purchase award recipient. A recipient of a restricted stock purchase award that is granted before our stock becomes publicly traded may not transfer his or her restricted stock purchase award other than by will or the laws of descent and distribution. A recipient of a restricted stock purchase award that is granted while our stock is publicly listed may transfer his or her restricted stock purchase award only as expressly authorized by the terms of the applicable restricted stock purchase agreement.

Corporate Transactions. In the event of certain corporate transactions, all outstanding stock awards under the 2000 plan may be assumed, continued or substituted for by any surviving entity. If the surviving entity elects not to assume, continue or substitute for such awards, the vesting provisions of such stock awards generally will be accelerated in full and such stock awards will be terminated if and to the extent not exercised at or prior to the effective time of the corporate transaction and our repurchase rights will generally lapse.

Plan Amendments. Our board of directors has authority to amend or terminate the 2000 plan. However, no amendment or termination of the plan will adversely affect any rights under awards already granted to a participant unless agreed to by the affected participant.

     2005 Equity Incentive Plan

We adopted our 2005 equity incentive plan, or 2005 plan, in August 2005, to become effective upon completion of this offering. The plan will terminate in August 2015, unless our board of directors terminates it earlier. The 2005 plan provides for the grant of the following:

•  ISOs, which may be granted solely to our employees, including officers; and

•  NSOs, stock purchase awards, stock bonus awards, stock unit awards, stock appreciation rights and other stock awards, which may be granted to our directors, consultants or employees, including officers.

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Share Reserve. An aggregate of 1,500,000 shares of our common stock are authorized for issuance under our 2005 plan, plus the number of shares remaining available for future issuance under our 2000 plan that are not covered by outstanding options as of the termination of the 2000 plan on the effective date of this offering. In addition, this amount will be automatically increased annually on the first day of our fiscal year, from 2007 until 2015, by the lesser of (a) 3.5% of the aggregate number of shares of common stock outstanding on December 31 of the preceding fiscal year or (b) 1,000,000 shares of common stock. However, our board of directors has the authority to designate a smaller number of shares by which the authorized number of shares of common stock under the 2005 plan will be increased. In addition, the share reserve under the 2005 plan will be increased from time to time by a number of shares of common stock equal to those shares of common stock that are issuable pursuant to options and other stock awards outstanding under the 2000 plan or shares of our common stock issued under the 2000 plan, as of the effective date of this offering and that, but for the termination of the 2000 plan as of the effective date of this offering, would otherwise have reverted to the share reserve of the 2000 plan upon the termination or expiration of those stock options or other awards or, in the case of shares issued under the 2000 plan, that would have been repurchased or required by us under the terms of the 2000 plan.

Shares of our common stock subject to options and other stock awards that have expired or otherwise terminate under the 2005 plan without having been exercised in full again will become available for grant under the plan. Shares of our common stock issued under the 2005 plan may include previously unissued shares or reacquired shares bought on the market or otherwise. If any shares of our common stock subject to a stock award are not delivered to a participant because such shares are withheld for the payment of taxes or the stock award is exercised through a net exercise, then the number of shares that are not delivered to the participants shall again become available for grant under the 2005 plan. If the exercise of any stock award is satisfied by tendering shares of our common stock held by the participant, then the number of shares tendered shall again become available for grant under the 2005 plan. The maximum number of shares of our common stock that may be issued under the 2005 plan subject to ISOs is 10,000,000 shares plus the automatic annual increases described above.

Administration. The 2005 plan will be administered by our board of directors, which may in turn delegate authority to administer the plan to a committee. Subject to the terms of the 2005 plan, our board of directors or its authorized committee determines recipients, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting. Subject to the limitations set forth below, our board of directors or its authorized committee will also determine the exercise price of options granted under the 2005 plan and may reprice those options, including by reducing the exercise price of any outstanding option, canceling an option in exchange for cash or another equity award or any other action that is treated as a repricing under generally accepted accounting principles. Subject to the terms of the 2005 plan, our board of directors may delegate to one or more of our officers the authority to grant stock awards to our other officers and employees. Such officer would be able to grant only the total number of stock awards specified by our board of directors and such officer would not be allowed to grant a stock award to himself or herself.

Stock Options. Stock options will be granted pursuant to stock option agreements. Generally, the exercise price for an ISO cannot be less than 100% of the fair market value of the common stock subject to the option on the date of grant, and the exercise price for an NSO cannot be less than 85% of the fair market value of the common stock subject to the option on the date of grant. Options granted under the 2005 plan will vest at the rate specified in the option agreement. A stock option agreement may provide for early exercise, prior to vesting. Unvested shares of our common stock issued in connection with an early exercise may be repurchased by us.

In general, the term of stock options granted under the 2005 plan may not exceed ten years. Unless the terms of an optionholder’s stock option agreement provide for earlier or later termination, if an optionholder’s service relationship with us, or any affiliate of ours, ceases due to disability or death, the optionholder, or his or her beneficiary, may exercise any vested options up for to 12 months, or 18 months in the event of death, after the date the service relationship ends, unless the terms of the stock option agreement provide for earlier

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termination. If an optionholder’s service relationship with us, or any affiliate of ours, ceases without cause for any reason other than disability or death, the optionholder may exercise any vested options for up to three months after the date the service relationship ends, unless the terms of the stock option agreement provide for a longer period to exercise the option. If an optionholder’s relationship with us, or any affiliate of ours, ceases with cause, the option will terminate at the time the optionholder’s relationship with us ceases. In no event may an option be exercised after its expiration date.

Acceptable forms of consideration for the purchase of our common stock issued under the 2005 plan will be determined by our board of directors and may include cash, common stock previously owned by the optionholder, deferred payment arrangement or payment through a broker assisted exercise or, after we have adopted certain accounting standards, a net exercise feature, or other legal consideration approved by our board of directors.

Generally, an optionholder may not transfer a stock option other than by will or the laws of descent and distribution or a domestic relations order. However, an optionholder may designate a beneficiary who may exercise the option following the optionholder’s death.

Limitations. The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to ISOs that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. The options or portions of options that exceed this limit are treated as NSOs. No ISO may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any affiliate unless the following conditions are satisfied:

•  the option exercise price must be at least 110% of the fair market value of the stock subject to the option on the date of grant; and

•  the term of any ISO award must not exceed five years from the date of grant.

In addition, no employee may be granted options or stock appreciation rights under the 2005 plan covering more than 750,000 shares of our common stock in any calendar year, subject to an exception for new hires who may be granted an additional 500,000 shares of our common stock during the calendar year of initial employment.

Stock Purchase Awards. Stock purchase awards will be granted pursuant to stock purchase award agreements. A stock purchase award may require the payment of at least the par value of the stock. The purchase price for a stock purchase award may be payable in cash or any other form of legal consideration approved by our board of directors. Shares of our common stock acquired under a stock purchase award may, but need not, be subject to a share repurchase option in our favor in accordance with a vesting schedule to be determined by our board of directors. Rights to acquire shares of our common stock under a stock purchase award may be transferred only upon such terms and conditions as are set forth in the stock purchase award agreement.

Stock Bonus Awards. Stock bonus awards will be granted pursuant to stock bonus award agreements. A stock bonus award may be granted in consideration for the recipient’s past or future services performed for us or an affiliate of ours. Shares of our common stock acquired under a stock bonus award may, but need not, be subject to forfeiture to us in accordance with a vesting schedule to be determined by our board of directors. Rights to acquire shares of our common stock under a stock bonus award may be transferred only upon such terms and conditions as are set forth in the stock bonus award agreement.

Stock Unit Awards. Stock unit awards will be granted pursuant to stock unit award agreements. A stock unit award may require the payment of at least the par value of the stock. Payment of any purchase price may be made in any form permitted under applicable law; however, we will settle a payment due to a recipient of a stock unit award by cash or by delivery of shares of our common stock, a combination of cash and stock as deemed appropriate by our board of directors, or in any other form of consideration determined by our board of directors and set forth in the stock unit award agreement. Additionally, dividend equivalents may be credited in respect of shares of our common stock covered by a stock unit award. Except as otherwise

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provided in the applicable stock unit award agreement, stock units that have not vested will be forfeited upon the participant’s termination of continuous service for any reason.

Stock Appreciation Rights. Stock appreciation rights will be granted through a stock appreciation rights agreement. Each stock appreciation right is denominated in common stock share equivalents. The strike price of each stock appreciation right will be determined by our board of directors or its authorized committee at the time of grant. Our board of directors or its authorized committee may also impose any restrictions or conditions upon the vesting of stock appreciation rights that it deems appropriate. Stock appreciation rights may be paid in our common stock or in cash or any combination of the two, or any other form of legal consideration approved by our board of directors. If a stock appreciation right recipient’s relationship with us, or any affiliate of ours, ceases for any reason, the recipient may exercise any vested stock appreciation right up to three months from cessation of service, unless the terms of the stock appreciation right agreement provide that the right may be exercised for a longer or shorter period.

Other Stock Awards. Other forms of stock awards valued in whole or in part with reference to our common stock may be granted either alone or in addition to other stock awards under the 2005 plan. Our board of directors will have sole and complete authority to determine the persons to whom and the time or times at which such other stock awards will be granted, the number of shares of our common stock to be granted and all other conditions of such other stock awards.

Changes to Capital Structure. In the event that there is a specified type of change in our capital structure not involving the receipt of consideration by us, such as a stock split or stock dividend, the number of shares reserved under the 2005 plan and the number of shares and exercise price or strike price, if applicable, of all outstanding stock awards will be appropriately adjusted.

Corporate Transactions. Unless otherwise provided in the stock award agreement, in the event of certain corporate transactions, all outstanding stock awards under the 2005 plan may be assumed, continued or substituted for by any surviving entity. If the surviving entity elects not to assume, continue or substitute for such awards, the vesting provisions of such stock awards generally will be accelerated in full and such stock awards will be terminated if and to the extent not exercised at or prior to the effective time of the corporate transaction and our repurchase rights will generally lapse. In the event options outstanding under the 2005 plan are assumed, continued or substituted for by a surviving entity, all of the unvested shares subject to those options will become fully vested as of the change of control.

Plan Amendments. Our board of directors will have the authority to amend or terminate the 2005 plan. However, no amendment or termination of the plan will adversely affect any rights under awards already granted to a participant unless agreed to by the affected participant. We will obtain stockholder approval of any amendment to the 2005 plan as required by applicable law.

     2005 Non-Employee Directors’ Stock Option Plan

We adopted and our stockholders approved our 2005 non-employee directors’ stock option plan, or directors’ plan, in August 2005, to become effective upon the completion of this offering. The directors’ plan will terminate at the discretion of our board of directors. The directors’ plan provides for the automatic grant of NSOs to purchase shares of our common stock to our non-employee directors.

Share Reserve. An aggregate of 150,000 shares of our common stock are reserved for issuance under the directors’ plan. This amount will be increased annually on the first day of our fiscal year, from 2007 until 2015, by the aggregate number of shares of our common stock subject to options granted as initial grants and annual grants under the directors’ plan during the immediately preceding year. However, our board of directors will have the authority to designate a smaller number of shares by which the authorized number of shares of our common stock will be increased.

Shares of our common stock subject to stock options that have expired or otherwise terminated under the directors’ plan without having been exercised in full shall again become available for grant under the

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directors’ plan. Shares of our common stock issued under the directors’ plan may be previously unissued shares or reacquired shares bought on the market or otherwise. If the exercise of any stock option granted under the directors’ plan is satisfied by tendering shares of our common stock held by the participant, then the number of shares tendered shall again become available for the grant of awards under the directors’ plan.

Administration. The directors’ plan will be administered by our board of directors, which in turn may delegate authority to administer the plan to a committee.

Stock Options. Stock options will be granted pursuant to stock option agreements. The exercise price of the options granted under the directors’ plan will be equal to 100% of the fair market value of our common stock on the date of grant. Initial grants vest in equal monthly installments over three years after the date of grant and annual grants vest in equal monthly installments over 12 months after the date of grant.

In general, the term of stock options granted under the directors’ plan may not exceed ten years. Unless the terms of an optionholder’s stock option agreement provide for earlier termination, if an optionholder’s service relationship with us, or any affiliate of ours, ceases due to disability or death, the optionholder, or his or her beneficiary, may exercise any vested options up to 12 months, or 18 months in the event of death, after the date such service relationship ends. If an optionholder’s service relationship with us, or any affiliate of ours, ceases without cause for any reason other than disability or death, the optionholder may exercise any vested options up to three months from cessation of service, unless the terms of the stock option agreement provide for earlier or later termination.

Acceptable consideration for the purchase of our common stock issued under the directors’ plan may include cash, common stock previously owned by the optionholder or a program developed under Regulation T as promulgated by the Federal Reserve Board.

Generally, an optionholder may not transfer a stock option other than by will or the laws of descent and distribution. However, an optionholder may transfer an option under certain circumstances with our written consent if a Form S-8 registration statement is available for the exercise of the option and the subsequent resale of the shares. In addition, an optionholder may designate a beneficiary who may exercise the option following the optionholder’s death.

Automatic Grants.

•  Initial Grant. Any person who becomes a non-employee director after the completion of this offering will automatically receive an initial grant of an option to purchase 25,000 shares of our common stock upon his or her election. These options will vest in equal monthly installments over three years.

•  Annual Grant. In addition, any person who is a non-employee director on the date of each annual meeting of our stockholders automatically will be granted, on the annual meeting date, beginning with our 2006 annual meeting, an option to purchase 10,000 shares of our common stock, or the annual grant. However, the size of an annual grant made to a non-employee director who is elected after the completion of this offering and who has served for less than 12 months at the time of the annual meeting will be reduced by 25% for each full quarter prior to the date of grant during which such person did not serve as a non-employee director. These options will vest in equal monthly installments over 12 months.

Changes to Capital Structure. In the event there is a specified type of change in our capital structure not involving the receipt of consideration by us, such as a stock split or stock dividend, the number of shares reserved under the directors’ plan and the number of shares and exercise price of all outstanding stock options will be appropriately adjusted.

Corporate Transactions. In the event of certain corporate transactions, all outstanding options under the directors’ plan may be assumed, continued or substituted for by any surviving entity. If the surviving entity elects not to assume, continue or substitute for such options, the vesting of such options held by non-employee directors whose service has not terminated prior to the corporate transaction generally will be

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accelerated in full and all options outstanding under the directors’ plan will be terminated if not exercised prior to the effective date of the corporate transaction.

Plan Amendments. Our board of directors will have the authority to amend or terminate the directors’ plan. However, no amendment or termination of the directors’ plan will adversely affect any rights under awards already granted to a participant unless agreed to by the affected participant. We will obtain stockholder approval of any amendment to the directors’ plan as required by applicable law.

     2005 Employee Stock Purchase Plan

We adopted and our stockholders approved our 2005 employee stock purchase plan, or the purchase plan, in August 2005, to become effective upon the completion of this offering. The purchase plan will terminate at the time that all of the shares of our common stock then reserved for issuance under the purchase plan have been issued under the terms of the purchase plan, unless our board of directors terminates it earlier. The purchase plan provides a means by which employees may purchase our common stock through payroll deductions, and is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code.

Share Reserve. An aggregate of 750,000 shares of our common stock are reserved for issuance under the purchase plan. This amount will be increased annually on the first day of our fiscal year, from 2007 until 2015, by the lesser of (i) 1% of the fully-diluted shares of our common stock outstanding on January 1 of the current fiscal year or (ii) 300,000 shares of our common stock. However, our board of directors has the authority to designate a smaller number of shares by which the authorized number of shares of our common stock will be increased.

Administration. The purchase plan will be administered by our board of directors, who may in turn delegate authority to administer the purchase plan to a committee.

Offering. The purchase plan is implemented by offerings of rights to eligible employees. Under the purchase plan, we may specify offerings with a duration of not more than 24 months, and may specify shorter purchase periods within each offering. The first offering will begin on the effective date of this offering and continue for approximately 24 months with purchases occurring approximately every six months.

Unless otherwise determined by our board of directors or its authorized committee, common stock is purchased for accounts of employees participating in the plan at a price per share equal to the lower of (1) 85% of the fair market value of a share of our common stock on the date of commencement of participation in the offering or (2) 85% of the fair market value of a share of our common stock on the date of purchase. However, in the event the fair market value of a share of our common stock on the date of purchase is lower than the fair market value of a share of our common stock on the date of commencement of participation in the offering, the offering period automatically restarts on the date of such purchase. The price at which we sell shares in this offering will be used as the fair market value of a share of our common stock on the date of commencement of the initial offering under the purchase plan.

Generally, all regular employees, including executive officers, who work more than 20 hours per week may participate in the purchase plan and may authorize payroll deductions of up to 15% of their earnings for the purchase of our common stock under the purchase plan.

Limitations. Eligible employees may be granted rights only if the rights, together with any other rights held under our equity incentive plans and the purchase plan, do not permit the employee’s rights to purchase our common stock to accrue at a rate that exceeds $25,000 of the fair market value of our common stock for each calendar year in which such rights are outstanding. In addition, no employee will be eligible for the grant of any rights under the purchase plan if immediately after such rights are granted such employee would have voting power over five percent or more of our outstanding capital stock.

Corporate Transactions. In the event of certain corporate transactions, all outstanding purchase rights under the purchase plan may be assumed, continued or substituted for by any surviving entity. If the surviving

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entity elects not to assume, continue or substitute for such purchase rights, then the purchase rights will be exercised prior to the corporate transaction and the purchase rights will terminate immediately following such exercise.

Plan Amendments. Our board of directors will have the authority to amend or terminate the purchase plan. If the board determines that the amendment or termination of an offering is in our best interests and the best interests of our stockholders, then the board may terminate any offering on any purchase date, establish a new purchase date with respect to any offering then in progress, amend the purchase plan and the ongoing offering to reduce or eliminate a detrimental accounting treatment or terminate any offering and refund any money contributed back to the participants. We will obtain stockholder approval of any amendment to the purchase plan as required by applicable law.

     401(k) Plan

We maintain a defined contribution employee retirement plan for our employees. The plan is intended to qualify as a tax-qualified plan under Section 401(k) of the Internal Revenue Code so that contributions to the 401(k) plan, and income earned on such contributions, are not taxable to participants until withdrawn or distributed from the 401(k) plan. The 401(k) plan provides that each participant may contribute up to 100% of his or her pre-tax compensation, up to a statutory limit, which is $14,000 for calendar year 2005. Participants who are at least 50 years old can also make “catch-up” contributions, which in calendar year 2005 may be up to an additional $4,000 above the statutory limit. Under the 401(k) plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan’s trustee. The 401(k) plan also permits us to make discretionary contributions and matching contributions, subject to established limits and a vesting schedule. To date, we have not made any discretionary or matching contributions to the plan on behalf of participating employees.

Limitation of Liability and Indemnification

Our amended and restated certificate of incorporation, which will become effective upon the completion of this offering, limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:

•  breach of their duty of loyalty to the corporation or its stockholders;

•  act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

•  unlawful payment of dividends or redemption of shares; or

•  transaction from which the directors derived an improper personal benefit.

These limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or rescission.

Our amended and restated bylaws, which will become effective upon the completion of this offering, provide that we will indemnify our directors and executive officers, and may indemnify other officers, employees and other agents, to the fullest extent permitted by law. Our amended and restated bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in connection with their services to us, regardless of whether our amended and restated bylaws permit indemnification in connection with any such actions. We have obtained a policy of directors’ and officers’ liability insurance.

We intend to enter into separate indemnity agreements with our directors and executive officers, in addition to the indemnification provided for in our amended and restated bylaws. These agreements, among other things, require us to indemnify our directors and executive officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or

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proceeding arising out of their services as one of our directors or executive officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request.

At present, there is no pending litigation or proceeding involving any of our directors or executive officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, executive officers or persons controlling us, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

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Related Party Transactions

The following includes a description of transactions since January 1, 2002 and certain transactions prior to that date to which we have been a party, in which the amount involved in the transaction exceeds $60,000, and in which any of our directors, executive officers or holders of more than 5% of our capital stock had or will have a direct or indirect material interest, other than equity and other compensation, termination, change-in-control and other arrangements, which are described under “Management.” We believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions. All share and per share amounts have been retroactively adjusted to give effect to the 0.126453-for-1 reverse stock split effected in April 2005.

Stock Issuances

     Initial Issuances of Preferred Stock

From our inception through May 2001, we issued shares of our preferred stock private placements as follows:

•  541,593 shares of our previously outstanding Series A preferred stock at a price of $14.23 per share between June and October 1999 for aggregate gross proceeds of approximately $7.7 million;

•  809,299 shares of our previously outstanding Series B preferred stock at a price of $39.54 per share in March 2000 for aggregate gross proceeds of approximately $32.0 million;

•  673,418 shares of our previously outstanding Series C preferred stock at a price of $66.82 per share in September 2000 for aggregate gross proceeds of approximately $45.0 million; and

•  129,692 shares of our previously outstanding Series D preferred stock valued at $41.68 per share in connection with the acquisition of Prospect Genomics in May 2001.

The following table sets forth the names of our directors, executive officers or holders of more than 5% of our capital stock who participated in our previous Series A, Series B and Series C preferred stock financings in 1999 and 2000:

	Series A		Series B		Series C		Series D
	Preferred Stock		Preferred Stock		Preferred Stock		Preferred Stock
Investor	Purchased(1)		Purchased(1)		Purchased(1)		Purchased(1)
Atlas Venture Fund IV, LP and affiliates		219,536		153,378		59,859		–
Prospect Venture Partners, LP		199,046		54,796		32,131		–
Sprout Capital VIII, LP and affiliates		–		227,615		47,475		–
Index Ventures I, LP and affiliates		–		50,581		51,544		–
BAVP, LP		–		–		178,455		–
Stelios Papadopoulos(2)		–		2,529		25,164		–
Christopher Henney		–		–		7,482		–
Stephen K. Burley		–		–		–		9,263

(1)

These share numbers reflect the 0.126453-for-1 reverse stock split effected in April 2005 even though these shares had been exchanged for shares of Series A-1, Series B-1 and Series C-1 preferred stock or converted to common stock and were no longer outstanding prior to the reverse stock split.

(2)

Includes 19,454 shares of our previous Series C preferred stock previously held of record by SGC Partners I LLC. SG Cowen & Co., LLC is the managing member of SG Capital Partners L.L.C. which is the general partner of SG Merchant Banking Fund L.P. which is the sole member of SGC Partners I LLC. Because of the relationship, SGC Partners I LLC may be deemed to be an affiliate of SG Cowen & Co., LLC. Dr. Papadopoulos disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein, if any.

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In each of these preferred stock financings, we entered into or amended various stockholder agreements with the holders of our preferred stock relating to voting rights, information rights and registration rights, among other things. The rights, preferences and privileges of each series of preferred stock included a liquidation preference, dividend provisions and antidilution protective provisions, among other rights.

     Secured Bridge Financing and Recapitalization

In July 2004, as part of a secured loan financing, we issued convertible promissory notes in an aggregate principal amount of approximately $13.4 million to certain investors in two tranches.

The notes were secured by substantially all of our assets, accrued interest at 10% per year and were automatically convertible into shares of our preferred stock in the event we completed a preferred stock financing of at least $30.0 million, in the event of our sale or in certain other circumstances. In connection with the secured loan financing, the lenders were then permitted to exchange their existing shares of Series A, Series B, Series C or Series D preferred stock for an equal number of shares of a newly designated Series A-1, Series B-1, Series C-1 and Series D-1 preferred stock, respectively. All remaining outstanding shares of Series A, Series B, Series C or Series D preferred stock, including those held by Dr. Burley, were converted into an equal number of shares of common stock. All convertible promissory notes were subsequently amended in connection with our Series B preferred stock financing in April 2005 to convert all principal and unpaid interest accrued under the notes into shares of Series A-2 preferred stock.

In connection with the 2004 secured loan financing, we issued warrants to the investors that were exercisable for a number of shares of common stock determined based on the conversion price at which the notes were to be converted. These warrants were terminated in April 2005 in connection with the recapitalization effected in connection with our Series B preferred stock financing.

The following table sets forth the names of our directors, executive officers or holders of more than 5% of our capital stock who participated in our secured loan financing, the principal amount of each loan, the accrued interest as of April 21, 2005, the number of shares of Series A-2 preferred stock issued upon conversion of the debt and the number of shares of Series A-1, Series B-1 and Series C-1 preferred stock issued upon the exchange of Series A, Series B and Series C preferred stock:

					Shares of
					Series A-2
					Preferred		Shares Issued Upon Exchange
	Principal				Issued Upon
	Loan		Accrued		Debt		Series		Series		Series
Investor	Amount		Interest		Conversion		A-1(1)		B-1(2)		C-1(3)
Atlas Venture Fund IV, LP and affiliates	$	3,031,743	$	198,747		685,879		219,536		153,378		59,859
Prospect Venture Partners, LP	$	1,500,000	$	98,333		339,349		199,046		54,796		32,131
Sprout Capital VIII, LP and affiliates	$	1,915,674	$	125,583		433,388		–		227,615		47,475
Index Ventures I, LP and affiliates	$	1,500,000	$	98,333		339,478		–		101,162		60,999
BAVP, LP	$	3,000,000	$	196,666		678,698		–		–		178,455
Stelios Papadopoulos(4)	$	307,378	$	20,150		69,539		–		2,529		25,164
Christopher Henney	$	52,106	$	3,415		11,788		–		–		7,482

(1)	Shares of Series A-1 preferred stock issued upon exchange of shares of Series A preferred stock.
(2)	Shares of Series B-1 preferred stock issued upon exchange of shares of Series B preferred stock.
(3)	Shares of Series C-1 preferred stock issued upon exchange of shares of Series C preferred stock.

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(4)  Includes $250,000 principal amount, $16,389 of accrued interest, 56,558 shares of Series A-2 preferred stock issued upon conversion of the outstanding note to SGC Partners I LLC and 19,454 shares of Series C-1 preferred stock previously held of record by SGC Partners I LLC. Dr. Papadopoulos is a Vice Chairman of SG Cowen & Co., LLC. SG Cowen & Co., LLC is the managing member of SG Capital Partners L.L.C. which is the general partner of SG Merchant Banking Fund L.P. which is the sole member of SGC Partners I LLC. Because of the relationship, SGC Partners I LLC may be deemed to be an affiliate of SG Cowen & Co., LLC. Dr. Papadopoulos disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein, if any.

     Series B Financing and Recapitalization

In April 2005, we sold in a private placement 1,592,354 shares of Series B preferred stock at $4.71 per share for an aggregate purchase price of approximately $7.5 million in cash. The shares of Series B preferred stock were sold and issued under a Series B Preferred Stock Purchase Agreement dated April 21, 2005 which also provides for the investors’ irrevocable commitment to purchase an additional $7.5 million of our Series B preferred stock in December 2005, provided that no initial public offering or change of control of us has occurred prior to that date. As a result of the offering contemplated by this prospectus, the investors’ obligation to fund the second tranche will lapse. In connection with the private placement, purchasers of Series B preferred stock were allowed to exchange their aggregate shares of our Series A-1, Series A-2, Series B-1, Series C-1 and Series D-1 preferred stock into a newly designated Series A preferred stock pursuant to an exchange formula set forth in the purchase agreement. Non-participants’ outstanding shares of Series A-1, Series A-2, Series B-1, Series C-1 and Series D-1 preferred stock were converted into an equal number of shares of common stock. In addition, we effected a 0.126453-for-1 reverse stock split of all outstanding capital stock prior to closing the private placement.

The following table sets forth the names of directors, executive officers or holders of more than 5% of our capital stock who participated in our Series B preferred stock financing and the number of shares they each purchased or exchanged:

	Series A Preferred Stock		Series B Preferred
Investor	Received in Exchange		Stock Purchased
Atlas Venture Fund IV, LP and affiliates		3,352,837		391,984
Prospect Venture Partners, LP		1,141,795		133,574
Sprout Capital VIII, LP and affiliates		2,118,568		247,684
Index Ventures I, LP and affiliates		1,361,164		159,237
BAVP, LP		3,317,734		387,880
Stelios Papadopoulos(1)		334,596		39,123
Christopher Henney		31,730		6,187

(1)  Includes 276,362 shares of Series A preferred stock and 32,310 shares of Series B preferred stock held of record by SGC Partners I L.L.C. Dr. Papadopoulos is a Vice Chairman of SG Cowen & Co., LLC. SG Cowen & Co., LLC is the managing member of SG Capital Partners L.L.C. which is the general partner of SG Merchant Banking Fund L.P. which is the sole member of SGC Partners I LLC. Because of the relationship, SGC Partners I LLC may be deemed to be an affiliate of SG Cowen & Co., LLC. Dr. Papadopoulos disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein, if any.

Some of our directors are associated with our principal stockholders as indicated in the table below:

Director	Principal Stockholder
Dr. Jean-Francois Formela	Atlas Venture Fund IV, LP and affiliates
Louis C. Bock	BAVP, LP
Vijay Lathi	Sprout Capital VIII, LP and affiliates

In connection with our Series B preferred stock financing, we entered into or amended various stockholder agreements with the holders of our preferred stock relating to voting rights, information rights, and

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registration rights, among other things. These stockholder agreements will terminate upon the completion of this offering, except for the registration rights granted under our amended and restated investor rights agreement, as more fully described in “Description of Capital Stock—Registration Rights.”

Amended and Restated Investor Rights Agreement

Under our amended and restated investor rights agreement entered into in connection with our Series B preferred stock financing, some of our preferred stockholders have registration rights. See “Description of Capital Stock—Registration Rights” for a description of these registration rights. These registration rights have been waived with respect to this offering. Further, we agreed with our stockholders on restrictions on the issuance and transfer of shares of our capital stock and voting rights relating to the election of directors. These restrictions are not applicable to, and will terminate upon the closing of, this offering.

Separation Agreement

In June 2005, we entered into a separation agreement with Neill Giese, our former Vice President of Drug Development. Pursuant to the terms of the separation agreement, Dr. Giese is entitled to severance in the form of his base salary for a period of 12 months following his separation date, which was June 14, 2005. In exchange for his severance benefits under the separation agreement, Dr. Giese has released all claims against us.

Indemnity Agreements

We intend to enter into indemnity agreements with each of our directors and executive officers prior to the completion of this offering, as described in “Management—Limitation of Liability and Indemnification.”

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Principal Stockholders

The following table sets forth information regarding beneficial ownership of our capital stock by:

•  each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock;

•  each of our directors;

•  each of our named executive officers; and

•  all of our directors and executive officers as a group.

The percentage ownership information shown in the table is based upon (1) 1,199,446 shares of common stock outstanding as of August 15, 2005, (2) the conversion of all outstanding shares of our preferred stock into 15,192,354 shares of common stock upon the completion of this offering, (3)                 shares of our common stock automatically issuable upon the completion of this offering under a $6.0 million convertible note and (4) the issuance of                 shares of common stock in this offering. The percentage ownership information assumes no exercise of the underwriters’ over-allotment option.

Each individual or entity shown in the table has furnished information with respect to beneficial ownership. We have determined beneficial ownership in accordance with the SEC’s rules. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options or warrants that are either immediately exercisable or exercisable on or before October 14, 2005, which is 60 days after August 15, 2005. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. All of the options in this table are exercisable at any time but, if exercised, are subject to a lapsing right of repurchase until the options are fully vested. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

Except as otherwise noted below, the address for each person or entity listed in the table is c/o SGX Pharmaceuticals, Inc., 10505 Roselle Street, San Diego, California 92121.

				Percentage of Shares
				Beneficially Owned
		Number of Shares		Before			After
Name and Address of Beneficial Owner		Beneficially Owned		Offering			Offering
Atlas Venture Associates IV, Inc. and its affiliates(1)			3,744,821		22.85	%
	890 Winter Street, Suite 320
	Waltham, MA 02451
BAVP, L.P.(2)			3,705,614		22.61
	950 Tower Lane, Suite 700
	Foster City, CA 94404
Sprout Capital VIII, L.P. and its affiliates(3)			2,366,252		14.44
	1 Madison Avenue
	New York, NY 10010
Index Ventures Associates I Limited and its affiliates(4)			1,520,401		9.28
	No. 1 Seaton Place, St. Helier
	Jersey, Channel Islands JE48YJ
Prospect Venture Partners, L.P.			1,275,369		7.78
	435 Tasso Street, Suite 200
	Palo Alto, CA 94301
Michael Grey(5)			268,404		1.61
Stephen K. Burley(6)			213,333		1.29

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			Percentage of Shares
			Beneficially Owned
	Number of Shares		Before		After
Name and Address of Beneficial Owner	Beneficially Owned		Offering		Offering
James A. Rotherham		–		*		*
Annette North(7)		44,003		*		*
Timothy Harris(8)		255,833		1.54
Herbert Mutter(9)		34,224		*		*
Louis C. Bock(2)		3,705,614		22.61
Jean-François Formela(1)		3,744,821		22.85
Karin Eastham(10)		694		*		*
Christopher Henney(11)		193,091		1.18
Vijay Lathi(3)		2,366,252		14.44
Stelios Papadopoulos(12)		396,480		2.38		*
All directors and executive officers as a group (12 persons)(13)		11,222,749		65.32

* Represents beneficial ownership of less than 1%.

(1)	Atlas Venture Fund III, L.P. (“Atlas III”) is the record holder of 55,468 shares of common stock issuable upon conversion of preferred stock (the “Atlas III Shares”). Atlas Venture Entrepreneurs’ Fund III, L.P. (“AVE III”) is the record holder of 1,205  shares of common stock issuable upon conversion of preferred stock (the “AVE III Shares”). Atlas Venture Fund IV, L.P. (“Atlas IV”) is the record holder of 2,823,021 shares of common stock issuable upon conversion of preferred stock (the “Atlas IV Shares”). Atlas Venture Parallel Fund IV-A, C.V. (“Atlas IV-A”) is the record holder of 819,578 shares of common stock issuable upon conversion of preferred stock (the “Atlas IV-A Shares”). Atlas Venture Entrepreneurs’ Fund IV, L.P. (“AVE IV,” and together with Atlas III, AVE III, Atlas IV and Atlas IV-A, the “Funds”), is the record holder of 45,549 shares of common stock issuable upon conversion of preferred stock (the “AVE IV Shares”, and together with the Atlas III Shares, the AVE III Shares, the Atlas IV Shares and the Atlas IV-A Shares, the “Shares”). As general partner of certain of the Funds, and by virtue of the Funds relationship as affiliated limited partnerships, each of Atlas Venture Associates III, L.P. (“AVA III LP”) and Atlas Venture Associates IV, L.P. (“AVA IV LP”) may also be deemed to beneficially own the Shares. As the general partner of AVA III LP and AVA IV LP, respectively, Atlas Venture Associates III, Inc. (“AVA III Inc.”) and Atlas Venture Associates IV, Inc. (“AVA IV Inc.”) may also be deemed to beneficially own the Shares. AVA III LP, AVA IV LP, AVA III Inc. and AVA IV Inc. disclaim beneficial ownership of the Shares except to the extent of their pecuniary interest therein. In their capacities as directors of AVA III Inc. and AVA IV Inc. each of Messrs. Axel Bichara, Jean-Francois Formela and Christopher Spray may be deemed to beneficially own the Shares. Each of Messrs. Bichara, Formela and Spray disclaim beneficial ownership of the Shares except to the extent of his pecuniary interest therein.
(2)	The voting and disposition of the shares held by BAVP, L.P. is determined by the sole managing member of BA Venture Partners VI, LLC, the ultimate general partner of BAVP, L.P. Louis C. Bock is a member of our board of directors and one of four managing members of BA Venture Partners VI, LLC. As such, he may be deemed to share voting and investment power with respect to these shares beneficially owned by BA Venture Partners IV, Inc. Mr. Bock disclaims beneficial ownership of these shares, except to the extent of his proportionate pecuniary interest therein. Mr. Bock disclaims beneficial ownership of the securities beneficially owned by BA Venture Partners VI, LLC, and has advised us that the beneficial ownership of these securities should not be attributed to him.
(3)	Includes 2,095,218 shares held by Sprout Capital VIII, L.P., 125,704 shares held by Sprout Venture Capital, L.P., 27,781 shares held by Sprout Plan Investors, L.P., 110,685 shares held by DLJ ESC II, L.P. and 6,864 shares held by DLJ Capital Corporation. Vijay K. Lathi is a member of our board of directors and is a Managing Director of New Leaf Venture Partners, L.L.C., or NLV. NLV has entered into an agreement with DLJ Capital Corporation, or DLJCC, whereby NLV provides sub-management services for the Sprout investment portfolio. DLJCC is the managing general partner of Sprout Capital VIII, L.P., the general partner of Sprout Venture Capital, L.P., which is affiliated with DLJ LBO Plans Management Corporation, the general partner of DLJ ESC II, L.P., and of DLJ LBO Plans Management Corporation II, which is the general partner of Sprout Plan Investors, L.P., Mr. Lathi disclaims beneficial ownership of these shares except to the extent of his pecuniary interest in these entities.
(4)	Includes 835,016 shares held by Index Ventures I (Jersey) L.P., 530,203 shares held by Index Ventures I (Delaware) L.P., 28,862 shares held by Index Ventures I Parallel Entrepreneur Fund (Jersey) L.P., 116,435 shares held by Index Ventures I GmbH & Co. KG and 9,885 shares held by Index Venture Management SA on behalf of Index Employee Investment Plan.

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(5)	Represents 268,404 shares that Mr. Grey has the right to acquire from us within 60 days of August 15, 2005 pursuant to the exercise of stock options.
(6)	Includes 201,871 shares that Dr. Burley has the right to acquire from us within 60 days of August 15, 2005 pursuant to the exercise of stock options.
(7)	Represents 44,003 shares that Ms. North has the right to acquire from us within 60 days of August 15, 2005 pursuant to the exercise of stock options.

(8) Includes 218,201 shares that Dr. Harris has the right to acquire from us within 60 days of August 15, 2005 pursuant to the exercise of stock options and a warrant.

  (9) Includes 34,303 shares that Mr. Mutter has the right to acquire from us within 60 days of August 15, 2005 pursuant to the exercise of stock options.

(10)	Represents 694 shares that Ms. Eastham has the right to acquire from us within 60 days of August 15, 2005 pursuant to the exercise of stock options.
(11)	Includes 193,091 shares of common stock, of which 90,417 shares are subject to repurchase as of 60 days after August 15, 2005.
(12)	Includes 22,761 shares that Dr. Papadopoulos has the right to acquire from us within 60 days of August 15, 2005 pursuant to the exercise of outstanding options. Also includes 308,672 shares of common stock held of record by SGC Partners I L.L.C. Dr. Papadopoulos is a Vice Chairman of SG Cowen & Co., LLC. SG Cowen & Co., LLC is the managing member of SG Capital Partners L.L.C. which is the general partner of SG Merchant Banking Fund L.P. which is the sole member of SGC Partners I LLC. Because of the relationship, SGC Partners I LLC may be deemed to be an affiliate of SG Cowen & Co., LLC. Dr. Papadopoulos disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein, if any.
(13)	Includes the shares referred to in footnotes (5), (6), (7), (8), (9), (10), (11) and (12) above.

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Description of Capital Stock

Upon completion of this offering and the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of 75,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share.

The following is a summary of the rights of our common stock and preferred stock. This summary is not complete. For more detailed information, please see our amended and restated certificate of incorporation and bylaws, which are filed as exhibits to the registration statement of which this prospectus is a part.

Common Stock

     Outstanding Shares

Based on 1,198,514 shares of common stock outstanding as of June 30, 2005, the conversion of all outstanding shares of preferred stock into 15,192,354 shares of common stock upon the completion of this offering, the automatic issuance of                     shares of our common stock upon the completion of this offering under a $6.0 million convertible note, the issuance of shares of common stock in this offering, and no exercise of options or warrants, there will be                      shares of common stock outstanding upon completion of this offering.

As of June 30, 2005, there were 2,391,843 shares of common stock subject to outstanding options under our 2000 equity incentive plan, and 266,726 shares of common stock subject to outstanding warrants.

As of June 30, 2005, we had approximately 201 record holders of our common stock.

     Voting Rights

Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Our amended and restated certificate of incorporation and bylaws do not provide for cumulative voting rights. Because of this, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election.

     Dividends

Subject to preferences that may be applicable to any then outstanding shares of preferred stock, holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.

     Liquidation

In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock.

     Rights and Preferences

Holders of common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which we may designate in the future.

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     Fully Paid and Nonassessable

All of our outstanding shares of common stock are, and the shares of common stock to be issued in this offering will be, fully paid and nonassessable.

Preferred Stock

Upon the closing of this offering, our board of directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series (but not below the number of shares of such series then outstanding).

Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in our control and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock.

Warrants

As of June 30, 2005, there were outstanding warrants to purchase the following shares of our capital stock:

				Weighted				Weighted
		# of Shares		Average		# of Shares		Average
		Before		Exercise Price		of Common		Exercise Price
		This		Before This		Stock After		After This
Description		Offering		Offering		This Offering		Offering
Series B Preferred Stock(1)			25,038	$	4.71		25,038	$	4.71
Common Stock(2)			241,688	$	2.06		241,688	$	2.06
	Total:		266,726	$	2.31		266,726	$	2.31

(1)	This warrant will automatically net exercise and terminate if not exercised prior to the completion of this offering. Assumes exercise of all shares prior to the completion of this offering.
(2)	Includes warrants issued in July 2005 to purchase 230,000 shares of our common stock.

In July 2005, we issued warrants to purchase an aggregate of 230,000 shares of our common stock to two former employees at an exercise price of $0.50 per share with a five year term.

The remaining warrants to purchase an aggregate of 11,690 shares of our common stock were issued to lenders in connection with our credit arrangements and currently have exercise prices ranging from $4.71 per share to $66.82 per share. All of these warrants expire no later than five years after our initial public offering.

Each of these warrants has a net exercise provision under which its holder may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares based on the fair market value of our common stock at the time of exercise of the warrant after deduction of the aggregate exercise price. Each of these warrants also contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrant in the event of stock dividends, stock splits, reorganizations and reclassifications and consolidations.

The holders of certain of these warrants are entitled to registration rights under our amended and restated investor rights agreement, as described in “—Registration Rights” below.

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Registration Rights

Under an amended and restated investor rights agreement, following the completion of this offering, the holders of 15,192,354 shares of common stock, the holder of                      shares of our common stock automatically issuable upon the completion of this offering under a $6.0 million convertible note and the holders of warrants to purchase 45,436 shares of common stock have the right to require us to register their shares with the SEC so that those shares may be publicly resold, or to include their shares in any registration statement we file.

     Demand Registration Rights

At any time beginning 180 days after the completion of this offering, the holders of at least 66²/3% of the shares having registration rights have the right to demand that we file up to two registration statements, subject to specified exceptions.

     Form S-3 Registration Rights

If we are eligible to file a registration statement on Form S-3, holders of shares having registration rights have the right to demand that we file a registration statement on Form S-3 so long as the aggregate amount of securities to be sold under the registration statement on Form S-3 is at least $1,000,000, subject to specified exceptions.

     “Piggyback” Registration Rights

If we register any securities for public sale, stockholders with registration rights will have the right to include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, but not below 35% of the total number of shares included in the registration statement, except for this offering in which the underwriters have excluded any sales by existing investors.

     Expenses of Registration

We will pay all expenses relating to up to two demand registrations, all Form S-3 registrations and all piggyback registrations, other than underwriting discounts and commissions. However, we will not pay for the expenses of any demand registration if the request is subsequently withdrawn by the stockholders initiating the demand registration, subject to specified exceptions.

     Expiration of Registration Rights

The registration rights described above will expire five years after the completion of this offering.

Delaware Anti-Takeover Law and Provisions of our Amended and Restated Certificate of Incorporation and Bylaws

     Delaware Anti-Takeover Law

We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

•  prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

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•  the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

•  on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66²/3% of the outstanding voting stock which is not owned by the interested stockholder.

Section 203 defines a business combination to include:

•  any merger or consolidation involving the corporation and the interested stockholder;

•  any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

•  subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; and

•  the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

     Amended and Restated Certificate of Incorporation and Bylaws

Provisions of our amended and restated certificate of incorporation and bylaws, which will become effective upon the completion of this offering, may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these provisions could adversely affect the price of our common stock. Among other things, our amended and restated certificate of incorporation and bylaws:

•  permit our board of directors to issue up to 5,000,000 shares of preferred stock, with such rights, preferences and privileges as they may designate (including the right to approve an acquisition or other change in our control);

•  provide that the authorized number of directors may be changed only by resolution of the board of directors;

•  provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

•  divide our board of directors into three classes;

•  require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;

•  provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a stockholder’s notice;

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•  do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election); and

•  provide that special meetings of our stockholders may be called only by the chairman of the board, our chief executive officer or by the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors.

The amendment of any of these provisions would require approval by the holders of at least 66²/3% of our then outstanding common stock.

Nasdaq National Market Listing

We are applying to have our common stock included for quotation on the Nasdaq National Market under the symbol “SGXP.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is U.S. Stock Transfer Corporation. The transfer agent and registrar’s address is 1745 Gardena Avenue, Glendale, CA 91204-2991.

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Shares Eligible for Future Sale

Immediately prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after the restrictions lapse could adversely affect the prevailing market price for our common stock as well as our ability to raise equity capital in the future.

Based on the number of shares of common stock outstanding as of June 30, 2005, upon completion of this offering,            shares of common stock will be outstanding, assuming no exercise of the underwriters’ over-allotment option and no exercise of options or warrants. All of the shares sold in this offering will be freely tradable unless held by an affiliate of ours. Except as set forth below, the remaining shares of common stock outstanding after this offering will be restricted as a result of securities laws or lock-up agreements. These remaining shares will generally become available for sale in the public market as follows:

•  no restricted shares will be eligible for immediate sale upon the completion of this offering;

•  restricted shares, less shares subject to a repurchase option in our favor tied to the holders’ continued service to us, which will be eligible for sale upon lapse of the repurchase option, will be eligible for sale upon expiration of lock-up agreements 180 days after the date of this prospectus; and

•  the remainder of the restricted shares will be eligible for sale from time to time thereafter upon expiration of their respective one-year holding periods, but could be sold earlier if the holders exercise any available registration rights.

Rule 144

In general, under Rule 144 under the Securities Act, as in effect on the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

•  1% of the number of shares of our common stock then outstanding, which will equal approximately                      shares immediately after this offering; or

•  the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.

Rule 144(k)

Under Rule 144(k) under the Securities Act as in effect on the date of this prospectus, a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.                   shares of our common stock will qualify for resale under Rule 144(k) within 180 days of the date of this prospectus.

Rule 701

Rule 701 under the Securities Act, as in effect on the date of this prospectus, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our employees, executive officers, directors or consultants who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701,

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but all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares.

However, substantially all Rule 701 shares are subject to lock-up agreements as described below and under “Underwriting” and will become eligible for sale at the expiration of those agreements.

Lock-Up Agreements

We, along with our directors, executive officers and substantially all of our other stockholders, optionholders and warrantholders, have agreed with the underwriters that for a period of 180 days following the date of this prospectus, we or they will not offer, sell, assign, transfer, pledge, contract to sell or otherwise dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for shares of common stock, subject to specified exceptions. CIBC World Markets Corp. and Piper Jaffray & Co. on behalf of the underwriters may, in their sole discretion, at any time without prior notice, release all or any portion of the shares from the restrictions in any such agreement. We have been advised by CIBC World Markets Corp. and Piper Jaffray & Co. that, when determining whether or not to release shares from the lock-up agreements, they will consider, among other factors, the stockholder’s reasons for requesting the release, the number of shares for which the release is being requested and market conditions at the time. There are no agreements between CIBC World Markets Corp., Piper Jaffray & Co. and any of our stockholders, optionholders or affiliates releasing them from these lock-up agreements prior to the expiration of the 180-day period. All of these lock-up agreements are subject to limited extension under certain circumstances to allow analysts to publish reports about us.

Registration Rights

Upon completion of this offering, the holders of 15,192,354 shares of our common stock and the holder of            shares of our common stock automatically issuable upon the completion of this offering under a $6.0 million convertible note and the holders of warrants to purchase an aggregate of 45,436 shares of our common stock will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the 180-day lock-up arrangement described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of any such registration. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See “Description of Capital Stock — Registration Rights.”

Equity Incentive Plans

We intend to file with the SEC a registration statement under the Securities Act covering the shares of common stock reserved for issuance under our 2000 equity incentive plan, our 2005 equity incentive plan, our 2005 non-employee directors’ stock option plan, and our 2005 employee stock purchase plan. The registration statement is expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under the registration statement will be available for sale in the open market following its effective date, subject to Rule 144 volume limitations and the 180-day lock-up arrangement described above, if applicable.

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Underwriting

We have entered into an underwriting agreement with the underwriters named below. CIBC World Markets Corp., Piper Jaffray & Co. and JMP Securities LLC are acting as the representatives of the underwriters.

The underwriting agreement provides for the purchase of a specific number of shares of common stock by each of the underwriters. The underwriters’ obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of shares of common stock set forth opposite its name below:

Underwriter		Number of Shares
CIBC World Markets Corp.
Piper Jaffray & Co.
JMP Securities LLC
	Total

The underwriters have agreed to purchase all of the shares offered by this prospectus (other than those covered by the over-allotment option described below) if any are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances.

The shares should be ready for delivery on or about                     , 2005 against payment in immediately available funds. The underwriters are offering the shares subject to various conditions and may reject all or part of any order. The representatives have advised us that the underwriters propose to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representatives may offer some of the shares to other securities dealers at such price less a concession of $           per share. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $           per share to other dealers. After the shares are released for sale to the public, the representatives may change the offering price and other selling terms at various times.

We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 30 days after the date of this prospectus, permits the underwriters to purchase a maximum of  additional shares from us to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to the public will be $                    and the total proceeds to us will be $                    . The underwriters have severally agreed that, to the extent the over-allotment option is exercised, they will each purchase a number of additional shares proportionate to the underwriter’s initial amount reflected in the foregoing table.

The following table provides information regarding the amount of the discount to be paid to the underwriters by us:

		Total Without	Total With Full
		Exercise of Over-	Exercise of Over-
	Per Share	Allotment Option	Allotment Option
SGX	$	$	$

We estimate that the total expenses of the offering, excluding the underwriting discount, will be approximately $          .

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.

106

We, our officers and directors and substantially all of our other stockholders have agreed to a 180-day “lock-up” with respect to our shares of common stock and other of our securities that they beneficially own, including securities that are convertible into shares of common stock and securities that are exchangeable or exercisable for shares of common stock. This means that, subject to certain exceptions, for a period of 180 days following the date of this prospectus, we and such persons may not offer, sell, pledge or otherwise dispose of these securities without the prior written consent of CIBC World Markets Corp. and Piper Jaffray & Co. The 180-day lock-up period is subject to extension if (i) during the last 17 days of the lock-up period we issue an earnings release or material news or a material event relating to us occurs or (ii) prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the lock-up period, in which case the restrictions imposed in these lock-up agreements shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. The lock-up provisions do not prevent us from selling shares under any trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934, as amended. The lock-up provisions do not prevent security holders from transferring their shares or other securities as gifts, to a trust for the benefit of themselves of member of their immediate family, for corporations to wholly-owned subsidiaries, for limited liability companies to their members or affiliated limited liability companies or for partnerships to their partners or affiliated partnerships, provided in each case, that the transferee of such shares of other securities agree to be locked-up to the same extent as the security holder from whom they received the shares.

The representatives have informed us that they do not expect discretionary sales by the underwriters to exceed five percent of the shares offered by this prospectus.

There is no established trading market for the shares. The offering price for the shares has been determined by us and the representatives, based on the following factors:

•  the history and prospects for the industry in which we compete;

•  our past and present operations;

•  our historical results of operations;

•  our prospects for future business and earning potential;

•  our management;

•  the general condition of the securities markets at the time of this offering;

•  the recent market prices of securities of generally comparable companies;

•  the market capitalization and stages of development of other companies which we and the representatives believe to be comparable to us; and

•  other factors deemed to be relevant.

Rules of the SEC may limit the ability of the underwriters to bid for or purchase shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules:

•  Stabilizing transactions—The representative may make bids or purchases for the purpose of pegging, fixing or maintaining the price of the shares, so long as stabilizing bids do not exceed a specified maximum.

•  Over-allotments and syndicate covering transactions—The underwriters may sell more shares of our common stock in connection with this offering than the number of shares that they have committed to purchase. This over-allotment creates a short position for the underwriters. This short sales position may involve either “covered” short sales or “naked” short sales. Covered short sales are short sales made in an amount not greater than the underwriters’ over-allotment option to purchase additional shares in this offering described above. The underwriters may close out any covered short position either by exercising their over-allotment option or by purchasing shares in the open market. To determine how they will close the covered short position, the underwriters will consider, among other things, the price of shares

107

	available for purchase in the open market, as compared to the price at which they may purchase shares through the over-allotment option. Naked short sales are short sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that, in the open market after pricing, there may be downward pressure on the price of the shares that could adversely affect investors who purchase shares in this offering.
•	Penalty bids—If the representatives purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering.
•	Passive market making—Market makers in the shares who are underwriters or prospective underwriters may make bids for or purchases of shares, subject to limitations, until the time, if ever, at which a stabilizing bid is made.

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales or to stabilize the market price of our common stock may have the effect of raising or maintaining the market price of our common stock or preventing or mitigating a decline in the market price of our common stock. As a result, the price of the shares of our common stock may be higher than the price that might otherwise exist in the open market. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resales of the shares.

Neither we nor the underwriters makes any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq National Market or otherwise. If such transactions are commenced, they may be discontinued without notice at any time.

108

Legal Matters

The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley Godward LLP, San Diego, California. Certain legal matters relating to the offering will be passed upon for the underwriters by Latham & Watkins LLP, Menlo Park, California. As of the date of this prospectus, GC&H Investments, LLC, an investment partnership composed of certain partners and persons associated with Cooley Godward LLP, beneficially owned approximately 13,144 shares, or approximately      %, of our common stock (on an as-converted basis).

Experts

Ernst & Young LLP, independent registered public accounting firm, have audited our consolidated financial statements at December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, as set forth in their report. We have included our consolidated financial statements in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP’s report, given on their authority as experts in accounting and auditing.

Where You Can Find More Information

We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the shares of common stock being offered by this prospectus. This prospectus does not contain all of the information in the registration statement and its exhibits. For further information with respect to SGX and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.

You can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

Upon completion of this offering, we will be subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, and we will file reports, proxy statements and other information with the SEC. These reports, proxy statements and other information will be available for inspection and copying at the public reference room and web site of the SEC referred to above. We also maintain a website at http://www.sgxpharma.com, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not part of this prospectus.

109

SGX Pharmaceuticals, Inc.

Index to Financial Statements

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2003 and 2004 and June 30, 2005 (unaudited)	F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004 and the six months ended June 30, 2004 and 2005 (unaudited)	F-4
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2002, 2003 and 2004 and the six months ended June 30, 2005 (unaudited)	F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004 and the six months ended June 30, 2004 and 2005 (unaudited)	F-8
Notes to Consolidated Financial Statements	F-9

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

SGX Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of SGX Pharmaceuticals, Inc. as of December 31, 2003 and 2004 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SGX Pharmaceuticals, Inc., at December 31, 2003 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

San Diego, California

April 3, 2005,

except for paragraphs 3 through 6 of Note 10 as to which the date is

April 21, 2005

F-2

SGX Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except par value and share data)

											Pro Forma
		December 31,									Stockholders’
								June 30,			Equity at June 30,
		2003			2004			2005			2005
								(unaudited)			(unaudited)
Assets
Current assets:
	Cash and cash equivalents	$	13,635		$	11,512		$	10,428
	Accounts receivable		2,081			919			1,379
	Prepaid expenses and other current assets		1,169			1,229			1,036
Total current assets			16,885			13,660			12,843
Property and equipment, net			13,285			9,663			7,590
Goodwill and intangible assets, net			3,820			3,615			3,525
Other assets			1,953			1,394			1,314
Total assets		$	35,943		$	28,332		$	25,272
Liabilities and stockholders’ deficit
Current liabilities:
	Accounts payable	$	900		$	652		$	775
	Accrued liabilities and other current liabilities		4,298			2,866			2,151
	Accrued liability for the acquisition of Troxatyl		–			1,000			1,000
	Current portion of line of credit		3,851			2,958			1,611
	Note payable		1,981			–			–
	Bridge notes payable		–			13,154			–
	Deferred revenue		4,813			1,664			2,617
Total current liabilities			15,843			22,294			8,154
Deferred rent			293			266			218
Line of credit, net of current portion			3,655			1,308			761
Deferred revenue, long-term			1,890			2,396			2,397
Note payable, net of current portion			4,000			6,000			6,000			—
Redeemable convertible preferred stock, par value $.001; Authorized shares— 18,245,351 and 34,391,054 at December 31, 2003 and 2004, respectively, and 19,000,000 at June 30, 2005 (unaudited); issued and outstanding shares 2,154,004 and 1,765,900 at December 31, 2003 and 2004, respectively, and 15,192,354 at June 30, 2005 (unaudited); aggregate liquidation preference and redemption amount— $90,114 and $75,690 at December 31, 2003 and 2004, respectively, and $41,000 at June 30, 2005 (unaudited)			88,306			74,850			40,200		$	–
Stockholders’ deficit:
	Common stock, par value $.001; Authorized shares— 27,000,000 and 35,000,000 at December 31, 2003 and 2004, respectively, and 50,000,000 at June 30, 2005 (unaudited); issued and outstanding shares— 854,312 and 1,000,873 at December 31, 2003 and 2004, respectively, and 1,198,514 at June 30, 2005 (unaudited); 16,390,769 shares of outstanding pro forma (unaudited)		1			1			1			16
	Notes receivable from stockholders		(1,997	)		(138	)		(67	)		(67	)
	Additional paid-in capital		11,226			27,120			94,707			140,892
	Deferred compensation		(590	)		–			(8,273	)		(8,273	)
	Accumulated deficit		(86,684	)		(105,765	)		(118,826	)		(118,826	)
Total stockholders’ deficit			(78,044	)		(78,782	)		(32,458	)	$	13,742
Total liabilities and stockholders’ deficit		$	35,943		$	28,332		$	25,272

See accompanying notes.

F-3

SGX Pharmaceuticals, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

											Six Months Ended
		Years Ended December 31,									June 30,
		2002			2003			2004			2004			2005
											(unaudited)
Revenue:
	Grants	$	350		$	3,344		$	6,380		$	1,742		$	429
	Grants— subcontractor reimbursements		–			4,599			4,976			1,520			2,666
	Collaborations and commercial agreements		2,986			10,135			15,941			8,597			6,763
Total revenue			3,336			18,078			27,297			11,859			9,858
Expenses:
	Research and development		25,573			28,587			31,444			15,255			16,742
	General and administrative		10,122			7,353			6,719			3,337			4,749
	In-process technology		–			–			4,000			–			–
Total operating expenses			35,695			35,940			42,163			18,592			21,491
Loss from operations			(32,359	)		(17,862	)		(14,866	)		(6,733	)		(11,633	)
Interest income			622			320			175			44			115
Interest expense			(932	)		(1,219	)		(669	)		(382	)		(190	)
Interest expense associated with bridge notes			–			–			(3,392	)		–			(1,188	)
Net loss			(32,669	)		(18,761	)		(18,752	)		(7,071	)		(12,896	)
Accretion to redemption value of redeemable convertible preferred stock			(329	)		(329	)		(329	)		(165	)		(165	)
Net loss attributable to common stockholders		$	(32,998	)	$	(19,090	)	$	(19,081	)	$	(7,236	)	$	(13,061	)
Basic and diluted net loss per share attributable to common stockholders:
	Historical	$	(39.42	)	$	(22.43	)	$	(19.91	)	$	(8.34	)	$	(12.39	)
	Pro forma (unaudited)							$	(6.61	)				$	(1.17	)
Shares used to compute basic and diluted net loss per share attributable to common stockholders:
	Historical		837			851			958			867			1,054
	Pro forma (unaudited)								2,887						11,157

See accompanying notes.

F-4

SGX Pharmaceuticals, Inc.

Consolidated Statements of Stockholders’ Deficit

Years Ended December 31, 2002, 2003 and 2004 and the Six Months Ended June 30, 2005 (unaudited)

(in thousands, except share data)

Common Stock

Notes

Accumulated

Receivable

Additional

Other

Total

Earnout

from

Paid-In

Deferred

Comprehensive

Accumulated

Stockholders’

Shares

Shares

Amount

Stockholders

Capital

Compensation

Income (Loss)

Deficit

Deficit

Balance at December 31, 2001

692,222

85,293

$

1

$

(1,116

)

$

7,443

$

(2,612

)

$

(2

)

$

(34,596

)

$

(30,882

)

Issuance of warrant to lender

–

–

–

–

212

–

–

–

212

Issuance of common stock upon exercise of stock options

148,947

–

–

(970

)

1,001

–

–

–

31

Repurchase of unvested restricted stock

(37,436

)

–

–

113

(326

)

210

–

–

(3

)

Repayment of notes receivable from stockholders

–

–

–

101

–

–

–

–

101

Accrued interest on notes receivable from stockholders

–

–

–

(117

)

–

–

–

–

(117

)

Deferred compensation for issuance of equity instruments

–

–

–

–

758

(758

)

–

–

–

Stock-based compensation, including amortization of deferred compensation

–

–

–

–

246

1,511

–

–

1,757

Release of earnout shares upon achievement of milestones

56,862

(56,862

)

–

–

1,778

–

–

–

1,778

Cancellation of unearned earnout shares

–

(28,431

)

–

–

–

–

–

–

–

Issuance cost incurred in equity financing

–

–

–

–

(118

)

–

–

–

(118

)

Deemed dividend and accretion to redemption value of redeemable convertible preferred stock

–

–

–

–

–

–

–

(329

)

(329

)

Unrealized gain on available–for–sale securities

–

–

–

–

–

–

2

–

2

Net loss

–

–

–

–

–

–

–

(32,669

)

(32,669

)

Comprehensive loss

–

–

–

–

–

–

–

–

(32,667

)

Balance at December 31, 2002

860,595

–

1

(1,989

)

10,994

(1,649

)

–

(67,594

)

(60,237

)

Issuance of warrant to lender

–

–

–

–

15

–

–

–

15

Issuance of common stock upon exercise of stock options

615

–

–

–

5

–

–

–

5

Repurchase of unvested restricted stock

(14,155

)

–

–

91

(86

)

–

–

–

5

Issuance of common stock to former employee

7,257

–

–

–

–

–

–

–

–

Repayment of notes receivable from stockholders

–

–

–

25

–

–

–

–

25

Accrued interest on notes receivable from stockholders

–

–

–

(124

)

–

–

–

–

(124

)

Deferred compensation for issuance of equity instruments

–

–

–

57

(57

)

–

–

–

Stock-based compensation, including amortization of stock-based compensation

–

–

–

–

123

1,116

–

–

1,239

Write-off of issuance costs incurred in equity financing

–

–

–

–

118

–

–

–

118

Deemed dividend and accretion to redemption value of redeemable convertible preferred stock

–

–

–

–

–

–

–

(329

)

(329

)

Net loss and comprehensive loss

–

–

–

–

–

–

–

(18,761

)

(18,761

)

Balance at December 31, 2003

854,312

–

$

1

$

(1,997

)

$

11,226

$

(590

)

$

–

$

(86,684

)

$

(78,044

)

F-5

SGX Pharmaceuticals, Inc.

Consolidated Statements of Stockholders’ Deficit (continued)

Years Ended December 31, 2002, 2003 and 2004 and the Six Months Ended June 30, 2005 (unaudited)

(in thousands, except share data)

Common Stock

Notes

Accumulated

Receivable

Additional

Other

Total

Earnout

from

Paid-In

Deferred

Comprehensive

Accumulated

Stockholders’

Shares

Shares

Amount

Stockholders

Capital

Compensation

Income (Loss)

Deficit

Deficit

Balance at December 31, 2003

854,312

–

$

1

$

(1,997

)

$

11,226

$

(590

)

$

–

$

(86,684

)

$

(78,044

)

Issuance of common stock upon exercise of stock options

22,393

–

–

–

62

–

–

–

62

Repurchase of unvested restricted stock

(1,488

)

–

–

–

(10

)

–

–

–

(10

)

Repurchase of common stock in exchange for settlement of notes and accrued interest from stockholders

(262,448

)

–

–

1,764

(1,764

)

–

–

–

–

Forgiveness of a portion of principal on notes and accrued interest on note settlement

–

–

–

131

651

–

–

–

782

Repayment of notes receivable from stockholders

–

–

–

42

–

–

–

–

42

Accrued interest on notes receivable from stockholders

–

–

–

(78

)

–

–

–

–

(78

)

Deferred compensation for issuance of equity instruments

–

–

–

6

(6

)

–

–

–

Amortization of stock-based compensation

–

–

–

–

(147

)

596

–

–

449

Issuance costs incurred in equity financing

–

–

–

–

(166

)

–

–

–

(166

)

Conversion of redeemable preferred stock into common stock for non- participation in the bridge financing

388,104

–

–

–

13,785

–

–

–

13,785

Issuance of warrants to bridge note lenders

–

–

–

–

3,477

–

–

–

3,477

Deemed dividend and accretion to redemption value of redeemable convertible preferred stock

–

–

–

–

–

–

–

(329

)

(329

)

Net loss and comprehensive loss

–

–

–

–

–

–

–

(18,752

)

(18,752

)

Balance at December 31, 2004

1,000,873

–

$

1

$

(138

)

$

27,120

$

–

$

–

$

(105,765

)

$

(78,782

)

F-6

SGX Pharmaceuticals, Inc.

Consolidated Statements of Stockholders’ Deficit (continued)

Years Ended December 31, 2002, 2003 and 2004 and the Six Months Ended June 30, 2005 (unaudited)

(in thousands, except share data)

Common Stock

Notes

Accumulated

Receivable

Additional

Other

Total

Earnout

from

Paid-In

Deferred

Comprehensive

Accumulated

Stockholders’

Shares

Shares

Amount

Stockholders

Capital

Compensation

Income (Loss)

Deficit

Deficit

Balance at December 31, 2004

1,000,873

–

$

1

$

(138

)

$

27,120

$

–

$

–

$

(105,765

)

$

(78,782

)

Issuance of common stock upon exercise of stock options

358

–

–

–

1

–

–

–

1

Conversion of preferred stock into common stock for non- participation in the Series B financing

57,459

–

–

–

1,233

–

–

–

1,233

Repayment of notes receivable from stockholders

–

–

–

71

–

–

–

–

71

Deferred compensation for issuance of equity instruments

–

–

–

–

9,863

(9,863

)

–

–

–

Amortization of stock-based compensation

–

–

–

–

–

1,590

–

–

1,590

Repurchase of unvested restricted stock

(176

)

–

–

–

(3

)

–

–

–

(3

)

Issuance of restricted stock

140,000

–

–

–

654

–

–

–

654

Issuance of equity instruments to former employees and consultants

–

–

–

–

1,309

–

–

–

1,309

Deemed dividend and accretion to redemption value of redeemable convertible preferred stock

–

–

–

–

–

–

–

(165

)

(165

)

Reduction of redemption value on redeemable preferred stock

–

–

–

–

54,530

–

–

–

54,530

Net loss and comprehensive loss

–

–

–

–

–

–

–

(12,896

)

(12,896

)

Balance at June 30, 2005 (unaudited)

1,198,514

–

$

1

$

(67

)

$

94,707

$

(8,273

)

$

–

$

(118,826

)

$

(32,458

)

See accompanying notes.

F-7

SGX Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

												Six Months Ended
			Years Ended December 31,									June 30,
			2002			2003			2004			2004			2005
												(unaudited)
Operating activities:
Net loss			$	(32,669	)	$	(18,761	)	$	(18,752	)	$	(7,071	)	$	(12,896	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			4,327			5,110			5,002			2,512			2,294
	Imputed interest expense on convertible debenture			291			239			18			18			–
	Stock-based compensation			1,757			1,239			449			326			3,553
	Compensation related to earnout shares			1,778			–			–			–			–
	Amortization of discount on warrants			41			84			64			32			32
	Amortization of discount on warrants associated with bridge notes			–			–			2,753			–			727
	Deferred rent			42			169			(27	)		(17	)		(48	)
	Non-cash receipt of fixed assets			(350	)		–			–			–			–
	Accrual of interest on notes receivable from stockholders			(117	)		(124	)		(78	)		49			–
	Accrual of interest on bridge notes payable			–			–			467			–			411
	Forgiveness of principal and accrued interest on note settlement			–			–			782			–			–
	Changes in operating assets and liabilities:
		Prepaid expenses and other current assets		(281	)		(2,185	)		1,102			132			(267	)
		Accrued interest on marketable securities		70			–			–			–			–
		Accounts payable and accrued liabilities		(3,657	)		1,968			(680	)		(607	)		(592	)
		Deferred revenue		187			5,865			(2,643	)		(1,822	)		954
		Other assets		(806	)		84			559			398			80
Net cash used in operating activities				(29,387	)		(6,312	)		(10,984	)		(6,050	)		(5,752	)
Investing activities:
Purchases of property and equipment, net				(5,327	)		(1,313	)		(1,175	)		(896	)		(131	)
Purchase of short term investments				(20,093	)		–			–			–			–
Sale and maturity of short-term investments				30,002			–			–			–			–
Net cash provided by (used in) investing activities				4,582			(1,313	)		(1,175	)		(896	)		(131	)
Financing activities:
Proceeds from lines of credit and notes payable				9,952			1,302			643			642			–
Principal payments on lines of credit and notes payable				(1,991	)		(3,912	)		(3,946	)		(2,003	)		(1,926	)
Proceeds from repayment of notes receivable from stockholders				101			25			42			–			71
Issuance of common stock for cash, net of repurchases				28			10			52			45			(2	)
Issuance of preferred stock, net				(118	)		118			(166	)		–			6,656
Issuance of bridge notes				–			–			13,411						–
Net cash provided by (used in) financing activities				7,972			(2,457	)		10,036			(1,316	)		4,799
Net decrease in cash and cash equivalents				(16,833	)		(10,082	)		(2,123	)		(8,262	)		(1,084	)
Cash and cash equivalents at beginning of period				40,550			23,717			13,635			13,635			11,512
Cash and cash equivalents at end of period			$	23,717		$	13,635		$	11,512		$	5,373		$	10,428
Supplemental schedule of cash flow information:
Cash paid for interest			$	600		$	890		$	587		$	332		$	159
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock for notes receivable			$	970		$	–		$	–		$	–		$	–
Issuance of warrant related to line of credit			$	212		$	15		$	–		$	–		$	–
Deferred compensation			$	758		$	57		$	–		$	–		$	9,863
Conversion of bridge notes and redeemable convertible preferred stock to equity			$	–			–			–		$	13,785		$	54,530

See accompanying notes.

F-8

SGX Pharmaceuticals, Inc.

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

(in thousands, except share and per share data)

1. Organization and Summary of Significant Accounting Policies

     Organization and Business

SGX Pharmaceuticals, Inc. (“SGX” or the “Company”), was incorporated in Delaware on July 16, 1998. SGX is a biotechnology company focused on the discovery, development and commercialization of innovative cancer therapeutics.

     Principles of Consolidation

The consolidated financial statements include the assets, liabilities, and results of operations of the Company and its wholly-owned subsidiary. All material intercompany balances and transactions have been eliminated in consolidation.

     Interim Financial Information

The financial statements as of June 30, 2005 and for the six months ended June 30, 2004 and 2005 are unaudited. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial information therein in accordance with U.S. generally accepted accounting principles. The results of operations for the six months ended June 30, 2005 are not necessarily indicative of the results that may be reported for the year ending December 31, 2005.

     Stock Split

In April 2005, the Company’s board of directors authorized a .126453-for-1 reverse stock split for all outstanding preferred and common shares. All share information has been retroactively restated to reflect the reverse stock split.

     Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.

     Unaudited Pro Forma Stockholders’ Equity

The Company’s board of directors has authorized the filing of a registration statement with the Securities and Exchange Commission to register shares of its common stock in an initial public offering. Upon the closing of the initial public offering, all of the shares of preferred stock will be converted into 15,192,354 shares of common stock. The unaudited pro forma stockholders’ equity reflects the conversion of all outstanding preferred stock into common stock as if such conversion had occurred at June 30, 2005. In addition to the conversion of preferred stock upon an initial public offering, the unaudited pro forma stockholders’ equity at June 30, 2005 reflects the conversion of a note payable balance of $6,000 into additional paid in capital as if such conversion had occurred at June 30, 2005.

     Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of less than three months when purchased to be cash equivalents. Cash equivalents are recorded at cost, which approximate market value.

F-9

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

     Stock-Based Compensation

The Company has elected to follow Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related Interpretations in accounting for its employee and director stock options. Under APB 25, if the exercise price of the Company’s employee and director stock options equals or exceeds the estimated fair value of the underlying stock on the date of grant, no compensation expense is recognized.

Options or stock awards issued to non-employees are recorded at their fair value as determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), and Emerging Issues Task Force (“EITF”) 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods and Services, and are periodically revalued as the options vest and are recognized as expense over the related service period.

The Company’s board of directors estimates the fair value of the Company’s common stock for purposes of establishing exercise prices of stock options. Given the absence of an active market for the Company’s common stock through 2004, the board of directors considered, among other factors, the liquidation preferences, anti-dilution protection and voting preferences of the preferred stock over the common stock in determining the estimated fair value of the common stock for purposes of establishing the exercise prices for stock option grants.

In preparation for an initial public offering, the Company has revised its estimate of the fair value for financial reporting purposes of common stock for the last six months of 2004 and the six months ended June 30, 2005. This valuation was done retrospectively by management, a related party, and the Company did not obtain contemporaneous valuations from an independent valuation specialist. In reassessing the value of common stock in 2004 and 2005, the Company considered the price it received in April 2005 for its Series B preferred stock of $4.71 per share, since this was an arms-length transaction. Starting on July 1, 2004, the Company reduced the value originally attributed to the preferences on the Series B preferred stock to 10% of the price of the preferred stock. Accordingly, the Company estimated the fair value of the common stock to be 90% of the Series B preferred stock price, or $4.24 per share. The Company kept this value constant until April 2005, when the Company steadily increased the estimated fair value to $6.10 per common share based on an assessment of market considerations, including discussions with the underwriters in the initial public offering. This valuation method was selected because the Company believes it reflects the change in value held by the common stockholders that will result from a successful public offering, which includes the conversion of preferred stock into common stock thereby eliminating the preferences and rights attributable to the preferred stock. Furthermore, the Company believes this valuation approach is consistent with valuation methodologies applied to other similar companies pursuing an initial public offering.

The Company recorded deferred stock compensation, net of forfeitures, for employee and non-employee directors stock option grants within stockholders’ deficit of $0 in 2004 and $9,863 in the six months ended June 30, 2005, which represents the difference between the revised fair value of the common stock for financial reporting purposes and the option exercise price at the date of grant. The weighted-average exercise price and the weighted-average revised fair value were $0.50 and $4.62 for the options granted during the six months ended June 30, 2005, respectively. Deferred compensation will be amortized to expense over the vesting period of the related options using an accelerated method in accordance with FASB Interpretation (“FIN”) No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.

F-10

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

The Company recorded amortization of deferred stock compensation of $0 during the year ended December 31, 2004 and $2,244 during the six months ended June 30, 2005. The expected future amortization expense for deferred stock compensation for stock option grants is as follows:

For the Years Ending December 31,
2005	$	5,804
2006		3,401
2007		1,181
2008		127
2009		4
	$	10,517

Below is a summary of employee stock option grant and restricted stock award activity, net of forfeitures, and related fair value information for the six months ended June 30, 2005. There were no employee stock option grants during the period July 1 to December 31, 2004:

							Fair Value of
			Shares		Exercise		Common Stock on		Intrinsic Value
Grant Date			Granted		Price		Date of Grant		Per Share
2005:
	May			1,682,500	$	0.50	$	5.17	$	4.67
	June			471,188	$	0.50	$	6.10	$	5.60
		Total		2,153,688

The table below illustrates the effect on net loss and net loss per share had the Company applied the fair value provisions of SFAS No. 123 to employee stock compensation.

	December 31,									June 30,
	2002			2003			2004			2004			2005
Net loss attributable to common stockholders, as reported	$	(32,998	)	$	(19,090	)	$	(19,081	)	$	(7,236	)	$	(13,061	)
Add: Stock-based employee compensation expense included in net loss attributable to common stockholders		759			334			121			95			2,244
Deduct: Stock-based employee compensation determined under the fair value method		(911	)		(475	)		(262	)		(166	)		(2,265	)
Pro forma net loss attributable to common stockholders	$	(33,150	)	$	(19,231	)	$	(19,222	)	$	(7,307	)	$	(13,082	)
Basic and diluted net loss attributable to common stockholders per share, as reported	$	(39.42	)	$	(22.43	)	$	(19.91	)	$	(8.34	)	$	(12.39	)
Pro forma basic and diluted net loss attributable to common stockholders per share	$	(39.61	)	$	(22.60	)	$	(20.06	)	$	(8.43	)	$	(12.41	)

F-11

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

The fair value of these stock option and restricted stock grants were estimated at the date of grant, using a Black-Scholes option pricing model, using a risk-free interest rate of 3% and the following weighted average assumptions: volatility factor of 63%, dividend yield of 0%; and a weighted-average life of the stock option and restricted stock grants of four years.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company’s employee stock option and restricted stock grants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and restricted stock grants.

Property and Equipment

Property and equipment are stated on the basis of cost less accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight–line method over the shorter of the estimated useful lives of the assets (3¹/2 to 15 years) or the term of the applicable lease.

Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through the undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset. Although the Company has accumulated losses since inception, the Company believes the future cash flows to be received from the long-lived assets will exceed the assets’ carrying value, and accordingly, the Company has not recognized any impairment losses through December 31, 2004.

Income Taxes

The Company accounts for income taxes using the liability method in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of the Company’s assets and liabilities and are estimated using enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when the Company determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Net Loss Per Share Attributable to Common Stockholders

The Company computes net loss per share attributable to common stockholders in accordance with SFAS No. 128, Earnings Per Share (“SFAS 128”). Under the provisions of SFAS 128, basic net loss per share attributable to common stockholders (“Basic EPS”) is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share attributable to common stockholders (“Diluted EPS”) is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares and dilutive common share equivalents then outstanding. Common share equivalents consist of the incremental common shares issuable upon the conversion of preferred stock, shares issuable upon the exercise of stock options and shares issuable

F-12

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

upon the exercise of warrants. For the periods presented, Diluted EPS is identical to Basic EPS because common share equivalents, including all of the Company’s preferred stock, outstanding stock options and outstanding warrants, are excluded from the calculation, as their effect is antidilutive. Had the Company been in a net income position, these securities may have been included in the calculation. These potentially dilutive securities consist of the following on a weighted average basis:

	Years Ended December 31,						Six Months Ended June 30,
	2002		2003		2004		2004		2005
Redeemable convertible preferred stock		2,158,216		2,154,004		1,987,522		2,154,004		6,958,451
Outstanding common stock options		252,276		278,885		367,762		375,813		940,185
Outstanding warrants		17,193		20,553		20,958		20,844		124,199
Total		2,427,685		2,453,442		2,376,242		2,550,661		8,022,835

The unaudited pro forma basic and diluted net loss per share calculations assume the conversion of all outstanding shares of preferred stock into shares of common stock using the as-if-converted method, as if such conversion had occurred as of January 1, 2004 or, in the case of a portion of the new Series A and the Series B preferred stock, the original issuance date since it was later. The unaudited pro forma basic and diluted net loss per share calculations do not assume the conversion of the common stock issuable balance of $6,000, as the number of shares are determined based on the price per share in the initial public offering.

Fair Value of Financial Statements

The carrying value of cash equivalents, accounts receivable, accounts payable, accrued expenses and liabilities and notes payable are considered to be reasonable estimates of their respective fair values due to their short-term nature.

Deferred Rent

Rent expense is recorded on a straight-line basis over the term of the lease. The difference between rent expense accrued and amounts paid under the lease agreement is recorded as deferred rent in the accompanying consolidated balance sheets.

Research and Development

Research and development costs are expensed as incurred and consist primarily of costs associated with clinical trials, compensation, including stock-based compensation, and other expenses related to research and development, personnel, facilities costs and depreciation.

Revenue Recognition

The Company’s collaboration agreements and commercial agreements contain multiple elements, including non-refundable upfront fees, payments for reimbursement of research costs, payments for ongoing research, payments associated with achieving specific milestones and, in the case of collaboration agreements, development milestones and royalties based on specified percentages of net product sales, if any. The Company applies the revenue recognition criteria outlined in Staff Accounting Bulletin No. 104, Revenue Recognition and EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). In

F-13

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

applying these revenue recognition criteria, the Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

Cash received in advance of services being performed is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement.

When a payment is specifically tied to a separate earnings process, revenues are recognized when the specific performance obligation associated with the payment is completed. Performance obligations typically consist of significant and substantive milestones pursuant to the related agreement. Revenues from milestone payments may be considered separable from funding for research services because of the uncertainty surrounding the achievement of milestones for products in early stages of development. Accordingly, these payments could be recognized as revenue if and when the performance milestone is achieved if they represent a separate earnings process as described in EITF 00-21.

In connection with certain research collaborations and commercial agreements, revenues are recognized from non-refundable upfront fees, which the Company does not believe are specifically tied to a separate earnings process, ratably over the term of the agreement. Research services provided under some of the Company’s agreements are on a fixed fee basis. Revenues associated with long-term fixed fee contracts are recognized based on the performance requirements of the agreements and as services are performed.

Revenues derived from reimbursement of direct out-of-pocket expenses for research costs associated with grants are recorded in compliance with EITF Issue 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent (“EITF 99-19”), and EITF Issue 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred (“EITF 01-14”). According to the criteria established by these EITF Issues, in transactions where the Company acts as a principal, with discretion to choose suppliers, bears credit risk and performs part of the services required in the transaction, the Company records revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the statements of operations.

None of the payments that the Company has received from collaborators to date, whether recognized as revenue or deferred, is refundable even if the related program is not successful.

Use of Estimates

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

Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income, requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income (loss) and other comprehensive income (loss),

F-14

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

including foreign currency translation adjustments and unrealized gains and losses on investments, are to be reported, net of their related tax effect, to arrive at comprehensive income (loss).

Recently Issued Accounting Standards

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of unallocated overhead resulting from abnormally low production (or idle capacity), freight, handling costs, and wasted material (spoilage). This statement requires that those items be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement will be effective for inventory costs during the fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of this statement will have a material impact on its financial condition or results of operations.

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004),“Share-Based Payment” (“SFAS 123R”) which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees or directors, including grants of employee and director stock options, to be recognized as an expense on the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123R must be adopted no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt SFAS 123R on January 1, 2006.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using the intrinsic value method under APB Opinion No. 25 and, as such, generally recognize no compensation cost for employee stock options issued at fair market value. Accordingly, the adoption of the fair value method under SFAS 123R will have a significant impact on our results of operations, although it will have no impact on the Company’s overall financial position. The impact of adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123R in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net loss and loss per share in this note 1 to our financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” SFAS 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” and replaces it with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 and is required to be adopted beginning January 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS 153 will have on its consolidated results of operations and financial condition but does not expect it to have a material impact.

F-15

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

2. Balance Sheet Details

Property and Equipment

Property and equipment consist of the following:

			December 31,
	Estimated								June 30,
	Life in Years		2003			2004			2005
									(unaudited)
Lab equipment		5-7	$	10,918		$	11,851		$	11,945
Computers and equipment		3-5		7,381			7,629			7,665
Leasehold improvements		4-15		4,795			4,795			4,935
Furniture		10		411			411			411
Construction in progress		NA		772			766			627
				24,277			25,452			25,583
Accumulated depreciation and amortization				(10,992	)		(15,789	)		(17,993	)
			$	13,285		$	9,663		$	7,590

Total depreciation expense of property and equipment was $4,079, $4,884, and $4,797 for the years ended December 31, 2002, 2003 and 2004, respectively, and $2,406 and $2,204 for the six months ended June 30, 2004 and 2005, respectively. Cost and accumulated depreciation of assets under equipment lines of credit was $12,482 and $3,244, respectively, at December 31, 2003, $13,425 and $5,978, respectively, at December 31, 2004, and $14,426 and $9,127, respectively, at June 30, 2005. Depreciation of assets under equipment lines of credit is included in depreciation expense.

A majority of the Company’s property and equipment collateralizes the outstanding obligation under the existing line of credit agreements as of December 31, 2004 and June 30, 2005.

Goodwill and Intangible Assets

Intangible assets include the following:

			December 31, 2003
			Gross
	Estimated		Carrying		Accumulated
	Life in Years		Amount		Amortization
Goodwill		Indefinite	$	3,914	$	(522	)
Licenses		3– 5		977		(549	)
Total intangible assets			$	4,891	$	(1,071	)

			December 31, 2004
			Gross
	Estimated		Carrying		Accumulated
	Life in Years		Amount		Amortization
Goodwill		Indefinite	$	3,914	$	(522	)
Licenses		3– 5		977		(754	)
Total intangible assets			$	4,891	$	(1,276	)

F-16

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

				June 30, 2005
				(unaudited)
				Gross
		Estimated		Carrying		Accumulated
		Life in Years		Amount		Amortization
Goodwill			Indefinite	$	3,914	$	(522	)
Licenses			3– 5		977		(844	)
	Total intangible assets			$	4,891	$	(1,366	)

The amortization expense of intangible assets, excluding goodwill, for the years ended December 31, 2002, 2003 and 2004 and the six months ended June 30, 2004 and 2005 was approximately $256, $205, $226, $138 and $90, respectively.

Estimated amortization of intangibles (in thousands) for the years ended:

2005	$	176
2006		47
Thereafter		–
	$	223

3. Lines of Credit

In July 2002, the Company entered into a line of credit agreement under which it could borrow up to $6,000 to finance equipment. During 2002, the Company borrowed the entire $6,000 of this line of credit in one drawdown. The borrowing under the line of credit bears interest at 9.7% per annum and is collateralized solely by the financed equipment. Principal and interest are payable monthly over 36 months, and the Company is required to make a final balloon payment equal to approximately 5% of the original principal amount of the drawdown.

In September 2002, the Company entered into a line of credit agreement under which it could borrow up to $6,500 to finance equipment. Borrowings under the line of credit bear interest at rates ranging between 9.14% and 10.60% per annum and are collateralized solely by the financed equipment. Principal and interest are payable monthly over either 35 months or 47 months depending on the type of equipment financed. The line of credit requires the Company to execute a letter of credit in favor of the finance company in the amount of $150. As of December 31, 2004, there are no amounts available for future draws under this line of credit.

Future minimum principal payments due on the above equipment lines of credit as of December 31, 2004 are as follows (in thousands):

2005	$	2,958
2006		1,029
2007		280
2008		52
Total	$	4,319

F-17

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

The Company issued a warrant in connection with the equipment lines of credit, which has an unamortized amount of $53 as of December 31, 2004 and $21 as of June 30, 2005. This amount is offset with the corresponding debt line item in the balance sheet as of December 31, 2004 and June 30, 2005.

In September 2005, the Company entered into a line of credit and equipment financing agreement with Silicon Valley Bank and Oxford Finance Corporation to provide $8.0 million of general purpose working capital financing and $2.0 million of equipment and leasehold improvements financing. The debt bears interest at a rate of approximately 10% per annum and is due in monthly installments over three years. One-half of the proceeds are available to the Company immediately under the line of credit and equipment financing agreements and the remainder becomes available in the fourth quarter of 2005 and the second quarter of 2006 assuming the funding of an additional $7.5 million of Series B proceeds or upon completion of the Company’s proposed initial public offering. In September 2005, the Company borrowed $4.0 million for general purpose working capital under this facility and issued the lenders warrants to purchase an aggregate of 40,763 shares of our Series B preferred stock, with an initial exercise price of $4.71 per share. These warrants will become exercisable for 40,763 shares of common stock upon completion of the Company’s proposed initial public offering. Additional warrants may be issued under this facility based upon future draw amounts under the facility.

4. Commitments and Collaborative Research and Development Agreements

The Company leases its office and research facilities and certain office equipment under noncancelable operating leases, which expire at various dates from 2005 to 2008. The leases include escalation clauses beginning on the first anniversary of the respective lease and continuing through the end of the leases. The leases require the Company to pay for all maintenance, insurance and property taxes. In addition to a cash security deposit, one of the leases required the Company to execute a letter of credit in favor of its landlord in the amount of $88.

In accordance with the letter of credit agreements, the Company is required to restrict cash equal to the amount of the letters of credit. As of December 31, 2004, restricted cash of $367 was included in cash and cash equivalents since restriction on this amount lapsed in January 2005.

Future minimum lease payments are as follows at December 31, 2004:

2005	$	2,194
2006		958
2007		898
2008		707
Total minimum lease payments	$	4,757

Rent expense for the years ended December 31, 2002, 2003, and 2004 was $2,065, $1,986 and $2,075, respectively. Rent expense for the six months ended June 30, 2004 and 2005 was $1,030 and $1,130, respectively.

F-18

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

Bridge Financing

In July and September 2004, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) whereby the Company borrowed from certain preferred stockholders an aggregate principal amount of approximately $13,411 under Secured Convertible Promissory Notes (the “Secured Bridge Notes”) and issued to those preferred stockholders warrants (the “Bridge Warrants”) to purchase shares of common stock of the Company (the “Bridge Financing”). In conjunction with the Bridge Financing, the Company concurrently entered into an Intellectual Property Security Agreement pursuant to which the Company granted and pledged a security interest in its intellectual property as collateral.

The Secured Bridge Notes had an annual interest rate of 10%. The principal and accrued interest under the Secured Bridge Notes converted into shares of Series A-2 preferred stock in connection with the initial closing of the Series B preferred stock financing. (See Notes 5 and 10)

The shares of preferred stock of any preferred stockholder that did not participate at least 50% of their pro rata amount in the Bridge Financing was automatically converted into shares of common stock upon the closing of the Bridge Financing. An aggregate of 388,104 shares of Series A, B, C and D preferred stock were converted into common stock as a result of nonparticipation in the Bridge Financing by certain preferred stockholders. For those preferred stockholders that did participate in the Bridge Financing, their shares of Series A, B, C and D preferred stock were exchanged for shares of Series A-1, B-1, C-1 and D-1 preferred stock, respectively, on a one-for-one basis. As a result, the Company’s outstanding capital stock at December 31, 2004 consisted of common stock, Series A-1, B-1, C-1 and D-1 preferred stock. (See Notes 5 and 10)

The Company determined the fair value of the Bridge Warrants on the grant date, using the Black-Scholes pricing model with a resulting aggregate expense of approximately $1,739, which was recorded against the principal balance and was amortized over the term of the Secured Bridge Notes. Of the debt discount, approximately $1,376 was recognized as interest expense during the year ended December 31, 2004 and $363 for the six months ended June 30, 2005.

Pursuant to EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features, and EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, the Company recorded an additional non-cash charge of approximately $1,739 against the principal balance of the Secured Bridge Notes. This amount represents the difference between the conversion price of the Secured Bridge Notes and the underlying value of the stock issuable upon conversion of the Secured Bridge Notes. Of this noncash charge, approximately $1,376 has been recognized as interest expense during the year ended December 31, 2004 and $363 for the six months ended June 30, 2005.

Note Payable

In December 2001, the Company entered into a research program agreement with Millennium Pharmaceuticals, Inc. (“Millennium”). Concurrent with the signing of the research program agreement, the Company issued to Millennium a convertible note with a term of three years in exchange for $6,000. As of December 31, 2003, $4,000 of the note was converted into the right to receive common stock upon the closing of an initial public offering at a conversion price equal to the price per share in the offering. This amount has been reclassified from short-term and reflected as a long-term liability in the balance sheet.

During 2004, the Company issued an amended and restated convertible promissory note to Millennium and the remaining balance on the note was converted into the right to receive common stock upon the closing of an initial public offering at a conversion price equal to the price per share in the offering. As the note payable

F-19

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

is settled in a variable number of shares upon conversion due to an initial public offering, the Company continues to reflect the amount as a long-term liability until settled in accordance with SFAS No. 150.

Sponsored Research and Drug Discovery Collaboration Agreements with Cystic Fibrosis Foundation Therapeutics, Inc.

In January 2001, the Company entered into a sponsored research agreement with Cystic Fibrosis Foundation Therapeutics, Inc. (“CFFT”), the drug discovery and development arm of the Cystic Fibrosis Foundation. Through December 31, 2004, the Company recognized revenue of $6,439 related to research funding and $775 related to the achievement of five milestones. In July 2005, the Company entered into a new three-year drug discovery collaboration agreement with CFFT. Over the term of the collaboration, CFFT may provide over $15,000 in an upfront payment and in technology access, research payments and research milestones, and the Company will be eligible for clinical development milestones and royalties on product sales.

Collaboration and License Agreement with Eli Lilly and Company

In April 2003, the Company entered into a two-year research and technology agreement with Eli Lilly and Company (“Eli Lilly”). Under the terms of the agreement, the Company has received upfront research and technology fees of $18,625 through June 30, 2005. These payments were initially recorded as deferred revenue and recognized as services were performed pursuant to the agreement.

In April 2005, the research term of the agreement was extended for an additional three years. The Company is entitled to receive research funding of approximately $4,500 per year, approximately $1,100 of which has been received as of June 30, 2005.

In December 2003, the Company also expanded its research and technology agreement with Eli Lilly to provide Eli Lilly with long-term access to its beamline facility at the Advanced Photon Source in Argonne, Illinois, to support Eli Lilly drug discovery programs. Under the terms of the Company’s beamline services agreement with Eli Lilly, the Company generates crystal structure data on Eli Lilly drug targets and compounds in exchange for upfront access fees and maintenance fees paid by Eli Lilly. Upon execution of the agreement, the Company received a $2,000 upfront access fee payment and will receive payments for annual operating costs in future years.

In-Licensing of Troxatyl^tm

In July 2004, the Company licensed exclusive worldwide rights to Troxatyl from Shire BioChem Inc. (“Shire”). Troxatyl is a novel compound currently in clinical trials for the treatment of acute myelogenous leukemia. Under the terms of the agreement, the Company made an upfront payment of $3,000 and a payment of $1,000 on the one-year anniversary of the agreement. The Company is also required to make milestone payments based on successful development and approval of Troxatyl and will be required to make royalty payments based on net sales. The Company has not yet completed clinical development or obtained regulatory approval of Troxatyl for any indication. As a result, no estimate of the amount or timing of any of these other potential payments has been accrued for in the accompanying consolidated financial statements. A one-time charge of $4,000 for purchased in-process research and development related to the upfront and one-year anniversary payments has been reflected in the Statement of Operations for the year ended December 31, 2004, based on the fact that the technology acquired did not have established feasibility and had no alternative future use.

F-20

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

5. Redeemable Convertible Preferred Stock

Redeemable Convertible Preferred Stock

During the year ended December 31, 2002, 12,400 shares of Series D redeemable preferred stock were cancelled due to being unearned under an earnout agreement. There were no changes to the redeemable convertible preferred stock in 2003. A summary of redeemable convertible preferred stock issued and outstanding as of December 31, 2002 and 2003 is as follows:

			Aggregate Liquidation
	Shares Issued and		Preference and
	Outstanding		Redemption Value
Series A		541,594	$	7,709
Series B		809,299		32,000
Series C		673,419		45,000
Series D		129,692		5,405
		2,154,004	$	90,114

During the year ended December 31, 2004, the following shares of redeemable convertible preferred stock were converted into shares of common stock for non-participation in the Bridge Financing:

Series A	114,159
Series B	167,684
Series C	69,206
Series D	37,055
Total	388,104

The remaining shares of Series A, B, C and D preferred stock were exchanged for Series A-1, B-1, C-1 and D-1 preferred stock, respectively, on a one-for-one basis upon the closing of the Bridge Financing. A summary of redeemable convertible preferred stock issued and outstanding as of December 31, 2004 was as follows:

			Aggregate Liquidation
	Shares Issued and		Preference and
	Outstanding		Redemption Value
Series A-1		427,435	$	6,084
Series B-1		641,615		25,370
Series C-1		604,213		40,375
Series D-1		92,637		3,861
		1,765,900	$	75,690

As of December 31, 2004 the Series A-1, B-1, C-1 and D-1 preferred stock are convertible at the option of the holder on a one-for-one basis, subject to adjustment for dilution, into a total of 1,765,900 shares of common stock. In addition, the preferred stock will automatically convert into common shares upon the closing of an underwritten public offering of equity securities which results in a minimum per share purchase price of $16.90 with net proceeds of at least $25,000, or upon a vote of the holders of more than 50% of the preferred stock then outstanding. The holder of each share of preferred stock is entitled to one vote for each share of common stock into which it would convert. On any date after September 12, 2005 and on each of the first and second anniversaries thereof, upon approval of at least 66 ²/3% of the then outstanding shares of

F-21

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

preferred stock, such shares may be redeemed in three equal annual installments. The Company was required to affect redemptions by paying cash in an amount equal to $14.23, $39.54, $66.82 and $41.68 per share for Series A-1, B-1, C-1 and D-1 preferred stock, respectively, plus any declared but unpaid dividends.

Holders of the preferred shares shall be entitled to receive non-cumulative dividends at an annual rate of $1.14, $3.16, $5.35 and $0.44 per share of Series A-1, B-1, C-1 and D-1 preferred stock, respectively, as adjusted for stock splits, stock combinations and stock dividends. To date, the Company has not declared any dividends.

In the event of liquidation, the preferred stockholders receive a liquidation preference equal to the original issuance price plus declared but unpaid dividends. The liquidation preference has priority over all distributions to common stockholders. After payment of the liquidation preference, all remaining assets from liquidation are to be paid to the preferred stockholders and common stockholders according to the number of shares held. However, the total amounts that may be distributed (including all amounts payable under the liquidation preference) to the holders of Series A-1, B-1, C-1 and D-1 preferred stock shall not exceed $42.70, $118.62, $200.47 and $125.00 per share, respectively. All remaining amounts shall be distributed ratably to the holders of common stock.

As of June 30, 2005, the Company completed a Series B preferred stock financing and recapitalization (See Note 10). A summary of redeemable convertible preferred stock issued and outstanding as of June 30, 2005 is as follows:

			Aggregate Liquidation
	Shares Issued and		Preference and
	Outstanding		Redemption Value
Series A (New)		13,600,000	$	33,500
Series B (New)		1,592,354		7,500
		15,192,354	$	41,000

As of June 30, 2005, the Series A (new) and Series B (new) preferred stock are convertible into a total of 15,192,354 shares of common stock and have a redemption value of $2.46 and $4.71 per share for Series A (new) and Series B (new) preferred stock, respectively, plus any declared but unpaid dividends.

6. Stockholders’ Deficit

Common Stock

The majority of the outstanding shares of common stock have been issued to the founders, directors, employees and consultants of the Company. In connection with certain stock purchase agreements, the Company has the option to repurchase, at the original issuance price, the unvested shares in the event of termination of employment or engagement. Shares under these agreements vest over periods of up to four years. At December 31, 2004 and June 30, 2005, 115,262 shares and 1,526,981 shares, respectively, were subject to repurchase by the Company.

Stock Options

In June 1999, the Company adopted its 1999 Stock Option Plan under which employees, directors, and consultants may be granted options and stock purchase rights to purchase common shares. In February 2000, the Company adopted its 2000 Equity Incentive Plan (the “Equity Incentive Plan”). The Equity Incentive

F-22

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

Plan replaced the Company’s 1999 Stock Option Plan under which no stock options were granted. The Equity Incentive Plan provides for the grant of up to 3,100,000 shares pursuant to incentive and non–statutory stock options, stock bonuses or sales of restricted stock. Options granted under the Equity Incentive Plan generally expire no later than ten years from the date of grant (five years for a 10% stockholder). Options generally vest over a period of four years. The exercise price of incentive stock options must be equal to at least the fair value of the Company’s common stock on the date of grant, and the exercise price of non-statutory stock options may be no less than 85% of the fair value of the Company’s common stock on the date of grant. The exercise price of any option granted to a 10% stockholder may not be less than 110% of the fair value of the Company’s common stock on the date of grant.

The following table summarizes activity related to options to purchase shares of the Company’s common stock:

					Weighted-Average
		Shares			Exercise Price
Outstanding at December 31, 2001			296,672		$	6.41
	Granted		167,821		$	6.96
	Exercised		(148,947	)	$	6.72
	Canceled		(56,975	)	$	7.28
Outstanding at December 31, 2002			258,571		$	6.41
	Granted		93,955		$	5.06
	Exercised		(615	)	$	6.72
	Canceled		(23,486	)	$	6.72
Outstanding at December 31, 2003			328,425		$	6.01
	Granted		79,894		$	2.37
	Exercised		(22,394	)	$	2.77
	Canceled		(56,881	)	$	6.01
Outstanding at December 31, 2004			329,044		$	5.30
	Granted		2,071,750		$	0.50
	Exercised		(358	)	$	7.50
	Canceled		(8,593	)	$	0.66
Outstanding at June 30, 2005			2,391,843		$	1.15
Exercisable at December 31, 2004			262,885		$	5.33

Selected information regarding stock options as of December 31, 2004:

									Weighted
			Weighted						Average
Range of			Average		Weighted				Exercise Price
Exercise	Options		Remaining		Average		Options		of Options
Price	Outstanding		Life in Years		Exercise Price		Exercisable		Exercisable
$0.79		14,041		5.71	$	0.09		12,925	$	0.79
$1.98		78,591		9.05	$	1.98		61,856	$	1.98
$6.72		236,412		7.31	$	6.72		188,007	$	6.72
Total		329,044		7.66	$	5.30		262,788	$	5.33

F-23

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

At December 31, 2004, 241,112 shares were vested.

At December 31, 2004, exercise prices of outstanding stock options ranged between $0.79 and $6.72 per share. The weighted-average fair value of options granted (as determined through the use of the Black-Scholes pricing model) during 2004, 2003, and 2002 were $0.95, $1.98, and $5.61, respectively. At December 31, 2004, options to purchase 241,113 shares were vested. The weighted-average remaining contractual life of the options outstanding at December 31, 2004 was 7.66 years.

During the years ended December 31, 2002 and 2001, in connection with the grant of certain stock options to employees, the Company recorded deferred stock compensation totaling approximately $500 and $1,200, respectively, representing the difference between the exercise price and the estimated fair value of the Company’s common stock on the date such stock options were granted. Deferred compensation is included as a reduction of stockholders’ equity and is being amortized to expense over the vesting period of the options in accordance with FIN No. 28, which permits an accelerated amortization methodology. During the years ended December 31, 2004, 2003 and 2002, the Company recorded amortization of deferred stock compensation expense of approximately $121, $302 and $756, respectively.

At December 31, 2004, 1,033,376 shares remain available for future issuance or grant under the 2000 Equity Incentive Plan.

Notes Receivable

From 1999 to 2002, the board of directors authorized the issuance of an aggregate of approximately $2,000 in loans to employees and consultants, related to the exercise of their stock options and purchase of their restricted stock. The notes are full recourse and are also secured by the underlying stock. The notes bear interest at 7%. The principal amount of the notes and the related interest are required to be repaid on the earlier of five years from the origination date of the loans, upon termination of employment by or association with the Company or upon the sale of the underlying stock securing the note.

During 2004, the compensation committee of the board of directors authorized the Company to repurchase vested and unvested shares of common stock in settlement of the principal and accrued interest on the outstanding notes (the “Note Settlement”). The Company repurchased 33,187 shares of common stock in settlement of approximately $1,113 in aggregate principal and accrued interest on the notes. The Company also forgave approximately $782 of principal and accrued interest related to those notes whose principal balance had been partially repaid in the Note Settlement. As of December 31, 2004, approximately $138 of aggregate principal and accrued interest remained outstanding on the notes and are being marked-to-market until such notes are extinguished.

Warrants

In 2000, in conjunction with its equipment line of credit agreement, the Company issued a warrant to purchase up to an aggregate of 4,672 shares of the Company’s Series A-1 preferred stock at an exercise price of $14.23 per share. The warrant is exercisable through 2007. The Company determined the fair value on the grant date, using the Black-Scholes pricing model, with a resulting aggregate expense of $33, which was recorded against the principal balance and has been fully amortized as interest expense in prior years.

In 2000, in conjunction with the issuance of its Series C preferred stock, the Company issued a warrant to purchase up to an aggregate of 7,581 shares of the Company’s common stock at an exercise price of $8.45 per share to the placement agent. The warrant expired unexercised in 2004.

F-24

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

In 2001, in conjunction with an executive recruiting agreement, the Company issued a warrant to purchase up to an aggregate of 2,529 shares of the Company’s common stock at an exercise price of $6.72 per share to the executive recruiting agency. The warrant is exercisable through 2011. The Company determined the fair value on the grant date, using the Black-Scholes pricing model, with a resulting aggregate expense of $22.

In conjunction with the line of credit agreement entered into in July 2002, the Company issued warrants to purchase up to an aggregate of 4,489 shares of the Company’s Series C-1 preferred stock at an exercise price of $66.82 per share. If the Company issues preferred stock in an equity financing at a price less than $66.62 per share in the future (“Qualified Financing”), the exercise price of the warrants will be adjusted to the price per share of the Qualified Financing. Also, the number of shares to be issued upon exercise of the warrant will be adjusted accordingly and the securities issuable upon exercise of the warrants will be securities issued in the Qualified Financing. The warrants are exercisable through the later of July 2012 or 5 years after the closing of the Company’s initial public offering of its common stock. The Company determined the fair value on the grant date, using the Black-Scholes pricing model, with a resulting aggregate expense of $168, which is recorded against the principal balance and is being amortized over the term of the line of credit. Of the debt discount, approximately $64 has been recognized as interest expense during the year ended December 31, 2004.

In conjunction with the line of credit agreement entered into in September 2002, the Company issued warrants to purchase up to an aggregate of 192 shares and 390 shares of the Company’s Series C-1 preferred stock at an exercise price of $66.82 per share during 2004 and 2003, respectively. If the Company issues preferred stock in a Qualified Financing, the exercise price of the warrants will be adjusted to the price per share of the Qualified Financing. Also, the number of shares to be issued upon exercise of the warrants will be adjusted accordingly and the securities issued upon exercise of the warrants will be the securities issued in the Qualified Financing. The warrants are exercisable through the earlier of September 2009 or the closing of the Company’s initial public offering of its common stock. The Company determined the fair value on the grant date, using the Black-Scholes pricing model, and has recognized the fair value as interest expense.

In July 2005, the Company issued fully-vested warrants to purchase 230,000 shares of common stock with exercise prices ranging from $.20 to $.50 per share to two former employees of the Company. The warrants were contractually committed to be issued in June 2005 and therefore, the Company recorded stock compensation expense of $1.3 million during the six months ended June 30, 2005. The Company determined the fair value using the Black-Scholes pricing model with the following assumptions: volatility factor of 63%, dividend yield of 0% and a five year life.

Shares Reserved for Future Issuance

The Company has reserved shares of common stock for future issuance as follows:

	December 31,		June 30,
	2004		2005
Conversion of convertible preferred stock		1,765,900		15,192,354
2000 Equity Incentive Plan		1,332,421		2,946,476
Warrants		13,455		266,726
		3,111,776		18,405,556

F-25

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

7. Income Taxes

Significant components of the Company’s deferred tax assets as of December 31, 2004 and 2003 are shown below. A valuation allowance of $40,692, of which $7,551 relates to 2004, has been recognized to offset the deferred tax assets, as realization of such assets is uncertain.

		December 31,
		2004			2003
Deferred tax assets:
	Net operating loss carryforwards	$	29,954		$	24,655
	Research and development credits		4,783			3,954
	Capitalized research and development		1,742			1,739
	License		1,630			–
	Accrued vacation		258			246
	Deferred revenue		1,655			2,731
	Other		236			210
	Depreciation and amortization		434			–
Total deferred tax assets			40,692			33,535
Valuation allowance for deferred tax assets			(40,692	)		(33,141	)
Net deferred tax assets			–			394
Deferred tax liabilities:
	Depreciation and amortization		–			(394	)
Net deferred taxes		$	–		$	–

At December 31, 2004, the Company had federal and California tax net operating loss carryforwards of approximately $78,949 and $40,407, respectively. The federal and California tax loss carryforwards will begin to expire in 2019 and 2009, respectively, unless previously utilized. The Company also has federal and California research and development tax credit carryforwards totaling approximately $3,300 and $2,281, respectively. The federal research and development tax credit carry forward will begin to expire in 2019, unless previously utilized.

Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company’s net operating loss and tax credit carryforwards may be limited as a result of certain cumulative changes in the Company’s stock ownership which occurred during 1999 and 2001. However, the Company believes that the limitations will not have a material impact on the utilization of the carryforwards.

8. Employee Benefit Plan

Effective October 1, 1999, the Company adopted a defined contribution 401(k) profit sharing plan (the “Plan”) covering substantially all employees that meet certain age requirements. Employees may contribute up to 100% of their compensation per year (subject to a maximum limit by federal law). The Plan does allow for employer matching.

9. Reductions In Force

During June 2002, the Company eliminated approximately 30% of its workforce (39 employees) and closed its San Francisco office. The Company recorded a charge related to this reduction in force of approximately

F-26

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

$2,000, of which approximately $1,700 was paid as of December 31, 2004. The charge consisted of approximately $1,100 for severance expenses and approximately $900 for the anticipated net rental payments due over the remaining term of the Company’s facility lease in San Francisco. The remaining accrual for this reduction in force is approximately $282 as of December 31, 2004, and it is related to the lease and is expected to be paid over the remaining period of the lease (approximately two years).

During August 2004, the Company eliminated approximately 11% of its workforce (17 employees). The Company recorded a charge related to this reduction in force of approximately $278, all of which has been paid as of December 31, 2004.

10. Subsequent Events

Extension of Maturity Date of Secured Bridge Notes

In January 2005, the Company, the agent and the lenders party to the Loan and Security Agreement holding a majority in interest of the outstanding principal amount under all of the Secured Bridge Notes (the “Majority Lenders”) agreed to extend the maturity date of the Secured Bridge Notes from January 27, 2005 to March 31, 2005, or such earlier date as may be determined by the Majority Lenders. Subsequently, the Company, the agent and the Majority Lenders agreed to further extend the maturity date of the Secured Bridge Notes from March 31, 2005 to April 22, 2005, or such earlier date as may be determined by the Majority Lenders.

Reduction in Force

In April 2005, the Company terminated 14 of its employees. The Company provided severance benefits to all such terminated employees who executed a severance agreement and release. The total costs associated with the severance benefits were approximately $230.

Equity Financing and Recapitalization

On April 21, 2005, the Company completed the initial close of a private placement of equity securities (the “Series B Financing”). The total amount committed by the investors in the Series B Financing (“Series B Investors”) was approximately $15,000 of which approximately $7,500 was received by the Company in the initial close and the remaining $7,500 was irrevocably committed by the Series B Investors to be funded no later than December 15, 2005 unless the Company has completed an initial public offering or sale of the Company prior to that date.

Immediately prior to the Series B Financing, the Company effected a reverse stock split whereby each share of common and preferred stock then outstanding was converted into 0.126453 of one share of common stock or the applicable series of preferred stock. The principal and accrued interest under the Secured Bridge Notes were converted into 3,034,095 shares of Series A-2 preferred stock at a conversion rate of $4.71 per share. The remaining rights and obligations under the Secured Bridge Notes, including the Bridge Warrants, were terminated in their entirety.

The holders of Series A-1, A-2, B-1, C-1 and D-1 preferred (“Existing Preferred”) stock who participated to a certain minimum extent in the Series B Financing were given the right to exchange all of such holder’s outstanding shares of Existing Preferred stock together with the shares of Series A-2 preferred stock issued upon conversion of the Second Bridge Notes for an aggregate of 13,600,000 shares of new Series A preferred stock. Immediately following the closing of the Series B Financing, each then outstanding share of Existing

F-27

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to June 30, 2005

and the six months ended June 30, 2004 and 2005 is unaudited)

Preferred stock (i.e., shares that were not exchanged for shares of new Series A preferred stock) was automatically converted into one share of common stock.

As a result of the Series B Financing, a warrant to purchase 1,765 shares of the Company’s Series C-1 preferred stock at an exercise price of $66.82 were adjusted pursuant to their terms and became exercisable for 25,038 shares of Series B preferred stock at an exercise price of $4.71 per share. The Company calculated the fair value of the modification under SFAS 123 and determined it to be immaterial.

F-28

                                Shares

Common Stock

PROSPECTUS

          , 2005

CIBC World Markets Piper Jaffray

JMP Securities

Until                     , 2005 (25 days after the commencement of the offering), all dealers that buy, sell or trade the common stock may be required to deliver a prospectus, regardless of whether they are participating in this offering. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth all costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of the common stock being registered. All amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market filing fee.

		Amount to be
		Paid
SEC registration fee		$	9,475
NASD filing fee			8,550
Nasdaq National Market filing fee			100,000
Blue sky qualification fees and expenses			*
Printing and engraving expenses			*
Legal fees and expenses			*
Accounting fees and expenses			*
Transfer agent and registrar fees and expenses			*
Miscellaneous expenses			*
	Total	$	*

* To be provided by amendment.

Item 14. Indemnification of Directors and Officers.

We are incorporated under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such person as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation may indemnify any persons who are, or are threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which such officer or director has actually and reasonably incurred. Our amended and restated certificate of incorporation and amended and restated bylaws, each of which will become effective upon the completion of this offering, provide for the

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indemnification of our directors and officers to the fullest extent permitted under the Delaware General Corporation Law.

Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for any:

•  transaction from which the director derives an improper personal benefit;

•  act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

•  unlawful payment of dividends or redemption of shares; or

•  breach of a director’s duty of loyalty to the corporation or its stockholders.

Our amended and restated certificate of incorporation and amended and restated bylaws include such a provision. Expenses incurred by any officer or director in defending any such action, suit or proceeding in advance of its final disposition shall be paid by us upon delivery to us of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified by us.

Section 174 of the Delaware General Corporation Law provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held liable for such actions. A director who was either absent when the unlawful actions were approved, or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered in the books containing minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.

As permitted by the Delaware General Corporation Law, we intend to enter into indemnity agreements with each of our directors and executive officers, that require us to indemnify such persons against any and all expenses (including attorneys’ fees), witness fees, damages, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with any action, suit or proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director, an officer or an employee of the registrant or any of its affiliated enterprises, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The indemnity agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder.

At present, there is no pending litigation or proceeding involving any of our directors or executive officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

We have an insurance policy covering our officers and directors with respect to certain liabilities, including liabilities arising under the Securities Act or otherwise.

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Reference is made to the following documents filed as exhibits to this registration statement regarding relevant indemnification provisions described above and elsewhere herein:

Exhibit Document	Number
Form of Underwriting Agreement		1.1
Form of Registrant’s Amended and Restated Certificate of Incorporation to become effective upon completion of this offering		3.2
Form of Registrant’s Amended and Restated Bylaws to become effective upon completion of this offering		3.4
Amended and Restated Investor Rights Agreement dated April 21, 2005 between Registrant and certain of its stockholders		4.7
Form of Indemnity Agreement		10.1

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Item 15. Recent Sales of Unregistered Securities.

The following list sets forth information regarding all securities sold by us since January 2002. All share amounts have been retroactively adjusted to give effect to a 0.126453-for-1 reverse stock split of our common stock and preferred stock and the related recapitalization that was effected in April 2005.

(1) In July 2002, in connection with a line of credit agreement, the registrant issued three warrants to two lenders to purchase approximately $300,000 of (i) shares of the registrant’s then outstanding Series C preferred stock, at an initial exercise price of $8.45 per share, subject to adjustment, or (ii) shares of preferred stock issued in a subsequent qualified equity financing at a price per share less than $8.45, as adjusted, with the exercise price of the warrants to be adjusted in such event to the price per share of the shares of preferred stock issued in the subsequent qualified equity financing. The warrants are exercisable through July 2012. These warrants were amended and restated in January 2005 to be exercisable for shares of the registrant’s previously outstanding Series C-1 preferred stock or shares of preferred stock issued in a subsequent qualified equity financing. In April 2005, these warrants were adjusted by the reverse stock split and recapitalization and are currently exercisable for an aggregate of 4,488 shares of common stock at an exercise price of $66.82 per share.

(2) In August 2002, in connection with a line of credit agreement, the registrant issued a warrant to a lender to purchase approximately $118,000 of (i) shares of the registrant’s then outstanding Series C preferred stock, at an initial exercise price of $8.45 per share, subject to adjustment, or (ii) shares of preferred stock issued in a subsequent qualified equity financing at a price per share less than $8.45 per share, as adjusted, with the exercise price of the warrants to be adjusted in such event to the price per share of the shares of preferred stock issued in the subsequent qualified equity financing. The warrants are exercisable through the closing of this offering and will automatically be net exercised upon the closing of the offering if not exercised prior to that time. This warrant was amended and restated in January 2005 to be exercisable for shares of the registrant’s Series C-1 preferred stock or shares of preferred stock issued in a subsequent qualified equity financing. In April 2005, this warrant was adjusted by the reverse stock split, recapitalization and Series B preferred stock financing and is exercisable for 25,038 shares of the registrant’s Series B preferred stock at an exercise price of $4.71 per share prior to the completion of this offering.

(3) In July and September 2004, the registrant issued $13.4 million principal amount of secured convertible promissory notes in a private placement to 56 accredited investors pursuant to a loan and security agreement. The notes accrued interest at a rate of 10% per year. In April 2005, the principal and accrued interest under the notes was converted into 3,034,095 shares of the registrant’s series A-2 preferred stock. In July 2004, in connection with the issuance of the notes, the registrant issued (i) an aggregate of 427,429 shares of the registrant’s previously outstanding Series A-1 preferred stock to 9 accredited investors upon exchange of an aggregate of 427,429 shares of the registrant’s previously outstanding Series A preferred stock, (ii) an aggregate of 641,599 shares of the registrant’s previously outstanding Series B-1 preferred stock to 28 accredited investors upon exchange of an aggregate of 641,599 shares of the registrant’s previously outstanding Series B preferred stock, (iii) an aggregate of 604,182 shares of the registrant’s previously outstanding Series C-1 preferred stock to 53 accredited investors upon exchange of an aggregate of 604,182 shares of the registrant’s previously outstanding Series C preferred stock, (iv) an aggregate of 92,635 shares of the registrant’s previously outstanding Series D-1 preferred stock to 4 accredited investors upon exchange of an aggregate of 92,635 shares of the registrant’s previously outstanding Series D preferred stock and (v) an aggregate of 388,088 shares of common stock to 21 accredited investors upon conversion of the previously outstanding preferred stock not exchanged in connection with the loan and security agreement. In September 2004, in connection with the issuance of the notes, the registrant also issued warrants to purchase shares of common stock to each of the 56 accredited investors, with a exercise price of $0.01 per share. These warrants were terminated in April 2005 in connection with the Series B preferred stock financing.

(4) In December 2004, the registrant issued an amended and restated convertible promissory note in a private placement to Millennium Pharmaceuticals, Inc. (as successor in interest to mHOLDINGS Trust) in the aggregate principal amount of $6 million. No interest accrues on the principal unless a payment

II-4

towards the principal becomes overdue. Upon completion of this offering, this note will convert in a private placement into                      shares of common stock at a conversion price equal to $          , the price per share in this offering.

(5) In April 2005, in connection with the registrant’s Series B preferred stock financing and recapitalization, the registrant (i) issued and sold an aggregate of 1,592,354 shares of Series B preferred stock in a private placement to 53 accredited investors for aggregate consideration of approximately $7.5 million, (ii) issued an aggregate of 13,600,000 shares of the registrant’s Series A preferred stock to 51 accredited investors upon the exchange of an aggregate of 427,429 shares of the registrant’s previously outstanding Series A-1 preferred stock, 3,034,095 shares of the registrant’s previously outstanding series A-2 preferred stock, 641,599 shares of the registrant’s previously outstanding Series B-1 preferred stock, 604,182 shares of the registrant’s previously outstanding Series C-1 preferred stock, and 92,635 shares of the registrant’s previously outstanding Series D-1 preferred stock. Upon completion of this offering, these shares of Series A preferred stock and Series B preferred stock will convert into an aggregate of 15,192,354 shares of common stock.

(6) In July 2005, the registrant issued two warrants to purchase up to an aggregate of 230,000 shares of common stock having an exercise price of $0.50 per share to two accredited investors as consideration for past services to the registrant.

(7) In September 2005, in connection with a credit facility, the registrant issued two warrants to two lenders to purchase an aggregate of 40,763 shares of the registrant’s Series B preferred stock, at an initial exercise price of $4.71 per share. The warrants are exercisable through September 2015. The warrants will become exercisable for 40,763 shares of the registrant’s common stock upon completion of this offering.

(8) As of June 30, 2005, the registrant had granted options under the registrant’s 2000 equity incentive plan to purchase 2,391,843 shares of common stock (net of expirations and cancellations) to employees, directors and consultants, having exercise prices ranging from $0.79 to $6.72 per share. In May 2005, the registrant also granted 140,000 shares of restricted common stock under its 2000 equity incentive plan to one of the registrant’s directors.

The offers, sales, and issuances of the securities described in paragraphs (1), (2), (3), (4), (5), and (6) were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act in that the issuance of securities to the recipients did not involve a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited or sophisticated person and had adequate access, through employment, business or other relationships, to information about us.

The offers, sales, and issuances of the securities described in paragraphs (1), (3), (4), (5), (6) and (7) were deemed to be exempt from registration under the Securities Act in reliance on Rule 506 of Regulation D in that the issuance of securities to the accredited investors did not involve a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited investor under Rule 501 of Regulation D.

The offers, sales and issuances of the securities described in paragraph (8) were deemed to be exempt from registration under the Securities Act in reliance on Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were our employees, directors or bona fide consultants and received the securities under our 2000 equity incentive plan. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had adequate access, through employment, business or other relationships, to information about us.

II-5

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits.

Exhibit
Number			Description of Document
	1	.1(1)	Form of Underwriting Agreement.
	3	.1(1)	Registrant’s Amended and Restated Certificate of Incorporation, as amended and as currently in effect.
	3	.2(1)	Form of Registrant’s Amended and Restated Certificate of Incorporation to become effective upon completion of this offering.
	3	.3(1)	Registrant’s Bylaws, as currently in effect.
	3	.4(1)	Form of Registrant’s Amended and Restated Bylaws to become effective upon completion of this offering.
	4	.1†	Form of Common Stock Certificate of Registrant.
	4	.2(1)	Form of Warrant to Purchase Common Stock issued by Registrant in July 2005 to Timothy Harris and Linda Grais.
	4	.3†	Form of Amended and Restated Warrant issued by Registrant in January 2005 to GATX Ventures, Inc.
	4	.4†	Amended and Restated Warrant issued by Registrant in January 2005 to Oxford Finance Corporation.
	4	.5†	Amended and Restated Warrant issued by Registrant in January 2005 to Silicon Valley Bank.
	4	.6(1)	Amended and Restated Convertible Promissory Note dated December 16, 2004 between Registrant and Millennium Pharmaceuticals, Inc.
	4	.7(1)	Amended and Restated Investor Rights Agreement dated April 21, 2005 between Registrant and certain of its stockholders.
	4	.8	Form of Warrant issued by Registrant in September 2005 to Oxford Finance Corporation and Silicon Valley Bank. Reference is made to Exhibit 10.34.
	5	.1†	Opinion of Cooley Godward LLP.
	10	.1+(1)	Form of Indemnity Agreement by and between Registrant and its directors and executive officers.
	10	.2+(1)	2000 Equity Incentive Plan and Form of Option Agreement and Form of Stock Option Grant Notice thereunder.
	10	.3+(1)	2005 Equity Incentive Plan and Form of Stock Option Agreement and Form of Stock Option Grant Notice thereunder.
	10	.4+(1)	2005 Employee Stock Purchase Plan and Form of Offering Document thereunder.
	10	.5+(1)	2005 Non-Employee Directors’ Stock Option Plan and Form of Stock Option Agreement and Form of Stock Option Grant Notice thereunder.
	10	.6+(1)	Amended and Restated Executive Employment Agreement dated January 1, 2005 between Registrant and Michael Grey.
	10	.7+(1)	Executive Employment Agreement dated January 1, 2002 between Registrant and Stephen Burley, M.D., D.Phil. and related relocation loan agreement dated July 29, 2002.
	10	.8+(1)	Separation Letter Agreement dated November 12, 2004 between Registrant and Tim Harris, Ph.D.
	10	.9+(1)	Offer Letter Agreement dated June 3, 2005 between Registrant and James A. Rotherham.
	10	.10+(1)	Separation Agreement dated June 14, 2005 between Registrant and Neill Giese.
	10	.11+(1)	Chairmanship Letter Agreement dated January 16, 2004 between Registrant and Christopher Henney, Ph.D., DSc
	10	.12+(1)	Non-Employee Director Compensation Letter Agreement dated April 13, 2001 between Registrant and Stelios Papadopoulos, Ph.D., as amended.
	10	.13(1)	Lease Agreement dated September 20, 1999 between Registrant and ARE-10505 Roselle Street, LLC, as amended.
	10	.14(1)	Lease Agreement dated May 18, 2000 between Registrant and ARE-3770 Tansy Street, LLC.

II-6

Exhibit
Number			Description of Document
	10	.15(1)	Lease Agreement dated June 1, 2001 between Registrant and BRS Torrey I, LLC.
	10	.16*(1)	Patent and Know How License dated July 23, 2004 between Registrant, Shire Biochem Inc., Tanaud Ireland Inc. and Tanaud International B.V., as amended, and related novation agreements.
	10	.17*(1)	Collaboration and License Agreement dated April 14, 2003 between Registrant and Eli Lilly and Company.
	10	.18*(1)	Amendment to Agreement dated July 1, 2003 between Registrant and Eli Lilly and Company.
	10	.19*(1)	Amendment to Agreement dated January 30, 2004 between Registrant and Eli Lilly and Company.
	10	.20*(1)	Amendment to Agreement dated November 11, 2004 between Registrant and Eli Lilly and Company.
	10	.21*(1)	Amendment to Agreement dated March 31, 2005 between Registrant and Eli Lilly and Company.
	10	.22*(1)	Collaboration Agreement dated August 20, 2004 between Registrant, F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.
	10	.23*(1)	Collaboration Agreement dated August 1, 2003 between Registrant and OSI Pharmaceuticals, Inc.
	10	.24(1)	Amendment to Agreement dated January 11, 2004 between Registrant and OSI Pharmaceuticals, Inc.
	10	.25*(1)	Amendment to Agreement dated February 1, 2005 between Registrant and OSI Pharmaceuticals, Inc.
	10	.26*(1)	Collaboration Agreement dated March 18, 2004 between Registrant and Serono International SA.
	10	.27*(1)	Collaboration Agreement dated December 1, 2003 between Registrant and UroGene, S.A. (which was acquired by Pierre Fabre Médicament in July 2005).
	10	.28*(1)	Amendment to Agreement dated December 16, 2004 between Registrant and UroGene, S.A. (predecessor-in-interest to Pierre Fabre Médicament) and related assignment agreements.
	10	.29*(1)	Drug Discovery Agreement dated July 1, 2005 between Registrant and Cystic Fibrosis Foundation Therapeutics, Inc.
	10	.30(1)	Memorandum of Understanding dated July 26, 2000 between the Advanced Photon Source and the Structural GenomiX Collaborative Access Team and related Collaborative Access Team User Agreement dated May 15, 2001 between Registrant, The University of Chicago and United States Department of Energy.
	10	.31(1)	Master Loan and Security Agreement No. 2081008 dated August 28, 2002 between Registrant and Oxford Finance Corporation, as amended.
	10	.32	First Amendment to Lease Agreement dated August 30, 2005 between Registrant and ARE-3770 Tansy Street, LLC.
	10	.33	Third Amendment to Lease Agreement dated August 30, 2005 between Registrant and ARE-10505 Roselle Street, LLC.
	10	.34	Loan and Security Agreement dated September 16, 2005 among Registrant, Oxford Finance Corporation and Silicon Valley Bank.
	23	.1	Consent of Independent Registered Public Accounting Firm.
	23	.2†	Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
	24	.1	Power of Attorney. Reference is made to the signature page hereto.

†      To be filed by amendment.

+ Indicates management contract or compensatory plan.

* Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

(1)    Filed with the Registrant’s Registration Statement on Form S-1 on September 2, 2005.

II-7

(b) Financial Statement Schedules.

No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or the notes thereto.

Item 17. Undertakings.

The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-8

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement on Form S-1 (No. 333-128059) to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on the 14th day of October 2005.

SGX PHARMACEUTICALS, INC.

By:  /s/ Michael Grey

Michael Grey

President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement on Form S-1 (No. 333-128059) has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Michael Grey Michael Grey	President, Chief Executive Officer and Member of the Board of Directors (Principal Executive Officer)	October 14, 2005
/s/ James A. Rotherham, C.P.A. James A. Rotherham, C.P.A.	Chief Financial Officer (Principal Financial and Accounting Officer)	October 14, 2005
* Christopher S. Henney, Ph.D., D.Sc.	Chairman of the Board of Directors	October 14, 2005
* Louis C. Bock	Member of the Board of Directors	October 14, 2005
* Karin Eastham, C.P.A.	Member of the Board of Directors	October 14, 2005

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Signature		Title	Date
* Jean-Francois Formela, M.D.		Member of the Board of Directors	October 14, 2005
* Vijay K. Lathi		Member of the Board of Directors	October 14, 2005
* Stelios Papadopoulos, Ph.D.		Member of the Board of Directors	October 14, 2005
*By:	/s/ Michael Grey Michael Grey Attorney-in-Fact

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EXHIBIT INDEX

Exhibit
Number			Description of Document
	1	.1(1)	Form of Underwriting Agreement.
	3	.1(1)	Registrant’s Amended and Restated Certificate of Incorporation, as amended and as currently in effect.
	3	.2(1)	Form of Registrant’s Amended and Restated Certificate of Incorporation to become effective upon completion of this offering.
	3	.3(1)	Registrant’s Bylaws, as currently in effect.
	3	.4(1)	Form of Registrant’s Amended and Restated Bylaws to become effective upon completion of this offering.
	4	.1†	Form of Common Stock Certificate of Registrant.
	4	.2(1)	Form of Warrant to Purchase Common Stock issued by Registrant in July 2005 to Timothy Harris and Linda Grais.
	4	.3†	Form of Amended and Restated Warrant issued by Registrant in January 2005 to GATX Ventures, Inc.
	4	.4†	Amended and Restated Warrant issued by Registrant in January 2005 to Oxford Finance Corporation.
	4	.5†	Amended and Restated Warrant issued by Registrant in January 2005 to Silicon Valley Bank.
	4	.6(1)	Amended and Restated Convertible Promissory Note dated December 16, 2004 between Registrant and Millennium Pharmaceuticals, Inc.
	4	.7(1)	Amended and Restated Investor Rights Agreement dated April 21, 2005 between Registrant and certain of its stockholders.
	4	.8	Form of Warrant issued by Registrant in September 2005 to Oxford Finance Corporation and Silicon Valley Bank. Reference is made to Exhibit 10.34.
	5	.1†	Opinion of Cooley Godward LLP.
	10	.1+(1)	Form of Indemnity Agreement by and between Registrant and its directors and executive officers.
	10	.2+(1)	2000 Equity Incentive Plan and Form of Option Agreement and Form of Stock Option Grant Notice thereunder.
	10	.3+(1)	2005 Equity Incentive Plan and Form of Stock Option Agreement and Form of Stock Option Grant Notice thereunder.
	10	.4+(1)	2005 Employee Stock Purchase Plan and Form of Offering Document thereunder.
	10	.5+(1)	2005 Non-Employee Directors’ Stock Option Plan and Form of Stock Option Agreement and Form of Stock Option Grant Notice thereunder.
	10	.6+(1)	Amended and Restated Executive Employment Agreement dated January 1, 2005 between Registrant and Michael Grey.
	10	.7+(1)	Executive Employment Agreement dated January 1, 2002 between Registrant and Stephen Burley, M.D., D.Phil. and related relocation loan agreement dated July 29, 2002.
	10	.8+(1)	Separation Letter Agreement dated November 12, 2004 between Registrant and Tim Harris, Ph.D.
	10	.9+(1)	Offer Letter Agreement dated June 3, 2005 between Registrant and James A. Rotherham.
	10	.10+(1)	Separation Agreement dated June 14, 2005 between Registrant and Neill Giese.
	10	.11+(1)	Chairmanship Letter Agreement dated January 16, 2004 between Registrant and Christopher Henney, Ph.D., DSc
	10	.12+(1)	Non-Employee Director Compensation Letter Agreement dated April 13, 2001 between Registrant and Stelios Papadopoulos, Ph.D., as amended.
	10	.13(1)	Lease Agreement dated September 20, 1999 between Registrant and ARE-10505 Roselle Street, LLC, as amended.
	10	.14(1)	Lease Agreement dated May 18, 2000 between Registrant and ARE-3770 Tansy Street, LLC.

Exhibit
Number			Description of Document
	10	.15(1)	Lease Agreement dated June 1, 2001 between Registrant and BRS Torrey I, LLC.
	10	.16*(1)	Patent and Know How License dated July 23, 2004 between Registrant, Shire Biochem Inc., Tanaud Ireland Inc. and Tanaud International B.V., as amended, and related novation agreements.
	10	.17*(1)	Collaboration and License Agreement dated April 14, 2003 between Registrant and Eli Lilly and Company.
	10	.18*(1)	Amendment to Agreement dated July 1, 2003 between Registrant and Eli Lilly and Company.
	10	.19*(1)	Amendment to Agreement dated January 30, 2004 between Registrant and Eli Lilly and Company.
	10	.20*(1)	Amendment to Agreement dated November 11, 2004 between Registrant and Eli Lilly and Company.
	10	.21*(1)	Amendment to Agreement dated March 31, 2005 between Registrant and Eli Lilly and Company.
	10	.22*(1)	Collaboration Agreement dated August 20, 2004 between Registrant, F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.
	10	.23*(1)	Collaboration Agreement dated August 1, 2003 between Registrant and OSI Pharmaceuticals, Inc.
	10	.24(1)	Amendment to Agreement dated January 11, 2004 between Registrant and OSI Pharmaceuticals, Inc.
	10	.25*(1)	Amendment to Agreement dated February 1, 2005 between Registrant and OSI Pharmaceuticals, Inc.
	10	.26*(1)	Collaboration Agreement dated March 18, 2004 between Registrant and Serono International SA.
	10	.27*(1)	Collaboration Agreement dated December 1, 2003 between Registrant and UroGene, S.A. (which was acquired by Pierre Fabre Médicament in July 2005).
	10	.28*(1)	Amendment to Agreement dated December 16, 2004 between Registrant and UroGene, S.A. (predecessor-in-interest to Pierre Fabre Médicament) and related assignment agreements.
	10	.29*(1)	Drug Discovery Agreement dated July 1, 2005 between Registrant and Cystic Fibrosis Foundation Therapeutics, Inc.
	10	.30(1)	Memorandum of Understanding dated July 26, 2000 between the Advanced Photon Source and the Structural GenomiX Collaborative Access Team and related Collaborative Access Team User Agreement dated May 15, 2001 between Registrant, The University of Chicago and United States Department of Energy.
	10	.31(1)	Master Loan and Security Agreement No. 2081008 dated August 28, 2002 between Registrant and Oxford Finance Corporation, as amended.
	10	.32	First Amendment to Lease Agreement dated August 30, 2005 between Registrant and ARE-3770 Tansy Street, LLC.
	10	.33	Third Amendment to Lease Agreement dated August 30, 2005 between Registrant and ARE-10505 Roselle Street, LLC.
	10	.34	Loan and Security Agreement dated September 16, 2005 among Registrant, Oxford Finance Corporation and Silicon Valley Bank.
	23	.1	Consent of Independent Registered Public Accounting Firm.
	23	.2†	Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
	24	.1	Power of Attorney. Reference is made to the signature page hereto.

†	To be filed by amendment.
+	Indicates management contract or compensatory plan.
*	Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
(1)	Filed with the Registrant’s Registration Statement on Form S-1 on September 2, 2005.

EX-10.32

                                                                   EXHIBIT 10.32

                       FIRST AMENDMENT TO LEASE AGREEMENT

     THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "FIRST AMENDMENT") is made as
of August 30, 2005, by and between ARE-3770 TANSY STREET, LLC, a Delaware
limited liability company ("LANDLORD"), and SGX PHARMACEUTICALS, INC., a
Delaware corporation ("TENANT"), formerly known as STRUCTURAL GENOMIX, INC.

                                    RECITALS

     A. Landlord and Tenant are parties to that certain Lease Agreement dated as
of May 18, 2000 (the "LEASE"), pursuant to which Tenant leases certain space
containing approximately 15,410 rentable square feet in a building located at
3770 Tansy Street, San Diego, California (the "BUILDING"). Capitalized terms
used herein without definition shall have the meanings defined for such terms in
the Lease.

     B. ARE-10505 ROSELLE STREET, LLC, a Delaware limited liability company
("LANDLORD'S AFFILIATE"), and Tenant are parties to that certain Lease Agreement
dated as of July 12, 1999, as amended by that certain First Amendment to Lease
Agreement dated as of May 31, 2000, as further amended by that certain Second
Amendment to Lease Agreement dated as of May 18, 2000, and as further amended by
that certain Third Amendment to Lease Agreement dated as of August 30, 2005 (as
amended, the "OTHER LEASE"), pursuant to which Tenant leases certain space
containing approximately 17,603 rentable square feet in a building located at
10505 Roselle Street, San Diego, California (the "OTHER BUILDING").

     C. Landlord and Tenant desire to amend the Lease to, among other things,
extend the term of the Lease, subject to the terms and conditions set forth
below.

     NOW, THEREFORE, in consideration of the foregoing Recitals, which are
incorporated herein by this reference, the mutual promises and conditions
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:

1.   TERM. The definition of Term on Page 1 of the Lease is hereby amended and
     restated in its entirety as follows:

          "TERM: From the Area B Commencement Date until June 30, 2007"

2.   NO FURTHER EXTENSION RIGHT. Section 39 of the Lease is hereby deleted in
     its entirety.

3.   CAPITAL IMPROVEMENT ALLOWANCE. Landlord shall make available to Tenant a
     tenant improvement allowance of up to $25,000 (the "NEW TI ALLOWANCE").
     Tenant may use all or any portion of such amount at either the Building or
     the Other Building for Improvements (as hereinafter defined). As used
     herein, "IMPROVEMENTS" mean (i) construction of improvements at the
     Building (or, if applicable, the Other Building) desired by and to be
     performed by Tenant (subject to Landlord's or, if applicable, Landlord's
     Affiliate's supervision) and which improvements shall be of a fixed and
     permanent nature, and/or (ii) cosmetic improvements at the Building (or, if
     applicable, the Other Building) such as carpeting and painting. In
     addition, Tenant shall have the right to use the New TI Allowance to offset
     the cost of capital expenditures which Landlord (or Landlord's Affiliate)
     undertakes and for which Tenant is otherwise responsible for reimbursing
     Landlord (or, if applicable, Landlord's Affiliate) as part of operating
     expenses. Tenant acknowledges and agrees that (i) Landlord's (or, if

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     applicable, Landlord's Affiliate's) prior written consent shall be required
     with respect to the Improvements and that it shall be reasonable for
     Landlord (or, if applicable, Landlord's Affiliate's) to withhold its
     consent to any improvements which Landlord (or, if applicable, Landlord's
     Affiliate's) considers not to be substantially reusable after the
     expiration of the Term of the Lease (or, if applicable, the Other Lease),
     and (ii) upon the expiration of the Term of the Lease (or, if applicable,
     the Other Lease), the Improvements shall become the property of Landlord
     (or Landlord's Affiliate if the same are made at the Other Building) and
     may not be removed by Tenant. Except for the New TI Allowance, Tenant shall
     be solely responsible for all of the costs of the Improvements. The
     Improvements shall be treated as Alterations and shall be undertaken
     pursuant to Section 12 of the Lease (or, if undertaken at the Other
     Building then Section 12 of the Other Lease). Landlord shall have the right
     to review and approve all contracts entered into by Tenant in connection
     with the Improvements including, without limitation, the provisions in such
     contracts dealing with insurance, indemnity and lien waivers. Landlord
     shall not unreasonably delay its review and approval of such contracts.
     Landlord shall fund the New TI Allowance upon completion of the
     Improvements and upon presentation to Landlord of a draw request containing
     unconditional lien waivers and such other documents as are customary for
     construction projects in the San Diego area. Promptly following completion
     of the Improvements and prior to funding by Landlord, Tenant shall provide
     to Landlord: (i) sworn statements setting forth the names of all
     contractors and subcontractors who did the work on the Improvements; and
     (ii) "as built" plans for the Improvements. Any portion of the New TI
     Allowance not used by Tenant by September 30, 2006, shall be forfeited.

4.   MISCELLANEOUS.

     A. This First Amendment is the entire agreement between the parties with
     respect to the subject matter hereof and supersedes all prior and
     contemporaneous oral and written agreements and discussions. This First
     Amendment may be amended only by an agreement in writing, signed by the
     parties hereto.

     B. This First Amendment is binding upon and shall inure to the benefit of
     the parties hereto, their respective agents, employees, representatives,
     officers, directors, divisions, subsidiaries, affiliates, assigns, heirs,
     successors in interest and shareholders.

     C. This First Amendment may be executed in any number of counterparts, each
     of which shall be deemed an original, but all of which when taken together
     shall constitute one and the same instrument. The signature page of any
     counterpart may be detached therefrom without impairing the legal effect of
     the signature(s) thereon provided such signature page is attached to any
     other counterpart identical thereto except having additional signature
     pages executed by other parties to this First Amendment attached thereto.

     D. Landlord and Tenant each represent and warrant that it has not dealt
     with any broker, agent or other person (collectively, "BROKER") in
     connection with this transaction and that no Broker was the procuring cause
     of the transaction. Landlord and Tenant each hereby agree to indemnify and
     hold the other harmless from and against any claims by any Broker claiming
     a commission or other form of compensation by virtue of having dealt with
     Tenant or Landlord, as applicable, with regard to the transaction
     documented by this First Amendment.

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     E. Except as amended and/or modified by this First Amendment, the Lease is
     hereby ratified and confirmed and all other terms of the Lease shall remain
     in full force and effect, unaltered and unchanged by this First Amendment.
     Landlord hereby acknowledges that Tenant is not in default under the Lease.
     In the event of any conflict between the provisions of this First Amendment
     and the provisions of the Lease, the provisions of this First Amendment
     shall prevail. Whether or not specifically amended by this First Amendment,
     all of the terms and provisions of the Lease are hereby amended to the
     extent necessary to give effect to the purpose and intent of this First
     Amendment.

                       [SIGNATURES ARE ON THE NEXT PAGE.]

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     IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as of the day and year first above written.

LANDLORD:                             ARE-3770 TANSY STREET, LLC,
                                      a Delaware limited liability company

                                      By: ALEXANDRIA REAL ESTATE EQUITIES, L.P.,
                                          a Delaware limited partnership,
                                          its managing member

                                      By: ARE-QRS CORP.,
                                          a Maryland corporation,
                                          its general partner


                                      By: /s/ Jennifer Pappas
                                          --------------------------------------
                                      Its: V. P. and Assistant Secretary


TENANT:                               SGX PHARMACEUTICALS, INC.,
                                      a Delaware corporation


                                      By: /s/ M.G. Grey
                                          --------------------------------------
                                      Its: President and CEO

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EX-10.33

                                                                   EXHIBIT 10.33

                       THIRD AMENDMENT TO LEASE AGREEMENT

     THIS THIRD AMENDMENT TO LEASE AGREEMENT (this "THIRD AMENDMENT") is made as
of August 30, 2005, by and between ARE-10505 ROSELLE STREET, LLC, a Delaware
limited liability company ("LANDLORD"), and SGX PHARMACEUTICALS, INC., a
Delaware corporation ("TENANT"), formerly known as STRUCTURAL GENOMIX, INC.

                                    RECITALS

     A. Landlord and Tenant (formerly known as Protarch, Inc.) are parties to
that certain Lease Agreement dated as of July 12, 1999, as amended by that
certain First Amendment to Lease Agreement dated as of May 31, 2000, and as
further amended by that certain Second Amendment to Lease Agreement dated as of
May 18, 2000 (as amended, the "LEASE"), pursuant to which Tenant leases certain
space containing approximately 17,603 rentable square feet in a building located
at 10505 Roselle Street, San Diego, California (the "BUILDING"). Capitalized
terms used herein without definition shall have the meanings defined for such
terms in the Lease.

     B. ARE-3770 TANSY STREET, LLC, a Delaware limited liability company
("LANDLORD'S AFFILIATE"), and Tenant are parties to that certain Lease Agreement
dated as of May 18, 2000, as amended by that certain First Amendment to Lease
Agreement dated as of August 30, 2005 (as amended, the "OTHER LEASE"), pursuant
to which Tenant leases certain space containing approximately 15,410 rentable
square feet in a building located at 3770 Tansy Street, San Diego, California
(the "OTHER BUILDING").

     C. Landlord and Tenant desire to amend the Lease to, among other things,
extend the term of the Lease, subject to the terms and conditions set forth
below.

     NOW, THEREFORE, in consideration of the foregoing Recitals, which are
incorporated herein by this reference, the mutual promises and conditions
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:

1.   TERM. The definition of Term on Page 1 of the Lease is hereby amended and
     restated in its entirety as follows:

          "TERM: Commencing on the Commencement Date and expiring on June 30,
                 2007"

2.   CAPITAL IMPROVEMENT ALLOWANCE. Landlord shall make available to Tenant a
     tenant improvement allowance of up to $25,000 (the "NEW TI Allowance").
     Tenant may use all or any portion of such amount at either the Building or
     the Other Building for Improvements (as hereinafter defined). As used
     herein, "IMPROVEMENTS" mean (i) construction of improvements at the
     Building (or, if applicable, the Other Building) desired by and to be
     performed by Tenant (subject to Landlord's or, if applicable, Landlord's
     Affiliate's supervision) and which improvements shall be of a fixed and
     permanent nature, and/or (ii) cosmetic improvements at the Building (or, if
     applicable, the Other Building) such as carpeting and painting. In
     addition, Tenant shall have the right to use the New TI Allowance to offset
     the cost of capital expenditures which Landlord (or Landlord's Affiliate)
     undertakes and for which Tenant is otherwise responsible for reimbursing
     Landlord (or, if applicable, Landlord's Affiliate) as part of

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     operating expenses. Tenant acknowledges and agrees that (i) Landlord's (or,
     if applicable, Landlord's Affiliate's) prior written consent shall be
     required with respect to the Improvements and that it shall be reasonable
     for Landlord (or, if applicable, Landlord's Affiliate's) to withhold its
     consent to any improvements which Landlord (or, if applicable, Landlord's
     Affiliate's) considers not to be substantially reusable after the
     expiration of the Term of the Lease (or, if applicable, the Other Lease),
     and (ii) upon the expiration of the Term of the Lease (or, if applicable,
     the Other Lease), the Improvements shall become the property of Landlord
     (or Landlord's Affiliate if the same are made at the Other Building) and
     may not be removed by Tenant. Except for the New TI Allowance, Tenant shall
     be solely responsible for all of the costs of the Improvements. The
     Improvements shall be treated as Alterations and shall be undertaken
     pursuant to Section 12 of the Lease (or, if undertaken at the Other
     Building then Section 12 of the Other Lease). Landlord shall have the right
     to review and approve all contracts entered into by Tenant in connection
     with the Improvements including, without limitation, the provisions in such
     contracts dealing with insurance, indemnity and lien waivers. Landlord
     shall not unreasonably delay its review and approval of such contracts.
     Landlord shall fund the New TI Allowance upon completion of the
     Improvements and upon presentation to Landlord of a draw request containing
     unconditional lien waivers and such other documents as are customary for
     construction projects in the San Diego area. Promptly following completion
     of the Improvements and prior to funding by Landlord, Tenant shall provide
     to Landlord: (i) sworn statements setting forth the names of all
     contractors and subcontractors who did the work on the Improvements; and
     (ii) "as built" plans for the Improvements. Any portion of the New TI
     Allowance not used by Tenant by September 30, 2006, shall be forfeited.

3.   MISCELLANEOUS.

     A. This Third Amendment is the entire agreement between the parties with
     respect to the subject matter hereof and supersedes all prior and
     contemporaneous oral and written agreements and discussions. This Third
     Amendment may be amended only by an agreement in writing, signed by the
     parties hereto.

     B. This Third Amendment is binding upon and shall inure to the benefit of
     the parties hereto, their respective agents, employees, representatives,
     officers, directors, divisions, subsidiaries, affiliates, assigns, heirs,
     successors in interest and shareholders.

     C. This Third Amendment may be executed in any number of counterparts, each
     of which shall be deemed an original, but all of which when taken together
     shall constitute one and the same instrument. The signature page of any
     counterpart may be detached therefrom without impairing the legal effect of
     the signature(s) thereon provided such signature page is attached to any
     other counterpart identical thereto except having additional signature
     pages executed by other parties to this Third Amendment attached thereto.

     D. Landlord and Tenant each represent and warrant that it has not dealt
     with any broker, agent or other person (collectively, "BROKER") in
     connection with this transaction and that no Broker was the procuring cause
     of the transaction. Landlord and Tenant each hereby agree to indemnify and
     hold the other harmless from and against any claims by any Broker claiming
     a commission or other form of compensation by virtue of having dealt with
     Tenant or Landlord, as applicable, with regard to the transaction
     documented by this Third Amendment.

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     E. Except as amended and/or modified by this Third Amendment, the Lease is
     hereby ratified and confirmed and all other terms of the Lease shall remain
     in full force and effect, unaltered and unchanged by this Third Amendment.
     Landlord hereby acknowledges that Tenant is not in default under the Lease.
     In the event of any conflict between the provisions of this Third Amendment
     and the provisions of the Lease, the provisions of this Third Amendment
     shall prevail. Whether or not specifically amended by this Third Amendment,
     all of the terms and provisions of the Lease are hereby amended to the
     extent necessary to give effect to the purpose and intent of this Third
     Amendment.

                       [SIGNATURES ARE ON THE NEXT PAGE.]

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     IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment
as of the day and year first above written.

LANDLORD:                             ARE-10505 ROSELLE STREET, LLC,
                                      a Delaware limited liability company

                                      By: ALEXANDRIA REAL ESTATE EQUITIES, L.P.,
                                          a Delaware limited partnership,
                                          its managing member

                                      By: ARE-QRS CORP.,
                                          a Maryland corporation,
                                          its general partner


                                      By: /s/ Jennifer Pappas
                                          --------------------------------------
                                      Its: V. P. and Assistant Secretary


TENANT:                               SGX PHARMACEUTICALS, INC.,
                                      a Delaware corporation


                                      By: /s/ M.G. Grey
                                          --------------------------------------
                                      Its: President and CEO

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                                      S-1

EX-10.34

                                                                   EXHIBIT 10.34

                           LOAN AND SECURITY AGREEMENT

     THIS LOAN AND SECURITY AGREEMENT (the "Agreement") dated September 16, 2005
by and among OXFORD FINANCE CORPORATION ("Oxford"); SILICON VALLEY BANK, a
California-chartered bank, with its principal place of business at 3003 Tasman
Drive, Santa Clara, California 95054 ("SVB") (SVB and the Oxford each
individually a "Lender", and collectively the "Lenders"), and SGX
PHARMACEUTICALS, INC. (formerly known as STRUCTURAL GENOMIX, INC.), a Delaware
corporation, whose address is 10505 Roselle Street, San Diego, California 92121
("Borrower") provides the terms on which Lenders shall lend to Borrower and
Borrower shall repay Lenders. The parties agree as follows:

1    ACCOUNTING AND OTHER TERMS

     Accounting terms not defined in this Agreement shall be construed following
GAAP. Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation," in this
or any Loan Document. Capitalized terms in this Agreement shall have the
meanings as set forth in Section 13. All other terms contained in this
Agreement, unless otherwise indicated, shall have the meanings provided by the
Code, to the extent such terms are defined therein.

2    LOANS AND TERMS OF PAYMENT

     2.1 PROMISE TO PAY.

     Borrower hereby unconditionally promises to pay Lenders the unpaid
principal amount of all Credit Extensions hereunder with all interest, fees and
finance charges due thereon as and when due in accordance with this Agreement.

     2.1.1 EQUIPMENT ADVANCES.

     (a) Availability. Subject to the terms and conditions of this Agreement,
Lenders agree, severally and not jointly, to lend to Borrower from time to time
prior to the Equipment Commitment Termination Date, advances (each an "Equipment
Advance" and collectively the "Equipment Advances") in an aggregate amount not
to exceed the Equipment Commitment Amount according to each Lender's pro rata
share of the Equipment Commitment Amount (based upon the respective Equipment
Commitment Percentage of each Lender). When repaid, the Equipment Advances may
not be re-borrowed. Lenders' obligation to make Equipment Advances shall
terminate on the earlier of (i) the occurrence and continuance of an Event of
Default, or (ii) the Equipment Commitment Termination Date. The Equipment
Advances may only be used to finance or refinance Eligible Equipment purchased
on or after 90 days before the date of each Equipment Advance (determined based
upon the applicable invoice date of such Eligible Equipment) (provided that any
Equipment Advances made on or after April 1, 2006 and before May 31, 2006 may be
used to finance or refinance Eligible Equipment purchased on or after January 1,
2006 (determined based upon the applicable invoice date of such Eligible
Equipment)) and may not exceed one hundred percent (100%) of the Original Stated
Cost of the Financed Equipment. Each Equipment Advance must be for a minimum of
One Hundred Thousand Dollars ($100,000). The number of Equipment Advances is
limited to twice per month.


                                                                               1



     (b) Procedure. To obtain an Equipment Advance, Borrower must notify Lenders
(the notice is irrevocable) by facsimile no later than 12:00 p.m. Pacific time
seven (7) Business Days before the day on which the Equipment Advance is to be
made ("Equipment Advance Funding Date"). Borrower shall deliver to Lenders a
completed supplement in substantially the form attached as Exhibit C (the "Loan
Supplement"), signed by a Responsible Officer, or his or her designee, copies of
invoices for the Financed Equipment and such additional information as Lenders
may reasonably request at least five (5) Business Days before the proposed
Equipment Advance Funding Date. In addition, the notice in the form of Exhibit B
(Payment/Advance Form) and a Note payable to each Lender in the form of Exhibit
H must be signed by a Responsible Officer or designee and include a copy of the
invoice for the Financed Equipment being financed. On the Equipment Advance
Funding Date, each Lender shall credit and/or transfer (as applicable) to
Borrower's deposit account, an amount equal to its Equipment Commitment
Percentage multiplied by the amount of the Equipment Advance. Each Lender may
make Equipment Advances under this Agreement based on instructions from a
Responsible Officer or his or her designee or without instructions if the
Equipment Advances are necessary to meet Obligations which have become due. Each
Lender may rely on any telephone notice given by a person whom such Lender
believes is a Responsible Officer or designee. Borrower shall indemnify each
Lender for any loss Lender suffers due to such reliance.

     2.1.2 GROWTH CAPITAL LOAN FACILITY.

     (a) Availability. Subject to the terms and conditions of this Agreement,
Lenders agree, severally and not jointly, to lend to Borrower from time to time
prior to the Growth Capital Commitment Termination Date, advances (each a
"Growth Capital Advance" and collectively the "Growth Capital Advances") in an
aggregate amount not to exceed the Growth Capital Loan Commitment according to
each Lender's pro rata share of the Growth Capital Loan Commitment (based upon
the respective Growth Capital Commitment Percentage of each Lender). When
repaid, the Growth Capital Advances may not be re-borrowed. Lenders' obligation
to lend hereunder shall terminate on the earlier of (i) the occurrence and
continuance of an Event of Default, or (ii) the Growth Capital Commitment
Termination Date. For purposes of this Section, the minimum amount of each
Growth Capital Advance is One Million Dollars ($1,000,000).

     (b) Borrowing Procedure. To obtain a Growth Capital Advance, Borrower must
notify Lenders by facsimile or telephone by 12:00 p.m. Pacific Time seven (7)
Business Days prior to the date the Growth Capital Advance is to be made. If
such notification is by telephone, Borrower must promptly confirm the
notification by delivering to Lenders a completed Payment/Advance Form in the
form attached as Exhibit B. In addition, a Note payable to each Lender in the
form of Exhibit G must be signed by a Responsible Officer or designee. On the
Growth Capital Funding Date, each Lender shall credit and/or transfer (as
applicable) to Borrower's deposit account, an amount equal to its Growth Capital
Commitment Percentage multiplied by the amount of the Growth Capital Advance.
Each Lender may make Growth Capital Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Growth Capital Advances are necessary to meet Obligations
which have become due. Each Lender may rely on any telephone notice given by a
person whom such Lender believes is a Responsible Officer or designee. Borrower
shall indemnify each Lender for any loss Lender suffers due to such reliance.


                                                                               2



     2.2 TERMINATION OF COMMITMENT TO LEND.

     Each Lender's obligation to lend the undisbursed portion of the Obligations
shall terminate if, in such Lender's sole discretion made in good faith, there
has been a material adverse change in the general affairs, management, results
of operation, condition (financial or otherwise) of Borrower or the prospect of
repayment of the Obligations, or there has been any material adverse deviation
by Borrower from the most recent business plan of Borrower presented to and
accepted by Lenders prior to the execution of this Agreement.

     2.3 REPAYMENT OF CREDIT EXTENSIONS ON EQUIPMENT ADVANCES AND GROWTH CAPITAL
ADVANCES.

     (a) Principal and Interest Payments on Payment Dates.

          (i) Equipment Advances. For each Equipment Advance, Borrower shall
make equal monthly payments of principal and interest, calculated by the Lenders
based upon: (1) the amount of the Equipment Advance, (2) the interest rate
applicable thereto as determined in accordance with Section 2.3(b) of this
Agreement, and (3) an amortization schedule equal to the Equipment Advance
Repayment Period, on the first Business Day of the month following the month in
which the Equipment Advance Funding Date occurs (or commencing on the Equipment
Advance Funding Date if the Equipment Advance Funding Date is the first Business
Day of the month) with respect to such Equipment Advance and continuing
thereafter during the Equipment Advance Repayment Period on the first Business
Day of each successive calendar month (each an "Equipment Advance Payment
Date"). All unpaid principal and accrued interest is due and payable in full on
the Equipment Advance Maturity Date with respect to such Equipment Advance. An
Equipment Advance may only be prepaid in accordance with Sections 2.3(c), 2.3(d)
and 2.3(e).

          (ii) Growth Capital Advance. For each Growth Capital Advance, Borrower
shall make monthly payments of interest only commencing on the first Business
Day of the month following the month in which the Growth Capital Funding Date
occurs (or commencing on the Growth Capital Funding Date if the Growth Capital
Funding Date is the first Business Day of the month) with respect to such Growth
Capital Advance and continuing thereafter on the first Business Day of each
successive calendar month (each a "Growth Capital Interest Only Payment Date")
during the Growth Capital Interest Only Period. Commencing on the Growth Capital
Amortization Date, Borrower shall make thirty-six (36) equal monthly payments of
principal and interest which would fully amortize the outstanding Growth Capital
Advances as of the Growth Capital Amortization Date over the Growth Capital
Repayment Period (individually, the "Growth Capital Scheduled Payment", and
collectively, "Growth Capital Scheduled Payments") and on the first Business Day
of each successive month and continuing thereafter during the Growth Capital
Repayment Period on the first Business Day of each successive calendar month
(each a "Growth Capital Scheduled Payment Date "). All unpaid principal and
accrued interest is due and payable in full on the Growth Capital Maturity Date.
A Growth Capital Advance may only be prepaid in accordance with Sections 2.3(c)
and 2.3(d). Each Growth Capital Interest Only Payment Date and each Growth
Capital Scheduled Payment Date are sometimes referred to as a "Growth Capital
Payment Date."

          (iii) Payments received as to an Equipment Advance or a Growth Capital
Advance after 12:00 noon Pacific time are considered received at the opening of
business on the next Business Day.

     (b) Interest Rate.


                                                                               3



          (i) Equipment Advances. Borrower shall pay interest on each Equipment
Advance Payment Date on the unpaid principal amount of each Equipment Advance
until the Equipment Advance has been paid in full, at the fixed rate equal to
the greater of: (i) ten percent (10%) per annum, or (ii) six and one-tenth
percent (6.1%) per annum in excess of the Treasury Rate as of the date of the
Equipment Advance Funding Date, determined by Lenders for each Equipment
Advance. Interest is computed on the basis of a 360 day year of twelve 30-day
months.

          (ii) Growth Capital Loans. Borrower shall pay interest on each Growth
Capital Payment Date on the unpaid principal amount of each Growth Capital
Advance until the Growth Capital Advance has been paid in full, at the fixed
rate equal to the greater of: (i) ten percent (10%) per annum, or (ii) six and
one-tenth percent (6.1%) per annum in excess of the Treasury Rate as of the date
of the Growth Capital Funding Date, determined by Lenders for each Growth
Capital Advance. Interest is computed on the basis of a 360 day year of twelve
30-day months.

          (iii) Default Rate. Any amounts outstanding under the Equipment
Advances, or Growth Capital Advances during the continuance of an Event of
Default shall bear interest at a per annum rate equal to the Default Rate.

     (c) Mandatory Prepayment Upon an Acceleration. If the Equipment Advances
and/or the Growth Capital Advances are accelerated following the occurrence of
an Event of Default or otherwise, Borrower shall immediately pay to Lenders an
amount equal to the sum of: (i) all outstanding principal plus accrued interest,
(ii) the Prepayment Fee, plus (iii) all other sums, if any, that shall have
become due and payable, including interest at the Default Rate with respect to
any past due amounts.

     (d) Permitted Prepayment of Loans. Borrower shall have the option to prepay
all, but not less than all, of the Equipment Advances or the Growth Capital
Advances advanced by Lenders under this Agreement, provided Borrower (i)
provides written notice to Lenders of its election to prepay the Equipment
Advances or the Growth Capital Advances at least thirty (30) days prior to such
prepayment, and (ii) pays, on the date of such prepayment (A) all outstanding
principal plus accrued interest, (B) the Prepayment Fee (except as provided in
Section 7.2 or Section 7.3), plus (C) all other sums, if any, that shall have
become due and payable, including interest at the Default Rate with respect to
any past due amounts. Borrower shall have the option to prepay all, but not less
than all, of the Equipment Advances and the Growth Capital Advances advanced by
Lenders under this Agreement, if Lenders do not give the consent described in
Section 7.2 or Section 7.3 provided Borrower (i) provides written notice to
Lenders of its election to so prepay, and (ii) pays, on the date of such
prepayment (A) all outstanding principal plus accrued interest, plus (B) all
other sums, if any, that shall have become due and payable, including interest
at the Default Rate with respect to any past due amounts.

     (e) Prepayment of Equipment Advances upon an Event of Loss. Borrower shall
bear the risk of any loss, theft, destruction, or damage of or to the Financed
Equipment. If during the term of this Agreement any item of Financed Equipment
becomes obsolete or is lost, stolen, destroyed, damaged beyond repair, rendered
permanently unfit for use, or seized by a governmental authority for any reason
for a period equal to at least the remainder of the term of this Agreement (an
"Event of Loss"), then in each case:


                                                                               4



          (i) if no Event of Default has occurred or is continuing, within ten
(10) days following the Event of Loss, at Borrower's option, Borrower shall (x)
pay to Lenders on account of the Obligations an amount equal to (1) the ratio
(expressed as a percentage) of (A) the Original Stated Costs of the item(s) of
Financed Equipment subject to the Event of Loss to (B) the Equipment Advance
Loan Amount for the Equipment Advance financing such item(s) of Financed
Equipment, multiplied by (2) all accrued and unpaid interest with respect to the
applicable Equipment Advance(s) to the date of the prepayment, plus all
outstanding principal with respect to the applicable Equipment Advance(s); or
(y) repair or replace any Financed Equipment subject to an Event of Loss
provided the repaired or replaced Financed Equipment is of equal or like value
to the Financed Equipment subject to an Event of Loss and provided further that
Lenders have a first priority perfected security interest in such repaired or
replaced Financed Equipment;

          (ii) if an Event of Default has occurred and is continuing (and so
long as the Equipment Advances have not been accelerated, in which case the
amounts owing shall be governed by Section 2.3(c) and 9.1(a)), within ten (10)
days following the Event of Loss, Borrower shall pay to Lenders on account of
the Obligations an amount equal to (1) the ratio (expressed as a percentage) of
(A) the Original Stated Costs of the item(s) of Financed Equipment subject to
the Event of Loss to (B) the Equipment Advance Loan Amount for the Equipment
Advance financing such item(s) of Financed Equipment, multiplied by (2) all
accrued and unpaid interest with respect to the applicable Equipment Advance(s)
to the date of the prepayment, plus all outstanding principal with respect to
the applicable Equipment Advance(s); plus (3) all other sums, if any, that shall
have become due and payable, including interest at the Default Rate with respect
to any past due amounts.

     (f) Debit of Accounts. SVB may debit any of Borrower's deposit accounts
including Account Number 3300295549 for principal and interest payments or any
other amounts Borrower owes SVB hereunder. These debits shall not constitute a
set-off. Borrower shall separately set up an ACH payment structure in favor of
Oxford, satisfactory to Oxford.

     2.4 FEES.

     Borrower will pay to Lenders:

     (a) Loan Fee. A fully earned, non-refundable Loan Fee of $20,000 (to be
shared between SVB and the Oxford pursuant to their respective Growth Capital
Commitment Percentages) is due on the Effective Date.

     (b) Prepayment Fee. The Prepayment Fee, as defined herein, if and when
applicable.

     (c) Lenders Expenses. All Lenders Expenses (including reasonable attorneys'
fees and reasonable expenses) incurred through and after the Effective Date,
when due. Borrower has paid Lenders a good faith deposit of $10,000 (the "Good
Faith Deposit"). Any portion of the Good Faith Deposit not utilized to pay
Lenders Expenses in connection with the documentation, negotiation and closing
of this Agreement and the Loan Documents shall be refunded to Borrower after the
determination of such Lenders Expenses.

3    CONDITIONS OF LOANS

     3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.

     The Lenders' agreement to make the initial Credit Extension is subject to
the condition precedent that Lenders shall have received, in form and substance
satisfactory to Lenders, such documents and completion of such other matters, as
Lenders may reasonably deem necessary or appropriate, including, without
limitation, the following:


                                                                               5



     (a) this Agreement;

     (b) a certificate of the Secretary of Borrower with respect to articles,
by-laws, incumbency and resolutions authorizing the execution and delivery of
this Agreement;

     (c) Perfection Certificate by Borrower;

     (d) an Intercreditor Agreement;

     (e) financing statements (Forms UCC-1);

     (f) GECC has released its fixture filing against certain of Borrower's
assets in San Diego County, in form acceptable to Lenders:

     (g) Account Control Agreement/Investment Account Control Agreements (SVB
and other financial institutions);

     (h) insurance certificate;

     (i) payment of the fees and Lenders Expenses then due specified in Section
2.4 hereof;

     (j) Certificate of Foreign Qualification (if applicable);

     (k) Certificate of Good Standing/Legal Existence; and

     (l) such other documents, and completion of such other matters, as Lenders
may reasonably deem necessary or appropriate.

     3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.

     The obligations of Lenders to make each Credit Extension, including the
initial Credit Extension, is subject to the following:

     (a) timely receipt of any Payment/Advance Form.

     (b) Borrower shall have duly executed and delivered to each Lender a Note
in the amount of such Lender's Equipment Advance or Growth Capital Advance, as
applicable.

     (c) with respect to an Equipment Advance only, a Loan Supplement.

     (d) For each Growth Capital Advance or Equipment Advance, a Warrant to
Purchase Stock for SVB in the form of Exhibit D for the number of shares of
Series B Preferred Stock equal to 4.8% of such Growth Capital Advance or
Equipment Advance made by SVB divided by $4.71 (rounded to the nearest whole
number) duly executed and delivered by Borrower.

     (e) For each Growth Capital Advance or Equipment Advance, a Warrant to
Purchase Stock for Oxford in the form of Exhibit E for the number of shares of
Series B Preferred Stock equal to 4.8% of such Growth Capital Advance or
Equipment Advance made by Oxford divided by $4.71 (rounded to the nearest whole
number) duly executed and delivered by Borrower.


                                                                               6



     (f) the representations and warranties in Section 5 shall be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default shall have occurred and be continuing,
or result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
in Section 5 remain materially true.

4    CREATION OF SECURITY INTEREST

     4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to each Lender, to
secure the payment and performance in full of all of the Obligations and the
performance of each of Borrower's duties under the Loan Documents, a continuing
security interest in, and pledges and assigns to each Lender the Collateral,
wherever located, whether now owned or hereafter acquired or arising, and all
proceeds and products thereof. Borrower warrants and represents that the
security interest granted herein shall be a first priority security interest in
the Collateral. SVB may place a "hold" on any certificates of deposit or deposit
or investment accounts pledged as Collateral to secure cash management services,
corporate business credit cards or letters of credit separately issued or
supplied by SVB under separate agreements between SVB and Borrower.

     Borrower agrees that any disposition of the Collateral in violation of this
Agreement, by either the Borrower or any other Person, shall be deemed to
violate the rights of the Lenders under the Code. If the Agreement is
terminated, Lenders' lien and security interest in the Collateral shall continue
until Borrower fully satisfies its Obligations. If Borrower shall at any time,
acquire a commercial tort claim, Borrower shall promptly notify Lenders in a
writing signed by Borrower of the brief details thereof and grant to Lenders in
such writing a security interest therein and in the proceeds thereof, all upon
the terms of this Agreement, with such writing to be in form and substance
satisfactory to Lenders.

     Upon the indefeasible payment in full in cash of all Obligations under this
Agreement and the termination of any obligation of any Lender to make Credit
Extensions hereunder, Lenders shall execute and deliver to Borrower, at
Borrower's sole cost and expense, all documents and instruments as shall be
reasonably necessary to evidence termination of the security interest in the
Collateral created hereunder, including a UCC-3 Termination Statement.

     4.2 AUTHORIZATION TO FILE FINANCING STATEMENTS.

     Borrower hereby authorizes Lenders to file financing statements, without
notice to Borrower, with all appropriate jurisdictions, in order to perfect or
protect Lenders' interest or rights hereunder.

5    REPRESENTATIONS AND WARRANTIES

     Borrower represents and warrants to each Lender as follows:

     5.1 DUE ORGANIZATION AND AUTHORIZATION.

     Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified, except where the failure to do so could
not reasonably be expected to cause a Material Adverse Change. In connection
with this Agreement, the Borrower delivered to Lenders a certificate signed by
the Borrower and entitled "Perfection Certificate". The Borrower represents and
warrants to each Lender that: (a) the Borrower's exact legal name is that
indicated on the Perfection Certificate and on the signature page hereof; (b)
the Borrower is an organization of the type, and is organized in the
jurisdiction, set forth in the Perfection Certificate; (c) the Perfection
Certificate accurately sets forth the Borrower's


                                                                               7



organizational identification number or accurately states that the Borrower has
none; (d) the Perfection Certificate accurately sets forth the Borrower 's place
of business, or, if more than one, its chief executive office as well as the
Borrower's mailing address if different, and (e) all other information set forth
on the Perfection Certificate pertaining to the Borrower is accurate and
complete. If the Borrower does not now have an organizational identification
number, but later obtains one, Borrower shall forthwith notify the Lenders of
such organizational identification number.

     The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's organizational documents,
nor constitute an event of default under any material agreement by which
Borrower is bound. Borrower is not in default under any agreement to which or by
which it is bound in which the default could reasonably be expected to cause a
Material Adverse Change.

     5.2 COLLATERAL.

     Borrower has good title to the Collateral, free of Liens except Permitted
Liens. Borrower has no deposit account, other than the deposit accounts with SVB
and deposit accounts described in the Perfection Certificate delivered to
Lenders in connection herewith. The Accounts are bona fide, existing
obligations, and the service or property has been performed or delivered to the
account debtor or its agent for immediate shipment to and unconditional
acceptance by the account debtor. The Collateral is not in the possession of any
third party bailee (such as a warehouse). Except as hereafter disclosed to the
Lenders in writing by Borrower, none of the components of the Collateral shall
be maintained at locations other than as provided in the Perfection Certificate.
In the event that Borrower, after the date hereof, intends to store or otherwise
deliver any portion of the Collateral to a bailee, then Borrower will first
receive the written consent of Lenders and such bailee must acknowledge in
writing that the bailee is holding such Collateral for the benefit of Lenders.
All Inventory is in all material respects of good and marketable quality, free
from material defects. Borrower is the sole owner of the Intellectual Property,
except for non-exclusive licenses granted to its customers in the ordinary
course of business. Each Patent is valid and enforceable and no part of the
Intellectual Property has been judged invalid or unenforceable, in whole or in
part, and no claim has been made that any part of the Intellectual Property
violates the rights of any third party, except to the extent such claim could
not reasonably be expected to cause a Material Adverse Change.

     5.3 LITIGATION.

     Except as shown in the Perfection Certificate, there are no actions or
proceedings pending or, to the knowledge of Borrower's Responsible Officers,
threatened by or against Borrower or any Subsidiary in which an adverse decision
could reasonably be expected to cause a Material Adverse Change.

     5.4 NO MATERIAL DETERIORATION IN FINANCIAL STATEMENTS.

     All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Lenders fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Lenders, although Borrower's cash may have declined to
pay necessary and ordinary course business expenses.


                                                                               8



     5.5 SOLVENCY.

     The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.

     5.6 REGULATORY COMPLIANCE.

     Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could reasonably be expected to cause a Material Adverse Change. None of
Borrower's or any Subsidiary's properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP.
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that are necessary to continue its business as
currently conducted, except where the failure to make such declarations, notices
or filings would not reasonably be expected to cause a Material Adverse Change.

     5.7 SUBSIDIARIES.

     Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.

     5.8 FULL DISCLOSURE.

     No written representation, warranty or other statement of Borrower in any
certificate or written statement given to any Lender (taken together with all
such written certificates and written statements given to any Lender) contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements contained in the certificates or statements not
misleading, it being recognized by Lenders that the projections and forecasts
provided by Borrower in good faith and based upon reasonable assumptions are not
viewed as facts and that actual results during the period or periods covered by
such projections and forecasts may differ from the projected or forecasted
results.

6    AFFIRMATIVE COVENANTS

     Borrower shall do all of the following for so long as any Lender has an
obligation to make any Credit Extension, or there are outstanding Obligations:


                                                                               9



     6.1 GOVERNMENT COMPLIANCE.

     Borrower shall maintain its and all Subsidiaries' legal existence and good
standing as a Registered Organization and maintain qualification in each
jurisdiction in which the failure to so qualify would reasonably be expected to
have a material adverse effect on Borrower's business or operations. Borrower
shall comply, and have each Subsidiary comply, with all laws, ordinances and
regulations to which it is subject, noncompliance with which could have a
material adverse effect on Borrower's business or operations.

     6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.

     (a) So long as Borrower is not subject to the reporting requirements of
Sections 12 or 15 of the Securities and Exchange Act, as amended, Borrower shall
deliver to Lenders: (i) as soon as available, but no later than thirty (30) days
after the last day of each month, a company prepared consolidated balance sheet
and income statement covering Borrower's consolidated operations during the
period certified by a Responsible Officer and in a form acceptable to Lenders;
(ii) as soon as available, but no later than one hundred eighty (180) days after
the last day of Borrower's fiscal year, audited consolidated financial
statements prepared under GAAP, consistently applied, together with an
unqualified opinion on the financial statements from an independent certified
public accounting firm reasonably acceptable to Lenders; (iii) annual financial
projections approved by Borrower's Board of Directors consistent in form and
detail with those provided to Borrower's venture capital investors as soon as
available, but no later than sixty (60) days after Board approval; and (iv)
budgets, sales projections, operating plans or other financial information
reasonably requested by Lenders.

     (b) In the event that the Borrower's stock becomes publicly held, Borrower
shall deliver to Lenders, within five (5) days of filing, copies of or
electronic links to (in the case of electronic links being provided to Lenders,
Borrower shall still be required to submit to Lenders the applicable compliance
certificate in the form of Exhibit F) all statements, reports and notices made
available to Borrower's security holders or to any holders of Subordinated Debt
and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission.

     (c) In addition, Borrower shall deliver to Lenders: (i) a prompt report of
any legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of One Hundred
Thousand Dollars ($100,000.00) or more; and (ii) such other financial
information as Lenders may reasonably request from time to time.

     (d) Within thirty (30) days after the last day of each month, Borrower
shall deliver to Lenders a Compliance Certificate signed by a Responsible
Officer in the form of Exhibit F.

     6.3 INVENTORY; RETURNS.

     Borrower shall keep all Inventory in good and marketable condition, free
from material defects. Returns and allowances between Borrower and its account
debtors shall follow Borrower's customary practices as they exist at the
Effective Date. Borrower must promptly notify Lenders of all returns,
recoveries, disputes and claims, which involve more than $50,000.

     6.4 TAXES.

     Borrower shall make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments (other than taxes
and assessments which Borrower is contesting in good faith, with adequate
reserves maintained in accordance with GAAP) and will deliver to Lenders, on
demand, appropriate certificates attesting to such payments.


                                                                              10



     6.5 INSURANCE.

     Borrower shall keep its business and the Collateral insured for risks and
in amounts standard for companies in Borrower's industry and location and as
Lenders may reasonably request. Insurance policies shall be in a form, with
companies, and in amounts that are satisfactory to Lenders. All property
policies shall have a lender's loss payable endorsement showing each Lender as
an additional loss payee and waive subrogation against Lenders, and all
liability policies shall show, or have endorsements showing, each Lender as an
additional insured. All policies (or the loss payable and additional insured
endorsements) shall provide that the insurer must give Lenders at least thirty
(30) days notice before canceling, amending, or declining to renew its policy.
At Lenders' request, Borrower shall deliver certified copies of policies and
evidence of all premium payments. Proceeds payable under any policy shall, at
Lenders' option, be payable to Lenders on account of the Obligations.
Notwithstanding the foregoing and other than with respect to Financed Equipment
which is governed by Section 2.3(e), (a) so long as no Event of Default has
occurred and is continuing, Borrower shall have the option of applying the
proceeds of any casualty policy up to $25,000, in the aggregate, toward the
replacement or repair of destroyed or damaged property; provided that any such
replaced or repaired property (i) shall be of equal or like value as the
replaced or repaired Collateral and (ii) shall be deemed Collateral in which
Lenders have been granted a first priority security interest, and (b) after the
occurrence and during the continuance of an Event of Default, all proceeds
payable under such casualty policy shall, at the option of Lenders, be payable
to Lenders on account of the Obligations. If Borrower fails to obtain insurance
as required under this Section 6.5 or to pay any amount or furnish any required
proof of payment to third persons and Lenders, Lenders may make all or part of
such payment or obtain such insurance policies required in this Section 6.5, and
take any action under the policies Lenders deem prudent.

     6.6 ACCOUNTS.

     (a) Borrower shall maintain Borrower's primary depository and operating
accounts and securities accounts with SVB, which accounts shall represent at
least 15% of the dollar value of the Borrower's accounts at all financial
institutions.

     (b) Borrower shall identify to Lenders, in writing, any bank or securities
account opened by Borrower with any institution other than SVB. In addition, for
each such account that the Borrower at any time opens or maintains, Borrower
shall, at the Lenders' request and option, pursuant to an agreement in form and
substance acceptable to the Lenders cause the depository bank or securities
intermediary to agree that such account is the collateral of Lenders pursuant to
the terms hereunder. The provisions of the previous sentence shall not apply to
deposit accounts exclusively used for payroll, payroll taxes and other employee
wage and benefit payments to or for the benefit of the Borrower's employees.

     6.7 INTELLECTUAL PROPERTY.

     Borrower shall: (i) protect, defend and maintain the validity and
enforceability of the Intellectual Property; (ii) promptly advise Lenders in
writing of material infringements of the Intellectual Property; and (iii) not
allow any Intellectual Property material to the Borrower's business to be
abandoned, forfeited or dedicated to the public without Lenders' written
consent.


                                                                              11



     6.8 FURTHER ASSURANCES.

     Borrower shall execute any further instruments and take further action as
Lenders reasonably request to perfect or continue Lenders' security interest in
the Collateral or to effect the purposes of this Agreement.

7    NEGATIVE COVENANTS

     Borrower shall not do any of the following without the Lenders' prior
written consent for so long as any Lender has an obligation to make Credit
Extensions or there are any outstanding Obligations:

     7.1 DISPOSITIONS.

     Convey, sell, lease, transfer or otherwise dispose of (collectively a
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, except for Transfers (i) of Inventory in the ordinary
course of business; (ii) of worn-out or obsolete Equipment not constituting
Financed Equipment; (iii) of licenses and similar arrangements for the use of
the Intellectual Property of Borrower or its Subsidiaries in the ordinary course
of business, including licensing of Intellectual Property to partnership in bona
fide corporate collaborations; or (iv) such other Transfers not to exceed
$50,000 in the aggregate in any fiscal year.

     7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR LOCATIONS OF COLLATERAL.

     Engage in or permit any of its Subsidiaries to engage in any business other
than the businesses currently engaged in by Borrower or reasonably related
thereto, or have a material change in its ownership (other than by the sale of
Borrower's equity securities in a public offering or to venture capital
investors so long as Borrower identifies to Lenders the venture capital
investors prior to the closing of the investment), or a material change in
management; provided, however, if Lenders do not consent to such material change
in ownership or material change in management, then Borrower may prepay all of
the Obligations without payment of the Prepayment Fee. Borrower shall not,
without at least thirty (30) days prior written notice to Lenders: (i) relocate
its chief executive office, or add any new offices or business locations,
including warehouses (unless such new offices or business locations contain less
than Five Thousand Dollars ($5,000) in Borrower's assets or property), or (ii)
change its jurisdiction of organization, or (iii) change its organizational
structure or type, or (iv) change its legal name, or (v) change any
organizational number (if any) assigned by its jurisdiction of organization.

     7.3 MERGERS OR ACQUISITIONS.

     Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person; provided, however, if Lenders do not consent to such
a transaction, then Borrower may prepay all of the Obligations without payment
of the Prepayment Fee. A Subsidiary may merge or consolidate into another
Subsidiary or into Borrower.

     7.4 INDEBTEDNESS.

     Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.


                                                                              12



     7.5 ENCUMBRANCE.

     Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
herein. The Collateral may also be subject to Permitted Liens. Except as
permitted under Section 7.1, Borrower shall not sell, transfer, assign,
mortgage, pledge, lease, grant a security interest in, or encumber, or enter
into any agreement, document, instrument or other arrangement (except with or in
favor of Lenders) with any Person which directly or indirectly prohibits or has
the effect of prohibiting Borrower from selling, transferring, assigning,
mortgaging, pledging, leasing, granting a security interest in or upon, or
encumbering any of Borrower's Intellectual Property.

     7.6 DISTRIBUTIONS; INVESTMENTS.

     (i) Directly or indirectly acquire or own any Person, or make any
Investment in any Person, other than Permitted Investments or mergers or
acquisitions permitted by Section 7.3 above, or permit any of its Subsidiaries
to do so; or (ii) pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock except (a) dividends and
distributions payable solely in capital stock of Borrower and (b) repurchases of
stock from former employees, consultants or directors of Borrower under the
terms of applicable repurchase agreements in an aggregate amount not to exceed
$50,000 in the aggregate in any fiscal year, provided that no Event of Default
has occurred, is continuing or would exist after giving effect to any such
repurchase.

     7.7 TRANSACTIONS WITH AFFILIATES.

     Directly or indirectly enter into or permit to exist any material
transaction with any Affiliate of Borrower except for transactions that are in
the ordinary course of Borrower's business, upon fair and reasonable terms that
are no less favorable to Borrower than would be obtained in an arm's length
transaction with a non-affiliated Person.

     7.8 SUBORDINATED DEBT.

     Make or permit any payment on any Subordinated Debt, except under the terms
of the Subordinated Debt, or amend any provision in any document relating to the
Subordinated Debt without Lenders' prior written consent.

     7.9 COMPLIANCE.

     Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Credit Extension for that purpose; fail to meet the minimum
funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair
Labor Standards Act or violate any other law or regulation, if the violation
could reasonably be expected to have a material adverse effect on Borrower's
business or operations or would reasonably be expected to cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.

     7.10 INDEBTEDNESS PAYMENTS.

     (i) Prepay, redeem, purchase, defease or otherwise satisfy in any manner
prior to the scheduled repayment thereof any Indebtedness for borrowed money
(other than amounts due under this Agreement or due any Lender) or lease
obligations, (ii) amend, modify or otherwise change the terms of any
Indebtedness for borrowed money or lease obligations so as to accelerate the
scheduled repayment thereof or (iii) repay any notes to officers, directors or
shareholders.


                                                                              13



8    EVENTS OF DEFAULT

     Any one of the following is an Event of Default:

     8.1 PAYMENT DEFAULT.

     Borrower fails to pay any of the Obligations within three (3) days after
their due date. During the additional period the failure to cure the default
shall not constitute an Event of Default (but no Credit Extension shall be made
during such cure period).

     8.2 COVENANT DEFAULT.

     (a) If Borrower fails to perform any obligation under Sections 6.2 or 6.7
or violates any of the covenants contained in Section 7 of this Agreement, or

     (b) If Borrower fails or neglects to perform, keep, or observe any other
material term, provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and any Lender and as to any default under such other
term, provision, condition, covenant or agreement that can be cured, has failed
to cure such default within ten (10) days after the occurrence thereof;
provided, however, that if the default cannot by its nature be cured within the
ten (10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional reasonable period (which
shall not in any case exceed thirty (30) days after the end of such 10 day
period) to attempt to cure such default, and within such reasonable time period
the failure to have cured such default shall not be deemed an Event of Default
(provided that no Credit Extensions will be made during such cure period).

     8.3 MATERIAL ADVERSE CHANGE. A Material Adverse Change occurs.

     8.4 ATTACHMENT.

          (i) Any material portion of Borrower's assets is attached, seized,
levied on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in ten (10) days; (ii) the service of process
upon the Borrower seeking to attach, by trustee or similar process, any funds of
the Borrower on deposit with any Lender, or any entity under the control of any
Lender (including a subsidiary); (iii) Borrower is enjoined, restrained, or
prevented by court order from conducting a material part of its business; (iv) a
judgment or other claim becomes a Lien on a material portion of Borrower's
assets; or (v) a notice of lien, levy, or assessment is filed against any of
Borrower's assets by any government agency and not paid within ten (10) days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions shall be
made during the cure period).

     8.5 INSOLVENCY.

          (i) Borrower is unable to pay its debts (including trade debts) as
they mature; (ii) Borrower begins an Insolvency Proceeding; or (iii) an
Insolvency Proceeding is begun against Borrower and not dismissed or stayed
within forty five (45) days (but no Credit Extensions shall be made before any
Insolvency Proceeding is dismissed).


                                                                              14



     8.6 OTHER AGREEMENTS.

     If there is a default in any agreement to which Borrower is a party with a
third party or parties resulting in a right by such third party or parties,
whether or not exercised, to accelerate the maturity of any Indebtedness in an
amount in excess of One Hundred Thousand Dollars ($100,000) or that could result
in a Material Adverse Change.

     8.7 JUDGMENTS.

     If a judgment or judgments for the payment of money in an amount,
individually or in the aggregate, of at least Two Hundred Thousand Dollars
($200,000) shall be rendered against Borrower and shall remain unsatisfied and
unstayed for a period of ten (10) days (provided that no Credit Extensions will
be made prior to the satisfaction or stay of such judgment).

     8.8 MISREPRESENTATIONS.

     If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Lenders or to
induce Lenders to enter this Agreement or any Loan Document.

     8.9 GUARANTY.

          (i) Any guaranty of any Obligations terminates or ceases for any
reason to be in full force; or (ii) any Guarantor does not perform any
obligation under any guaranty of the Obligations; or (iii) any material
misrepresentation or material misstatement exists now or later in any warranty
or representation in any guaranty of the Obligations or in any certificate
delivered to Lenders in connection with the guaranty; or (iv) any circumstance
described in Sections 8.3, 8.4, 8.5, or 8.8 occurs to any Guarantor, or (v) the
liquidation, winding up, termination of existence, or insolvency of any
Guarantor.

     8.10 INTENTIONALLY DELETED.

     8.11 LIEN PRIORITY.

     There is a material impairment in the priority of any Lender's security
interest in the Collateral.

9    RIGHTS AND REMEDIES

     9.1 RIGHTS AND REMEDIES.

     When an Event of Default occurs and continues Lenders may, without notice
or demand, do any or all of the following:

     (a) Declare all Obligations immediately due and payable (but if an Event of
Default described in Section 8.5 occurs all Obligations are immediately due and
payable without any action by Lenders);


                                                                              15



     (b) Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and any Lender;

     (c) Settle or adjust disputes and claims directly with account debtors for
amounts, on terms and in any order that Lenders consider advisable and notify
any Person owing Borrower money of Lenders' security interest in such funds and
verify the amount of such account. Borrower shall collect all payments in trust
for Lenders and, if requested by Lenders, immediately deliver the payments to
Lenders in the form received from the account debtor, with proper endorsements
for deposit;

     (d) Make any payments and do any acts it considers necessary or reasonable
to protect their security interest in the Collateral. Borrower shall assemble
the Collateral if Lenders request and make it available as Lenders designate.
Lenders may enter premises where the Collateral is located, take and maintain
possession of any part of the Collateral, and pay, purchase, contest, or
compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Lenders a license to
enter and occupy any of its premises, without charge, to exercise any of
Lenders' rights or remedies;

     (e) Apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by any Lender owing to or for the credit or the
account of Borrower;

     (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral. Lenders are hereby granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower's labels, patents, copyrights, mask works, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Lenders' exercise of their rights under this Section, Borrower's
rights under all licenses and all franchise agreements inure to Lenders; and

     (g) Place a "hold" on any account maintained with any Lender (provided
that, except with respect to any certificates of deposit or deposit or
investment accounts pledged as Collateral to secure cash management services,
corporate business credit cards or letters of credit separately issued or
supplied by SVB under separate agreements between SVB and Borrower, Lenders
agree not to take any of the actions described in this clause (g) unless an
Event of Default has occurred and is continuing);

     (h) Deliver a notice of exclusive control, any entitlement order, or other
directions or instructions pursuant to any control agreement or similar
agreements providing control of any Collateral (provided that, Lenders agree not
to take any of the actions described in this clause (h) unless an Event of
Default has occurred and is continuing);

     (i) demand and receive possession of Borrower's Books; and

     (j) exercise all rights and remedies and dispose of the Collateral
according to the Code.

     9.2  POWER OF ATTORNEY.

     Borrower hereby irrevocably appoints each Lender as its lawful
attorney-in-fact, to be effective upon the occurrence and during the continuance
of an Event of Default, to: (i) endorse Borrower's name on any checks or other
forms of payment or security; (ii) sign Borrower's name on any invoice or bill
of lading for any Account or drafts against account debtors, (iii) settle and
adjust


                                                                              16



disputes and claims about the Accounts directly with account debtors, for
amounts and on terms such Lender determines reasonable; (iv) make, settle, and
adjust all claims under Borrower's insurance policies; and (v) transfer the
Collateral into the name of such Lender or a third party as the Code permits.
Borrower hereby appoints each Lender as its lawful attorney-in-fact to sign
Borrower's name on any documents necessary to perfect or continue the perfection
of any security interest regardless of whether an Event of Default has occurred
until all Obligations have been satisfied in full and Lenders are under no
further obligation to make Credit Extensions hereunder. Each Lender's foregoing
appointment as Borrower's attorney in fact, and all of such Lender's rights and
powers, coupled with an interest, are irrevocable until all Obligations have
been fully repaid and performed and Lenders' obligation to provide Credit
Extensions terminates.

     9.3  ACCOUNTS, NOTIFICATION AND COLLECTION.

     In the event that an Event of Default occurs and is continuing, Lenders may
notify any Person owing Borrower money of Lenders' security interest in the
funds and verify and/or collect the amount of the Account. After the occurrence
of an Event of Default, any amounts received by Borrower shall be held in trust
by Borrower for Lenders, and, if requested by Lenders, Borrower shall
immediately deliver such receipts to Lenders in the form received from the
account debtor, with proper endorsements for deposit.

     9.4  LENDERS EXPENSES

     Any amounts paid by Lenders as provided herein are Lenders Expenses and are
immediately due and payable and shall bear interest at the then applicable rate
and be secured by the Collateral. No payments by Lenders shall be deemed an
agreement to make similar payments in the future or Lenders' waiver of any Event
of Default.

     9.5  LENDERS' LIABILITY FOR COLLATERAL.

     So long as Lenders comply with their obligations, if any, under the Code,
neither Lender shall in any way or manner be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any
diminution in the value of the Collateral; or (d) any act or default of any
carrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss,
damage or destruction of the Collateral.

     9.6  REMEDIES CUMULATIVE.

     Lenders' rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Lenders have all rights and remedies
provided under the Code, by law, or in equity. Lenders' exercise of one right or
remedy is not an election, and Lenders' waiver of any Event of Default is not a
continuing waiver. Lenders' delay is not a waiver, election, or acquiescence. No
waiver hereunder shall be effective unless signed by each Lender and then is
only effective for the specific instance and purpose for which it was given.

     9.7  DEMAND WAIVER.

     Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Lenders on which Borrower is
liable.


                                                                              17



10   NOTICES

     Notices or demands by any party about this Agreement must be in writing and
personally delivered or sent by an overnight delivery service, or by certified
mail, postage prepaid, return receipt requested, or by telefacsimile at the
addresses listed below. A party may change its notice address by written notice
to the other party.

          If to Borrower:   SGX Pharmaceuticals, Inc.
                            10505 Roselle Street
                            San Diego, CA 92121
                            Attn: James A. Rotherham, Chief Financial Officer
                            Fax: (858) 777-5610

          If to SVB:        Silicon Valley Bank
                            4442 Eastgate Mall, Suite 110
                            San Diego, California 92121
                            Attn: Susan L. Worsham
                            Fax: (858) 622-1424

          If to Oxford:     Oxford Finance Corporation
                            133 N. Fairfax Street
                            Alexandria, VA 22314
                            Attn: Michael J. Altenburger,
                            Chief Financial Officer
                            Telephone: (703) 519-4900
                            Facsimile: (703) 519-5225

                            With a copy to:

                            Oxford Finance Corporation
                            1674 Foothill Park Court
                            Lafayette, CA 94549
                            Attn: Kevin May
                            Telephone: (925) 932-7034
                            Facsimile: (925) 932-7035

11   CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

     California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Lenders each submit to the exclusive jurisdiction
of the State and Federal courts in California and Borrower accepts jurisdiction
of the courts and venue in Santa Clara County, California. NOTWITHSTANDING THE
FOREGOING, THE LENDERS SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING
AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION
WHICH THE LENDERS DEEM NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE
COLLATERAL OR TO OTHERWISE ENFORCE THE LENDERS' RIGHTS AGAINST THE BORROWER OR
ITS PROPERTY.

     BORROWER AND LENDERS EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS
OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND
ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER
INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.


                                                                              18



12   GENERAL PROVISIONS

     12.1 SUCCESSORS AND ASSIGNS.

     This Agreement binds and is for the benefit of the successors and permitted
assigns of each party. Borrower may not assign this Agreement or any rights or
Obligations under it without Lenders' prior written consent which may be granted
or withheld in Lenders' discretion. Lenders have the right, without the consent
of or notice to Borrower, to sell, transfer, assign, negotiate, or grant
participation in all or any part of, or any interest in, Lenders' obligations,
rights and benefits under this Agreement, the Loan Documents or any related
agreement, including, without limitation, an assignment to any Affiliate or
related party.

     12.2 INDEMNIFICATION.

     Borrower hereby indemnifies, defends and holds Lenders and their respective
officers, employees, and agents harmless against: (a) all obligations, demands,
claims, and liabilities asserted by any other party in connection with the
transactions contemplated by the Loan Documents; and (b) all losses or Lenders
Expenses incurred, or paid by Lenders from, following, or consequential to
transactions between Lenders and Borrower (including reasonable attorneys' fees
and expenses), except as to (a) and (b), for losses caused by a Lender's gross
negligence or willful misconduct.

     12.3 ATTORNEYS' FEES, COSTS AND EXPENSES.

     In any action or proceeding between Borrower and any Lender arising out of
the Loan Documents the prevailing party will be entitled to recover its
reasonable attorneys' fees and other reasonable costs and expenses incurred, in
addition to any other relief to which it may be entitled.

     12.4 RIGHT OF SET-OFF.

     Borrower hereby grants to each Lender, a lien, security interest and right
of set-off as security for all Obligations to such Lender, hereunder, whether
now existing or hereafter arising upon and against all deposits, credits,
collateral and property, now or hereafter in the possession, custody,
safekeeping or control of such Lender or any entity under the control of such
Lender (including a subsidiary of Lender) or in transit to any of them. At any
time after the occurrence and during the continuance of an Event of Default,
without demand or notice, a Lender may set-off the same or any part thereof and
apply the same to any liability or obligation of Borrower even though unmatured
and regardless of the adequacy of any other collateral securing the Obligations.
ANY AND ALL RIGHTS TO REQUIRE ANY LENDER TO EXERCISE ITS RIGHTS OR REMEDIES WITH
RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO
EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER
PROPERTY OF THE BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY
WAIVED.

     12.5 TIME OF ESSENCE.

     Time is of the essence for the performance of all Obligations in this
Agreement.


                                                                              19



     12.6 SEVERABILITY OF PROVISION.

     Each provision of this Agreement is severable from every other provision in
determining the enforceability of any provision.

     12.7 AMENDMENTS IN WRITING, INTEGRATION.

     All amendments to this Agreement must be in writing and signed by both
Lenders and Borrower. This Agreement and the Loan Documents represent the entire
agreement about this subject matter, and supersede prior negotiations or
agreements. All prior agreements, understandings, representations, warranties,
and negotiations between the parties about the subject matter of this Agreement
and the Loan Documents merge into this Agreement and the Loan Documents.

     12.8 COUNTERPARTS.

     This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.

     12.9 SURVIVAL.

     All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower to indemnify any Lender, including without limitation Section 12.2,
shall survive until the statute of limitations with respect to such claim or
cause of action shall have run.

     12.10 CONFIDENTIALITY.

     In handling any confidential information of Borrower or Borrower's
Affiliates, each Lender shall exercise the same degree of care that it exercises
for its own proprietary information, but disclosure of information may be made:
(i) to a Lender's subsidiaries or affiliates in connection with their business
with Borrower; (ii) to prospective transferees or purchasers of any interest in
the Credit Extensions (provided, however, such Lender shall use commercially
reasonable efforts in obtaining such prospective transferee's or purchaser's
agreement to the terms of this provision); (iii) as required by law, regulation,
subpoena, or other order, (iv) as required in connection with a Lender's
examination or audit; and (v) as Lenders consider appropriate in exercising
remedies under this Agreement. Confidential information does not include
information that either: (a) is in the public domain or in a Lender's possession
when disclosed to Lenders, or becomes part of the public domain after disclosure
to Lenders through no fault of Lenders; or (b) is disclosed to a Lender by a
third party, if Lenders do not know that the third party is prohibited from
disclosing the information.

     12.11 EFFECTIVE DATE.

     Notwithstanding anything set forth in this Agreement or any Loan Document
to the contrary, this Agreement and all of the Loan Documents shall not be
effective until the date on which each Lender execute this Agreement as
indicated on the signature page to this Agreement.


                                                                              20



     12.12 EXISTING OXFORD FACILITY.

     Oxford hereby consents to the incurrence of Indebtedness by Borrower
pursuant to this Agreement and to the grant of a security interest in the
Collateral, notwithstanding anything to the contrary contained in that certain
Master Loan and Security Agreement No. 2081008 dated as of August 28, 2002 by
and between Oxford and Borrower, as amended (the "Existing Oxford Agreement"),
and agrees that the incurrence of such Indebtedness and the grant of such
security interest shall not result in or constitute a breach or violation of any
covenant contained in the Existing Oxford Agreement. Oxford further consents to
Borrower's issuance of shares of Borrower's common stock in connection with its
initial public offering, notwithstanding any covenant contained in the Existing
Oxford Agreement, and agrees that Borrower's issuance of common stock in
connection with Borrower's initial public offering shall not result in or
constitute a breach or violation of any covenant contained in the Existing
Oxford Agreement.

13   DEFINITIONS

     13.1 DEFINITIONS.

     In this Agreement:

     "ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing, as such definition may be amended from time to time according to the
Code.

     "AFFILIATE" is a Person that owns or controls directly or indirectly the
Person, any Person that controls or is controlled by or is under common control
with the Person, and each of that Person's senior executive officers, directors,
partners and, for any Person that is a limited liability company, that Person's
managers and members.

     "BORROWER'S BOOKS" are all Borrower's books and records including ledgers,
records regarding Borrower's assets or liabilities, the Collateral, business
operations or financial condition and all computer programs or discs or any
equipment containing the information.

     "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which
SVB is closed.

     "CODE" is the Uniform Commercial Code as adopted in California as amended
and in effect from time to time.

     "COLLATERAL" is any and all properties, rights and assets of the Borrower
granted by the Borrower to Lenders or arising under the Code, now, or in the
future, described on Exhibit A.

     "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made


                                                                              21



or, if not determinable, the maximum reasonably anticipated liability for it
determined by the Person in good faith; but the amount may not exceed the
maximum of the obligations under the guarantee or other support arrangement.

     "COPYRIGHTS" are all copyright rights, applications or registrations and
like protections in each work or authorship or derivative work, whether
published or not (whether or not it is a trade secret) now or later existing,
created, acquired or held.

     "CREDIT EXTENSION" is each Equipment Advance, Growth Capital Advance or any
other extension of credit by any Lender for Borrower's benefit made pursuant to
this Agreement.

     "DEFAULT RATE" means for each Equipment Advance and Growth Capital Advance,
five percent (5%) above the highest rate otherwise applicable thereto.

     "DOLLARS" and "$" each means the lawful currency of the United States

     "EFFECTIVE DATE" is the date Lenders execute this Agreement and as
indicated on the signature page hereof.

     "ELIGIBLE EQUIPMENT" is Equipment, including general purpose computer
equipment, office equipment, test and laboratory equipment, furnishings, subject
to the limitations set forth herein. All Equipment financed with the proceeds of
the Equipment Advances shall be new, provided that Lenders, in their sole
discretion, may finance used equipment.

     "EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.

     "EQUIPMENT ADVANCE" is defined in Section 2.1.1(a).

     "EQUIPMENT ADVANCE LOAN AMOUNT" in respect to each Equipment Advance is the
original principal amount of such Equipment Advance.

     "EQUIPMENT ADVANCE MATURITY DATE" is, for each Equipment Advance, the
earliest of (a) the 36th Equipment Advance Payment Date for such Equipment
Advance, or (b) the occurrence of an Event of Default and acceleration of the
Obligations as a consequence thereof.

     "EQUIPMENT ADVANCE PAYMENT DATE" is defined in Section 2.3(a).

     "EQUIPMENT ADVANCE REPAYMENT PERIOD" is, for each Equipment Advance, is a
period of time equal to thirty six (36) consecutive months commencing on the
first Business Day of the month following the month in which the Equipment
Advance Funding Date occurs (or commencing on the Equipment Advance Funding Date
if the Equipment Advance Funding Date is the first Business Day of the month).

     "EQUIPMENT COMMITMENT AMOUNT" is (a) One Million Dollars ($1,000,000)
through December 31, 2005, plus (b) an additional One Million Dollars
($1,000,000) on or after April 1, 2006, but if and only if on or before December
31, 2005 one of the following is met: (i) the Series B Closing Condition or (ii)
the IPO Condition.

     "EQUIPMENT COMMITMENT PERCENTAGE" means: (i) forty percent (40%) with
respect to SVB, and sixty percent (60%) with respect to Oxford.


                                                                              22



     "EQUIPMENT COMMITMENT TERMINATION DATE" is December 31, 2006.

     "ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.

     "EVENT OF LOSS" is defined in Section 2.3(e).

     "FINANCED EQUIPMENT" is all present and future Eligible Equipment in which
Borrower has any interest, the purchase of which is financed by an Equipment
Advance.

     "GAAP" is generally accepted accounting principles.

     "GROWTH CAPITAL ADVANCE" or "GROWTH CAPITAL ADVANCES" is defined in Section
2.1.2.

     "GROWTH CAPITAL AMORTIZATION DATE" means February 1, 2006.

     "GROWTH CAPITAL COMMITMENT PERCENTAGE" means: (i) forty percent (40%) with
respect to SVB, and sixty percent (60%) with respect to Oxford.

     "GROWTH CAPITAL COMMITMENT TERMINATION DATE" is (a) for the first Four
Million Dollars ($4,000,000), December 31, 2005, and (b) for the second Four
Million Dollars ($4,000,000), January 31, 2006.

     "GROWTH CAPITAL FUNDING DATE" is any date on which a Growth Capital Advance
is made to or on account of Borrower.

     "GROWTH CAPITAL INTEREST ONLY PERIOD" means, for each Growth Capital
Advance, the period of time commencing on its Growth Capital Funding Date
through the day before the Growth Capital Amortization Date.

     "GROWTH CAPITAL LOAN COMMITMENT" is (a) Four Million Dollars ($4,000,000)
through December 31, 2005, plus (b) an additional Four Million Dollars
($4,000,000) if and only if on or before December 31, 2005 one of the following
is met: (i) the Series B Closing Condition or (ii) the IPO Condition.

     "GROWTH CAPITAL MATURITY DATE" is, for each Growth Capital Advance, the
earliest of (a) January 1, 2009, the 36th Growth Capital Scheduled Payment Date
for each Growth Capital Advance, or (b) the occurrence of an Event of Default
and acceleration of the Obligations as a consequence thereof.

     "GROWTH CAPITAL PAYMENT DATE" is defined in Section 2.3(a)(ii).

     "GROWTH CAPITAL REPAYMENT PERIOD" is a period of time equal to thirty six
(36) consecutive months commencing on February 1, 2006.

     "GUARANTOR" is any present or future guarantor of the Obligations.

     "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price
of property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.


                                                                              23



     "INSOLVENCY PROCEEDING" is any proceeding by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

     "INTELLECTUAL PROPERTY" is:

     (a) Copyrights, Trademarks, Patents, Know-How and Mask Works including
amendments, renewals, extensions;

     (b) All licenses or other rights to use and all license fees and royalties
from the use of the intellectual property rights in (a) above and (c) and (d)
below, including without limitation, all intellectual property rights licensed
or sublicensed to Borrower under that certain Patent and Know How, License
Agreement dated July 23, 2004, between Borrower, Shire Biochem Inc., Tanaud
Ireland Inc. and Tanaud International B.V., as amended, including the related
novation agreements (the "Shire License Agreement");

     (c) Any trade secrets and any intellectual property rights in methods,
processes, technologies, computer software and computer software products now or
later existing, created, acquired or held;

     (d) All design rights which may be available to Borrower now or later
created, acquired or held;

     (e) Any claims for damages (past, present or future) for infringement of
any of the rights above, with the right, but not the obligation, to sue and
collect damages for use or infringement of the intellectual property rights in
(a), (b), (c) and (d) above;

     (f) All Proceeds and products of the foregoing, including all insurance,
indemnity or warranty payments.

     "INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.

     "INVESTMENT" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.

     "IPO CONDITION" means the effectiveness, after the Effective Date, but on
or before December 31, 2005, of Borrower's initial public offering with Borrower
receiving at least $7.5 million net cash proceeds.

     "KNOW-HOW" means all ideas, inventions, scientific information, procedures,
instructions, techniques, designs, formulas, methods, data, technical
information (including toxicological, pharmaceutical, non-clinical, clinical and
medical data, health registration data and marketing data), processing
specifications, pricing studies and market evaluation materials and all
intellectual property rights therein owned, licensed or sublicensed by Borrower.


                                                                              24



     "LENDERS EXPENSES" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).

     "LETTER-OF-CREDIT RIGHT" means a right to payment or performance under a
letter of credit, whether or not the beneficiary has demanded or is at the time
entitled to demand payment or performance.

     "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

     "LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or
guaranties executed by Borrower and any other present or future agreement
between Borrower and/or Guarantor for the benefit of Lenders in connection with
this Agreement, all as amended, extended or restated.

     "LOAN SUPPLEMENT" is defined in Section 2.1.1(b) and attached as Exhibit C.

     "MASK WORKS" are all mask works or similar rights available for the
protection of semiconductor chips, now owned or later acquired.

     "MATERIAL ADVERSE CHANGE" is: (i) a material impairment in the perfection
or priority of Lenders' security interest in the Collateral or in the value of
such Collateral; (ii) a material adverse change in the business, operations, or
condition (financial or otherwise) of the Borrower; or (iii) a material
impairment of the prospect of repayment of any portion of the Obligations.

     "NOTE" means: (i) for each Growth Capital Advance, one of the secured
promissory notes of Borrower substantially in the form of Exhibit G, and (ii)
for each Equipment Advance, one of the secured promissory notes of Borrower
substantially in the form of Exhibit H.

     "OBLIGATIONS" are debts, principal, interest, Prepayment Fee, Lenders
Expenses, and other amounts Borrower owes either of the Lenders now or later
under or in connection with this Agreement, including cash management services,
letters of credit and foreign exchange contracts, if any and including interest
accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Lenders.

     "ORIGINAL STATED COST" is (a) the original cost to Borrower of the item of
new Eligible Equipment net of any and all freight, installation, tax, or (b) the
fair market value assigned to such item of used Eligible Equipment by mutual
agreement of Borrower and Lenders at the time of making of the Equipment
Advance.

     "PATENTS" are patents, patent applications and like protections, including
improvements, divisions, continuations, renewals, reissues, extensions and
continuations in part of the same.

     "PERMITTED INDEBTEDNESS" is:

     (a) Borrower's indebtedness to Lenders under this Agreement or the Loan
Documents;

     (b) Indebtedness existing on the Effective Date and shown on the Perfection
Certificate, including any existing Indebtedness to any Lender;


                                                                              25



     (c) Subordinated Debt;

     (d) Indebtedness to trade creditors incurred in the ordinary course of
business;

     (e) Indebtedness secured by Permitted Liens;

     (f) Indebtedness of Borrower to any Subsidiary and Contingent Obligations
of any Subsidiary with respect to obligations of Borrower (provided that the
primary obligations are not prohibited hereby), and Indebtedness of any
Subsidiary to any other Subsidiary and Contingent Obligations of any Subsidiary
with respect to obligations of any other Subsidiary (provided that the primary
obligations are not prohibited hereby);

     (g) Other Indebtedness not otherwise permitted by Section 7.4 not exceeding
$50,000 in the aggregate outstanding at any time; and

     (h) Extensions, refinancings, modifications, amendments and restatements of
any items of Permitted Indebtedness (a) through (g) above, provided that the
then outstanding principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be.

     "PERMITTED INVESTMENTS" are:

     (a) Investments shown on the Perfection Certificate and existing on the
Effective Date;

     (b) (i) marketable direct obligations issued or unconditionally guaranteed
by the United States or its agency or any state maturing within 1 year from its
acquisition, (ii) commercial paper maturing no more than 1 year after its
creation and having the highest rating from either Standard & Poor's Corporation
or Moody's Investors Service, Inc., (iii) SVB's certificates of deposit issued
maturing no more than 1 year after issue, (iv) any other investments
administered through the Lenders and (v) any Investments permitted by Borrower's
investment policy, as amended from time to time, provided that such investment
policy (and any such amendment thereto) has been approved by Lenders;

     (c) Investments consisting of (i) travel advances and employee relocation
loans and other employee loans and advances in the ordinary course of business
and (ii) loans to employees, officers or directors relating to the purchase of
equity securities of Borrower or its Subsidiaries pursuant to employee stock
purchase plans or agreements approved by Borrower's Board of Directors; which do
not exceed $100,000 in the aggregate in any year, provided that no cash loans
under this clause (ii) may be made if an Event of Default is then occurring or
would otherwise upon the making thereof;

     (d) Investments (including debt obligations) received in connection with
bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of business;

     (e) Investments consisting of notes receivable of, or prepaid royalties and
other credit extensions, to customers and suppliers who are not Affiliates of
Borrower, in the ordinary course of business; provided that this paragraph (e)
shall not apply to Investments of Borrower in any Subsidiary;


                                                                              26



     (f) Joint ventures or strategic alliances (in the ordinary course of
Borrower's business) consisting of the non-exclusive licensing of technology,
the development of technology or the providing of technical support, provided
that any cash investments by Borrower do not exceed $50,000 in the aggregate in
any fiscal year, provided that no such cash investment may be made if an Event
of Default is then occurring or would otherwise upon the making thereof;

     (g) Investments pursuant to or arising under currency agreements or
interest rate agreements entered into in the ordinary course of business;

     (h) Investments consisting of deposit accounts and securities accounts of
Borrower, subject to the compliance by Borrower with the covenant set forth in
Section 6.6 hereof;

     (i) Investments of Subsidiaries in or to other Subsidiaries of Borrower and
Investments by Borrower in Subsidiaries not to exceed $ 50,000 in the aggregate
in any fiscal year, provided that no Investments by Borrower in Subsidiaries may
be made if an Event of Default is then occurring or would otherwise upon the
making thereof; and

     (j) Other Investments not otherwise permitted by Section 7.6 not exceeding
$50,000 in the aggregate outstanding at any time.

     "PERMITTED LIENS" are:

     (a) Liens existing on the Effective Date and shown on the Perfection
Certificate or arising under this Agreement or other Loan Documents, including
Liens in favor of either Lender;

     (b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Lenders' security interests;

     (c) Purchase money Liens (and including for purposes of this clause Liens
incurred in connection with capital leases) (i) on Equipment acquired or held by
Borrower incurred for financing the acquisition of the Equipment securing no
more than $500,000 in the aggregate amount outstanding and provided there is no
longer any availability to borrow Equipment Advances, or (ii) existing on
equipment when acquired, if the Lien is confined to the property and
improvements and the proceeds of the equipment;

     (d) Leases or subleases and licenses or sublicenses granted in the ordinary
course of Borrower's business, if the leases, subleases, licenses and
sublicenses do not prohibit granting Lenders a security interest;

     (e) materialmen's, mechanic's, repairmen's, employee's or other like Liens
arising in the ordinary course of business and which are not delinquent;

     (f) banker's liens, rights of setoff and similar Liens incurred on deposits
made in the ordinary course of business subject to Borrower's compliance with
Section 6.6 hereof;

     (g) Liens arising from judgments, decrees or attachments in circumstances
not constituting an Event of Default under Sections 8.4 or 8.7;

     (h) Liens in favor of other financial institutions arising in connection
with Borrower's deposit accounts or securities accounts held at such
institutions to secure payment of fees and similar costs and expenses subject to
Borrower's compliance with Section 6.6 hereof;


                                                                              27



     (i) Liens to secure payment of worker's compensation, employment insurance,
old age pensions or other social security obligations of Borrower in each case
arising in the ordinary course of business of Borrower;

     (j) easements, reservations, rights-of-way, restrictions, minor defects or
irregularities in title and similar charges or encumbrances affecting real
property not constituting a material adverse effect on the business or condition
(financial or otherwise) of Borrower or otherwise materially impairing the
conduct of Borrower's business; and

     (k) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described above, but any extension, renewal or
replacement Lien must be limited to the property encumbered by the existing Lien
and the then outstanding principal amount of the indebtedness may not increase.

     "PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.

     "PREPAYMENT FEE" shall be, for each Growth Capital Advance or Equipment
Advance, an amount equal to: (1) if the prepayment date is on or before one year
after the Growth Capital Funding Date and/or the Equipment Advance Funding Date
(as applicable), four percent (4.0%) of the outstanding principal balance as of
the prepayment date, (2) if the prepayment date is more than one year after the
Growth Capital Funding Date and/or the Equipment Advance Funding Date (as
applicable), but on or before two years after the Growth Capital Funding Date
and/or the Equipment Advance Funding Date (as applicable), three percent (3.0%)
of the outstanding principal balance as of the prepayment date, and (3) if the
prepayment date is more than two years after the Growth Capital Funding Date
and/or the Equipment Advance Funding Date (as applicable), two percent (2.0%) of
the outstanding principal balance as of the prepayment date. The "Prepayment
Fee" for Growth Capital Advances shall be the sum of all of the "Prepayment
Fees" for every Growth Capital Advance. The "Prepayment Fee" for Equipment
Advances shall be the sum of all of the "Prepayment Fees" for every Equipment
Advance.

     "PROCEEDS" has the meaning described in the Code as in effect from time to
time.

     "REGISTERED ORGANIZATION" means an organization organized solely under the
law of a single state or the United States and as to which the state or the
United States must maintain a public record showing the organization to have
been organized.

     "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, President,
Chief Financial Officer and the Controller of Borrower.

     "SERIES B CLOSING CONDITION" means the closing, after the Effective Date
but on or before December 31, 2005, of Borrower's sale or sales of at least
$7,499,987 of its Series B Preferred Stock.

     "SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's
debt to Lenders (pursuant to a subordination agreement entered into between the
Lenders, the Borrower and the subordinated creditor), on terms acceptable to
Lenders.


                                                                              28



     "SUBSIDIARY" is any Person, corporation, partnership, limited liability
company, joint venture, or any other business entity of which more than 50% of
the voting stock or other equity interests is owned or controlled, directly or
indirectly, by the Person or one or more Affiliates of the Person.

     "SUPPORTING OBLIGATION" means a Letter-of-Credit Right, secondary
obligation or obligation of a secondary obligor or that supports the payment or
performance of an account, chattel paper, a document, a general intangible, an
instrument or investment property.

     "TRADEMARKS" are trademark and service mark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of the owner or licensee of such trademark and service
mark rights connected with the trademarks and service mark rights.

     "TREASURY RATE" means the U.S. Treasury note yield to maturity for a
36-month term as quoted in the Wall Street Journal on the day the Equipment
Advance Funding Date or the Growth Capital Advance Funding Date, as applicable.

                     (Signatures are on the following page)


                                                                              29



IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.

                                        BORROWER:

                                        SGX PHARMACEUTICALS, INC.


                                        By: /s/ James A. Rotherham
                                            ------------------------------------
                                        Name: James A. Rotherham
                                        Title: Chief Financial Officer


                                        LENDERS:

                                        OXFORD FINANCE CORPORATION


                                        By: /s/ MJ Altenburger
                                            ------------------------------------
                                        Name: Michael J. Altenburger
                                        Manager Chief Financial Officer


                                        SILICON VALLEY BANK


                                        By: /s/ Susan L. Worsham
                                            ------------------------------------
                                        Name: Susan L. Worsham
                                        Title: Deal Team Leader

Effective as of September 16, 2005


                                                                              30



                                    EXHIBIT A

     The Collateral consists of all right, title and interest of Borrower in and
to the following:

     All goods, equipment, inventory, contract rights or rights to payment of
money, license agreements, franchise agreements, general intangibles (including
payment intangibles), accounts (including health-care receivables), documents,
instruments (including any promissory notes), chattel paper (whether tangible or
electronic), cash, deposit accounts, fixtures, letters of credit rights (whether
or not the letter of credit is evidenced by a writing), commercial tort claims,
securities, and all other investment property, financial assets, whether now
owned or hereafter acquired, wherever located; all Supporting Obligations and
any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and Proceeds thereof.

     All Letter-Of-Credit Rights (whether or not the letter of credit is
evidenced by a writing); and

     All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions,
attachments, accessories, accessions and improvements to and replacements,
products, proceeds and insurance proceeds of any or all of the foregoing.

     The Collateral does not include:

     (a) Any Intellectual Property. Notwithstanding the foregoing, the
Collateral shall include all accounts, license and royalty fees and other
revenues, proceeds, or income arising out of or relating to any of the foregoing
Intellectual Property. To the extent a court of competent jurisdiction holds
that a security interest in any Intellectual Property is necessary to have a
security interest in any accounts, license and royalty fees and other revenues,
proceeds, or income arising out of or relating to any of the foregoing
Intellectual Property, then the Collateral shall, effective as of the Effective
Date, include the Intellectual Property, to the extent necessary to permit
perfection of the Lenders' security interest in such accounts, license and
royalty fees and other revenues, proceeds, or income arising out of or relating
to any of the Intellectual Property (other than the Intellectual Property under
the Shire License Agreement).

(b) any contract, instrument or chattel paper in which the Borrower has any
right, title or interest if and to the extent any such contract, instrument or
chattel paper includes a provision containing a restriction on assignment such
that the creation of a security interest in the right, title or interest of
Borrower therein would be prohibited and would, in and of itself, cause or
result in a default thereunder enabling another person party to such contract,
instrument or chattel paper to enforce any remedy with respect thereto (provided
that the foregoing exclusion shall not apply if (i) such prohibition has been
waived or such person has otherwise consented to the creation hereunder of a
security interest in such contract, instrument or chattel paper or (ii) such
prohibition would be rendered ineffective pursuant to Sections 9-407(a) or
9-408(a) of the Code, as applicable and as then in effect in any relevant
jurisdiction, or any other applicable law (including the federal bankruptcy
code) or principles of equity; provided further that immediately upon the
ineffectiveness, lapse or termination of any such provision, the Collateral
shall include, and Borrower shall be deemed to have granted a security interest
in, all its rights, title and interest in and to such contract, instrument or
chattel paper as if such provision had never been in effect; and provided
further that the foregoing exclusion shall in no way be construed so as to
limit, impair or otherwise affect Lenders' unconditional continuing security
interest in and to all rights, title and interests of Borrower in or to


                                                                              31



any payment obligations or other rights to receive monies due or to become due
under any such contract, instrument or chattel paper and in any such monies and
other proceeds of such contract, instrument or chattel paper), or

(c) more than 65% of the total combined voting power of all classes of stock
entitled to vote the shares of capital stock of any Subsidiary of Borrower not
incorporated or organized under the laws of one of the States or jurisdictions
of the United States.


                                                                              32



                                    EXHIBIT B

                        LOAN PAYMENT/ADVANCE REQUEST FORM

     Fax To: __________________         Date:_______________

     LOAN PAYMENT:

                                        (BORROWER)

From Account #                          To Account #
(Deposit Account #)                     (Loan Account #)

     Principal $__________    and/or Interest $__________

     All Borrower's representation and warranties in the Loan and Security
Agreement are true, correct and complete in all material respects on the date of
the telephone transfer request for an advance, but those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date:


Authorized Signature:                           Phone Number:
                      ---------------                         ------------------

LOAN ADVANCE:

COMPLETE OUTGOING WIRE REQUEST SECTION BELOW IF ALL OR A PORTION OF THE FUNDS
FROM THIS LOAN ADVANCE ARE FOR AN OUTGOING WIRE.

From Account #                          To Account #
(Loan Account #)                        (Deposit Account #)

Amount of Advance $__________

All Borrower's representation and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
telephone transfer request for an advance, but those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date:


Authorized Signature:                           Phone Number:
                      ---------------                         ------------------
OUTGOING WIRE REQUEST

COMPLETE ONLY IF ALL OR A PORTION OF FUNDS FROM THE LOAN ADVANCE ABOVE ARE TO BE
WIRED.

Deadline for same day processing is 12:00pm, P.S.T.

Beneficiary Name:                       Amount of Wire: $__________

Beneficiary Bank:                       Account Number:

City and State:

Beneficiary Bank Transit (ABA) #: ______________ Beneficiary Bank Code (Swift,
Sort, Chip, etc.):

                                        (FOR INTERNATIONAL WIRE ONLY)


                                                                              33



Intermediary Bank:                      Transit (ABA) #:

For Further Credit to:

Special Instruction:

By signing below, I (we) acknowledge and agree that my (our) funds transfer
request shall be processed in accordance with and subject to the terms and
conditions set forth in the agreements(s) covering funds transfer service(s),
which agreements(s) were previously received and executed by me (us).


Authorized Signature: _______________   2nd Signature (If Required): ___________

Print Name/Title: ___________________   Print Name/Title: ______________________

Telephone # _________________________   Telephone # ____________________________


                                                                              34



                                    EXHIBIT C

                        FORM OF LOAN AGREEMENT SUPPLEMENT
                        LOAN AGREEMENT SUPPLEMENT No. [ ]

     LOAN AGREEMENT SUPPLEMENT No. [_____], dated _______________, 20____
("Supplement"), to the Loan and Security Agreement dated as of _______________,
20____ (as amended, restated, or otherwise modified from time to time, the "Loan
Agreement) by and among the undersigned ________________________ ("Borrower"),
Oxford Finance Corporation ("Oxford") and Silicon Valley Bank ("SVB").
Capitalized terms used herein but not otherwise defined herein are used with the
respective meanings given to such terms in the Loan Agreement.

     To secure the prompt payment by Borrower of all amounts from time to time
outstanding under the Loan Agreement, and the performance by Borrower of all the
terms contained in the Loan Agreement, Borrower grants Lenders, a first priority
security interest in each item of equipment and other property described in
Annex A hereto, which equipment and other property shall be deemed to be
additional Financed Equipment and Collateral. The Loan Agreement is hereby
incorporated by reference herein and is hereby ratified, approved and confirmed.
Annex A (Equipment Schedule) is attached hereto.

     Borrower hereby certifies that (a) the foregoing information is true and
correct; (b) the representations and warranties made by Borrower in the Loan
Agreement are true and correct in all material respects on the date hereof and
shall be true and correct in all material respects on such Equipment Advance
Funding Date. No Event of Default has occurred and is continuing under the Loan
Agreement. This Supplement may be executed by Borrower and Lenders in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute but one and the same
instrument.

     This Supplement is delivered as of this day and year first above written.

SILICON VALLEY BANK                     SGX PHARMACEUTICALS, INC.


By:                                     By:
   ----------------------------------       ------------------------------------
Name:                                   Name:
      -------------------------------         ----------------------------------
Title:                                  Title:
       ------------------------------          ---------------------------------

OXFORD FINANCE CORPORATION


By:
   ----------------------------------
Name:
      -------------------------------
Title:
       ------------------------------

Annex A - Description of Financed Equipment


                                                                              35



                              ANNEX A TO SUPPLEMENT

     The Financed Equipment being financed with the Equipment Advance which this
Supplement is being executed is listed below. Upon the funding of such Equipment
Advance, this schedule and the property described below automatically shall be
deemed to be a part of the Collateral.



Description of Equipment   Make   Model   Serial #   Invoice #
- ------------------------   ----   -----   --------   ---------
                                         




                                                                              36



                                    EXHIBIT D

                               FORM OF SVB WARRANT


                                                                              37



THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF
ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5 BELOW, MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE
OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF
THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS
EXEMPT FROM REGISTRATION.

                            WARRANT TO PURCHASE STOCK

Company: SGX PHARMACEUTICALS, INC. (formerly known as STRUCTURAL GENOMIX, INC.),
a Delaware corporation

Number of Shares: [INSERT NUMBER OF SHARES EQUAL TO: (A) 4.8% MULTIPLIED BY THE
TOTAL DOLLAR AMOUNT OF THE RELEVANT GROWTH CAPITAL ADVANCE OR EQUIPMENT ADVANCE
MADE BY SVB, DIVIDED BY (B) $4.71] ________________

Class of Stock: Series B Preferred

Warrant Price: $4.71 per share

Issue Date: [INSERT RELEVANT GROWTH CAPITAL ADVANCE FUNDING DATE OR EQUIPMENT
ADVANCE FUNDING DATE]

Expiration Date: The longer of (i) the 10th anniversary after the Issue Date,
and (ii) five years after the closing of the Company's initial public offering
of its Common Stock.

     THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, SILICON VALLEY BANK ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the company (the "Company") at the Warrant
Price, all as set forth above and as adjusted pursuant to Article 2 of this
Warrant, subject to the provisions and upon the terms and conditions set forth
in this Warrant.

ARTICLE 1. EXERCISE.

          1.1 Method of Exercise. Holder may exercise this Warrant by delivering
a duly executed Notice of Exercise in substantially the form attached as
Appendix 1 to the principal office of the Company. Unless Holder is exercising
the conversion right set forth in Article 1.2, Holder shall also deliver to the
Company a check, wire transfer (to an account designated by the Company), or
other form of payment acceptable to the Company for the aggregate Warrant Price
for the Shares being purchased.

          1.2 Conversion Right. In lieu of exercising this Warrant as specified
in Article 1.1, Holder may from time to time convert this Warrant, in whole or
in part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Article 1.3.


                                                                              38



          1.3 Fair Market Value. If the Company's common stock is traded in a
public market and the Shares are common stock, the fair market value of each
Share shall be the closing price of a Share reported for the business day
immediately before Holder delivers its Notice of Exercise to the Company (or in
the instance where the Warrant is exercised immediately prior to the
effectiveness of the Company's initial public offering, the "price to public"
per share price specified in the final prospectus relating to such offering). If
the Company's common stock is traded in a public market and the Shares are
preferred stock, the fair market value of a Share shall be the closing price of
a share of the Company's common stock reported for the business day immediately
before Holder delivers its Notice of Exercise to the Company (or, in the
instance where the Warrant is exercised immediately prior to the effectiveness
of the Company's initial public offering, the initial "price to public" per
share price specified in the final prospectus relating to such offering), in
both cases, multiplied by the number of shares of the Company's common stock
into which a Share is convertible. If the Company's common stock is not traded
in a public market, the Board of Directors of the Company shall determine fair
market value in its reasonable good faith judgment.

          1.4 Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant and, if applicable, the Company receives
payment of the aggregate Warrant Price, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.

          1.5 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation on surrender and cancellation of this Warrant, the
Company shall execute and deliver, in lieu of this Warrant, a new warrant of
like tenor.

          1.6 Treatment of Warrant Upon Acquisition of Company.

               1.6.1 "Acquisition". For the purpose of this Warrant,
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity or the parent of the
surviving entity after the transaction.

               1.6.2 Treatment of Warrant at Acquisition.

A) Upon the written request of the Company, Holder agrees that, in the event of
an Acquisition that is not an asset sale and in which the sole consideration is
cash, either (a) Holder shall exercise its conversion or purchase right under
this Warrant and such exercise will be deemed effective immediately prior to the
consummation of such Acquisition or (b) if Holder elects not to exercise the
Warrant, this Warrant will expire upon the consummation of such Acquisition. The
Company shall provide the Holder with written notice of its request relating to
the foregoing (together with such reasonable information as the Holder may
request in connection with such contemplated Acquisition giving rise to such
notice), which is to be delivered to Holder not less than ten (10) calendar days
prior to the closing of the proposed Acquisition.


                                                                              39



B) Upon the written request of the Company, Holder agrees that, in the event of
an Acquisition that is an "arms length" sale of all or substantially all of the
Company's assets (and only its assets) to a third party that is not an Affiliate
(as defined below) of the Company (a "True Asset Sale"), either (a) Holder shall
exercise its conversion or purchase right under this Warrant and such exercise
will be deemed effective immediately prior to the consummation of such
Acquisition or (b) if Holder elects not to exercise the Warrant, this Warrant
will continue until the Expiration Date if the Company continues as a going
concern following the closing of any such True Asset Sale. The Company shall
provide the Holder with written notice of its request relating to the foregoing
(together with such reasonable information as the Holder may request in
connection with such contemplated Acquisition giving rise to such notice), which
is to be delivered to Holder not less than ten (10) days prior to the closing of
the proposed Acquisition.

C) Notwithstanding the foregoing provisions of this Section 1.6, in the event
that the acquirer in an Acquisition does not agree to assume this Warrant at and
as of the closing thereof, this Warrant, to the extent not exercised or
converted on or prior to such closing, shall terminate and be of no further
force or effect as of immediately following such closing if all of the following
conditions are met: (i) the acquirer is subject to the reporting requirements of
Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended,
(ii) the class of stock or other security of the acquirer that would be received
by Holder in connection with such Acquisition were Holder to exercise or convert
this Warrant on or prior to the closing thereof is listed for trading on a
national securities exchange or approved for quotation on an automated
inter-dealer quotation system, (iii) the value (determined as of the closing of
such Acquisition in accordance with the definitive agreements therefor) of the
acquirer stock and/or other securities that would be received by Holder in
respect of each Share were Holder to exercise or convert this Warrant on or
prior to the closing of such Acquisition is equal to or greater than three (3)
times the then-effective Warrant Price, and (iv) upon the exercise or conversion
of this Warrant on or prior to the closing of such Acquisition, Holder would be
able to publicly resell all of the acquirer stock and/or other securities that
would be received by Holder in such Acquisition within 120 days following the
closing thereof pursuant to an effective registration statement covering such
acquirer stock and/or other securities or pursuant to the provisions of Rule 144
under the Act.

D) Upon the closing of any Acquisition other than those particularly described
in subsections (A), (B) and (C) above, the successor entity shall assume the
obligations of this Warrant, and this Warrant shall be exercisable for the same
securities, cash, and property as would be payable for the Shares issuable upon
exercise of the unexercised portion of this Warrant as if such Shares were
outstanding on the record date for the Acquisition and subsequent closing. The
Warrant Price and/or number of Shares shall be adjusted accordingly.

As used herein "Affiliate" shall mean any person or entity that owns or controls
directly or indirectly ten (10) percent or more of the stock of Company, any
person or entity that controls or is controlled by or is under common control
with such persons or entities, and each of such person's or entity's officers,
directors, joint venturers or partners, as applicable.


                                                                              40



ARTICLE 2. ADJUSTMENTS TO THE SHARES.

          2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on the Shares payable in common stock, or other securities, then upon
exercise of this Warrant, for each Share acquired, Holder shall receive, without
cost to Holder, the total number and kind of securities to which Holder would
have been entitled had Holder owned the Shares of record as of the date the
dividend occurred. If the Company subdivides the Shares by reclassification or
otherwise into a greater number of shares or takes any other action which
increases the amount of stock into which the Shares are convertible, the number
of shares purchasable hereunder shall be proportionately increased and the
Warrant Price shall be proportionately decreased. If the outstanding shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased and the number
of Shares shall be proportionately decreased.

          2.2 Reclassification, Exchange, Combinations or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Certificate of
Incorporation, as such may be amended from time to time, upon the closing of a
registered public offering of the Company's common stock or as otherwise
provided therein. The Company or its successor shall promptly issue to Holder an
amendment to this Warrant setting forth the number and kind of such new
securities or other property issuable upon exercise or conversion of this
Warrant as a result of such reclassification, exchange, substitution or other
event that results in a change of the number and/or class of securities issuable
upon exercise or conversion of this Warrant. The amendment to this Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article 2 including, without
limitation, adjustments to the Warrant Price and to the number of securities or
property issuable upon exercise of the new Warrant. The provisions of this
Article 2.2 shall similarly apply to successive reclassifications, exchanges,
substitutions, or other events.

          2.3 Adjustments for Diluting Issuances. For so long as the Shares are
preferred stock, the number of shares of common stock issuable upon conversion
of the Shares, shall be subject to adjustment, from time to time in the manner
set forth in the Company's Certificate of Incorporation, as amended from time to
time, as if the Shares were issued and outstanding on and as of the date of any
such required adjustment. The provisions set forth for the Shares in the
Company's Certificate of Incorporation, as amended from time to time, relating
to the above in effect as of the Issue Date may not be amended, modified or
waived, without the prior written consent of Holder unless such amendment,
modification or waiver affects the rights associated with the Shares in the same
manner as such amendment, modification or waiver affects the rights associated
with all other shares of Series B Preferred Stock..


                                                                              41



          2.4 No Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Article 2 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Article against impairment; provided,
however, that notwithstanding the foregoing, nothing in this Section 2.4 shall
restrict or impair the Company's right to effect changes to the rights,
preferences and privileges associated with the Shares with the requisite consent
of the stockholders as may be required to amend the Certificate of Incorporation
from time to time so long as such amendment affects the rights, preferences and
privileges granted to Holder associated with the Shares in the same manner as
the other holders of Series B Preferred Stock.

          2.5 Fractional Shares. No fractional Shares shall be issuable upon
exercise or conversion of this Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying Holder the amount computed by
multiplying the fractional interest by the fair market value of a full Share.

          2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
Price, the Company shall promptly notify Holder in writing, and, at the
Company's expense, promptly compute such adjustment, and furnish Holder with a
certificate of its Chief Financial Officer setting forth such adjustment and the
facts upon which such adjustment is based. The Company shall, upon written
request, furnish Holder a certificate setting forth the Warrant Price in effect
upon the date thereof and the series of adjustments leading to such Warrant
Price.

ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.

          3.1 Representations and Warranties. The Company represents and
warrants to the Holder as follows:

               (a) The initial Warrant Price referenced on the first page of
this Warrant is not greater than the price per share at which the Shares were
last issued in an arms-length transaction in which at least $500,000 of the
Shares were sold.

               (b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.

               (c) The Capitalization Table previously provided to Holder
remains true and complete in all material respects as of the Issue Date.

          3.2 Notice of Certain Events. If the Company proposes at any time (a)
to declare any dividend or distribution upon any of its stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
or (b) to merge or consolidate with or into any other corporation, or sell,
lease, license, or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; then, in


                                                                              42



connection with each such event, the Company shall give Holder: (1) at least 10
calendar days prior written notice of the date on which a record will be taken
for such dividend or distribution (and specifying the date on which the holders
of common stock will be entitled thereto) or for determining rights to vote, if
any, in respect of the matters referred to in (a) above; and (2) in the case of
the matters referred to in (b) above at least 10 calendar days prior written
notice of the date when the same will take place (and specifying the date on
which the holders of common stock will be entitled to exchange their common
stock for securities or other property deliverable upon the occurrence of such
event). While the Company is a private company, the Company shall send a
concurrent written notice to Holder if the Company sends any written notice to
its preferred stockholders regarding: (a) the Company offering for sale any
shares of the Company's capital stock (or other securities convertible into such
capital stock), other than (i) pursuant to the Company's stock option or other
compensatory plans, (ii) in connection with commercial credit arrangements or
equipment financings, or (iii) in connection with strategic transactions for
purposes other than capital raising; or (b) the Company proposing to effect any
reclassification or recapitalization of any of its stock. The Company shall send
concurrently to Holder the same notice as the Company gives to the holders of
registration rights if the Company proposes to offer holders of registration
rights the opportunity to participate in an underwritten public offering of the
Company's securities for cash.

          3.3 Registration under Securities Act of 1933, as amended. The Company
agrees to solicit the requisite consent of the holders of the Company's
preferred stock to add the Holder as a party to the Company's Amended and
Restated Investor Rights Agreement dated as of April 21, 2005, as such may be
amended from time to time (the "Investor Rights Agreement") to provide Holder
with those certain incidental, or "Piggyback," registration rights pursuant to
and as set forth in the Company's Investor Rights Agreement; provided, however,
that if Section 5.3 or Section 5.4 of this Warrant conflicts with any provisions
of the Investor Rights Agreement, the provisions of Section 5.3 or Section 5.4
of this Warrant, as applicable, shall control until this Warrant has been fully
exercised or terminated. The provisions set forth in the Company's Investors'
Right Agreement or similar agreement relating to the above in effect as of the
Issue Date may not be amended, modified or waived without the prior written
consent of Holder unless such amendment, modification or waiver affects the
rights associated with the Shares in the same manner as such amendment,
modification, or waiver affects the rights associated with all other shares of
the same series and class as the Shares granted to the Holder.

          3.4 No Shareholder Rights. Except as provided in this Warrant, the
Holder will not have any rights as a shareholder of the Company until the
exercise of this Warrant.

          3.5 Information. So long as the Company is not a public company and
solely after the Company's obligations to provide financial information under
the Loan Agreement have terminated, upon the request by Holder, the Company
shall provide to the Holder: (i) the quarterly reports furnished to certain of
Company's investors under Section 3.1(c) of the Investors Rights Agreement (as
defined in Section 3.3 of this Warrant), and (ii) the annual reports furnished
to certain of Company's investors under Section 3.1(b) of the Investors Rights
Agreement..


                                                                              43



ARTICLE 4. REPRESENTATIONS, WARRANTIES OF THE HOLDER. The Holder represents and
warrants to the Company as follows:

          4.1 Purchase for Own Account. This Warrant and the securities to be
acquired upon exercise of this Warrant by the Holder will be acquired for
investment for the Holder's account, not as a nominee or agent, and not with a
view to the public resale or distribution within the meaning of the Act. Holder
also represents that the Holder has not been formed for the specific purpose of
acquiring this Warrant or the Shares.

          4.2 Disclosure of Information. The Holder has received or has had full
access to all the information it considers necessary or appropriate to make an
informed investment decision with respect to the acquisition of this Warrant and
its underlying securities. The Holder further has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of this Warrant and its underlying securities and to
obtain additional information (to the extent the Company possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify any information furnished to the Holder or to which the
Holder has access.

          4.3 Investment Experience. The Holder understands that the purchase of
this Warrant and its underlying securities involves substantial risk. The Holder
has experience as an investor in securities of companies in the development
stage and acknowledges that the Holder can bear the economic risk of such
Holder's investment in this Warrant and its underlying securities and has such
knowledge and experience in financial or business matters that the Holder is
capable of evaluating the merits and risks of its investment in this Warrant and
its underlying securities and/or has a preexisting personal or business
relationship with the Company and certain of its officers, directors or
controlling persons of a nature and duration that enables the Holder to be aware
of the character, business acumen and financial circumstances of such persons.

          4.4 Accredited Investor Status. The Holder is an "accredited investor"
within the meaning of Regulation D promulgated under the Act.

          4.5 The Act. The Holder understands that this Warrant and the Shares
issuable upon exercise or conversion hereof have not been registered under the
Act in reliance upon a specific exemption therefrom, which exemption depends
upon, among other things, the bona fide nature of the Holder's investment intent
as expressed herein. The Holder understands that this Warrant and the Shares
issued upon any exercise or conversion hereof must be held indefinitely unless
subsequently registered under the Act and qualified under applicable state
securities laws, or unless exemption from such registration and qualification
are otherwise available.

ARTICLE 5. MISCELLANEOUS.

          5.1 Term: This Warrant is exercisable in whole or in part at any time
and from time to time on or before the Expiration Date.

          5.2 Legends. This Warrant and the Shares (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:


                                                                              44



     THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED
     UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES
     LAWS OF ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5
     BELOW, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR
     HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE
     STATE SECURITIES LAW OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND
     SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE
     OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM REGISTRATION.

          5.3 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon exercise of this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company) and the transferee agrees to be bound by all of the
terms and conditions of this Warrant. The Company shall not require Holder to
provide an opinion of counsel if the transfer is to Holder's parent company, SVB
Financial Group (formerly Silicon Valley Bancshares), or any other affiliate of
Holder. Additionally, the Company shall also not require an opinion of counsel
if there is no material question as to the availability of Rule 144, including
without limitation, the availability of current information as referenced in
Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in
reasonable detail, the selling broker represents that it has complied with Rule
144(f), and the Company is provided with a copy of Holder's notice of proposed
sale.

          5.4 Transfer Procedure. Upon receipt by Holder of the executed
Warrant, Holder will transfer all of this Warrant to Holder's parent company,
SVB Financial Group, by execution of an Assignment substantially in the form of
Appendix 2 whereby the transferee agrees to be bound by all of the obligations
of Holder under this Warrant. Subject to the provisions of Article 5.3 and upon
providing Company with written notice, SVB Financial Group and any subsequent
Holder may transfer all or part of this Warrant or the Shares issuable upon
exercise of this Warrant (or the Shares issuable directly or indirectly, upon
conversion of the Shares, if any) to any transferee, provided, however, in
connection with any such transfer, SVB Financial Group or any subsequent Holder
will give the Company notice of the portion of the Warrant being transferred
with the name, address and taxpayer identification number of the transferee and
Holder will surrender this Warrant to the Company for reissuance to the
transferee(s) (and Holder if applicable) by execution of an Assignment
substantially in the form of Appendix 2 whereby the transferee agrees to be
bound by all of the obligations of Holder under this Warrant. The Company may
refuse to transfer this Warrant or the Shares to any person who directly
competes with the Company, unless, in either case, the stock of the Company is
publicly traded.

          5.5 Notices. All notices and other communications from the Company to
the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such


                                                                              45



address as may have been furnished to the Company or the Holder, as the case may
(or on the first business day after transmission by facsimile) be, in writing by
the Company or such Holder from time to time. Effective upon receipt of the
fully executed Warrant and the initial transfer described in Article 5.4 above,
all notices to the Holder shall be addressed as follows until the Company
receives notice of a change of address in connection with a transfer or
otherwise:

               SVB Financial Group
               Attn: Treasury Department
               3003 Tasman Drive, HA 200
               Santa Clara, CA 95054
               Telephone: 408-654-7400
               Facsimile: 408-496-2405

Notice to the Company shall be addressed as follows until the Holder receives
notice of a change in address:

               SGX Pharmaceuticals, Inc.
               10505 Roselle Street
               San Diego, CA 92121
               Attn: Chief Financial Officer
               Telephone: (858) 558-4850
               Facsimile: (858) 622-8458

          5.6 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.

          5.7 Attorney's Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorney's fees.

          5.8 Automatic Conversion upon Expiration. In the event that, upon the
Expiration Date, the fair market value of one Share (or other security issuable
upon the exercise hereof) as determined in accordance with Section 1.3 above is
greater than the Warrant Price in effect on such date, then this Warrant shall
automatically be deemed on and as of such date to be converted pursuant to
Section 1.2 above as to all Shares (or such other securities) for which it shall
not previously have been exercised or converted, and the Company shall promptly
deliver a certificate representing the Shares (or such other securities) issued
upon such conversion to the Holder.

          5.9 Counterparts. This Warrant may be executed in counterparts, all of
which together shall constitute one and the same agreement.

          5.10 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.


                                                                              46



          5.11 Market Stand-Off. Upon the Company adding the Holder as a party
to the Investor Rights Agreement as contemplated in Section 3.3 hereof, Holder
shall become subject to and bound by the "Market Stand-Off" provision in Section
2.13 of the Investor Rights Agreement as it may be amended from time to time.

      [Remainder of page intentionally left blank; signature page follows]


                                                                              47



"COMPANY"

SGX PHARMACEUTICALS, INC.
(f/k/a STRUCTURAL GENOMIX, INC.)


By:
    ----------------------------------------
Name: Michael Grey
      (Print)
Title: Chief Executive Officer and President


"HOLDER"

SILICON VALLEY BANK


By:
    ----------------------------------------
Name:
      --------------------------------------
      (Print)
Title:
       -------------------------------------


                                                                              48



                                   APPENDIX 1

                               NOTICE OF EXERCISE

     1. Holder elects to purchase ___________ shares of the Common/Series ______
Preferred [strike one] Stock of __________________ pursuant to the terms of the
attached Warrant, and tenders payment of the purchase price of the shares in
full.

          [or]

     1. Holder elects to convert the attached Warrant into Shares/cash [strike
one] in the manner specified in the Warrant. This conversion is exercised for
_____________________ of the Shares covered by the Warrant.

          [Strike paragraph that does not apply.]

     2. Please issue a certificate or certificates representing the shares in
the name specified below:

                                          --------------------------------------
                                                      Holders Name

                                          --------------------------------------

                                          --------------------------------------
                                                      (Address)

     3. By its execution below and for the benefit of the Company, Holder hereby
restates each of the representations and warranties in Article 4 of the Warrant
as the date hereof.

                                          HOLDER:

                                          --------------------------------------


                                          By:
                                              ----------------------------------
                                          Name:
                                                --------------------------------
                                          Title:
                                                 -------------------------------
                                          (Date):
                                                  ------------------------------


                                                                              49



                                   APPENDIX 2

                                   ASSIGNMENT

     For value received, Silicon Valley Bank hereby sells, assigns and transfers
     unto

Name:    SVB Financial Group
Address: 3003 Tasman Drive (HA-200)
         Santa Clara, CA 95054

Tax ID:  91-1962278

     that certain Warrant to Purchase Stock issued by ________________________
     (the "Company"), on ____________, 200_ (the "Warrant") together with all
     rights, title and interest therein.

                                          SILICON VALLEY BANK


                                          By:
                                              ----------------------------------
                                          Name:
                                                --------------------------------
                                          Title:
                                                 -------------------------------

Date:
      ---------------------------------

By its execution below, and for the benefit of the Company, SVB Financial Group
makes each of the representations and warranties set forth in Article 4 of the
Warrant and agrees to all other provisions of the Warrant as of the date hereof.

                                          SVB Financial Group


                                          By:
                                              ----------------------------------
                                          Name:
                                                --------------------------------
                                          Title:
                                                 -------------------------------


                                                                              50



                                    EXHIBIT E

                             FORM OF OXFORD WARRANT


                                                                              51



THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF
ANY STATE AND, EXCEPT AND PURSUANT TO THE PROVISIONS OF ARTICLE 5 BELOW, MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE
OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF
THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS
EXEMPT FROM REGISTRATION.

                            WARRANT TO PURCHASE STOCK

Company: SGX PHARMACEUTICALS, INC. (formerly known as STRUCTURAL GENOMIX, INC.),
a Delaware corporation Number of Shares: [INSERT NUMBER OF SHARES EQUAL TO: (A)
4.8% MULTIPLIED BY THE TOTAL DOLLAR AMOUNT OF THE RELEVANT GROWTH CAPITAL
ADVANCE OR EQUIPMENT ADVANCE MADE BY OXFORD, DIVIDED BY (B) $4.71]
________________
Class of Stock: Series B Preferred
Warrant Price: $4.71 per share

Issue Date: [INSERT RELEVANT GROWTH CAPITAL ADVANCE FUNDING DATE OR EQUIPMENT
ADVANCE FUNDING DATE]

Expiration Date: The longer of (i) the 10th anniversary after the Issue Date,
and (ii) five years after the closing of the Company's initial public offering
of its Common Stock.

     THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, OXFORD FINANCE CORPORATION ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the company (the "Company") at the Warrant
Price, all as set forth above and as adjusted pursuant to Article 2 of this
Warrant, subject to the provisions and upon the terms and conditions set forth
in this Warrant.

ARTICLE 1. EXERCISE.

          1.1 Method of Exercise. Holder may exercise this Warrant by delivering
a duly executed Notice of Exercise in substantially the form attached as
Appendix 1 to the principal office of the Company. Unless Holder is exercising
the conversion right set forth in Article 1.2, Holder shall also deliver to the
Company a check, wire transfer (to an account designated by the Company), or
other form of payment acceptable to the Company for the aggregate Warrant Price
for the Shares being purchased.

          1.2 Conversion Right. In lieu of exercising this Warrant as specified
in Article 1.1, Holder may from time to time convert this Warrant, in whole or
in part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Article 1.3.

          1.3 Fair Market Value. If the Company's common stock is traded in a
public market and the Shares are common stock, the fair market value of each
Share shall be the closing price of a Share reported for the business day
immediately before


                                                                              52



Holder delivers its Notice of Exercise to the Company (or in the instance where
the Warrant is exercised immediately prior to the effectiveness of the Company's
initial public offering, the "price to public" per share price specified in the
final prospectus relating to such offering). If the Company's common stock is
traded in a public market and the Shares are preferred stock, the fair market
value of a Share shall be the closing price of a share of the Company's common
stock reported for the business day immediately before Holder delivers its
Notice of Exercise to the Company (or, in the instance where the Warrant is
exercised immediately prior to the effectiveness of the Company's initial public
offering, the initial "price to public" per share price specified in the final
prospectus relating to such offering), in both cases, multiplied by the number
of shares of the Company's common stock into which a Share is convertible. If
the Company's common stock is not traded in a public market, the Board of
Directors of the Company shall determine fair market value in its reasonable
good faith judgment.

          1.4 Delivery of Certificate and New Warrant. Promptly after Holder
exercises or converts this Warrant and, if applicable, the Company receives
payment of the aggregate Warrant Price, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.

          1.5 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation on surrender and cancellation of this Warrant, the
Company shall execute and deliver, in lieu of this Warrant, a new warrant of
like tenor.

          1.6 Treatment of Warrant Upon Acquisition of Company.

               1.6.1 "Acquisition". For the purpose of this Warrant,
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity or the parent of the
surviving entity after the transaction.

               1.6.2 Treatment of Warrant at Acquisition.

A) Upon the written request of the Company, Holder agrees that, in the event of
an Acquisition that is not an asset sale and in which the sole consideration is
cash, either (a) Holder shall exercise its conversion or purchase right under
this Warrant and such exercise will be deemed effective immediately prior to the
consummation of such Acquisition or (b) if Holder elects not to exercise the
Warrant, this Warrant will expire upon the consummation of such Acquisition. The
Company shall provide the Holder with written notice of its request relating to
the foregoing (together with such reasonable information as the Holder may
request in connection with such contemplated Acquisition giving rise to such
notice), which is to be delivered to Holder not less than ten (10) calendar days
prior to the closing of the proposed Acquisition.


                                                                              53



B) Upon the written request of the Company, Holder agrees that, in the event of
an Acquisition that is an "arms length" sale of all or substantially all of the
Company's assets (and only its assets) to a third party that is not an Affiliate
(as defined below) of the Company (a "True Asset Sale"), either (a) Holder shall
exercise its conversion or purchase right under this Warrant and such exercise
will be deemed effective immediately prior to the consummation of such
Acquisition or (b) if Holder elects not to exercise the Warrant, this Warrant
will continue until the Expiration Date if the Company continues as a going
concern following the closing of any such True Asset Sale. The Company shall
provide the Holder with written notice of its request relating to the foregoing
(together with such reasonable information as the Holder may request in
connection with such contemplated Acquisition giving rise to such notice), which
is to be delivered to Holder not less than ten (10) days prior to the closing of
the proposed Acquisition.

C) Notwithstanding the foregoing provisions of this Section 1.6, in the event
that the acquirer in an Acquisition does not agree to assume this Warrant at and
as of the closing thereof, this Warrant, to the extent not exercised or
converted on or prior to such closing, shall terminate and be of no further
force or effect as of immediately following such closing if all of the following
conditions are met: (i) the acquirer is subject to the reporting requirements of
Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended,
(ii) the class of stock or other security of the acquirer that would be received
by Holder in connection with such Acquisition were Holder to exercise or convert
this Warrant on or prior to the closing thereof is listed for trading on a
national securities exchange or approved for quotation on an automated
inter-dealer quotation system, (iii) the value (determined as of the closing of
such Acquisition in accordance with the definitive agreements therefor) of the
acquirer stock and/or other securities that would be received by Holder in
respect of each Share were Holder to exercise or convert this Warrant on or
prior to the closing of such Acquisition is equal to or greater than three (3)
times the then-effective Warrant Price, and (iv) upon the exercise or conversion
of this Warrant on or prior to the closing of such Acquisition, Holder would be
able to publicly resell all of the acquirer stock and/or other securities that
would be received by Holder in such Acquisition within 120 days following the
closing thereof pursuant to an effective registration statement covering such
acquirer stock and/or other securities or pursuant to the provisions of Rule 144
under the Act.

D) Upon the closing of any Acquisition other than those particularly described
in subsections (A), (B) and (C) above, the successor entity shall assume the
obligations of this Warrant, and this Warrant shall be exercisable for the same
securities, cash, and property as would be payable for the Shares issuable upon
exercise of the unexercised portion of this Warrant as if such Shares were
outstanding on the record date for the Acquisition and subsequent closing. The
Warrant Price and/or number of Shares shall be adjusted accordingly.

As used herein "Affiliate" shall mean any person or entity that owns or controls
directly or indirectly ten (10) percent or more of the stock of Company, any
person or entity that controls or is controlled by or is under common control
with such persons or entities, and each of such person's or entity's officers,
directors, joint venturers or partners, as applicable.


                                                                              54



ARTICLE 2. ADJUSTMENTS TO THE SHARES.

          2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
dividend on the Shares payable in common stock, or other securities, then upon
exercise of this Warrant, for each Share acquired, Holder shall receive, without
cost to Holder, the total number and kind of securities to which Holder would
have been entitled had Holder owned the Shares of record as of the date the
dividend occurred. If the Company subdivides the Shares by reclassification or
otherwise into a greater number of shares or takes any other action which
increases the amount of stock into which the Shares are convertible, the number
of shares purchasable hereunder shall be proportionately increased and the
Warrant Price shall be proportionately decreased. If the outstanding shares are
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares, the Warrant Price shall be proportionately increased and the number
of Shares shall be proportionately decreased.

          2.2 Reclassification, Exchange, Combinations or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Certificate of
Incorporation, as such may be amended from time to time, upon the closing of a
registered public offering of the Company's common stock or as otherwise
provided therein. The Company or its successor shall promptly issue to Holder an
amendment to this Warrant setting forth the number and kind of such new
securities or other property issuable upon exercise or conversion of this
Warrant as a result of such reclassification, exchange, substitution or other
event that results in a change of the number and/or class of securities issuable
upon exercise or conversion of this Warrant. The amendment to this Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article 2 including, without
limitation, adjustments to the Warrant Price and to the number of securities or
property issuable upon exercise of the new Warrant. The provisions of this
Article 2.2 shall similarly apply to successive reclassifications, exchanges,
substitutions, or other events.

          2.3 Adjustments for Diluting Issuances. For so long as the Shares are
preferred stock, the number of shares of common stock issuable upon conversion
of the Shares, shall be subject to adjustment, from time to time in the manner
set forth in the Company's Certificate of Incorporation, as amended from time to
time, as if the Shares were issued and outstanding on and as of the date of any
such required adjustment. The provisions set forth for the Shares in the
Company's Certificate of Incorporation, as amended from time to time, relating
to the above in effect as of the Issue Date may not be amended, modified or
waived, without the prior written consent of Holder unless such amendment,
modification or waiver affects the rights associated with the Shares in the same
manner as such amendment, modification or waiver affects the rights associated
with all other shares of Series B Preferred Stock..

          2.4 No Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in


                                                                              55



good faith assist in carrying out of all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment; provided, however, that
notwithstanding the foregoing, nothing in this Section 2.4 shall restrict or
impair the Company's right to effect changes to the rights, preferences and
privileges associated with the Shares with the requisite consent of the
stockholders as may be required to amend the Certificate of Incorporation from
time to time so long as such amendment affects the rights, preferences and
privileges granted to Holder associated with the Shares in the same manner as
the other holders of Series B Preferred Stock.

          2.5 Fractional Shares. No fractional Shares shall be issuable upon
exercise or conversion of this Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying Holder the amount computed by
multiplying the fractional interest by the fair market value of a full Share.

          2.6 Certificate as to Adjustments. Upon each adjustment of the Warrant
Price, the Company shall promptly notify Holder in writing, and, at the
Company's expense, promptly compute such adjustment, and furnish Holder with a
certificate of its Chief Financial Officer setting forth such adjustment and the
facts upon which such adjustment is based. The Company shall, upon written
request, furnish Holder a certificate setting forth the Warrant Price in effect
upon the date thereof and the series of adjustments leading to such Warrant
Price.

ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.

          3.1 Representations and Warranties. The Company represents and
warrants to the Holder as follows:

               (a) The initial Warrant Price referenced on the first page of
this Warrant is not greater than the price per share at which the Shares were
last issued in an arms-length transaction in which at least $500,000 of the
Shares were sold.

               (b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.

               (c) The Capitalization Table previously provided to Holder
remains true and complete in all material respects as of the Issue Date.

          3.2 Notice of Certain Events. If the Company proposes at any time (a)
to declare any dividend or distribution upon any of its stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
or (b) to merge or consolidate with or into any other corporation, or sell,
lease, license, or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; then, in connection with each such event, the
Company shall give Holder: (1) at least 10 calendar days prior written notice of
the date on which a record will be taken for such dividend or distribution (and
specifying the date on which the holders of common stock


                                                                              56



will be entitled thereto) or for determining rights to vote, if any, in respect
of the matters referred to in (a) above; and (2) in the case of the matters
referred to in (b) above at least 10 calendar days prior written notice of the
date when the same will take place (and specifying the date on which the holders
of common stock will be entitled to exchange their common stock for securities
or other property deliverable upon the occurrence of such event). While the
Company is a private company, the Company shall send a concurrent written notice
to Holder if the Company sends any written notice to its preferred stockholders
regarding: (a) the Company offering for sale any shares of the Company's capital
stock (or other securities convertible into such capital stock), other than (i)
pursuant to the Company's stock option or other compensatory plans, (ii) in
connection with commercial credit arrangements or equipment financings, or (iii)
in connection with strategic transactions for purposes other than capital
raising; or (b) the Company proposing to effect any reclassification or
recapitalization of any of its stock. The Company shall send concurrently to
Holder the same notice as the Company gives to the holders of registration
rights if the Company proposes to offer holders of registration rights the
opportunity to participate in an underwritten public offering of the Company's
securities for cash.

          3.3 Registration under Securities Act of 1933, as amended. The Company
agrees to solicit the requisite consent of the holders of the Company's
preferred stock to add the Holder as a party to the Company's Amended and
Restated Investor Rights Agreement dated as of April 21, 2005, as such may be
amended from time to time (the "Investor Rights Agreement") to provide Holder
with those certain incidental, or "Piggyback," registration rights pursuant to
and as set forth in the Company's Investor Rights Agreement; provided, however,
that if Section 5.3 or Section 5.4 of this Warrant conflicts with any provisions
of the Investor Rights Agreement, the provisions of Section 5.3 or Section 5.4
of this Warrant, as applicable, shall control until this Warrant has been fully
exercised or terminated. The provisions set forth in the Company's Investors'
Right Agreement or similar agreement relating to the above in effect as of the
Issue Date may not be amended, modified or waived without the prior written
consent of Holder unless such amendment, modification or waiver affects the
rights associated with the Shares in the same manner as such amendment,
modification, or waiver affects the rights associated with all other shares of
the same series and class as the Shares granted to the Holder.

          3.4 No Shareholder Rights. Except as provided in this Warrant, the
Holder will not have any rights as a shareholder of the Company until the
exercise of this Warrant.

          3.5 Information. So long as the Company is not a public company and
solely after the Company's obligations to provide financial information under
the Loan Agreement have terminated, upon the request by Holder, the Company
shall provide to the Holder: (i) the quarterly reports furnished to certain of
Company's investors under Section 3.1(c) of the Investors Rights Agreement (as
defined in Section 3.3 of this Warrant), and (ii) the annual reports furnished
to certain of Company's investors under Section 3.1(b) of the Investors Rights
Agreement..

ARTICLE 4. REPRESENTATIONS, WARRANTIES OF THE HOLDER. The Holder represents and
warrants to the Company as follows:


                                                                              57



          4.1 Purchase for Own Account. This Warrant and the securities to be
acquired upon exercise of this Warrant by the Holder will be acquired for
investment for the Holder's account, not as a nominee or agent, and not with a
view to the public resale or distribution within the meaning of the Act. Holder
also represents that the Holder has not been formed for the specific purpose of
acquiring this Warrant or the Shares.

          4.2 Disclosure of Information. The Holder has received or has had full
access to all the information it considers necessary or appropriate to make an
informed investment decision with respect to the acquisition of this Warrant and
its underlying securities. The Holder further has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of this Warrant and its underlying securities and to
obtain additional information (to the extent the Company possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify any information furnished to the Holder or to which the
Holder has access.

          4.3 Investment Experience. The Holder understands that the purchase of
this Warrant and its underlying securities involves substantial risk. The Holder
has experience as an investor in securities of companies in the development
stage and acknowledges that the Holder can bear the economic risk of such
Holder's investment in this Warrant and its underlying securities and has such
knowledge and experience in financial or business matters that the Holder is
capable of evaluating the merits and risks of its investment in this Warrant and
its underlying securities and/or has a preexisting personal or business
relationship with the Company and certain of its officers, directors or
controlling persons of a nature and duration that enables the Holder to be aware
of the character, business acumen and financial circumstances of such persons.

          4.5 Accredited Investor Status. The Holder is an "accredited investor"
within the meaning of Regulation D promulgated under the Act.

          4.5 The Act. The Holder understands that this Warrant and the Shares
issuable upon exercise or conversion hereof have not been registered under the
Act in reliance upon a specific exemption therefrom, which exemption depends
upon, among other things, the bona fide nature of the Holder's investment intent
as expressed herein. The Holder understands that this Warrant and the Shares
issued upon any exercise or conversion hereof must be held indefinitely unless
subsequently registered under the Act and qualified under applicable state
securities laws, or unless exemption from such registration and qualification
are otherwise available.

ARTICLE 5. MISCELLANEOUS.

          5.1 Term: This Warrant is exercisable in whole or in part at any time
and from time to time on or before the Expiration Date.

          5.2 Legends. This Warrant and the Shares (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:

     THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED
     UNDER THE SECURITIES ACT OF 1933, AS


                                                                              58



     AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AND
     PURSUANT TO THE PROVISIONS OF ARTICLE 5 BELOW, MAY NOT BE OFFERED, SOLD OR
     OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED
     UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAW OR, IN THE OPINION OF
     LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE
     SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS EXEMPT
     FROM REGISTRATION.

          5.3 Compliance with Securities Laws on Transfer. This Warrant and the
Shares issuable upon exercise of this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company) and the transferee agrees to be bound by all of the
terms and conditions of this Warrant. The Company shall not require Holder to
provide an opinion of counsel if the transfer is to any other affiliate of
Holder. Additionally, the Company shall also not require an opinion of counsel
if there is no material question as to the availability of Rule 144, including
without limitation, the availability of current information as referenced in
Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e) in
reasonable detail, the selling broker represents that it has complied with Rule
144(f), and the Company is provided with a copy of Holder's notice of proposed
sale.

          5.4 Transfer Procedure. Upon receipt by Holder of the executed
Warrant, Holder may transfer this Warrant to any affiliate of Holder, by
execution of an Assignment substantially in the form of Appendix 2 whereby the
transferee agrees to be bound by all of the obligations of Holder under this
Warrant. Subject to the provisions of Article 5.3 and upon providing Company
with written notice, any subsequent Holder may transfer all or part of this
Warrant or the Shares issuable upon exercise of this Warrant (or the Shares
issuable directly or indirectly, upon conversion of the Shares, if any) to any
transferee, provided, however, in connection with any such transfer, any
subsequent Holder will give the Company notice of the portion of the Warrant
being transferred with the name, address and taxpayer identification number of
the transferee and Holder will surrender this Warrant to the Company for
reissuance to the transferee(s) (and Holder if applicable) by execution of an
Assignment substantially in the form of Appendix 2 whereby the transferee agrees
to be bound by all of the obligations of Holder under this Warrant. The Company
may refuse to transfer this Warrant or the Shares to any person who directly
competes with the Company, unless, in either case, the stock of the Company is
publicly traded.

          5.5 Notices. All notices and other communications from the Company to
the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may (or on the first business day after transmission by
facsimile) be, in writing by the Company or such Holder from time to time.
Effective upon receipt of the fully executed Warrant and the initial transfer
described in Article 5.4 above, all notices to the Holder


                                                                              59



shall be addressed as follows until the Company receives notice of a change of
address in connection with a transfer or otherwise:

               Oxford Finance Corporation
               133 N. Fairfax Street
               Alexandria, VA 22314
               Attn: Michael J. Altenburger, Chief Financial Officer
               Telephone: (703) 519-4900
               Facsimile: (703) 519-5225

Notice to the Company shall be addressed as follows until the Holder receives
notice of a change in address:

               SGX Pharmaceuticals, Inc.
               10505 Roselle Street
               San Diego, CA 92121
               Attn: Chief Financial Officer
               Telephone: (858) 558-4850
               Facsimile: (858) 622-8458

          5.6 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.

          5.7 Attorney's Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorney's fees.

          5.8 Automatic Conversion upon Expiration. In the event that, upon the
Expiration Date, the fair market value of one Share (or other security issuable
upon the exercise hereof) as determined in accordance with Section 1.3 above is
greater than the Warrant Price in effect on such date, then this Warrant shall
automatically be deemed on and as of such date to be converted pursuant to
Section 1.2 above as to all Shares (or such other securities) for which it shall
not previously have been exercised or converted, and the Company shall promptly
deliver a certificate representing the Shares (or such other securities) issued
upon such conversion to the Holder.

          5.9 Counterparts. This Warrant may be executed in counterparts, all of
which together shall constitute one and the same agreement.

          5.10 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.

          5.11 Market Stand-Off. Upon the Company adding the Holder as a party
to the Investor Rights Agreement as contemplated in Section 3.3 hereof, Holder
shall become subject to and bound by the "Market Stand-Off" provision in Section
2.13 of the Investor Rights Agreement as it may be amended from time to time.

      [Remainder of page intentionally left blank; signature page follows]


                                                                              60



"COMPANY"

SGX PHARMACEUTICALS, INC. (f/k/a
STRUCTURAL GENOMIX, INC.)


By:
    ---------------------------------
Name: Michael Grey
      (Print)
Title: Chief Executive Officer and
       President

"HOLDER"

OXFORD FINANCE CORPORATION


By:
    ---------------------------------

Name:
     --------------------------------
     (Print)

Title:
       ------------------------------


                                                                              61



                                   APPENDIX 1

                               NOTICE OF EXERCISE

     1. Holder elects to purchase ___________ shares of the Common/Series ______
Preferred [strike one] Stock of __________________ pursuant to the terms of the
attached Warrant, and tenders payment of the purchase price of the shares in
full.

          [or]

     1. Holder elects to convert the attached Warrant into Shares/cash [strike
one] in the manner specified in the Warrant. This conversion is exercised for
_____________________ of the Shares covered by the Warrant.

     [Strike paragraph that does not apply.]

     2. Please issue a certificate or certificates representing the shares in
the name specified below:

                                        ----------------------------------------
                                        Holders Name

                                        ----------------------------------------

                                        ----------------------------------------
                                        (Address)

     3. By its execution below and for the benefit of the Company, Holder hereby
restates each of the representations and warranties in Article 4 of the Warrant
as the date hereof.

                                        HOLDER:

                                        ---------------------------------------


                                        By:
                                            -----------------------------------
                                        Name:
                                              ---------------------------------
                                        Title:
                                               --------------------------------
                                        (Date):
                                                -------------------------------


                                                                              62



                                   APPENDIX 2

                                   ASSIGNMENT

     For value received, Oxford Finance Corporation hereby sells, assigns and
     transfers unto

          Name:
                ------------------------
         Address:
                  ----------------------
          Tax ID:
                  ----------------------

     that certain Warrant to Purchase Stock issued by ________________________
     (the "Company"), on ____________, 200_ (the "Warrant") together with all
     rights, title and interest therein.

                                        OXFORD FINANCE CORPORATION


                                        By:
                                            ------------------------------------
                                        Name:
                                              ----------------------------------
                                        Title:
                                               ---------------------------------

Date:
      -------------------------------

By its execution below, and for the benefit of the Company, _____________ makes
each of the representations and warranties set forth in Article 4 of the Warrant
and agrees to all other provisions of the Warrant as of the date hereof.


                                        By:
                                            ------------------------------------
                                        Name:
                                              ----------------------------------
                                        Title:
                                               ---------------------------------


                                                                              63



                                    EXHIBIT F
                             COMPLIANCE CERTIFICATE

TO:   SILICON VALLEY BANK and OXFORD FINANCE CORPORATION
FROM: SGX PHARMACEUTICALS, INC.

     The undersigned authorized officer of SGX PHARMACEUTICALS, INC. certifies
that under the terms and conditions of the Loan and Security Agreement among
Borrower and Lenders (the "Agreement"), (i) Borrower is in complete compliance
for the period ending _______________ with all required covenants except as
noted below and (ii) all representations and warranties in the Agreement are
true and correct in all material respects on this date. Attached are the
required documents supporting the certification. In addition, the undersigned
certifies that (1) Borrower and each Subsidiary have timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP and
(ii) no liens has been levied or claims made against Borrower or any of its
Subsidiaries relating to unpaid employee payroll or benefits which Borrower has
not previously notified in writing to Lenders. The Officer certifies that these
are prepared in accordance with Generally Accepted Accounting Principles (GAAP)
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer acknowledges that no borrowings
may be requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined not just at the date this certificate is delivered.

     Please indicate compliance status by circling Yes/No under "Complies"
column.



REPORTING COVENANT                                       REQUIRED          COMPLIES
- ------------------                                       --------          --------
                                                                     
Prior to the Company becoming a public company:
Monthly financial statements with CC              Monthly within 30 days   Yes   No
Annual (CPA Audited)                              FYE within 180 days      Yes   No
Annual projections                                FYE within 60 days
                                                  of Board approval        Yes   No

After the Company becoming a public company:
10-Q, 10-K and 8-K                                Within 5 days after
                                                  filing with SEC          Yes   No


Comments Regarding Exceptions:
See Attached.                           LENDER USE ONLY
                                        Received by:
                                                     ---------------------------
Sincerely,                                                AUTHORIZED SIGNER
                                        Date:
                                              ----------------------------------
- -------------------------------------   Verified:
Signature                                         ------------------------------
                                                          AUTHORIZED SIGNER
Title                                   Date:
      -------------------------------         ----------------------------------
Date                                    Compliance Status: Yes     No
     --------------------------------                          ---    ---


                                                                              64



                                    EXHIBIT G
                       FORM OF GROWTH CAPITAL ADVANCE NOTE
                             SECURED PROMISSORY NOTE

$____________________                                              Dated: [Date]

     FOR VALUE RECEIVED, the undersigned, SGX PHARMACEUTICALS, INC., a Delaware
corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of [LENDER]
("Lender") the principal amount of ____________ Dollars ($__________) or such
lesser amount as shall equal the outstanding principal balance of the Growth
Capital Advance made to Borrower by Lender pursuant to the Loan Agreement
(defined below), and to pay all other amounts due with respect to the Growth
Capital Advance on the dates and in the amounts set forth in the Loan Agreement.
(Capitalized terms, unless defined in this Note, shall have the meaning given
such capitalized term in the Loan Agreement.)

     Interest on the principal amount of this Note from the date of this Note
shall accrue at _____% per annum based on a 360-day year of twelve 30-day months
or, if applicable, the Default Rate. Borrower shall make payments of accrued
interest only on the outstanding principal amount of the Growth Capital Advance
on the first Business Day of each month ("Payment Date"), commencing __________,
2005, through and including January 1, 2006. Commencing on February 1, 2006, and
continuing on consecutive Payment Dates thereafter, Borrower shall make to
Lender thirty six (36) equal payments of principal and accrued interest on the
then outstanding principal amount in the amount of ________ Dollars ($________).

     Principal, interest and all other amounts due with respect to the Growth
Capital Advance, are payable in lawful money of the United States of America to
Lender as set forth in the Loan Agreement. The principal amount of this Note and
the interest rate applicable thereto, and all payments made with respect
thereto, shall be recorded by Lender and, prior to any transfer hereof, endorsed
on the grid attached hereto which is part of this Note.

     This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Loan and Security Agreement, dated as of [Date], to which
Borrower and Lender are parties (the "Loan Agreement"). The Loan Agreement,
among other things, (a) provides for the making of this secured Growth Capital
Advance to Borrower, and (b) contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events.

     This Note may not be prepaid except as set forth in Section 2.3 of the Loan
Agreement. This Note and the obligation of Borrower to repay the unpaid
principal amount of the Growth Capital Advance, interest on the Growth Capital
Advance and all other amounts due Lenders under the Loan Agreement is secured
under the Loan Agreement.

     Presentment for payment, demand, notice of protest and all other demands
and notices of any kind in connection with the execution, delivery, performance
and enforcement of this Note are hereby waived.

     Borrower shall pay all reasonable fees and expenses, including, without
limitation, reasonable attorneys' fees and costs, incurred by Lenders in the
enforcement or attempt to enforce any of Borrower's obligations hereunder not
performed when due. This Note shall be governed by, and construed and
interpreted in accordance with, the laws of the State of California.

     IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed by
one of its officers thereunto duly authorized on the date hereof.

                                        SGX PHARMACEUTICALS, INC.


                                        By:
                                            ------------------------------------
                                        Name:
                                              ----------------------------------
                                        Title:
                                               ---------------------------------


                                                                              65



                  LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL



                                   SCHEDULED
       PRINCIPAL                    PAYMENT
DATE     AMOUNT    INTEREST RATE     AMOUNT    NOTATION BY
- ----   ---------   -------------   ---------   -----------
                                   




                                                                              66



                                    EXHIBIT H
                         FORM OF EQUIPMENT ADVANCE NOTE
                             SECURED PROMISSORY NOTE

$____________________                                              Dated: [Date]

     FOR VALUE RECEIVED, the undersigned, SGX PHARMACEUTICALS, INC., a Delaware
corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of [LENDER]
("Lender") the principal amount of ____________ Dollars ($__________) or such
lesser amount as shall equal the outstanding principal balance of the Equipment
Advance made to Borrower by Lender pursuant to the Loan Agreement (defined
below), and to pay all other amounts due with respect to the Equipment Advance
on the dates and in the amounts set forth in the Loan Agreement. (Capitalized
terms, unless defined in this Note, shall have the meaning given such
capitalized term in the Loan Agreement.)

     Interest on the principal amount of this Note from the date of this Note
shall accrue at _____% per annum based on a 360-day year of twelve 30-day months
or, if applicable, the Default Rate. Commencing on ___________, 200_, and on the
first Business Day of each month thereafter (each a "Payment Date"), Borrower
shall make to Lender thirty six (36) equal payments of principal and accrued
interest on the then outstanding principal amount in the amount of ________
Dollars ($________).

     Principal, interest and all other amounts due with respect to the Equipment
Advance, are payable in lawful money of the United States of America to Lender
as set forth in the Loan Agreement. The principal amount of this Note and the
interest rate applicable thereto, and all payments made with respect thereto,
shall be recorded by Lender and, prior to any transfer hereof, endorsed on the
grid attached hereto which is part of this Note.

     This Note is one of the Notes referred to in, and is entitled to the
benefits of, the Loan and Security Agreement, dated as of [Date], to which
Borrower and Lender are parties (the "Loan Agreement"). The Loan Agreement,
among other things, (a) provides for the making of this secured Equipment
Advance to Borrower, and (b) contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events.

     This Note may not be prepaid except as set forth in Section 2.3 of the Loan
Agreement. This Note and the obligation of Borrower to repay the unpaid
principal amount of the Equipment Advance, interest on the Equipment Advance and
all other amounts due Lenders under the Loan Agreement is secured under the Loan
Agreement.

     Presentment for payment, demand, notice of protest and all other demands
and notices of any kind in connection with the execution, delivery, performance
and enforcement of this Note are hereby waived.

     Borrower shall pay all reasonable fees and expenses, including, without
limitation, reasonable attorneys' fees and costs, incurred by Lenders in the
enforcement or attempt to enforce



any of Borrower's obligations hereunder not performed when due. This Note shall
be governed by, and construed and interpreted in accordance with, the laws of
the State of California.

     IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed by
one of its officers thereunto duly authorized on the date hereof.

                                        SGX PHARMACEUTICALS, INC.


                                        By:
                                            ------------------------------------
                                        Name:
                                              ----------------------------------
                                        Title:
                                               ---------------------------------



                  LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL



                                   SCHEDULED
       PRINCIPAL                    PAYMENT
DATE     AMOUNT    INTEREST RATE     AMOUNT    NOTATION BY
- ----   ---------   -------------   ---------   -----------
                                   




                                        4

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated April 3, 2005, except for paragraphs 3 through 6 of Note 10 as to which the date is April 21, 2005, in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-128059) and related Prospectus of SGX Pharmaceuticals, Inc. for the registration of its common stock expected to be filed on or about October 14,2005.

	/s/ ERNST & YOUNG LLP
San Diego, California
October 13, 2005

CORRESP

	ATTORNEYS AT LAW	Broomfield, CO
		720 566-4000
		Palo Alto, CA
	4401 Eastgate Mall	650 843-5000
	San Diego, CA	Reston, VA
	92121-1909	703 456-8000
	Main 858 550-6000	San Francisco, CA
	Fax 858 550-6420	415 693-2000
October 14, 2005	www.cooley.com	Washington, DC
		202 842-7800
Via Edgar and Federal Express	J. PATRICK LOOFBOURROW
	(858) 550-6089
	jploofbourrow@cooley.com

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
Division of Corporation Finance
U.S. Securities and Exchange Commission
Mailstop 6010
100 F Street, NE
Washington, D.C. 20549

Re: SGX Pharmaceuticals, Inc.
Registration Statement on Form S-1
File No. 333-128059

Ladies and Gentlemen:

Enclosed for electronic filing via EDGAR pursuant to the Securities Act of 1933, as amended (the “Securities Act”), on behalf of our client SGX Pharmaceuticals, Inc. (the “Company”) is Amendment No. 1 (“Amendment No. 1”) amending the Company’s Registration Statement on Form S-1, File No. 333-128059 (the “Registration Statement”) filed with the Securities and Exchange Commission (the “Commission” or the “SEC”) on September 2, 2005. Amendment No. 1 is marked to show changes from the Registration Statement as originally filed.

Amendment No. 1 is being filed in response to comments received from the staff of the Commission (the “Staff”) by letter dated October 12, 2005 with respect to the Registration Statement. The numbering of the paragraphs below correspond to the numbering of the comment letter, which for your convenience we have incorporated into this response letter in italics. Page references in the text of this response letter correspond to the page numbers of Amendment No. 1.

Comments applicable to the entire filing

1. We note that your filing contains numerous omissions throughout the prospectus which relate to the offering price range or the number of shares you will sell. These omissions include but are not limited to:

• Summary Financial Data

• Use Of Proceeds

• Capitalization

• Dilution

• The Option Grants Table

• Shares Eligible For Future Sale

• The Principal Stockholders Table

• Description of Capital Stock

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Two

	Rule 430A requires you to include this information in your filing based upon an estimate of the offering price within a bona fide range you disclose on the cover page and based upon an estimate of the number of shares you will sell. We consider a bona fide range to be $2 if the price is under $20 and 10% if it is above $20. You should include the required information in an amendment prior to circulating a “red herring” prospectus.
	The Company acknowledges the Staff’s comment and will revise the Registration Statement accordingly in a future amendment prior to circulating a preliminary “red herring” prospectus.
2.	Provide us with copies of all the graphic, photographic or artistic materials you intend to include in the prospectus prior to its printing and use. Please note that we may have comments. Please also note that all textual information in the graphic material should be brief and comply with the plain English guidelines regarding jargon and technical language.
	The Company acknowledges the Staff’s comment and confirms that it does not intend to use any graphic, photographic or artistic materials in the prospectus.

3.	Comments on your application for confidential treatment will be provided in a separate letter when they are available. Please note that we will not be in a position to accelerate effectiveness until all issues relating to your confidential treatment request have been resolved.
	The Company acknowledges the Staff’s comment.
4.	In a number of places in your document you have used technical jargon that is not likely to be understood by your readers. Technical jargon should not appear in the forefront of the prospectus. Please refer to Rule 421 of Regulation C. In the remainder of the prospectus you should minimize the use of jargon. If you cannot convey information without using jargon, please explain what the jargon means at the first place the terms appear. Here are some examples of technical jargon that needs to be replaced:

• Third-line treatment

• Second-line treatment

• Myelodysplastic Syndromes

• Lead compounds

• Proprietary fragment-based drug discovery platform

• Well-validated but challenging targets

• Lead optimization stage

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Three

• Receptor tyrosine kinases

• Dose-escalation trial

• Refractory to prior treatment

• Single-arm, open-label clinical trial

• Primary clinical endpoint

• Control therapy

• Has been powered to detect a doubling of the historical CR rate...

• Fast track designation

• Well-validated and suited for lead discovery

• Surrogate endpoints

• Mucositis

• Aplasia and sepsis

• Generic class of dioxolanes

• Patent estate

• Surrogate endpoints

	To the extent that these terms cannot be replaced by suitable alternatives, please revise to explain the meaning of these terms the first time each one is used.
	The Company has revised the disclosure throughout the Registration Statement in response to the Staff’s comment. In particular, the Company has rewritten parts of the forefront of the prospectus in plain English so that it can be more easily understood. With respect to a few of these terms which the Company believes could not be replaced by suitable alternatives to provide a clearer understanding to the reader, the Company has revised the disclosure to explain the meaning of the term the first time it is used.
5.	Throughout your document you have used a large number of acronyms that are not likely to be familiar to your readers. The use of acronyms is a convenience for the writer, but it forces readers to learn a new vocabulary in order to understand the disclosure in your document. Please delete all of the acronyms except those which can be commonly found in general interest publications. Examples of acronyms that should be deleted include:

• AML

• CR

• CRp

• CI

• CML

• MDS

• ATU

• MAA

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Four

The Company acknowledges the Staff’s comment and has revised its disclosure throughout the Registration Statement in response to the Staff’s comment with respect to CR, CRp, CI, ATU, MAA and several other acronyms.

However, the Company respectfully submits to the Staff that the terms CML, MDS and AML are acronyms that can be commonly found in general interest publications. Each of these acronyms is more commonly used than the full term to which they refer. Each of these acronyms is broadly used in the medical field and by biotechnology companies and is not a term that is specific only to the Company’s business. This view is well supported by internet and press searches with respect to the indicated acronyms, which searches generate significant use of the terms in a variety of forums and by a number of companies. Based on the common use of these acronyms, the Company respectfully submits that deletion of the acronyms would render the prospectus less accessible and represent a more significant obstacle to investors than use of the full term in lieu of the acronym. The Company has further confirmed that each of these acronyms is clearly explained where it is first used in each section of the Registration Statement.

Table of Contents Page

6.	Please refer to the next to last paragraph on this page (and the next to last bullet on page 5). In it you state that references to a number of specified documents are references to the documents that “will be in effect upon completion of this offering.” Please delete this statement as it is likely to confuse readers. The documents filed as exhibits to this registration statement, and discussed in the filing, should be the documents that will be in effect upon completion of this offering.
	The requested revisions have been made at pages i and 5.
7.	Please refer to the last paragraph on this page in which you appear to disclaim liability for your disclosures. It is not appropriate to disclaim liability for information you include in your registration statement. Please delete the paragraph.
	The requested deletion has been made at page i.

Prospectus Summary

8.	Please delete the phrase “is qualified in its entirety by the information appearing elsewhere in this prospectus” from the introductory paragraph. The statement is legalistic and inappropriate.
	The requested deletion has been made at page 1.

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Five

9.	Please refer to the table at the bottom of page 1, and a similar table that appears on page 48. In the column called “Program/Indication” you have included industry jargon and acronyms. In the column called “Status” you have included a parenthetical phrase at the end of each item, (e.g. data expected 2H06) which also appears to be industry jargon. Please revise the table to eliminate all of the jargon or to ensure that the meaning of the term is sufficiently explained.
	The Company has revised the disclosure in the tables at pages 2 and 51 so that it can be more easily understood. The Company has also substantially revised the two paragraphs preceding the table to ensure that the meaning of each of the remaining terms included in the table, such as “third-line,” “second-line,” and “MDS,” is adequately explained when such terms are first used in the prospectus.
10.	In the table, you appear to state that you will submit an IND to the FDA in the fourth quarter of 2006 for a drug called BCR-ABL that is currently in preclinical development. It is unclear to us how you can make such a prediction at this stage of development. Please disclose the factual basis for this prediction, or in the alternative, delete it.
	The disclosure has been revised at page 1 in response to the Staff’s comment. The Company supplementally advises the Staff that its timing expectation is based on the experience of the Company’s scientists and management who have substantial industry experience in drug discovery and development and knowledge of the typical time periods between selecting a developmental candidate to IND filing, as well as the status of and progress made under the BCR-ABL program to date.
11.	The disclosure currently included in your summary is unbalanced. While you have included a discussion of your positive opinions and beliefs regarding your proposed products and anticipated results of clinical studies, you have not included any discussion of the negative aspects of your business, and have not clearly indicated that positive results are not assured. Please limit the discussion of your disclosed products to the targeted indication and the stage of clinical trials. Move the remaining details, including any discussion of the results of clinical trials, to the Business section and balance this disclosure with a discussion explaining that later stage testing might not support the results of earlier testing. Additionally, revise the disclosure to discuss the negative aspects of your business. The negative aspects should include your history of losses, the fact that you do not have FDA approval for any for any of your products, that if you don’t obtain fast track designation for Troxatyl your timeline for NDA submission and approval could be extended by several years and that your technology “platform” has not yet resulted in any actual new drugs. The discussion of the negative aspects should be disclosed as prominently as the positive aspects and should not be separated from the discussion of the positive aspects.

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Six

	The disclosure has been revised throughout the Prospectus Summary and disclosure of specific risks associated with the Company’s business and business strategy has been included at page 4 under the heading “Risks Related to Our Business” in response to the Staff’s comment.
12.	Please note that in order to use the terms “Phase I/II” and “Phase II/III” your clinical trials must meet all the requirements of both referenced phases of clinical trials. For each time the phrase is used, supplementally confirm that all of the requirements of each phase of testing have been met or revise to use an alternative term to describe the phase of clinical trials.

	The Company advises the Staff that it has reviewed the general requirements for each phase of clinical trials and supplementally confirms that the design of its Phase I/II clinical trial dosing Troxatyl in AML patients by continuous intravenous infusion that it completed in the second quarter of 2005 and its ongoing pivotal Phase II/III clinical trial of Troxatyl for the third-line treatment of AML satisfy these requirements. With respect to the other Phase I/II clinical trials referenced in the Registration Statement that the Company intends to initiate in 2006 or thereafter, the Company supplementally confirms that it intends for such trials to satisfy all the requirements of both referenced phases of clinical trials. The Company further advises the Staff that following review of the general requirements for each Phase of clinical trials, the trials described as “Phase I/II clinical trial of Troxatyl for solid tumor indications”, the “Phase I/II clinical trial of Troxatyl in combination with Ara-C versus Ara-C alone” for the second-line treatment of AML and the “Phase I/II clinical trial of Troxatyl in combination with Gemzar”, might better be described as Phase I trials, and the Company has revised the disclosure accordingly.
13.	Explain your basis for believing that FAST is capable of producing at least one new IND per year beginning in 2006.
	The Company supplementally advises the Staff that, based on the Company’s experience with FAST to date (including the Company’s BCR-ABL, MET and RON and other discovery programs), the Company’s current portfolio of oncology targets, expected rates of drug target attrition, the assumption that additional targets will be selected to replace targets that are no longer in active discovery programs, the current status of the Company’s active discovery programs, the substantial industry experience of the Company’s scientists and management and assuming allocation of additional resources for research and development, the Company believes it has the capability to file an IND application per year, starting in 2006 with a product candidate from the Company’s BCR-ABL program. Please also refer to the response to comment 10 for additional information with respect to the product candidate from the BCR-ABL program.

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Seven

14.	Please balance the discussion of your strategy with a discussion of the risks and obstacles you will encounter in implementing this strategy.
	Disclosure of risks associated with the Company’s business strategy have been included at page 4 in response to the Staff’s comment.

Risk Factors — page 8

We cannot be certain that our clinical trial design for our ongoing pivotal Phase II/III clinical trial of Troxatyl for the third-line treatment of AML will be sufficient to lead to regulatory approval. — page 8

15.

The current subheading on this risk factor is very vague and indirect. Please revise it to more specifically identify the risk and its potential adverse consequences. As we understand it, the actual risk is that you have chosen a research design that is different from that recommended by the FDA, and you have foregone a Special Protocol Assessment which would have given you the FDA’s concurrence on the design and size of the clinical trial intended to form the primary basis of an effectiveness claim. As a consequence, you can’t be certain that the design, conduct and data analysis approach you plan on using for your trial will be sufficient to allow you to submit an NDA for the drug, or to receive approval for the drug. Please revise the subheading accordingly.

The subheading has been revised at page 8 in response to the Staff’s comment.

While we may seek to take advantage of various regulatory mechanisms intended to accelerate drug development and approval...there is no guarantee that the FDA will permit us to do so. — page 9

16.	Please revise the subheading to more specifically identify the risk and include the potential adverse consequences. It appears from the body of the risk factor that one very significant adverse consequence is that you could not submit an NDA for Troxatyl until the third quarter of 2009 at the earliest instead of the “late 2006 or early 2007” indicated in the summary section of the prospectus.
	The subheading has been revised at page 9 in response to the Staff’s comment.

Because we exclusively licensed our product candidate, Troxatyl, from Shire and our rights are subject to certain licenses to Shire from third parties, any dispute with Shire or between Shire

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Eight

and many of these third parties may adversely affect our ability to develop and commercialize Troxatyl —page 13

17.

Are there any material limitations to Shire’s rights under its agreements with Yale University and University of Georgia Research Foundation? When do these agreements expire?

The Company does not believe that there any material limitations to Shire's rights under its agreements with Yale University (“Yale”) and University of Georgia Research Foundation (“UGAF”) pertinent to the Company. The Company executed a Memorandum of Understanding with Yale and UGAF whereby, subject to certain conditions and only upon the termination of the Company’s agreement with Shire, Yale and UGAF each agreed to grant the Company a patent license on substantially the same terms contained in their agreement with Shire. The Memorandum of Understanding is filed as Schedule 7 to Exhibit 10.16 to the Registration Statement. The agreement between Shire and Yale and UGAF expires upon the expiration of the last to expire of the patents licensed under the agreement, including any renewals or extensions of such patents.

We are at an early stage of development, particularly in our internal development programs, and we may never attain product sales. — page 13

18.

This risk factor subheading is also too vague and generic to be meaningful. Please revise it to more adequately summarize the risk identified in the body of the risk factor. You should also clarify it to make clear whether you are referring only to your FAST technology and its potential results, or to the development of Troxatyl as well. Although the risk factor appears to be discussing the drug development program, we note that Troxatyl is mentioned in the last sentence.

The subheading has been revised at page 13 in response to the Staff’s comment. The Company has further revised the disclosure to make clear that it is referring only to its FAST technology and potential results and not to the development of Troxatyl, which is adequately covered by the disclosure contained in other risk factors.

If we fail to establish new collaborations and other commercial agreements, we may have to reduce or limit our internal drug discovery and development efforts. — page 14

19. Please refer to the caveat included in the fifth sentence of this risk factor to the effect that although you refer to may of your commercial arrangements with other pharmaceutical and biotechnology companies as “partnerships” or “collaborations,” in many cases you are only providing specific services for fees and milestone payments without any interest in future product sales or profits. The use of these terms to describe agreements for which

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Nine

you are only providing services for a fee is inappropriate. Please revise the disclosure throughout the document accordingly and confirm to us that the only agreements and arrangements described in this document as “partnerships” or “collaborations” are those in which you have future interests at stake.

The Company acknowledges the Staff’s comment and has revised the disclosure throughout the Registration Statement to make clear the distinction between its “collaborations” or “partnerships” and its other “commercial arrangements” that do not include any interest in future product sales or profits. For example, please refer to the revisions at pages 14, 31, 40, 41, 44, 46, 59 and elsewhere in the Registration Statement.

We are dependent on our collaborations, and events involving these collaborations or any future collaborations could prevent us from developing or commercializing product candidates. — page 14

20.	The first full paragraph of this risk factor is repeated in the carryover paragraph at the top of page 15. Please delete the repetitive disclosure.
	The repetitive disclosure has been deleted at page 15 in response to the Staff’s comment.

Our drug discovery efforts are dependent on continued access to and use of our beamline facility... page 16

21.	Please revise the subheading to identify how you might be adversely affected.
	The subheading has been revised at page 16 in response to the Staff’s comment.
22.	Please disclose, in the risk factor, how many beamline facilities there are, whether other facilities are comparable to your current facility and how long it might take you to obtain equivalent access to a comparative alternate facility. You need to provide an adequate factual context for analyzing this risk and its potential adverse consequences.
	Additional disclosure regarding beamline facilities has been added to the risk factor at page 16 in response to the Staff’s comment.

If our competitors develop drug discovery technologies that are more advanced than ours... page 16

23. The subheading does not appear to adequately summarize all of the information in the body of the risk factor. Please separate the discussion of the competitive environment for Troxatyl from the discussion of the competitive environment for your fragment-based drug discovery activities and present each discussion under an appropriate subheading.

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Ten

The subheading has been revised and the risk factor has been separated into two separate risk factors, one discussing the competitive environment for Troxatyl and the other discussing the competitive environment for the Company’s fragment-based drug discovery activities, at pages 16 and 17 in response to the Staff’s comment.

We may not be able to obtain patent term extension/restoration or other exclusivity for our products. — page 26

24.	The information in this risk factor is too vague and generic to be meaningful. Please expand it to include a factual context that ties the risk to your specific products. In this regard, we have also noted the discussion in the last paragraph of page 49. We think the discussion on page 49 is also too generic to be meaningful. Please expand it as well.
	Additional disclosure regarding the factual context of the Company’s Troxatyl intellectual property position has been added at pages 26 and 52 in response to the Staff’s comment.

Future sales of our common stock may cause our stock price to decline. — page 28

25.	It will be difficult for a potential investor to sort out and remember all of the numbers included in this risk factor. Please present the numerical information in the tabular format included in the examples contained in Staff Legal Bulletin No. 7, as revised.
	The Company has reviewed Staff Legal Bulletin No. 7, as revised, and revised the disclosure at pages 29 and 30 to include the numerical information in tabular format in response to the Staff’s comment.
26.	Please include more information regarding the “automatic annual increases” that will be included in the share reserves, and identify the potential adverse consequences resulting from these increases. We may have additional comments.
	The Company has supplemented its disclosure at page 30 to include additional information in response to the Staff’s comment.

Use of Proceeds — page 31

27.

Please expand the discussion in this section to quantify the amount of proceeds you anticipate using for each stated purpose.

The Company has expanded its disclosure at page 32 to include the approximate percentages of the proceeds that it anticipates using for each of the stated purposes. The Company believes that these percentages, together with the additional disclosure concerning the anticipated stage of completion of the clinical development of Troxatyl (in response to comment 28 below), provide sufficient information to prospective investors to understand the magnitude of the specific uses of proceeds described in this section.

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Eleven

28.	Please indicate, clearly, whether you anticipate that the proceeds from this offering will enable you to complete the development of Troxatyl. If not, discuss how far along in the process you anticipate the proceeds will enable you to go.
	The Company has included additional disclosure at page 32 confirming that it anticipates that the proceeds from the offering will be sufficient to enable it to complete accelerated approval of Troxatyl for the third-line treatment of AML, assuming expedited FDA review under its fast track designation standards.
29.	We note your statement that you may use a portion of the proceeds to repay a portion of your debt. Please include the information specified in Instruction 4 to Item 504 of Regulation S-K.
	The Company acknowledges the Staff’s comment and has included additional disclosure at page 32 regarding its debt obligations that may be repaid from a portion of the proceeds of the offering.

Capitalization — page 32

30.	Please specifically state that the table sets forth your cash and cash equivalents and your capitalization as of June 30, 2005.
	The Company has made the requested revision at page 33 in response to the Staff’s comment.

Management’s Discussion and Analysis

Financial Operations Overview

Research and Development Expense, page 38

31.	Please refer to the Division of Corporation Finance “Current Issues and Rulemaking Projects Quarterly Update” under section VIII — Industry Specific Issues — Accounting and Disclosure by Companies Engaged in Research and Development Activities. For each of your major research and development projects please disclose the costs incurred during each period presented and to date on the project.
	The Company has reviewed the Division of Corporation Finance “Current Issues and Rulemaking Projects Quarterly Update” under section VIII — Industry Specific Issues — Accounting and Disclosure by Companies Engaged in Research and Development

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Twelve

Activities and has included additional disclosure at page 39 in response to the Staff’s comment.

Critical Accounting Policies and Estimates

Stock-Based Compensation Expense, page 40

32.	We note the supplemental information provided on September 22, 2005 regarding management’s pricing of stock option grants. Please be aware that we may have additional comments upon finalization of price range.
	The Company acknowledges the Staff’s comment.

Results of Operations

Six Months Ended June 30, 2004 Compared to 2005 — page 41

33.

Please provide more detail regarding the personnel reductions referenced under “General and Administrative.” Also, please refer to the two risk factors on page 20 that relate to increasing the size of your organization and attracting and keeping personnel. The reduction in personnel seems to be inconsistent with the risks described on page 20. Please explain how this reduction in personnel relates to the risk factors describing your need for additional personnel and your ability to attract and keep employees.

The Company has included additional disclosure regarding the personnel reductions that occurred in 2004 and the first half of 2005 at page 42. The Company supplementally advises the Staff that it effected a reduction in force in 2004 and the first half of 2005 in connection with changing its business strategy to focus on oncology drug discovery and development. The headcount reductions were in part driven by the Company’s financial condition, the difficult private equity markets and other factors considered by management at that time. The disclosure in the prospectus assumes the completion of the offering and the Company anticipates that it will expand its research and development activities and will need to add personnel consistent with its focus on oncology drug discovery and development following the completion of the offering due to its responsibilities as a public company.

Liquidity and Capital Resources — page 43

34. Please refer to the discussion of the proposed financing agreement located on page 44. When the agreement is signed it should be filed as an exhibit to the registration statement.

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Thirteen

	The disclosure at page 45 has been updated to refer to the new financing agreement that was executed in September 2005. The agreement is filed with Amendment No. 1 as Exhibit 10.34.
35.	Identify the lender on your line of credit and file the loan agreement as an exhibit.
	The lenders have been identified at page 45 and the agreement is filed with Amendment No. 1 as Exhibit 10.34.
36.	Also, please expand the discussion here and in the “Use of Proceeds” section to explain, in reasonable detail, how you will use the additional funds from the loan.
	The Company has included additional disclosure at pages 32 and 45 regarding the use of the funds from the loan for general working capital and to purchase equipment and leasehold improvements.

Cash Flows — page 44

37.	Please revise your discussion to address the underlying reasons for fluctuations in net cash used in operations. It is insufficient to reiterate information currently presented within the Consolidated Statement of Cash Flows.
	The disclosure has been revised at page 45 in response to the Staff’s comment.

Contractual Obligations — page 46

38.	We note that you are required to make milestone payments based on successful development and approval of Troxatyl and will be required to make royalty payments based on net sales. Please include these amounts within the table or provide a discussion of your obligations and why you are unable to estimate the timing of payments within the notes to the table.
	In response to the Staff’s comment, the Company has included a footnote to the contractual obligation table at page 47 with a discussion of the milestone and royalty obligations, including the obligation to pay minimum royalty payments, that may become due and payable to Shire in connection with the successful development and approval of Troxatyl for the third-line treatment of AML. The Company has also included disclosure explaining why it is unable to estimate the timing of these milestone and royalty payments.
39.	Please update this information through September 30, 2005. If you finalize the new debt agreement after that date, you should also include it in the table.

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Fourteen

The Company respectfully advises the Staff that it will update the chart to September 30, 2005 when it includes September 30, 2005 financial information in a subsequent amendment to the Registration Statement. The Company has updated the chart at page 47 to include obligations arising under the new debt agreement.

Business — page 48

40.	Please note that we have not completed our review of your application for confidential treatment. We may have additional comments on your disclosure in conjunction with that review.
	The Company acknowledges the Staff’s comment.

Troxatyl — page 48

41.

On page 49, disclose the amounts paid to date to Shire and the aggregate amount of potential milestone payments to Shire. If the agreement with Shire calls for minimum royalty payments in any year, disclose the aggregate minimum royalty payments.

Additional disclosure has been added at page 52. However, the Company has not included disclosure of the aggregate amount of potential milestone payments to Shire or the aggregate minimum royalty payments. The Company has requested confidential treatment with respect to such confidential financial terms and would respectfully request that the Staff consider the disclosure in Amendment No. 1 together with the Company’s request for confidential treatment that was previously submitted to the Staff. The Company believes that its request for confidential treatment of these terms is in the best interest of its stockholders as described in detail in the Company’s request for confidential treatment that was previously submitted to the Staff.

Acute Myelogenous Leukemia — page 50

42.	Please refer to the second paragraph under this heading. You need to expand the discussion to explain the significance of your finding that the low-level toxicities you observed were not age-related.
	Additional disclosure has been included at page 53 in response to the Staff’s comment.
43.	If you only acquired the rights to Troxatyl in July of 2004, it is unclear how you could have patients that have experienced “durations of response” of over 12 months in the Phase I/II clinical trial. Does this mean Shire was conducting this trial at the time you acquired the rights to this drug?
	The Company supplementally advises the Staff that Shire commenced the Phase I/II clinical trial prior to licensing Troxatyl to the Company. The first patient was enrolled by

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Fifteen

	Shire in December 2002. As of July 2004 when the Company acquired an exclusive license to Troxatyl and took over the ongoing clinical program, 28 patients had already been enrolled in the trial.
44.	Please refer to the discussion of your current Phase II/III clinical trial. If the M.D. Anderson Cancer Center article was not published until August of 2005, it is not clear how you could have begun a trial in July 2005 using the information contained in that article. Please revise the disclosure to explain this.
	The Company supplementally advises the Staff that the Company received the data discussed in the M.D. Anderson Cancer Center article in January 2005. The Company subsequently engaged in several telephone conversations with Dr. Giles at the M.D. Anderson Cancer Center regarding the data that formed the basis for the article that was ultimately published in August 2005. Additionally, the Company was provided a pre-print of the article in March 2005. The Company has revised the disclosure at page 54 to provide additional explanation in response to the Staff’s comment.
45.	The discussion in this section contains a good deal of technical jargon that is not likely to be familiar to investors not involved in your industry. Please revise the disclosure throughout the section to replace the technical jargon with plain English, or where you cannot eliminate the technical language, explain what the terms mean at the first place they appear. For example, explain what you mean when you say that the “clinical trial has been powered to detect a doubling of the historical CR rate of 4.7% derived from the ...database.”
	The Company has revised the disclosure throughout the Business section in response to the Staff’s comment. The Company has eliminated the technical jargon or rewritten it in plain English so that the disclosure can be more easily understood. With respect to a few of the industry specific terms which the Company believes could not be replaced by suitable alternatives to provide a clearer understanding to the reader, the Company has revised the disclosure to explain the meaning of the term the first time it is used.

Research Programs — page 54

46.	When does your agreement with Pierre Fabre Medicament expire? Does the agreement provide for any payments to be made/received? If it does, please quantify the amount of any payments to date and any aggregate future payments and clarify who has the obligation to make these payments.
	The Company supplementally advises the Staff that the agreement expires on a product-by-product basis on the later of the last to expire patent covering a product or 15 years

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Sixteen

	after first commercial sale. The Company further supplementally advises that no payments are required to be made or received until there are product sales and then there are royalties on net sales of products. Each party to this collaboration bears its own expenses.
47.	It appears that the agreement with Pierre Fabre Medicament has not been filed as an exhibit. Please file the agreement or provide us with a written analysis supporting your determination that it is not required to be filed.
	The agreement is filed as Exhibits 10.27 and 10.28 to the Registration Statement. The original party to each of the agreements was UroGene, S.A., which is the predecessor-in-interest to Pierre Fabre Medicament. Clarifying disclosure has been added to page 57 to include reference to UroGene, SA, as the predecessor-in-interest to Pierre Fabre Medicament, and to the exhibit index to include reference to Pierre Fabre Medicament.

Collaborations, Commercial Agreements and Grants — page 56

48.	For each agreement that provides for payments to be made/received, quantify all amounts paid to date and all potential future payments and clarify which party has the obligation to make these payments.
	The Company has included additional disclosure at page 59 clarifying that all payments are to be made to the Company (other than in connection with the Shire license) under the referenced collaborations and commercial arrangements. The Company also includes disclosure of all material amounts paid to date under these arrangements and has additional disclosure regarding the terms of these agreements at pages 59 to 62. The Company has not, however, included specific disclosure with respect to the particular amounts of all potential future payments. The Company has requested confidential treatment with respect to such confidential financial terms and would respectfully request that the Staff consider the disclosure in Amendment No. 1 together with the Company’s request for confidential treatment that was previously submitted to the Staff. The Company believes that its request for confidential treatment of these terms is in the best interest of its stockholders as described in detail in the Company’s request for confidential treatment that was previously submitted to the staff.
49.	We note that you have filed agreements with UroGene as exhibits to the registration statement. Please revise to describe these agreements.
	Clarifying disclosure has been added to page 55 to include reference to UroGene, SA, as the predecessor-in-interest to Pierre Fabre Medicament, and to the exhibit index to include reference to Pierre Fabre Medicament. Please also refer to the response to comments 46 and 47 above.

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Seventeen

Related Party Transactions — page 88

50.	Please refer to footnote 2 to the table on page 88. Dr. Papadopoulos may not disclaim ownership of securities that have not been included in the table. Please revise the table to include the 19,454 shares referenced in the footnote. A similar revision should be made to the tables on pages 89, 90 and 93.
	The requested revisions have been made at pages 92, 93, 94, 97 and 98 in response to the Staff’s comment.

Underwriting — page 102

51.	Tell us whether any of the lead underwriters or any other broker dealers who may participate in the syndicate may offer and/or sell the shares electronically. If so, identify them in this section and disclose that they will be offering the shares electronically. Tell us the procedures they will use in their selling effort and how they intend to comply with the requirements of Section 5 of the Securities Act of 1933 particularly with regard to how offers and final confirmations will be made and how and when purchasers will fund their purchases.
	The Company has been advised that none of the representatives — CIBC World Markets Corp., Piper Jaffray & Co. and JMP Securities LLC — intend to engage in any electronic distribution. At the present time, however, the underwriting syndicate has not been finalized. As a result, the Company cannot confirm whether any members of the underwriting syndicate will engage in any electronic distribution. When and if the Company learns that members of the underwriting syndicate intend to engage in electronic distribution, we will supplementally provide you with both the identity of such syndicate member(s) and a description of the procedures to be employed by such syndicate member(s).
52.	Tell us whether you intend to do a “directed share offering”. If so, please disclose in this section the number of shares you will offer and to whom you will make the offer. Provide us with any material you have sent or intend to send to these potential purchasers such as a “friends and family letter”. Tell us when you first sent them or intend to send them to these potential purchasers. Tell us whether the sale will be handled by you directly or by the underwriting syndicate. Tell us the procedures you or the underwriter will employ in making the offering and how you will assure that this offer will meet the requirements of Section 5 of the Securities Act and Rule 134. We may have further comments.

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Eighteen

	The Company supplementally advises the Staff that it has determined that the Company will not conduct a directed share offering. Accordingly, the Underwriting section of the prospectus does not include any disclosure related to a directed share offering.
53.	Tell us whether you or the underwriters have any arrangements with a third party to host or access your preliminary prospectus on the Internet. Also, tell us who the party is and the address of the website. Describe the material terms of the agreement and provide us with a copy of any written agreement. Provide us with copies of all information concerning your company or the offering that appears on the third party website. We may have further comments.
	The Company has been informed that CIBC World Markets Corp. and Piper Jaffray & Co. plan to engage NetRoadshow to host the preliminary prospectus and the Company’s road show on NetRoadshow’s website at http://www.netroadshow.com for qualified investors only. The materials that will appear on NetRoadshow’s website in connection with the offering will be password protected and will consist of only a copy of the preliminary prospectus, a video of the road show, and information that is ministerial in nature. NetRoadshow will make such materials available only to investors to whom the underwriters have provided a password. An investor who is given the password may access such materials only twice during the period of the roadshow and will not be able to download, copy or print any portion of such materials other than the preliminary prospectus.
	CIBC World Markets Corp. and Piper Jaffray & Co. have entered into agreements with NetRoadshow following the guidance set forth in the Staff’s No Action Letter to Net Roadshow, Inc. dated July 30, 1997. Copies of these agreements have previously been provided to the Staff in connection with other transactions. Pursuant to these agreements, among other things, NetRoadshow has agreed to comply with its obligations under the terms of the July 30, 1997 No Action Letter with respect to road show transmissions for registered offerings, as amended or updated by other no-action letters relating to Internet road shows.
	In the event the procedures described above are modified, for example due to the implementation of the Commission’s Securities Offering Reform measures applicable after December 1, 2005, the Company will supplementally inform the Staff of such modifications.
54.	Confirm that you have described the nature and extent of any possible short sales by the underwriters. To the extent applicable, address the points enumerated in Section VIII.A.3. of the Division of Corporation Finance’s “Current Issues Outline” regarding syndicate short sales. The June 16, 2000 version is available on the SEC’s website, www.sec.gov.
	The Company confirms that it has disclosed the potential for syndicate short sales consistent with Section VIII.A.3. of the Division of Corporation Finance’s “Current

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Nineteen

Issues Outline” on pages 107 and 108 of the prospectus. For the Staff’s reference, the relevant disclosure is set forth below:

     “Over-allotments and syndicate covering transactions—The underwriters may sell more shares of our common stock in connection with this offering than the number of shares that they have committed to purchase. This over-allotment creates a short position for the underwriters. This short sales position may involve either “covered” short sales or “naked” short sales. Covered short sales are short sales made in an amount not greater than the underwriters’ over-allotment option to purchase additional shares in this offering described above. The underwriters may close out any covered short position either by exercising their over-allotment option or by purchasing shares in the open market. To determine how they will close the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market, as compared to the price at which they may purchase shares through the over-allotment option. Naked short sales are short sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that, in the open market after pricing, there may be downward pressure on the price of the shares that could adversely affect investors who purchase shares in this offering.”

Consolidated Financial Statements

Notes to Consolidated Financial Statements

Note 1. Organization and Summary of Significant Accounting Policies

Stock-Based Compensation, page F-10

55.	We note in your disclosure that $10.5 million of deferred stock compensation was recorded in the six months ended June 30, 2005. However the analysis that was provided to us supplementally indicates that $9.9 million was recorded. Please advise or revise.
	The requested revision has been made at page F-10 in response to the Staff’s comment.

Research and Development, page F-13

56. Please expand your research and development policy to include the types of costs included in R&D, including salaries, contractor fees, building costs, utilities,

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Twenty

administrative expenses and allocations of corporate costs. (NTR: This information is included in MD&A but should be included in the notes as well.)

The requested revision has been made at page F-13 in response to the Staff’s comment.

Note 2. Balance Sheet Details

Property and Equipment, page F-16

57.	We note that you have entered into property and equipment leases that qualify as capital leases under SFAS 13. As such, please provide information required by paragraph 16a(ii).
	The Company does not maintain capital leases as incorrectly stated in Note 2 on Page F-16. The Company has modified the reference to capital leases in Note 2 to correctly identify the arrangements as “equipment lines of credit.” The Company has provided the disclosures pertaining to the equipment lines of credit in Note 3 on Page F-17.

Note 5. Redeemable Convertible Preferred Stock

58.	Please provide a roll-forward of the balance of redeemable convertible preferred shares outstanding for each class of preferred shares for each period presented as required by paragraph 28(c) of Rule 5-02 of Regulation S-X.
	The requested revisions have been made at pages F-20 and F-21 in response to the Staff’s comment.

Note 6. Stockholders’ Deficit

Common Stock Issuable, page F-21

59.

Please provide a description of the current accounting treatment for the variable number of common shares issuable as a result of the conversion of the note payable to Millennium Pharmaceuticals, Inc. during 2003 and 2004 into a right to receive common stock. Additionally, please provide a detail description of the basis for this accounting treatment, including specific references to the accounting literature relied upon and you consideration of the provision of SFAS 150.

In response to the Staff’s inquiry of the accounting treatment of the convertible note payable to Millennium Pharmaceuticals, Inc. during 2003 and 2004, the Company has reviewed the provisions of SFAS 150 and determined the appropriate accounting treatment for the convertible note payable is to be reflected as a liability as opposed to within stockholders deficit.

Mr. Jeffrey P. Riedler, Esq.
Ms. Mary K. Fraser, Esq.
October 14, 2005
Page Twenty-One

In accordance with paragraph 12(a) of SFAS 150, a financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability, if at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: a) A fixed monetary amount known at inception; b) Variations in something other than the fair value of the issuer’s shares or c) Variations inversely related to the changes in fair value of the issuer’s equity shares. Because the note payable requires the Company to settle a fixed-amount financial instrument into a variable amount of shares, the convertible note payable should be reflected as a liability as the note holder is not subject to the risk and rewards of an equity holder due to the fluctuation in stock price until the settlement date (i.e., required conversion of the financial instrument into shares upon an IPO or sale of the company). This obligation, in substance, will be considered debt and will be accounted for in accordance with the provisions of APB Opinion No. 21, Interest on Payables and Receivable (this is consistent to the treatment of the debt since initial issuance in 2001). APB Opinion No. 21 requires the obligation to be accreted to its redemption amount at the date of maturity using the interest method.

The balance sheets as of December 31, 2004 and 2005 and June 30, 2005 have been adjusted to reflect the reclassification of $4 million, $6 million and $6 million, respectively, from common stock issuable to note payable within the long-term liability section of the balance sheets as there is no requirement to settle these amounts in cash as of the dates of the balance sheets.

Accountants Consent

60.	Provide a currently dated and appropriately signed consent from your independent accountants in the amendment for which you will request effectiveness.
	The Company acknowledges the Staff’s comment.

Sincerely,

/s/ J. Patrick Loofbourrow

JPL:amr

cc: Michael Grey
James Rotherham, CPA
Annette North, Esq.
Frederick T. Muto, Esq.
Charles S. Kim, Esq.
Ora T. Fisher, Esq.
Cheston J. Larson, Esq.