S-1/A

As filed with the Securities and Exchange Commission on January 4, 2006

Registration No. 333-128059

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 4

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                     

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 JANUARY 4, 2006

4,000,000 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 $11.00 and $13.00 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 9.

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

      The underwriters may also purchase up to an additional 600,000 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                     , 2006.

CIBC World Markets Piper Jaffray

JMP Securities

Table of Contents

	Page
Prospectus Summary		1
Risk Factors		9
Forward-Looking Statements		32
Use of Proceeds		33
Dividend Policy		33
Capitalization		34
Dilution		36
Selected Consolidated Financial Data		38
Management’s Discussion and Analysis of Financial Condition and Results of Operations		40
Business		53
Management		75
Related Party Transactions		96
Principal Stockholders		101
Description of Capital Stock		104
Shares Eligible for Future Sale		110
Underwriting		112
Legal Matters		116
Experts		116
Where You Can Find More Information		116
Index to Financial Statements		F-1
EXHIBIT 1.1
EXHIBIT 3.1
EXHIBIT 4.1
EXHIBIT 4.3
EXHIBIT 4.5
EXHIBIT 5.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.16
EXHIBIT 10.29
EXHIBIT 10.37
EXHIBIT 10.38
EXHIBIT 10.39
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 intend to complete submission of our rolling 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 ourselves and multiple partners. We are generating lead compounds 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. In this program, 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. In this program, we have also focused on compounds that inhibit wild type forms of BCR-ABL. Additional internal programs are at the lead optimization stage and are focused on the target AurA, an Aurora kinase that has been implicated in tumor growth, and the targets MET and RON, two closely related proteins that control cell growth and division, and are 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 $60.1 million in 2003, 2004 and the first nine 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/II trial (initiate 2006)
BCR-ABL
	•	Gleevec-resistant CML	Preclinical development (IND expected end of 2006)
MET and RON
	•	Solid tumors	Lead optimization
AurA
	•	Solid tumors	Lead optimization
K-RAS
	•	Solid tumors	Lead discovery

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 to 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

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ranged from one to over 12 months. Several patients remain in active remission and median survival time for Troxatyl-treated patients who achieved either a complete response or a complete response with partial platelet recovery was over eight months. On the basis of these results, we have concluded 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. However, later-stage or larger-scale clinical trials may not produce similar results to the results from our Troxatyl Phase I/II clinical trial or provide a basis for regulatory approval.

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. We expect to complete enrollment in the trial in the third quarter of 2006 and announce the results in the fourth quarter of 2006. If the results of this trial are positive, we intend to complete submission of our rolling 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, currently the only approved drug for this disease.

We are currently completing enrollment in 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 plan to initiate one or more 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 ourselves and 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, the process of identifying active new chemical entities, which may be transformed by subsequent modification into a clinically useful drug. We have identified a portfolio of approximately 20 oncology targets that we believe are clearly implicated in cancers. 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 and K-RAS.

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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 an 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 September 30, 2005, we had an accumulated deficit of approximately $129.5 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 9.

Recent Developments

In April 2005, certain existing preferred stockholders irrevocably committed to purchase approximately $7.5 million of additional shares of our Series B preferred stock in December 2005. In December 2005, we issued approximately $7.5 million of additional shares of our Series B preferred stock pursuant to these irrevocable commitments made in April 2005, resulting in estimated net proceeds of approximately $6.8 million. This transaction is discussed more fully in “Related Party Transactions—Stock Issuances—Series B Financing and Recapitalization” beginning on page 98. In December 2005, we also borrowed an additional $4.9 million under our line of credit and equipment financing agreement with Silicon Valley Bank and Oxford Finance Corporation. This transaction is described more fully in “Management’s Discussion and Analysis of Financial Condition—Liquidity and Capital Resources” beginning on page 47.

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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.	4,000,000 shares
Common stock to be outstanding after this offering	13,703,168 shares
Use of proceeds	We intend to use the net proceeds from this offering for the clinical development of Troxatyl and related milestone payments; 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 9,703,168 shares outstanding as of December 31, 2005, and excludes the following:

•  1,146,686 shares of common stock subject to outstanding options under our 2000 equity incentive plan, with a weighted average exercise price of $2.13 per share;

•  247,928 shares of common stock reserved for future issuance under our 2000 equity incentive plan;

•  1,200,000 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

•  195,629 shares of common stock subject to outstanding warrants, with a weighted average exercise price of $4.72 per share.

Unless otherwise stated, information in this prospectus assumes:

•  a 1-for-2 reverse stock split of our common stock effected on January 3, 2006;

•  the conversion of all our outstanding shares of preferred stock, including shares of our Series B preferred stock issued in December 2005 pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement, into 8,346,316 shares of common stock upon the completion of this offering;

•  the issuance of 500,000 shares of our common stock upon the completion of this offering upon the automatic conversion of a $6.0 million convertible note, assuming an initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus);

•  the issuance of 2,692 shares of our common stock upon the completion of this offering from the net exercise of a warrant, assuming an initial public offering price of $12.00 per share; 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 September 30, 2005 and for the nine months ended September 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.

																	Nine Months Ended
		Years Ended December 31,															September 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		$	3,152		$	451
	Grants—subcontractor reimbursements		–			–			–			4,599			4,976			3,460			4,376
	Collaborations and commercial agreements		–			1,338			2,986			10,135			15,941			11,819			9,923
Total revenue			–			1,338			3,336			18,078			27,297			18,431			14,750
Expenses:
	Research and development		6,616			17,831			25,573			28,587			31,444			27,954			27,610
	General and administrative		4,053			7,682			10,122			7,353			6,719			4,818			9,401
	In-process technology		–			1,500			–			–			4,000			—			—
Total operating expenses			10,669			27,013			35,695			35,940			42,163			32,772			37,011
Loss from operations			(10,669	)		(25,675	)		(32,359	)		(17,862	)		(14,866	)		(14,341	)		(22,261	)
Interest income			2,424			2,729			622			320			175			123			178
Interest expense			(126	)		(302	)		(932	)		(1,219	)		(669	)		(538	)		(253	)
Interest expense associated with debenture			–			–			–			–			(3,392	)		(732	)		(1,188	)
Net loss			(8,371	)		(23,248	)		(32,669	)		(18,761	)		(18,752	)		(15,488	)		(23,524	)
Accretion to redemption value of redeemable convertible preferred stock			(274	)		(329	)		(329	)		(329	)		(329	)		(247	)		(219	)
Net loss attributable to common stockholders		$	(8,645	)	$	(23,577	)	$	(32,998	)	$	(19,090	)	$	(19,081	)	$	(15,735	)	$	(23,743	)
Basic and diluted net loss attributable to common stockholders per share(1):
	Historical	$	(65.00	)	$	(86.05	)	$	(78.94	)	$	(44.92	)	$	(39.84	)	$	(33.69	)	$	(43.09	)
	Pro forma (unaudited)													$	(10.00	)				$	(4.03	)
Shares used to compute basic and diluted net loss attributable to common stockholders per share(1):
	Historical		133			274			418			425			479			467			551
	Pro forma (unaudited)														1,909						5,895

(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 September 30, 2005
				Pro			Pro Forma
	Actual			Forma			As Adjusted(1)
	(unaudited)
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	7,207		$	18,908		$	61,548
Working capital (deficit)		(1,205	)		9,075			51,715
Total assets		22,708			34,409			77,049
Long-term debt obligations (including current portion)		11,416			16,283			10,283
Redeemable preferred stock		40,254			47,088			—
Accumulated deficit		(129,508	)		(129,508	)		(129,508	)
Total stockholders’ (deficit) equity		(37,795	)		(37,795	)		57,933

(1)  A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus) would increase (decrease) the net proceeds to us from this offering by $3.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses. The pro forma as adjusted information is illustrative only and following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

The table above presents summary balance sheet data on an actual basis, on a pro forma basis and on a pro forma as adjusted basis. The pro forma balance sheet data gives effect to the issuance in December 2005 of approximately $7.5 million of our Series B preferred stock issued pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement, resulting in estimated net proceeds of approximately $6.8 million, and approximately $4.9 million of loan proceeds received from Silicon Valley Bank and Oxford Finance Corporation in December 2005 in connection with an existing credit facility. The pro forma as adjusted balance sheet data also gives effect to the sale of 4,000,000 shares of our common stock in this offering at an assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus), after deducting the underwriting discount and estimated offering expenses payable by us, the automatic conversion of the $6.0 million convertible note into 500,000 shares of common stock at the assumed initial public offering price of $12.00 per share, and the automatic conversion of all preferred stock, including shares of our Series B preferred stock issued in December 2005 pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement.

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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. 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

•  identifying, 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 60 trial centers in the United States, Canada 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, that the parties are currently negotiating to terminate. We have also entered into other drug discovery collaborations, such as those with the Cystic Fibrosis Foundation 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 current collaborators or any future collaborators (including collaborators resulting from a change of control) 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. Moreover, in the event of termination of a collaboration agreement, termination negotiations may result in less favorable terms than we would otherwise choose.

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 one or a combination 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 access 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. Additionally, 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

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or more 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; Velcade^tm (bortezomib), under development for this indication by Millennium Pharmaceuticals, Inc.; Avastin^tm (bevacizumab), under development for this indication by Genentech, Inc.; 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 one or more of the following:

•  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 proposals having a similar effect 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 December 31, 2005, we had 112 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 nine months ended September 30, 2005, we had a net loss attributable to common stockholders of $23.7 million. As of September 30, 2005, we had an accumulated deficit of approximately $129.5 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.

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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 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 $14.8 million and $18.4 million for the nine months ended September 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 the net proceeds from this offering, together with interest thereon, our existing cash and cash equivalents, and cash commitments from existing collaborations, commercial agreements and grants, will be sufficient to meet our projected operating requirements into the second quarter of 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

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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.

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 any one or a combination of the following:

•  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

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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.

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;

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

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

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

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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 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 products, 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

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competition and our opportunity to establish or maintain product revenue could be substantially reduced or eliminated.

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 $7.97 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 30% of the total amount we have raised since our inception, and will own approximately 30% of our total common stock immediately following the completion of this offering.

We believe that the net proceeds from this offering, together with interest thereon, our existing cash and cash equivalents, and cash commitments from existing collaborations, commercial agreements and grants, will be sufficient to meet our projected operating requirements into the second quarter of 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 55% 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.

9,703,168 shares, or approximately 71%, 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, based on the number of shares outstanding as of December 31, 2005, we will have outstanding 13,703,168 shares of common stock. This includes the 4,000,000 shares we are selling in this offering, which may be sold in the public market immediately unless held by an affiliate of ours, the conversion of all of our outstanding shares of preferred stock, including shares of our Series B preferred stock issued in December 2005 pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement, into 8,346,316 shares of common stock upon completion of this offering, the issuance of 500,000 shares of our common stock upon the completion of this offering upon the automatic conversion of a $6.0 million convertible note at the assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus) and the issuance of 2,692 shares of common stock upon the completion of this offering from the net exercise of a warrant at the assumed initial public offering price of $12.00 per share. 9,703,168 shares, or approximately 71%, of our total outstanding shares as well an aggregate of 1,342,315 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
8,151,342	Common stock	180 days after the date of this prospectus due to lock-up agreements the holders of these shares have with the underwriters or with us. However, the underwriters can waive these restrictions under the lock-up agreements with the underwriters and allow those stockholders to sell their shares at any time.
500,000	$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.
1,051,827	Common stock	From time to time after expiration of the 180-day lock-up upon completion of their respective one-year holding periods, or earlier if the holders exercise any available registration rights.
1,146,686	Options exercisable for common stock under our 2000 equity incentive plan	Upon the exercise of the options in the future, if ever, with all shares subject to a 180-day lock-up.
195,629	Warrants exercisable for common stock	Upon the exercise of the warrants in the future, if ever, with all shares subject to a 180-day lock-up.

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

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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	750,000 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	75,000.
2005 employee stock purchase plan	375,000.

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 500,000 shares (or a smaller number of shares as may be determined by our board of directors).

•  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 (or a smaller number of shares as may be determined by our board of directors).

•  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 150,000 shares (or a smaller number of shares as may be determined by our board of directors).

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 $42.6 million, based upon an assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus) and after deducting the underwriting discount and estimated offering expenses. A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share would increase (decrease) the net proceeds to us from this offering by $3.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the 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 $49.3 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 related milestone payments that may be payable to Shire, and approximately 35% to 45% 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 file an NDA with the FDA for accelerated approval of Troxatyl for the third-line treatment of AML. 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 approximately 15% to 25% 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, and up to approximately 5% to 10% to repay a portion of our debt under our line of credit and equipment financing agreement with Silicon Valley Bank and Oxford Finance Corporation. 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 $8.0 million of indebtedness outstanding under this facility which is being used for general working capital and $867,000 used for equipment purchases.

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 interest thereon, our existing cash and cash equivalents, and our cash commitments from existing collaborations, commercial agreements and grants, will be sufficient to meet our projected operating requirements into the second quarter of 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 September 30, 2005:

•  on an actual basis;

•  on a pro forma basis to give effect to (1) the issuance in December 2005 of approximately $7.5 million of our Series B preferred stock pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement, resulting in estimated net proceeds of approximately $6.8 million, and (2) approximately $4.9 million of loan proceeds received in December 2005 from Silicon Valley Bank and Oxford Finance Corporation; and

•  on a pro forma as adjusted basis to also 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 4,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus), after deducting the underwriting discount and estimated offering expenses, (3) the conversion of all of our outstanding shares of preferred stock, including shares of our Series B preferred stock issued in December 2005 pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement, into 8,346,316 shares of common stock upon the completion of this offering, (4) the issuance of 500,000 shares of our common stock upon the completion of this offering upon the automatic conversion of a $6.0 million convertible note at the assumed initial public offering price of $12.00 per share and (5) the issuance of 2,692 shares of our common stock upon the completion of this offering from the net exercise of a warrant at the assumed initial public offering price of $12.00 per share.

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 September 30, 2005
										Pro Forma
				Actual			Pro Forma			As Adjusted
				(unaudited)
				(in thousands except share
				amounts)
Cash and cash equivalents(1)				$	7,207		$	18,908		$	61,548
Long-term debt obligations (including current portion)				$	11,416		$	16,283		$	10,283
Redeemable convertible preferred stock, $0.001 par value: 19,000,000 shares authorized; 15,192,354 shares issued and outstanding, actual; 16,692,654 shares issued and outstanding, pro forma; no shares authorized, issued or outstanding, pro forma as adjusted					40,254			47,088			–
Stockholders’ (deficit) equity:
	Preferred stock, $0.001 par value: no shares authorized, issued or outstanding, actual and pro forma; 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 650,793 shares issued and outstanding, actual and pro forma; 75,000,000 shares authorized and 13,499,801 shares issued and outstanding, pro forma as adjusted				1			1			13
	Notes receivable from stockholders				(57	)		(57	)		(57	)
	Additional paid-in capital(1)				99,560			99,560			195,276
	Deferred compensation				(7,791	)		(7,791	)		(7,791	)
	Accumulated deficit				(129,508	)		(129,508	)		(129,508	)
		Total stockholders’ (deficit) equity(1)			(37,795	)		(37,795	)		57,933
			Total capitalization(1)	$	13,875		$	25,576		$	68,216

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(1)  A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus) would increase (decrease) each of pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $3.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only and following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

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

•  1,403,151 shares of common stock subject to outstanding options under our 2000 equity incentive plan, with a weighted average exercise price of $2.05 per share;

•  153,166 shares of common stock reserved for future issuance under our 2000 equity incentive plan;

•  1,200,000 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

•  170,826 shares of common stock subject to outstanding warrants, with a weighted average exercise price of $4.04 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 September 30, 2005 was approximately $(41.3) million, or approximately $(63.41) per common share, based on the number of common shares outstanding as of September 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 $5.8 million, or $0.65 per share of our common stock, represents our historical net tangible book value, taking into account the automatic conversion of our preferred stock upon completion of this offering, including shares of our Series B preferred stock issued in December 2005 pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement for estimated net proceeds of approximately $6.8 million.

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to the sale of common stock offered in this offering at the assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus), 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 September 30, 2005, and the conversion of the shares of Series B preferred stock issued in December 2005 pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement, into 8,346,316 shares of common stock upon completion of this offering, and after giving effect to the issuance of 500,000 shares of our common stock upon the completion of this offering upon the automatic conversion of a $6.0 million convertible note at the assumed initial public offering price of $12.00 per share, and after giving effect to $4.9 million of additional indebtedness, and after giving effect to the issuance of 2,692 shares of our common stock upon the completion of this offering from the net exercise of a warrant at the assumed initial public offering price of $12.00 per share, our pro forma as adjusted net tangible book value as of September 30, 2005 would have been approximately $54.5 million, or approximately $4.03 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $3.38 per share to existing common stockholders, and an immediate dilution of $7.97 per share to investors participating in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share				$	12.00
Historical net tangible book value per share as of September 30, 2005	$	(63.41	)
Pro forma increase in net tangible book value per share attributable to conversion of convertible preferred stock		64.06
Pro forma net tangible book value per share before this offering		0.65
Pro forma increase in net tangible book value per share attributable to existing common stockholders, including the issuance of 500,000 shares of our common stock upon the completion of this offering upon the automatic conversion of a $6.0 million convertible note at the assumed initial public offering price of $12.00 per share		3.38
Pro forma as adjusted net tangible book value per share after this offering					4.03
Pro forma dilution per share to investors participating in this offering				$	7.97

The following table summarizes, on a pro forma as adjusted basis as of September 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, after giving effect to the shares of Series B preferred stock issued in December 2005 pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement for estimated net proceeds of approximately $6.8 million, the issuance of 500,000 shares of our common stock upon the completion of this offering upon the automatic conversion of a $6.0 million convertible note at the assumed initial public

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offering price of $12.00 per share, and after giving effect to the issuance of 2,692 shares of our common stock upon the completion of this offering from the net exercise of a warrant at the assumed initial public offering price of $12.00 per share, before deducting the underwriting discount and estimated offering expenses:

		Shares Purchased					Total Consideration
												Average Price
		Number		Percent			Amount		Percent			Per Share
		(in thousands)
Existing stockholders before this offering			9,500		70	%	$	112,070		70	%	$	11.80
Investors participating in this offering			4,000		30	%		48,000		30	%	$	12.00
	Total		13,500				$	160,070				$	11.85

A $1.00 increase (decrease) in the assumed initial public offering price of $12.00 per share would increase (decrease) total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $4.0 million, $4.0 million and $0.30, respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses.

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 67% 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 4,600 shares or 33% of the total number of shares of common stock to be outstanding after this offering.

As of September 30, 2005, there were:

•  1,403,151 shares of common stock subject to outstanding options under our 2000 equity incentive plan, having a weighted average exercise price of $2.05 per share;

•  153,166 shares of common stock reserved for future issuance under our 2000 equity incentive plan; and

•  170,826 shares of common stock subject to outstanding warrants, having a weighted average exercise price of $4.04 per share.

Effective upon the completion of this offering, our 2000 equity incentive plan will terminate and an aggregate of 750,000 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 75,000 and 375,000 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 nine months ended September 30, 2004 and 2005, and the selected consolidated balance sheet data as of September 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.

																	Nine Months Ended
		Years Ended December 31,															September 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		$	3,152		$	451
	Grants—subcontractor reimbursements		–			–			–			4,599			4,976			3,460			4,376
	Collaborations and commercial agreements		–			1,338			2,986			10,135			15,941			11,819			9,923
Total revenue			–			1,338			3,336			18,078			27,297			18,431			14,750
Expenses:
	Research and development		6,616			17,831			25,573			28,587			31,444			27,954			27,610
	General and administrative		4,053			7,682			10,122			7,353			6,719			4,818			9,401
	In-process technology		–			1,500			–			–			4,000			–			–
Total operating expenses			10,669			27,013			35,695			35,940			42,163			32,772			37,011
Loss from operations			(10,669	)		(25,675	)		(32,359	)		(17,862	)		(14,866	)		(14,341	)		(22,261	)
Interest income			2,424			2,729			622			320			175			61			178
Interest expense			(126	)		(302	)		(932	)		(1,219	)		(669	)		(538	)		(253	)
Interest expense associated with debenture			–			–			–			–			(3,392	)		(670	)		(1,188	)
Net loss			(8,371	)		(23,248	)		(32,669	)		(18,761	)		(18,752	)		(15,488	)		(23,524	)
Accretion to redemption value of redeemable convertible preferred stock			(274	)		(329	)		(329	)		(329	)		(329	)		(247	)		(219	)
Net loss attributable to common stockholders		$	(8,645	)	$	(23,577	)	$	(32,998	)	$	(19,090	)	$	(19,081	)	$	(15,735	)	$	(23,743	)
Basic and diluted net loss attributable to common stockholders per share(1):
	Historical	$	(65.00	)	$	(86.05	)	$	(78.94	)	$	(44.92	)	$	(39.84	)	$	(33.69	)	$	(43.09	)
	Pro forma (unaudited)													$	(10.00	)				$	(4.03	)
Shares used to compute basic and diluted net loss attributable to common stockholders per share(1):
	Historical		133			274			418			425			479			467			551
	Pro forma (unaudited)														1,909						5,895

(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 September 30,
	2000			2001			2002			2003			2004			2005
																(unaudited)
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments	$	71,175		$	50,615		$	24,255		$	13,635		$	11,512		$	7,207
Working capital (deficit)		69,201			38,548			15,656			1,042			(8,634	)		(1,205	)
Total assets		75,736			72,095			47,721			35,943			28,332			22,708
Long-term debt obligations (including current portion)		1,645			7,707			15,789			13,487			23,420			11,416
Redeemable preferred stock		82,981			87,648			87,977			88,306			74,850			40,254
Accumulated deficit		(11,019	)		(34,596	)		(67,594	)		(86,684	)		(105,765	)		(129,508	)
Total stockholders’ deficit		(10,779	)		(30,882	)		(60,237	)		(78,044	)		(78,782	)		(37,795	)

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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 ourselves and 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 11 active revenue-generating collaborations, commercial agreements and grants based upon FAST and related technologies with pharmaceutical and biotechnology companies, including Eli Lilly & Company and Serono International S.A., as well as government and other agencies. We generated approximately $14.8 million in revenues from collaborations, commercial agreements and grants during the nine months ended September 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 September 30, 2005, our accumulated deficit was approximately $129.5 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 in the fourth quarter of 2006. We completed our first clinical trial evaluating Troxatyl dosing by continuous intravenous, or IV, infusion in the second quarter of 2005 and are currently completing enrollment in a Phase I dose ranging clinical trial of Troxatyl by continuous IV infusion in patients with refractory solid tumors.

We incurred $5.5 million, $3.5 million, and $9.0 million of expenses related to the development of Troxatyl in 2004, the nine months ended September 30, 2005, and cumulatively through September 30, 2005, respectively. These expenses for 2004 and cumulatively through September 30, 2005 include $4.0 million paid to Shire BioChem Inc. to in-license exclusive worldwide rights to Troxatyl.

Our research activities are focused on building an internal oncology pipeline and generating lead compounds for ourselves and multiple partners through application of our FAST drug discovery platform. We have identified a portfolio of approximately 20 oncology drug targets that we believe are clearly implicated in cancers. Our most advanced programs based upon FAST are focused on compounds that inhibit BCR-ABL, AurA and MET and RON. Based on our research activities and 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.

We incurred approximately $6.4 million, $451,000, and $10.5 million of internal research expenses in connection with our NIH grants in 2004, the nine months ended September 30, 2005, and cumulatively through September 30, 2005, respectively. We also incurred $5.0 million, $4.4 million, and $14.0 million of expenses to subcontractors in connection with our research under NIH grants in 2004, the nine months ended September 30, 2005, and cumulatively through September 30, 2005, respectively.

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. Research and development expense also includes approximately $3.6 million of stock-based compensation expense associated with employees performing research and development activities for the nine months ended September 30, 2005.

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

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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 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

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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 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

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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 of our common stock for the last six months of 2004 and the nine months ended September 30, 2005 for financial reporting purposes. This 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 per share ($9.42 per share on an assumed converted basis), 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 ($8.48 per share on an assumed converted basis). We kept this value constant until April 2005 when we steadily increased the estimated fair value to $14.06 per common share based on an assessment of market considerations, including discussions with the underwriters in this offering. Furthermore, we believe this valuation approach is consistent with valuation methodologies applied to other similar companies for financial reporting purposes pursuing an initial public offering.

For stock option and restricted stock grants to employees and non-employee directors, we recorded deferred stock compensation, net of forfeitures, totaling $0 in 2004 and $15.1 million in the nine months ended September 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 September 30, 2005, the expected future amortization expense for deferred stock compensation is $9.2 million, $4.1 million, $1.6 million, $241,000 and $21,000 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

Nine Months Ended September 30, 2004 Compared to 2005

Collaboration, Commercial Agreement and Grant Revenue. Collaboration, commercial agreement and grant revenue declined from $18.4 million for the nine months ended September 30, 2004 to $14.8 million for the nine months ended September 30, 2005. The decrease of $3.6 million, or 20.0%, 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 and $1.6 million due to a decrease in new agreements signed in 2005 as we changed our business strategy to focus on oncology drug discovery and development.

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Research and Development Expense. Research and development expense decreased from $28.0 million for the nine months ended September 30, 2004 to $27.6 million for the nine months ended September 30, 2005. The decrease was primarily attributable 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 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 $4.8 million for the nine months ended September 30, 2004 to $9.4 million for the nine months ended September 30, 2005. The increase was primarily attributable to an increase in equity-based compensation for option and restricted stock grants in 2005 which we are amortizing to expense as described below. 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 and restricted stock grants to employees and non-employee directors, we recorded deferred stock-based compensation of $15.1 million for the nine months ended September 30, 2005. We recorded these amounts as components of stockholders’ equity and are amortizing the amounts, using an accelerated method, as a non-cash charge to operating expenses over the vesting period of the options. We recorded amortization of stock-based compensation of $7.4 million for the nine months ended September 30, 2005. We anticipate recording additional amortization of deferred stock-based compensation related to employee stock option grants of approximately $1.8 million for the fourth quarter of 2005 and $4.1 million, $1.6 million, $241,000 and $21,000 for the years ending December 31, 2006, 2007, 2008 and 2009, respectively. In April 2005, we agreed to issue warrants to purchase 115,000 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 $123,000 for the nine months ended September 30, 2004 to $178,000 for the nine months ended September 30, 2005. The increase was due primarily to higher cash and cash equivalent balances in 2005 compared to 2004.

Interest Expense. Interest expense (excluding interest expense associated with our bridge notes issued in July and September 2004) decreased from $538,000 for the nine months ended September 30, 2004 to $253,000 for the nine months ended September 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 $732,000 and $1.2 million during the nine months ended September 30, 2004 and 2005, respectively, 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 nine months ended September 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 nine months ended September 30, 2005.

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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 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.

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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 nine months ended September 30, 2005, we received net proceeds from the sale of Series B preferred stock in April 2005 of approximately $6.7 million. In April 2005, certain of our existing investors also irrevocably committed to purchase in December 2005 additional shares of Series B preferred stock. These additional shares of Series B preferred stock were issued in December 2005 pursuant to these outstanding commitments under our April 2005 Series B preferred stock purchase agreement, resulting in estimated net proceeds of approximately $6.8 million.

We have received revenues from collaborations, commercial agreements and grants totaling $14.8 million and $18.4 million for the nine months ended September 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 $6 million to $8 million of additional proceeds in 2005 and approximately $18.0 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 $2.7 million for the nine months ended September 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 September 30, 2005, an aggregate of $5.4 million was outstanding under our line of credit. The debt agreements subject us to certain financial and non-financial covenants. As of September 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 approximately 3.2%.

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

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approximately 10% per annum and is due in monthly installments over three years. One-half of the proceeds were available to us immediately under the line of credit and equipment financing agreement, $4.0 million of general purpose working capital became available in December 2005 and the remaining $1.0 million of equipment and leasehold improvement financing will become available in the second quarter of 2006. In September 2005, we borrowed $4.0 million for general purpose working capital under this facility, which is recorded in current liabilities as of September 30, 2005, and issued the lenders warrants to purchase an aggregate of 40,763 shares of our Series B preferred stock, which will become exercisable for 20,381 shares of our common stock, at an exercise price of $9.42 per share, upon the completion of the offering contemplated by this prospectus. In December 2005, we borrowed approximately $4.9 million of additional funds under this line of credit and equipment financing agreement, and issued the lenders warrants to purchase an additional 49,607 shares of our Series B preferred stock, which will become exercisable for 24,803 shares of our common stock, at an exercise price of $9.42 per share, upon the 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

Our cash flows for 2006 and beyond will depend on a variety of factors, some of which are discussed below, including the timing of the completion of the offering contemplated by this prospectus and the use of those proceeds as described under “Use of Proceeds” elsewhere in this prospectus.

As of September 30, 2005, cash and cash equivalents totaled approximately $7.2 million as compared to $11.5 million at December 31, 2004, a decrease of approximately $4.3 million. The decrease resulted primarily from $27.1 million of expenses and equipment purchases (excluding non-cash items totaling approximately $11.8 million) offset by $14.8 million of revenue under grants, collaborations and commercial agreements, $6.7 million from the sale of our preferred stock, and $1.3 million which we borrowed (net of repayments) as described above. We had $11.7 million of net cash used in operations and approximately $638,000 of purchases of property and equipment and other items. The net cash used in operating activities primarily funded the net loss for the nine months ended September 30, 2005 of $23.5 million, partially offset by non-cash charges for depreciation and amortization of $3.2 million and stock-based compensation of $8.7 million.

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 primarily from $35.6 million of expenses (excluding non-cash items of a $10.4 million) offset by $27.3 million of revenue under grants, collaborations and commercial agreements and $9.5 million which we borrowed (net of repayments) as described above. We had net cash used in operations of $11.0 million and purchases of property and equipment of $1.2 million. 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.

Our net cash decreased by $16.8 million and $10.1 million in 2002 and 2003, respectively. These decreases were primarily the result of expenses totaling approximately $32.9 million and $30.2 million in 2002 and 2003, respectively (excluding non-cash items totaling approximately $3.1 million and $6.6 million, respectively). These expenses were offset by revenue under grants, collaborations and commercial agreements of $3.3 million in 2002 and $18.1 million in 2003. We also borrowed $8.0 million (net of repayments) in 2002 and repaid (net of new borrowings) $2.6 million in 2003. In 2002, we liquidated $9.9 million of our short-term investments and purchased $5.3 million in property and equipment.

We expect our cash outflows to increase as we advance Troxatyl and new product candidates into later stages of clinical development. If we successfully develop and obtain regulatory approval of Troxatyl for the treatment of AML, we will be required to pay up to $17.0 million to Shire as milestone payments, $11.0 million of which is payable upon the satisfaction of specified milestone events leading up to and including the filing of an NDA. We are unable to estimate with any certainty the costs we will incur in the

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continued development of Troxatyl and of other product candidates for commercialization. We also expect to continue to expand our research and development activities relating to the clinical development and preclinical research of treatments in the oncology area. 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.

     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, our existing cash and cash equivalents, and our cash commitments from existing collaborations, commercial agreements and grants, will be sufficient to meet our projected operating requirements into the second quarter of 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 September 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 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

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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 December 31, 2004:

				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)
Bridge notes payable(1)		$	13,154	$	13,154		–		–		–
Long-term debt obligations(2)			4,319		2,958		1,029		280		52
Operating lease obligations			4,757		2,194		958		898		707
License obligations(3)			1,000		1,000		–		–		–
	Total	$	23,230	$	19,306	$	1,987	$	1,178	$	759

(1)	The principal and interest under the bridge notes converted into shares of our preferred stock in April 2005.
(2)	Long term debt obligations do not include a convertible note payable of $6.0 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. Long-term debt obligations also do not include $8.9 million of indebtedness incurred in September and December 2005 under our credit and equipment financing agreement with Silicon Valley Bank and Oxford Finance Corporation.
(3)	License obligations do not include contingent payments of up to $17.0 million payable to Shire upon the completion of milestones related to the successful development and approval of Troxatyl for the treatment of AML, $11.0 million of which is payable upon the satisfaction of specified milestone events leading up to and including the filing of an NDA. License obligations also do not include royalties, including minimum royalty payments of approximately $10.0 million over a four-year period following product launch, or other milestone payments that may be payable in the future to Shire upon the occurrence of other development and regulatory events for solid tumor and other indications. 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 nine months ended September 30, 2005 and the year ended December 31, 2004, we had made aggregate payments of approximately $1.9 million and $0.3 million, respectively, 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 $2.3 million, respectively. The federal research and development tax credit carryforward will begin to expire in 2019, unless previously utilized.

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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 September 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.

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

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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 intend to complete submission of our rolling 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. 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 ourselves and 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. In this program, 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. In this program, we have also focused on compounds that inhibit wild type forms of BCR-ABL. Additional internal programs are at the lead optimization stage and are focused on the target AurA, an Aurora kinase that has been implicated in tumor growth, and the targets MET and RON, two closely related proteins that control cell growth and division and are 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 have generated aggregate revenues from collaborations, commercial agreements and grants of approximately $60.1 million in 2003, 2004 and the first nine 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/II trial (initiate 2006)
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			SGX (Worldwide)
	• Solid tumors	Lead optimization
K-RAS			SGX (Worldwide)
	• Solid tumors	Lead discovery

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, healthy 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 will also be required to make milestone payments of up to $17.0 million based on successful development and regulatory approval of Troxatyl for the treatment of AML, and will be required to make royalty payments based on net sales, including minimum royalty payments of approximately $10.0 million over a four-year period following product launch. In the future, we may owe additional milestone payments to Shire upon the occurrence of other development and regulatory events for solid tumor and other indications. 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 patent term 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

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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 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 to 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 for patients who achieved either a complete response or a complete response with partial platelet recovery was over eight 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 over eight 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 assessed and confirmed within approximately 90 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 in the fourth quarter of 2006.

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 complete submission of our rolling NDA to the FDA in late 2006 or early 2007. We have recently been

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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. 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 because, until recently, there had been 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.

Commonly used classification systems group MDS patients into multiple risk groups, depending on the severity of disease, and have 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 approximately one-third of MDS patients. 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.

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, aggregate data from two clinical trials evaluating Troxatyl by bolus IV injection in combination with Ara-C or idarubicin showed five of eight high-risk MDS or MDS transformed to AML patients achieved a complete response, with durations of response ranging from at least six to 13 months. In our Phase I/II trial evaluating Troxatyl dosing by continuous IV infusion, the two AML patients who previously had MDS, while not achieving a complete response, survived to 19 and 23 months.

In 2006, we plan to initiate a single-arm, open-label Phase I/II clinical trial of Troxatyl in high-risk MDS patients or 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

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to AML, 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.

Development Plan. We are currently completing enrollment in 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

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bolus IV injection. We plan to initiate one or more 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 ourselves and 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, the process of identifying active new chemical entities, which may be transformed by subsequent modification into a clinically useful drug. We have identified a portfolio of approximately 20 oncology drug targets that we believe are clearly implicated in cancers. 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 and K-RAS.

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. Novartis is currently conducting a Phase II clinical trial with a second generation BCR-ABL inhibitor and Bristol-Myers Squibb, or BMS, recently completed its rolling NDA submission for dasatinib (BMS-354825), a BCR-ABL inhibitor which is directed at patients who are resistant or intolerant to prior therapy. 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 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 2007 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 tumors. We are applying our FAST lead discovery technology to MET and RON, two closely related proteins,

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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. This agreement is structured as a 50/50 collaboration, with each party contributing an equal number of full time equivalent personnel and equally sharing costs. We have exclusive commercialization rights in the United States, Canada and Mexico to drugs developed under the agreement, and Pierre Fabre has exclusive commercialization rights in Europe. Commercialization rights in the rest of the world to drugs developed under the agreement are to be shared in a manner to be determined by the parties. The parties are currently negotiating a proposed termination of this agreement pursuant to which it is anticipated that each party will have worldwide rights to data and materials developed under the collaboration.

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

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believe are clearly implicated in cancers. 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. We are applying FAST to generate novel and potent lead compounds for well-validated protein and enzyme targets, including AurA and K-RAS. 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 11 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 $63.5 million in 2002, 2003, 2004 and the first nine 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

*  The research term of this agreement ended on December 31, 2005; however, the parties are not expected to designate an early lead series until February 2006.

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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
F. Hoffmann-La Roche Ltd.	Structural data on Roche targets and compounds	Dec. 2005	Upfront payment; funding
Biogen Idec Inc.	Structural data on Biogen Idec targets and compounds	Dec. 2005	Upfront payment; funding

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. 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. Over the term of the collaboration, CFFT may provide to us over $15.0 million in an upfront payment and in technology access, research and research milestone payments. In July 2005, CFFT paid us $1.0 million pursuant to this agreement. In addition, upon the sublicensing by CFFT of any lead series generated in the collaboration, we are eligible to receive the greater of a specified percentage of any sublicensing proceeds, or a specified royalty percentage and up to $8.25 million in milestone payments, assuming the successful completion of all developmental, and clinical trial-related milestones, including for Phase I, Phase II and Phase III clinical trials, and necessary regulatory approvals. Royalty or sublicensing payment obligations under the agreement continue on a country-by-country and product-by-product basis until the later of the date

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on which no valid patent claims relating to a product exist or 10 years from the date of the first sale of the product.

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 sought to discover novel small molecule inhibitors, referred to as early lead series, 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. The research term of this collaboration agreement ended on December 31, 2005; however, the parties are not expected to designate an early lead series until February 2006. Roche paid us an upfront fee and research funding through September 30, 2005 totaling approximately $1.4 million, and will be further obligated to pay us up to approximately $17.2 million in the form of additional research funding, milestone payments upon the occurrence of specified preclinical and clinical development milestones, including the designation of specified early lead series, and royalties on sales of products licensed to Roche under the agreement.

On a country-by-country basis and a collaboration product-by-collaboration product basis, the general terms of this collaboration agreement, including the royalty obligations under the 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.

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. As of September 30, 2005, we received aggregate upfront payment and success-based research payments of $680,000. In addition, we are eligible to receive additional success-based research payments of up to approximately $850,000 if all structures are determined together with clinical development milestones which may reach up to $10.25 million per product derived from the collaboration if all developmental clinical and regulatory milestones, including for Phase I, Phase II, and Phase III trials and the filing of an IND, with respect to the product are satisfied. We may also receive 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

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other party, subject to prior notice and the opportunity to cure. On a country-by-country basis, the royalty obligations 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.

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 September 30, 2005, we had received a total of approximately $17.8 million under the commercial agreement in the form of research, license, technology access 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 $2.3 million of which has been received as of September 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 leave our employment and significantly curtail 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.

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 September 30, 2005, we had received aggregate payments of approximately $2.3 million, consisting of upfront payments, research milestone payments and research funding. In addition, we are entitled to approximately $540,000 in future quarterly research payments, of which $180,000 had been earned as of September 30, 2005, and up to $750,000 in future milestone payments upon determination of specified protein structures, of which $600,000 had been earned as of September 30, 2005.

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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., Millennium Pharmaceuticals, Inc., Roche and Biogen Idec 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, some partners retain the option to further expand their access to our beamline facility in the future for additional payments. As of September 30, 2005, we have received aggregate payments under our beamline services agreements with Amgen, Exelixis and Millennium of approximately $1.3 million.

The terms of the Amgen, Exelixis, Millennium, Roche and Biogen Idec beamline agreements continue until February 2010, August 2007, March 2010, December 2010 and December 2006, 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 of up to $17.0 million based on successful development and approval of Troxatyl for the treatment of AML, and will be required to make royalty payments based on net sales including minimum royalty payments of approximately $10.0 million over a four-year period following product launch. In the future, we may owe up to an aggregate of $33.0 million in additional milestone payments to Shire upon the occurrence of other development and regulatory events for solid tumor and other indications. In addition, we may owe up to $50.5 million in aggregate sales milestone payments to Shire under the agreement. 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. Royalty obligations under the agreement continue on a country-by-country and product-by-product basis until the later of the date on which no valid licensed patent relating to a product exists or 10 years from the date of the first sale of the product. If no licensed patent covers the applicable product during the 10-year period from the date of the first sale, royalty obligations may be reduced in specified circumstances if there are competing generic products.

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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. In 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 assessed and confirmed within 90 days of treatment. We will seek to further enhance our pipeline by advancing our BCR-ABL, MET and RON, AurA and K-RAS 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 18 issued U.S. patents, at least 250 issued foreign patents, 9 pending U.S. applications and at least 80 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; Velcade^tm (bortezomib), under development for this indication by Millennium Pharmaceuticals, Inc.; Avastin^tm (bevacizumab), under development for this indication by Genentech, Inc.; 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 in June 2007 and a third lease agreement that terminates in September 2008. We also sublease to a third party 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 December 31, 2005, we had 112 employees, including 37 who hold Ph.D. or M.D. degrees. We had 89 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 December 31, 2005:

Name	Age		Position
Executive Officers and Directors
Michael Grey		53	President, Chief Executive Officer and Director
Stephen K. Burley, M.D., D.Phil.		48	Chief Scientific Officer and Senior Vice President, Research
W. Todd Myers, C.P.A.		38	Chief Financial Officer
Annette North, Esq.		40	Vice President, Legal Affairs and Corporate Secretary
Siegfried Reich, Ph.D.(4)		46	Vice President, Drug Discovery
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)		56	Director
Jean-François Formela, M.D.(2)(3)		49	Director
Vijay Lathi(1)		33	Director
Stelios Papadopoulos, Ph.D.(2)		57	Director
Key Employees
Peter Myers, Ph.D.(5)		62	Vice President, Drug Discovery
Sean McCarthy, D.Phil.		38	Vice President, Business Development

(1)	Member of the audit committee.
(2)	Member of the corporate governance and nominating committee.
(3)	Member of the compensation committee.
(4)	Dr. Reich has agreed to join us in February 2006 as our Vice President of Drug Discovery.
(5)	Dr. Myers will transition from his current position as our Vice President of Drug Discovery in February 2006 and leave us as an employee in mid-2006.

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., IDM Pharma, Inc. (formerly known as Epimmune Inc.) and Biomarin Pharmaceutical, 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

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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 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.

W. Todd Myers, C.P.A., joined us as our Chief Financial Officer in December 2005. Prior to joining us, Mr. Myers provided senior-level financial consulting services to publicly traded and privately held life science companies from October 2004 to December 2005. From March 2000 to June 2004, Mr. Myers was Chief Financial Officer, Secretary and Treasurer of FeRx Incorporated, a clinical development stage company dedicated to the development of oncology products based on a patented drug-delivery technology. In June 2004, FeRx Incorporated filed for protection under Chapter 7 of the bankruptcy code. From June 1997 to February 2000, he was Director of Finance at CombiChem, Inc., a publicly traded computational drug discovery company that was acquired by DuPont in 1999. Mr. Myers has also held positions with Premier Inc., a national consortium of health care providers, and with Ernst & Young, LLP. Mr. Myers received his B.S. in Accounting from the University of Illinois.

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.

Siegfried Reich, Ph.D., has agreed to join us in February 2006 as Vice President of Drug Discovery. Prior to joining us, from 2001 to December 2005, Dr. Reich was Vice President, Head of Viral and Ophthalmic Diseases Therapeutic Zone in Discovery at Pfizer, Inc. (Global Research and Development, La Jolla), overseeing the development of multiple clinical candidates in antivirals and ophthalmology. Prior to that, Dr. Reich held the position of Director, Head of Medicinal Chemistry at Agouron Pharmaceuticals, Inc., from 1997 to 2001 (through its acquisitions by Warner Lambert and Warner Lambert’s subsequent acquisition by Pfizer, Inc.). He began work at Agouron as a research scientist in 1988, and served as a project chemist and co-project leader of the HIV Protease Project, which identified Viracept^®, Agouron’s first approved drug for the treatment of AIDS, for which he is also an inventor. Dr. Reich received his B.S. in Chemistry in 1982 from San Diego State University and his Ph.D. in Chemistry in 1986 from the University of California, Irvine.

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

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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 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, 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

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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 and will leave us as an employee in mid-2006. 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 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 through mid-2006.

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.

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.

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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 first annual meeting of stockholders to be held following the completion of this offering;

•  Class II, which will consist of Ms. Eastham and Dr. Formela, and whose term will expire at our second annual meeting of stockholders to be held following the completion of this offering; and

•  Class III, which will consist of Drs. Papadopoulos and Henney, and whose term will expire at our third annual meeting of stockholders to be held following the completion of this offering.

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 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.

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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;

•  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.

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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 December 2003, we granted Dr. Henney a stock option under our 2000 equity incentive plan to purchase 7,587 shares of our common stock. In May 2005, Dr. Henney was granted a restricted stock award under our 2000 equity incentive plan of 70,000 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 11,380 shares of our common stock at an exercise price of $13.44 per share, and, subject to stockholder approval, offered him the opportunity to purchase 6,322 shares of our then outstanding preferred stock at a “split adjusted” purchase price of $133.64 per share. Dr. Papadopoulos did not purchase any shares of preferred stock pursuant to this agreement. Under the terms of a 2003 amendment to this agreement, we agreed to raise the 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 12,500 shares of our common stock at an exercise price of $1.00 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 12,500 shares of our common stock at an exercise price of $1.00 per share. The option vests in equal monthly installments over three years. Ms. Eastham early exercised this stock option in September 2005. 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 or following 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 years ended December 31, 2004 and 2005 by our chief executive officer and each of our other executive officers whose

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combined 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)		Year		Salary		Bonus(2)		Options			All Other Compensation
Michael Grey			2005	$	348,682		–		363,863			–
	President, Chief Executive Officer and Member of the Board of Directors		2004	$	332,308	$	37,700		2,383	(3)	$	81,893	(4)
Stephen K. Burley			2005	$	324,000	$	100,000		175,000			–
	Chief Scientific Officer and Senior Vice President, Research		2004	$	311,539	$	31,688		2,003	(3)		–
Annette North			2005	$	202,500		–		50,000			–
	Vice President, Legal Affairs and Corporate Secretary		2004	$	194,470	$	11,780		744	(3)	$	3,836	(7)
W. Todd Myers			2005	$	8,654		–		–			–
	Chief Financial Officer(5)		2004		–		–		–			–
Herbert Mutter			2005	$	106,434		–		12,500		$	45,926	(7)
	Former Chief Financial Officer(6)		2004	$	232,201	$	18,168		1,148	(3)	$	9,050	(4)

(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 $3.96 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)	Mr. Myers joined us as our Chief Financial Officer in December 2005.
(6)	Mr. Mutter resigned as our Chief Financial Officer in May 2005.
(7)	Represents $32,926 for unused vacation and $13,000 for consulting services paid in September 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, 2005, we granted stock options to purchase a total of 1,396,627 shares of our common stock, with a weighted average exercise price of $1.00 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.”

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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 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, 2005. No stock appreciation rights covering our common stock were granted to our named executive officers in 2005.

	Individual Grants(1)
			% of Total
			Options							Potential Realizable Value at
	Number of		Granted to							Assumed Annual Rates of
	Securities		Employees in							Stock Price Appreciation for
	Underlying		the Year Ended							Option Term(2)
	Options		December 31,			Exercise or Base		Expiration
Name	Granted		2005(1)			Price ($/Sh)		Date		5%		10%
Michael Grey		363,863		26.1	%		1.00		5/12/2015	$	6,526,682	$	10,281,711
Stephen K. Burley		175,000		12.5	%		1.00		5/12/2015	$	3,139,010	$	4,944,992
Annette North		50,000		3.6	%		1.00		5/12/2015	$	896,860	$	1,412,855
W. Todd Myers(3)		–		–			–		–		–		–
Herbert Mutter(4)		12,500		0.9	%		1.00		5/12/2015	$	224,215	$	353,214

(1)	Based on 1,396,627 stock options granted to employees during the fiscal year ended December 31, 2005 under our 2000 equity incentive plan, including grants to executive officers.
(2)	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 $12.00 per share (the midpoint of the range on the front cover of this prospectus), (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.
(3)	Mr. Myers joined us as our Chief Financial Officer in December 2005.
(4)	Mr. Mutter resigned from his position as our Chief Financial Officer in May 2005.

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

The following table provides information concerning the unexercised options held as of December 31, 2005, 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		100,000	$	1,100,000		49,573		221,731	$	503,478	$	2,418,174
Stephen K. Burley		50,000	$	550,000		58,066		106,943	$	292,418	$	1,163,030
Annette North		–		–		24,227		30,625	$	223,683	$	332,299
W. Todd Myers		–		–		–		–	$	–	$	–
Herbert Mutter		12,500	$	137,500		–		–	$	–	$	–

(1)  The value of an unexercised in-the-money option as of December 31, 2005 and the value realized are each equal to the excess of an assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus) 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 letter agreements with Mr. Myers, our Chief Financial Officer, and Dr. Reich, our future Vice President of Drug Discovery, relating to their 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 initial employment agreement set forth Mr. Grey’s base salary at $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, 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 363,863 shares of our common shares at an exercise price of $1.00 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. 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 12,645 shares of our common stock at an exercise price of $13.44 per share, the fair market value of our common stock on the date of grant. Options to purchase 3,161 shares vested on the one-year anniversary of the date of grant with options to purchase 9,484 vesting in equal monthly installments over the three years thereafter.

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 4,146 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 100,000 shares of our common stock at an exercise price of $1.00 per share. The warrant includes a net exercise provision and has a five-year term.

In November 2005, we entered into a letter agreement relating to Mr. Myers’ employment with us. The letter agreement sets forth Mr. Myers’ base salary of $225,000 per year and an annual cash bonus of up to 30% of

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his base salary, or $67,500, payable at the discretion of our board. The agreement entitles Mr. Myers to receive all customary and usual fringe benefits provided to our other executives. The agreement provides that, subject to the approval of our board, Mr. Myers will be granted a stock option to purchase an aggregate of 75,000 shares of our common stock at an exercise price equal to 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 in December 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. Myers’ employment at any time for cause and upon 30 days’ written notice without cause, as defined in the agreement. Similarly, Mr. Myers 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. Myers 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.

In December 2005, we entered into a letter agreement relating to Dr Reich’s employment with us. The letter agreement sets forth Dr. Reich’s base salary of $275,000 per year and an annual cash bonus of up to 30% of his base salary, or $82,500, payable at the discretion of our board. The agreement entitles Dr. Reich to receive all customary and usual fringe benefits provided to our other executives. The agreement provides that, subject to the approval of our board, Dr. Reich will be granted a stock option to purchase an aggregate of 75,000 shares of our common stock at an exercise price equal to 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 in February 2007, 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. In addition, subject to approval of our board, on or about August 1, 2006, provided Dr. Reich is still employed by us, he will be granted a stock option to purchase an aggregate of 30,000 shares of common stock at an exercise price equal to 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 in August 2007, 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 Dr. Reich’s employment at any time for cause and upon 30 days’ written notice without cause, as defined in the agreement. Similarly, Dr. Reich 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. Reich is terminated without cause, he is also entitled to a severance payment equal to six months of his base salary then in effect, provided he executes a waiver and general release in favor of us and complies with any provisions of the letter agreement and his employment, confidential information and assignment agreement that survive termination. Moreover, following a change in control, the vesting of any of his outstanding stock options will be accelerated by 12 months (24 months if Dr. Reich 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.

In June 2005, we entered into a letter agreement relating to the employment of our former Chief Financial Officer, James Rotherham. In November 2005, pursuant to a separation agreement, Mr. Rotherham’s employment terminated and he was paid severance pay in the form of continuation of his base salary for a period of six weeks. All stock options held by Mr. Rotherham expired unexercised.

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     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: 363,863 shares to Mr. Grey; 175,000 shares to Dr. Burley; and 50,000 shares to Ms. North. In August 2005, we granted Mr. Rotherham a stock option under our 2000 equity incentive plan to purchase 95,000 shares of common stock. The exercise price for each of the stock options was $1.00 per share, the price our board of directors determined was 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. In addition, in the event of a change in control, the vesting of any outstanding stock options held by Ms. North, 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 12,500 shares of our common stock, with an exercise price of $1.00 per share. Mr. Mutter exercised this stock option in August 2005. In December 2005, we agreed, subject to the approval of our board of directors, to grant to Mr. Myers a stock option to purchase an aggregate of 75,000 shares of our common stock at an exercise price equal to the fair market value of our common stock on the date of grant.

     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 approximately 34,774 shares, 6,322 shares, 28,603 shares and 1,264 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, $9,050, 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 131,224 shares of common stock were tendered to us in satisfaction of approximately $1.3 million of indebtedness and we forgave an aggregate of approximately $131,000 of interest accrued under the promissory notes.

     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.

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Share Reserve. As of December 31, 2005, an aggregate of 1,146,686 shares of our common stock were reserved for issuance upon exercise of outstanding options under the 2000 plan and 247,928 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 our 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 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.

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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 in August 2005 and our stockholders approved in October 2005 our 2005 equity incentive plan, or 2005 plan, 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.

Share Reserve. An aggregate of 750,000 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) 500,000 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

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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 5,000,000 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 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

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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 250,000 shares of our common stock in any calendar year, subject to an exception for new hires who may be granted an additional 375,000 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 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.

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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 in August 2005 and our stockholders approved in October 2005 our 2005 non-employee directors’ stock option plan, or directors’ plan, 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 75,000 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 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

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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 12,500 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 2007 annual meeting, an option to purchase 5,000 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 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 in August 2005 and our stockholders approved in October 2005 our 2005 employee stock purchase plan, or the purchase plan, 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.

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Share Reserve. An aggregate of 375,000 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) 150,000 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 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

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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 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, 2003 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 of our common stock and preferred stock effected in April 2005 and the 1-for-2 reverse stock split of our common stock effected on January 3, 2006. As a result of the 1-for-2 reverse stock split, each share of our preferred stock is convertible into one-half of a share of our common stock. The 1-for-2 reverse stock split of our common stock adjusted the conversion ratio of the preferred stock but did not adjust the number of outstanding shares of preferred stock.

Stock Issuances

     Initial Issuances of Preferred Stock

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

•  541,594 shares of our previously outstanding Series A preferred stock at a price of $14.23 per share of preferred stock 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 of preferred stock in March 2000 for aggregate gross proceeds of approximately $32.0 million;

•  673,419 shares of our previously outstanding Series C preferred stock at a price of $66.82 per share of preferred stock 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 of preferred stock 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(3)		–		–		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. As a result of the 1-for-2 reverse stock split effected in January 2006, each share of outstanding preferred stock is convertible into one-half of a share of our common stock. These shares of preferred stock are no longer outstanding but, if outstanding, each share would be convertible into one-half of a share of our common stock.

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(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.

(3)

Includes shares held by Dr. Henney’s two adult children who do not reside with him, over which Dr. Henney has no beneficial ownership or control.

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

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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(1)
	Principal				Issued Upon
	Loan		Accrued		Debt		Series		Series		Series
Investor	Amount		Interest		Conversion(1)		A-1(2)		B-1(3)		C-1(4)
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(5)	$	307,378	$	20,150		69,539		–		2,529		25,164
Christopher Henney(6)	$	52,106	$	3,415		11,788		–		-		7,482

(1)	As a result of the 1-for-2 reverse stock split effected in January 2006, each share of outstanding preferred stock is convertible into one-half of a share of our common stock. These shares of preferred stock are no longer outstanding but, if outstanding, each share would be convertible into one-half of a share of our common stock.
(2)	Shares of Series A-1 preferred stock issued upon exchange of shares of Series A preferred stock.
(3)	Shares of Series B-1 preferred stock issued upon exchange of shares of Series B preferred stock.
(4)	Shares of Series C-1 preferred stock issued upon exchange of shares of Series C preferred stock.
(5)	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.
(6)	Includes shares held by Dr. Henney’s two adult children who do not reside with him, over which Dr. Henney has no beneficial ownership or control.

     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. As a result of the 1-for-2 reverse stock split effected in January 2006, these shares of Series B preferred stock are currently convertible into an aggregate of 796,166 shares of common stock at a conversion price of $9.42 per share. 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 provided for the investors’ irrevocable commitment to purchase approximately $7.5 million of additional shares of our Series B preferred stock in December 2005. In December 2005, an additional 1,583,627 shares of Series B preferred stock were issued pursuant to these irrevocable commitments under our April 2005 Series B preferred stock purchase agreement. As a result of the 1-for-2 reverse stock split effected in January 2006, these shares of Series B preferred stock are currently convertible into an aggregate of 791,803 shares of common stock at a conversion price of $9.42 per share. In connection with the initial closing of 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.

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In addition, we effected a 0.126453-for-1 reverse stock split of all outstanding capital stock prior to closing the private placement.

The table below 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 received upon exchange.

					Shares of Common Stock
					Issuable Upon Conversion
	Series A Preferred Stock		Series B Preferred		of Series A and
Investor	Received in Exchange		Stock Purchased		Series B Preferred Stock
Atlas Venture Fund IV, LP and affiliates		3,352,837		783,968		2,068,402
Prospect Venture Partners, LP		1,141,795		267,148		704,471
Sprout Capital VIII, LP and affiliates		2,118,568		495,368		1,306,967
Index Ventures I, LP and affiliates		1,361,164		318,474		839,818
BAVP, LP		3,317,734		775,760		2,046,747
Stelios Papadopoulos(1)		334,596		78,246		206,421
Christopher Henney(2)		52,884		12,374		32,628

(1)

Includes 276,362 shares of Series A preferred stock and 64,620 shares of Series B preferred stock, together convertible into an aggregate of 170,491 shares of our common stock upon completion of this offering, 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.

(2)

Includes 13,050 shares held by Dr. Henney’s two adult children who do not reside with him, over which Dr. Henney has no beneficial ownership or control.

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 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.

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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.”

Participation in Initial Public Offering

Entities affiliated with certain of our principal stockholders have indicated potential interest in purchasing shares of common stock in this offering. However, because these potential indications of interest are not binding agreements or commitments to purchase, any or all of these stockholders may elect not to purchase any shares in this offering.

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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) 854,160 shares of common stock outstanding as of December 31, 2005, (2) the conversion of all outstanding shares of our preferred stock, including shares of our Series B preferred stock issued in December 2005 pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement, into 8,346,316 shares of common stock upon the completion of this offering, (3) 500,000 shares of our common stock issuable upon the completion of this offering upon the automatic conversion of a $6.0 million convertible note at the assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus), and (4) the issuance of 2,692 shares of common stock upon the completion of this offering from the net exercise of a warrant at the assumed initial public offering price of $12.00 per share, and also the issuance of 4,000,000 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 March 1, 2006, which is 60 days after December 31, 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)			2,068,402		21.32	%		15.09	%
	890 Winter Street, Suite 320
	Waltham, MA 02451
BAVP, L.P.(2)			2,046,747		21.09			14.94
	950 Tower Lane, Suite 700
	Foster City, CA 94404
Sprout Capital VIII, L.P. and its affiliates(3)			1,306,967		13.47			9.54
	1 Madison Avenue
	New York, NY 10010

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				Percentage of Shares
				Beneficially Owned
		Number of Shares		Before		After
Name and Address of Beneficial Owner		Beneficially Owned		Offering		Offering
Index Ventures Associates I Limited and its affiliates(4)			839,818		8.66		6.13
	No. 1 Seaton Place, St. Helier
	Jersey, Channel Islands JE48YJ
Prospect Venture Partners, L.P.			704,471		7.26		5.14
	435 Tasso Street, Suite 200
	Palo Alto, CA 94301
Michael Grey(5)			164,945		1.69		1.20
Stephen K. Burley(6)			121,459		1.24		*
W. Todd Myers(7)			0		*		*
Annette North(8)			26,437		*		*
Herbert Mutter(9)			12,500		*		*
Louis C. Bock(2)			2,046,747		21.09		14.94
Jean-François Formela(1)			2,068,402		21.32		15.09
Karin Eastham(10)			12,500		*		*
Christopher Henney(11)			110,215		1.14		*
Vijay Lathi(3)			1,306,967		13.47		9.54
Stelios Papadopoulos(12)			217,801		2.24		1.59
All directors and executive officers as a group (11 persons)(13)			6,087,973		61.67		43.89

* Represents beneficial ownership of less than 1%.

(1)	Includes 27,734 shares (the “Atlas III Shares”) held by Atlas Venture Fund III, L.P. (“Atlas III”), 602 shares (the “AVE III Shares”) held by Atlas Venture Entrepreneurs’ Fund III, L.P. (“AVE III”), 1,561,529 shares (the “Atlas IV Shares”) held by Atlas Venture Fund IV, L.P. (“Atlas IV”), 453,342 shares (the “Atlas IV-A Shares”) held by Atlas Venture Parallel Fund IV-A, C.V. (“Atlas IV-A”) and 25,195 shares (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”) held by Atlas Venture Entrepreneurs’ Fund IV, L.P. (“AVE IV,” and together with Atlas III, AVE III, Atlas IV and Atlas IV-A, the “Funds”). 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 1,157,266 shares held by Sprout Capital VIII, L.P., 69,431 shares held by Sprout Venture Capital, L.P., 21,137 shares held by Sprout Plan Investors, L.P., 55,342 shares held by DLJ ESC II, L.P. and 3,791 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

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	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 461,235 shares held by Index Ventures I (Jersey) L.P., 292,866 shares held by Index Ventures I (Delaware) L.P., 15,942 shares held by Index Ventures I Parallel Entrepreneur Fund (Jersey) L.P., 64,315 shares held by Index Ventures I GmbH & Co. KG and 5,460 shares held by Index Venture Management SA on behalf of Index Employee Investment Plan.
(5)	Includes 64,945 shares that Mr. Grey has the right to acquire from us within 60 days of December 31, 2005 pursuant to the exercise of stock options.
(6)	Includes 65,728 shares that Dr. Burley has the right to acquire from us within 60 days of December 31, 2005 pursuant to the exercise of stock options.
(7)	Mr. Myers joined as our Chief Financial Officer in December 2005.
(8)	Represents 26,437 shares that Ms. North has the right to acquire from us within 60 days of December 31, 2005 pursuant to the exercise of stock options.
(9)	Mr. Mutter resigned as our Chief Financial Officer in May 2005.

(10)	Includes 10,417 shares that are subject to repurchase by us within 60 days of December 31, 2005 under certain circumstances.
(11)	Includes 32,808 shares that are subject to repurchase by us within 60 days of December 31, 2005 under certain circumstances and 13,050 shares held by Dr. Henney’s two adult children who do not reside with him, over which Dr. Henney has no beneficial ownership or control.
(12)	Includes 11,380 shares that Dr. Papadopoulos has the right to acquire from us within 60 days of December 31, 2005 pursuant to the exercise of stock options. Also includes 170,491 shares held 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 854,160 shares of common stock outstanding as of December 31, 2005, the conversion of all outstanding shares of preferred stock, including shares of Series B preferred stock issued in December 2005 pursuant to irrevocable commitments made under our April 2005 Series B preferred stock purchase agreement, into 8,346,316 shares of common stock upon the completion of this offering, the issuance of 500,000 shares of our common stock upon the completion of this offering upon the automatic conversion of a $6.0 million convertible note at the assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus), the issuance of 2,692 shares of our common stock upon the completion of this offering from the net exercise of a warrant at the assumed initial public offering price of $12.00 per share, the issuance of 4,000,000 shares of common stock in this offering, and no exercise of options or warrants, there will be 13,703,168 shares of common stock outstanding upon completion of this offering.

As of December 31, 2005, there were 1,146,686 shares of common stock subject to outstanding options under our 2000 equity incentive plan and 195,629 shares of common stock subject to outstanding warrants, excluding the warrant that will be net exercised for 2,692 shares of our common stock at the assumed initial public offering price of $12.00 per share and terminate upon the completion of this offering.

As of December 31, 2005, we had approximately 210 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.

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     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.

     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 December 31, 2005, there were outstanding warrants to purchase the following shares of our capital stock:

				Weighted
		# of Shares		Average
		of Common		Exercise Price
		Stock After		After This
Description		This Offering		Offering
Series B Preferred Stock(1)			77,030	$	9.42
Common Stock			118,599	$	1.67
	Total:		195,629	$	4.72

(1)  Excludes the warrant that will be net exercised for 2,692 shares of our common stock at the assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus) and terminate upon the completion of this offering.

In July 2002, in connection with a line of credit agreement, we issued three warrants to two lenders to purchase approximately $300,000 of (i) shares of our 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. These warrants are exercisable through July 2012. In December 2005, these warrants were adjusted pursuant to their terms to become exercisable for shares of our Series B preferred stock at an exercise price of $4.71 per share. These warrants will become exercisable for an aggregate of 31,846 shares of our common stock, at an exercise price of $9.42 per share, upon completion of this offering.

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In July 2005, we issued warrants to purchase an aggregate of 115,000 shares of our common stock to two former employees at an exercise price of $1.00 per share with a five year term.

In September 2005, in connection with our line of credit and equipment financing agreement, we issued two warrants to two lenders to purchase an aggregate of 40,763 shares of our Series B preferred stock, at an initial exercise price of $4.71 per share. These warrants are exercisable through September 2015. These warrants will become exercisable for an aggregate of 20,381 shares of our common stock, at an exercise price of $9.42 per share, upon completion of this offering.

In December 2005, in connection with our line of credit and equipment financing agreement, we issued two additional warrants to the lenders to purchase an aggregate of 49,607 shares of our Series B preferred stock, at an initial exercise price of $4.71 per share. These warrants are exercisable through December 2015. These warrants will become exercisable for an aggregate of 24,803 shares of our common stock, at an exercise price of $9.42 per share, upon completion of this offering.

The remaining two warrants to purchase an aggregate of 3,599 shares of our common stock were issued to a lender in connection with a credit arrangement and to a service provider in connection with an executive recruiting agreement, and currently have exercise prices of $28.46 per share and $13.44 per share, respectively. These warrants expire in 2007 and 2011, respectively.

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, reclassifications and other enumerated events.

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.

Convertible Promissory Note

In December 2004, we 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 $6.0 million. No interest accrues on the principal unless a payment towards the principal becomes overdue. The full principal amount of the note will automatically convert into shares of our common stock upon the closing of an initial public offering at a conversion price equal to the price per share to the public in the offering. Upon completion of this offering, this note will automatically convert into 500,000 shares of common stock assuming an initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus).

Registration Rights

Under an amended and restated investor rights agreement, following the completion of this offering, the holders of 8,346,316 shares of common stock, the holder of 500,000 shares of our common stock issuable upon the completion of this offering upon the automatic conversion of $6.0 million convertible note at the assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus) and the holders of warrants to purchase 47,519 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.

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     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;

•  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.

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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;

•  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.

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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 December 31, 2005, upon completion of this offering, 13,703,168 shares of common stock will be outstanding, assuming no exercise of the underwriters’ over-allotment option and no exercise of options or warrants other than the warrant that will be net exercised for 2,692 shares of our common stock, at the assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus), upon completion of this offering. 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;

•  8,651,342 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 remaining 1,051,827 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 137,031 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. Approximately 1,445,893 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

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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, 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 holders of substantially all of our outstanding capital stock, options, warrants and other convertible securities, 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 8,346,316 shares of our common stock and the holder of 500,000 shares of our common stock issuable upon the completion of this offering upon the automatic conversion of a $6.0 million convertible note at the assumed initial public offering price of $12.00 per share (the midpoint of the range on the front cover of this prospectus) and the holders of warrants to purchase an aggregate of 47,519 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		4,000,000

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 600,000 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 $2,000,000.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.

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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.

Entities affiliated with certain of our principal stockholders have indicated potential interest in purchasing shares of common stock in this offering. However, because these potential indications of interest are not binding agreements or commitments to purchase, any or all of these stockholders may elect not to purchase any shares in this offering.

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

113

	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.
•	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 make 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.

In relation to each member state of the European Economic Area which has implemented the Prospectus Directive, which we refer to each as a relevant state, each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that member state, which we refer to as the relevant implementation date, it has not made and will not make an offer of shares to the public in that relevant member state, except that it may, with effect from and including the relevant implementation date, make an offer of shares to the public in that relevant member state:

(a)  in the period beginning on the date of publication of a prospectus in relation to the shares, which has been approved by the competent authority in that relevant member state or, where appropriate, approved in another relevant member state and notified to the competent authority in that relevant member state, all in accordance with the Prospectus Directive and ending on the date which is 12 months after the date of such publication;

(b)  at any time to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in shares;

(c)  at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000; and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

(d)  at any time in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of shares to the public” in relation to any shares in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe for the shares, as the same may be varied in that member state by any measure

114

implementing the Prospectus Directive in that member state and the expression Prospectus Directive means Directive 2003/71/ EC and includes any relevant implementing measure in each relevant member state.

Each underwriter has represented, warranted and agreed that:

(a)  it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000, or FSMA) received by it in connection with the issue or sale of any shares in circumstances in which Section 21(1) of the FSMA does not apply to us; and

(b)  it has complied with and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.

The shares offered pursuant to this prospectus will not be offered, directly or indirectly, to the public in Switzerland and this prospectus does not constitute a public offering prospectus as that term is understood pursuant to Article 652a or Article 1156 of the Swiss Federal Code of Obligations. We have not applied for a listing of the shares being offered pursuant to this prospectus on the SWX Swiss Exchange or on any other regulated securities market, and consequently, the information presented in this prospectus does not necessarily comply with the information standards set out in the relevant listing rules. The shares being offered pursuant to this prospectus have not been registered with the Swiss Federal Banking Commission as foreign investment funds, and the investor protection afforded to acquirers of investment fund certificates does not extend to acquirers of securities.

The offering is exclusively conducted under applicable private placement exemptions and therefore it has not been and will not be notified to, and this document or any other offering material relating to the shares has not been and will not be approved by, the Belgian Banking, Finance and Insurance Commission (“Commission bancaire, financière et des assurances/ Commissie voor het Bank, Financie en Assurantiewezen”). Any representation to the contrary is unlawful.

Each underwriter has undertaken not to offer sell, resell, transfer or deliver, or to take any steps thereto, directly or indirectly, any shares, and not to distribute or publish this document or any other material relating to the shares or to the offering in a manner which would be construed as: (a) a public offering under the Belgian Royal Decree of July 7, 1999 on the public character of financial transactions; or (b) an offering of securities to the public under Directive 2003/71/ EC which triggers an obligation to publish a prospectus in Belgium. Any action contrary to these restrictions will cause the recipient and us to be in violation of the Belgian securities laws.

The offering of the shares offered hereby in Italy has not been registered with the Commissione Nazionale per la Società e la Borsa, or CONSOB, pursuant to Italian securities legislation and, accordingly, the shares offered hereby cannot be offered, sold or delivered in the Republic of Italy nor may any copy of this prospectus or any other document relating to the shares offered hereby be distributed in Italy other than to professional investors (operatori qualificati) as defined in Article 31, second paragraph, of CONSOB Regulation No. 11522 of July 1, 1998 as subsequently amended. Any offer, sale or delivery of the shares offered hereby or distribution of copies of this prospectus or any other document relating to the shares offered hereby in Italy must be made:

(a)  by an investment firm, bank or intermediary permitted to conduct such activities in Italy in accordance with Legislative Decree No. 58 of February 24, 1998 and Legislative Decree No. 385 of September 1, 1993, which we refer to as the Banking Act;

(b)  in compliance with Article 129 of the Banking Act and the implementing guidelines of the Bank of Italy; and

(c)  in compliance with any other applicable laws and regulations and other possible requirements or limitations which may be imposed by Italian authorities.

Investors are advised to contact their legal, financial or tax advisers to obtain an independent assessment of the financial and tax consequences of an investment in the shares.

115

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. Cooley Godward LLP and GC&H Investments, LLC, an investment partnership composed of certain partners and persons associated with Cooley Godward LLP, will beneficially own approximately 7,094 shares, or approximately 0.05%, of our common stock (on an as-converted basis) upon the completion of this offering.

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.

116

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 September 30, 2005 (unaudited)	F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2003 and 2004 and the nine months ended September 30, 2004 and 2005 (unaudited)	F-4
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2002, 2003 and 2004 and the nine months ended September 30, 2005 (unaudited)	F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2003 and 2004 and the nine months ended September 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 audits 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 and paragraph 5 of Note 1 as to which the date is

January 3, 2006

F-2

SGX Pharmaceuticals, Inc.

Consolidated Balance Sheets

(in thousands, except par value and share data)

											Pro Forma
		December 31,									Stockholders’
								September 30,			Equity at
		2003			2004			2005			September 30, 2005
								(unaudited)			(unaudited)
Assets
Current assets:
	Cash and cash equivalents	$	13,635		$	11,512		$	7,207
	Accounts receivable		2,081			919			710
	Prepaid expenses and other current assets		1,169			1,229			2,113
Total current assets			16,885			13,660			10,030
Property and equipment, net			13,285			9,663			7,256
Goodwill and intangible assets, net			3,820			3,615			3,482
Other assets			1,953			1,394			1,940
Total assets		$	35,943		$	28,332		$	22,708
Liabilities and stockholders’ deficit
Current liabilities:
	Accounts payable	$	900		$	652		$	1,827
	Accrued liabilities and other current liabilities		4,298			2,866			2,761
	Accrued liability for the acquisition of Troxatyl		–			1,000			–
	Current portion of line of credit		3,851			2,958			5,416
	Note payable		1,981			–			–
	Bridge notes payable		–			13,154			–
	Deferred revenue		4,813			1,664			1,231
Total current liabilities			15,843			22,294			11,235
Deferred rent			293			266			193
Line of credit, net of current portion			3,655			1,308			–
Deferred revenue, long-term			1,890			2,396			2,821
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 September 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 September 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 September 30, 2005 (unaudited)			88,306			74,850			40,254			–
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 September 30, 2005 (unaudited); issued and outstanding shares— 427,156 and 500,436 at December 31, 2003 and 2004, respectively, and 650,793 at September 30, 2005 (unaudited); 8,746,957 shares of outstanding pro forma (unaudited)		1			1			1			9
	Notes receivable from stockholders		(1,997	)		(138	)		(57	)		(57	)
	Additional paid-in capital		11,226			27,120			99,560			145,806
	Deferred compensation		(590	)		–			(7,791	)		(7,791	)
	Accumulated deficit		(86,684	)		(105,765	)		(129,508	)		(129,508	)
Total stockholders’ deficit			(78,044	)		(78,782	)		(37,795	)	$	8,459
Total liabilities and stockholders’ deficit		$	35,943		$	28,332		$	22,708

See accompanying notes.

F-3

SGX Pharmaceuticals, Inc.

Consolidated Statements of Operations

(in thousands, except per share data)

											Nine Months Ended
		Years Ended December 31,									September 30,
		2002			2003			2004			2004			2005
											(unaudited)
Revenue:
	Grants	$	350		$	3,344		$	6,380		$	3,152		$	451
	Grants— subcontractor reimbursements		–			4,599			4,976			3,460			4,376
	Collaborations and commercial agreements		2,986			10,135			15,941			11,819			9,923
Total revenue			3,336			18,078			27,297			18,431			14,750
Expenses:
	Research and development		25,573			28,587			31,444			27,954			27,610
	General and administrative		10,122			7,353			6,719			4,818			9,401
	In-process technology		–			–			4,000			–			–
Total operating expenses			35,695			35,940			42,163			32,772			37,011
Loss from operations			(32,359	)		(17,862	)		(14,866	)		(14,341	)		(22,261	)
Interest income			622			320			175			123			178
Interest expense			(932	)		(1,219	)		(669	)		(538	)		(253	)
Interest expense associated with bridge notes			–			–			(3,392	)		(732	)		(1,188	)
Net loss			(32,669	)		(18,761	)		(18,752	)		(15,488	)		(23,524	)
Accretion to redemption value of redeemable convertible preferred stock			(329	)		(329	)		(329	)		(247	)		(219	)
Net loss attributable to common stockholders		$	(32,998	)	$	(19,090	)	$	(19,081	)	$	(15,735	)	$	(23,743	)
Basic and diluted net loss per share attributable to common stockholders:
	Historical	$	(78.94	)	$	(44.92	)	$	(39.84	)	$	(33.69	)	$	(43.09	)
	Pro forma (unaudited)							$	(10.00	)				$	(4.03	)
Shares used to compute basic and diluted net loss per share attributable to common stockholders:
	Historical		418			425			479			467			551
	Pro forma (unaudited)								1,909						5,895

See accompanying notes.

F-4

SGX Pharmaceuticals, Inc.

Consolidated Statements of Stockholders’ Deficit

Years Ended December 31, 2002, 2003 and 2004 and the Nine Months Ended September 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

346,111

42,646

$

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

74,473

–

–

(970

)

1,001

–

–

–

31

Repurchase of unvested restricted stock

(18,718

)

–

–

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

28,431

(28,431

)

–

–

1,778

–

–

–

1,778

Cancellation of unearned earnout shares

–

(14,215

)

–

–

–

–

–

–

–

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

430,297

–

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

307

–

–

–

5

–

–

–

5

Repurchase of unvested restricted stock

(7,077

)

–

–

91

(86

)

–

–

–

5

Issuance of common stock to former employee

3,629

–

–

–

–

–

–

–

–

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

427,156

–

$

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 Nine Months Ended September 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

427,156

–

$

1

$

(1,997

)

$

11,226

$

(590

)

$

–

$

(86,684

)

$

(78,044

)

Issuance of common stock upon exercise of stock options

11,196

–

–

–

62

–

–

–

62

Repurchase of unvested restricted stock

(744

)

–

–

–

(10

)

–

–

–

(10

)

Repurchase of common stock in exchange for settlement of notes and accrued interest from stockholders

(131,224

)

–

–

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

194,052

–

–

–

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

500,436

–

$

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 Nine Months Ended September 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

500,436

–

$

1

$

(138

)

$

27,120

$

–

$

–

$

(105,765

)

$

(78,782

)

Issuance of common stock upon exercise of stock options

51,713

–

–

–

1

–

–

–

1

Conversion of preferred stock into common stock for non- participation in the Series B financing

28,729

–

–

–

1,233

–

–

–

1,233

Repayment of notes receivable from stockholders

–

–

–

81

–

–

–

–

81

Deferred compensation for issuance of equity instruments

–

–

–

–

14,491

(14,491

)

–

–

–

Amortization of stock-based compensation

–

–

–

–

–

7,354

–

–

7,354

Repurchase of unvested restricted stock

(85

)

–

–

–

(3

)

–

–

–

(3

)

Issuance of restricted stock

70,000

–

–

–

654

(654

)

–

–

–

Issuance of equity instruments to former employees and consultants

–

–

–

–

1,309

–

–

–

1,309

Issuance of warrants to lenders

–

–

–

–

225

–

–

–

225

Deemed dividend and accretion to redemption value of redeemable convertible preferred stock

–

–

–

–

–

–

–

(219

)

(219

)

Reduction of redemption value on redeemable preferred stock

–

–

–

–

54,530

–

–

–

54,530

Net loss and comprehensive loss

–

–

–

–

–

–

–

(23,524

)

(23,524

)

Balance at September 30, 2005 (unaudited)

650,793

–

$

1

$

(57

)

$

99,560

$

(7,791

)

$

–

$

(129,508

)

$

(37,795

)

See accompanying notes.

F-7

SGX Pharmaceuticals, Inc.

Consolidated Statements of Cash Flows

(in thousands)

												Nine Months Ended
			Years Ended December 31,									September 30,
			2002			2003			2004			2004			2005
												(unaudited)
Operating activities:
Net loss			$	(32,669	)	$	(18,761	)	$	(18,752	)	$	(15,488	)	$	(23,524	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			4,327			5,110			5,002			3,766			3,178
	Imputed interest expense on convertible debenture			291			239			18			18			–
	Stock-based compensation			1,757			1,239			449			387			8,663
	Compensation related to earnout shares			1,778			–			–			–			–
	Amortization of discount on warrants			41			84			64			48			47
	Amortization of discount on warrants associated with bridge notes			–			–			2,753			553			727
	Deferred rent			42			169			(27	)		(25	)		(73	)
	Non-cash receipt of fixed assets			(350	)		–			–			–			–
	Accrual of interest on notes receivable from stockholders			(117	)		(124	)		(78	)		(57	)		–
	Accrual of interest on bridge notes payable			–			–			467			121			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			(1,260	)		(489	)
		Accrued interest on marketable securities		70			–			–			–			–
		Accounts payable and accrued liabilities		(3,657	)		1,968			(680	)		(483	)		(116	)
		Deferred revenue		187			5,865			(2,643	)		(1,134	)		(8	)
		Other assets		(806	)		84			559			542			(546	)
Net cash used in operating activities				(29,387	)		(6,312	)		(10,984	)		(13,012	)		(11,730	)
Investing activities:
Purchases of property and equipment, net				(5,327	)		(1,313	)		(1,175	)		(1,158	)		(638	)
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	)		(1,158	)		(638	)
Financing activities:
Proceeds from lines of credit and notes payable				9,952			1,302			643			642			4,000
Principal payments on lines of credit and notes payable				(1,991	)		(3,912	)		(3,946	)		(3,001	)		(2,672	)
Proceeds from repayment of notes receivable from stockholders				101			25			42			313			81
Issuance of common stock for cash, net of repurchases				28			10			52			(90	)		(2	)
Issuance of preferred stock, net				(118	)		118			(166	)		(47	)		6,656
Issuance of bridge notes				–			–			13,411			13,411			–
Net cash provided by (used in) financing activities				7,972			(2,457	)		10,036			11,228			8,063
Net decrease in cash and cash equivalents				(16,833	)		(10,082	)		(2,123	)		(2,942	)		(4,305	)
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		$	10,693		$	7,207
Supplemental schedule of cash flow information:
Cash paid for interest			$	600		$	890		$	587		$	469		$	205
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		$	–		$	–		$	225
Deferred compensation			$	758		$	57		$	–		$	–		$	14,491
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 September 30, 2005

and the nine months ended September 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 September 30, 2005 and for the nine months ended September 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 nine months ended September 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.

On January 3, 2006, the Company’s board of directors and stockholders authorized a 1-for-2 reverse stock split of the common stock that was effected on January 3, 2006. As a result, each share of the Company’s outstanding preferred stock is convertible into one-half of a share of the Company’s common stock. All common share information has been retroactively restated to reflect the 1-for-2 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 7,596,164 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 September 30, 2005. In addition to the conversion of preferred stock upon an initial public offering, the unaudited pro forma stockholders’ equity at September 30, 2005 reflects the conversion of a note payable balance of $6,000 into 500,000 shares of

F-9

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

common stock based on an assumed public offering price of $12.00 per share as if such conversion had occurred at September 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.

     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 nine months ended September 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 ($9.42 per share on an assumed converted basis), 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 ($8.48 per share on an assumed converted basis). The Company kept this value constant until April 2005, when the Company steadily increased the estimated fair value to $14.06 per common share based on an assessment of market considerations, including discussions with the underwriters in the initial public offering. Furthermore, the Company believes this valuation approach is consistent with valuation methodologies applied to other similar companies for financial reporting purposes pursuing an initial public offering.

The Company recorded deferred stock compensation, net of forfeitures, for employee and non-employee directors stock option and restricted stock grants within stockholders’ deficit of $0 in 2004 and $15,145 in the nine months ended September 30, 2005, which represents the difference between the revised fair value of

F-10

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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 $1.00 and $13.18 for the options granted during the nine months ended September 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.

The Company recorded amortization of deferred stock compensation of $449 during the year ended December 31, 2004 and $7,354, during the nine months ended September 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	$	9,179
2006		4,138
2007		1,566
2008		241
2009		21
	$	15,145

Below is a summary of employee stock option grant and restricted stock award activity, net of forfeitures, and related fair value information for the nine months ended September 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			867,750	$	1.00	$	10.34	$	9.34
	June			238,125	$	1.00	$	12.20	$	11.20
	July			213,863	$	1.00	$	14.06	$	13.06
	August			123,125	$	1.00	$	14.06	$	13.06
		Total		1,442,863

F-11

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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,									September 30,
	2002			2003			2004			2004			2005
Net loss attributable to common stockholders, as reported	$	(32,998	)	$	(19,090	)	$	(19,081	)	$	(15,735	)	$	(23,743	)
Add: Stock-based employee compensation expense included in net loss attributable to common stockholders		759			334			121			91			7,354
Deduct: Stock-based employee compensation determined under the fair value method		(911	)		(475	)		(262	)		(197	)		(5,156	)
Pro forma net loss attributable to common stockholders	$	(33,150	)	$	(19,231	)	$	(19,222	)	$	(15,841	)	$	(21,545	)
Basic and diluted net loss attributable to common stockholders per share, as reported	$	(78.94	)	$	(44.92	)	$	(39.84	)	$	(33.69	)	$	(43.09	)
Pro forma basic and diluted net loss attributable to common stockholders per share	$	(79.31	)	$	(45.25	)	$	(40.13	)	$	(33.92	)	$	(39.10	)

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

F-12

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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 and note payable, shares issuable upon the exercise of stock options and shares issuable 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, note payable, 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:

							Nine Months Ended
	Years Ended December 31,						September 30,
	2002		2003		2004		2004		2005
Redeemable convertible preferred stock		1,079,108		1,077,002		993,761		1,030,967		4,866,623
Outstanding common stock options		126,138		139,442		183,881		124,814		791,138
Outstanding warrants		8,596		10,276		10,479		10,422		86,115
Total		1,213,842		1,226,720		1,188,121		1,166,203		5,743,876

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 also assume the conversion of the note payable balance of $6,000 into

F-13

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

500,000 shares of common stock based on an assumed public offering price of $12.00 per share as if conversion occurred on or as of January 1, 2004.

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 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 non-refundable 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

F-14

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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), 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 overhead 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

F-15

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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.

2. Balance Sheet Details

Property and Equipment

Property and equipment consist of the following:

			December 31,
	Estimated								September 30,
	Life in Years		2003			2004			2005
									(unaudited)
Lab equipment		5-7	$	10,918		$	11,851		$	12,379
Computers and equipment		3-5		7,381			7,629			7,738
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			26,090
Accumulated depreciation and amortization				(10,992	)		(15,789	)		(18,834	)
			$	13,285		$	9,663		$	7,256

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 $3,612 and $3,045 for the nine months ended September 30, 2004 and 2005, respectively. Cost and accumulated depreciation of assets under equipment lines of credit was $14,338 and $7,442 respectively, at December 31, 2003, $14,980 and $10,562 respectively,

F-16

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

at December 31, 2004, and $14,980 and $12,215 respectively, at September 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 September 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	)

				September 30, 2005
				(unaudited)
				Gross
		Estimated		Carrying		Accumulated
		Life in Years		Amount		Amortization
Goodwill			Indefinite	$	3,914	$	(522	)
Licenses			3– 5		977		(887	)
	Total intangible assets			$	4,891	$	(1,409	)

The amortization expense of intangible assets, excluding goodwill, for the years ended December 31, 2002, 2003 and 2004 and the nine months ended September 30, 2004 and 2005 was approximately $256, $205, $226, $154 and $133, respectively.

Estimated amortization of intangibles (in thousands) for the years ended:

2005	$	176
2006		47
Thereafter		–
	$	223

F-17

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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

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 $56 as of September 30, 2005. This amount is offset with the corresponding debt line item in the balance sheet as of December 31, 2004 and September 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 its Series B preferred stock, with an initial exercise price of $4.71 per share. These warrants will become exercisable for 20,381 shares of common stock at an exercise price of $9.42 per share 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. The facility is subject to a “material adverse event” clause and the Company’s cash and cash equivalent accounts are subject to the control of the lenders if a “material adverse event” occurs. In accordance with the provisions of EITF 95-22, “Balance Sheet Classifications of Borrowings Outstanding under Revolving Credit Agreements that include both a Subjective Acceleration Clause and a Lock-Box Arrangement” and FASB Technical Bulletin 79-3, “Subjective Acceleration Clauses in Long-Term Debt Agreements”, the Company has classified the

F-18

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

borrowings of $4.0 million outstanding under this arrangement as of September 30, 2005 as current in the consolidated balance sheet.

In December 2005, the Company borrowed an additional $4.9 million under the line of credit facility and issued the lenders warrants to purchase an aggregate of 49,607 shares of its Series B preferred stock, with an exercise price of $4.71 per share. These warrants will become exercisable for 24,803 shares of common stock upon completion of the Company’s proposed initial public offering.

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 nine months ended September 30, 2004 and 2005 was $1,547 and $1,659, respectively.

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 and substantially all of the Company’s assets 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)

F-19

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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 nine months ended September 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 nine months ended September 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 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.

F-20

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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 $17,750 through September 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 $2,250 of which has been received as of September 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 up to $17.0 million of contingent milestone payments based on successful development and approval of Troxatyl for the treatment of AML. The Company may also be required to make milestone payments upon the occurrence of other development and regulatory events for solid tumor and other indications, and will be required to make minimum royalty payments based on net sales of up to approximately $10,000 over a four-year period following product launch. 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.

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

F-21

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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 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.

F-22

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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.

In April 2005, the principal and accrued interest under the Secured Bridge Notes were converted into 3,034,095 shares of Series A-2 preferred stock. Subsequent to the conversion of the Secured Bridge Notes, the holders of Series A-1, B-1, C-1, and D-1 preferred stock exchanged their 1,765,900 shares of Series A-1, B-1, C-1 and D-1 preferred stock, together with their 3,034,095 shares of Series A-2 preferred stock, for an aggregate of 13,600,000 shares of new Series A preferred stock, and 388,104 shares of common stock were issued upon conversion of shares of Series A-1, B-1, C-1 or D-1 preferred stock that were not exchanged for shares of new Series A preferred stock. Also in April 2005, the Company sold 1,592,354 shares of new Series B preferred stock for $4.71 per share for net proceeds of $6,656. As a result, a summary of redeemable convertible preferred stock issued and outstanding as of September 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 September 30, 2005, the 15,192,354 shares of Series A (new) and Series B (new) preferred stock are convertible into a total of 7,596,164 shares of common stock and have a redemption value of $2.46 and $4.71 per share of 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 September 30, 2005, 57,631 shares and 66,385 shares, respectively, were subject to repurchase by the Company.

F-23

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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 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 1,755,000 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 stock options to purchase shares of the Company’s common stock:

					Weighted-Average
		Shares			Exercise Price
Outstanding at December 31, 2001			148,283		$	12.83
	Granted		83,830		$	13.88
	Exercised		(74,473	)	$	13.44
	Cancelled		(28,546	)	$	14.49
Outstanding at December 31, 2002			129,094		$	12.80
	Granted		46,958		$	10.12
	Exercised		(307	)	$	13.44
	Cancelled		(11,644	)	$	13.44
Outstanding at December 31, 2003			164,101		$	11.98
	Granted		39,905		$	4.80
	Exercised		(11,196	)	$	5.59
	Cancelled		(28,335	)	$	12.04
Outstanding at December 31, 2004			164,475		$	10.67
	Granted		1,372,863		$	1.00
	Exercised		(51,713	)	$	1.06
	Cancelled		(82,474	)	$	2.38
Outstanding at September 30, 2005			1,403,151		$	2.05
Exercisable at December 31, 2004			121,072		$	10.40

F-24

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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
$1.58		7,020		6.34	$	1.58		6,384	$	1.58
$3.96		39,362		9.05	$	3.96		30,872	$	3.96
$13.44		118,093		7.32	$	13.44		83,816	$	13.44
Total		164,475		7.69	$	10.67		121,072	$	10.40

At December 31, 2004, 121,072 shares were vested.

At December 31, 2004, exercise prices of outstanding stock options ranged between $1.58 and $13.44 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 $1.90, $3.96, and $11.22, respectively. The weighted-average remaining contractual life of the options outstanding at December 31, 2004 was 7.69 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, 1,003,376 shares remained 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 131,224 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.

F-25

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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.

In 2001, in conjunction with an executive recruiting agreement, the Company issued a warrant to purchase up to an aggregate of 1,264 shares of the Company’s common stock at an exercise price of $13.44 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 $66.82 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 115,000 shares of common stock with exercise prices ranging from $0.40 to $1.00 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 nine months ended September 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.

F-26

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

Shares Reserved for Future Issuance

The Company has reserved shares of common stock for future issuance as follows:

	December 31,		September 30,
	2004		2005
Conversion of convertible preferred stock		882,950		7,596,164
2000 Equity Incentive Plan		666,210		1,556,317
Warrants		6,728		170,826
		1,555,888		9,323,307

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,
		2003			2004
Deferred tax assets:
	Net operating loss carryforwards	$	24,655		$	29,954
	Research and development credits		3,954			4,783
	Capitalized research and development		1,739			1,742
	License		–			1,630
	Accrued vacation		246			258
	Deferred revenue		2,731			1,655
	Other		210			236
	Depreciation and amortization		–			434
Total deferred tax assets			33,535			40,692
Valuation allowance for deferred tax assets			(33,141	)		(40,692	)
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.

F-27

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

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 $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. In December 2005, the Company issued approximately $7.5 million of additional shares pursuant to the April 2005 Series B preferred stock purchase agreement.

F-28

SGX Pharmaceuticals, Inc.—(Continued)

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2004 and pertaining to September 30, 2005

and the nine months ended September 30, 2004 and 2005 is unaudited)

Immediately prior to the initial closing of a Series B Financing in April 2005, 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 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-29

4,000,000 Shares

Common Stock

PROSPECTUS

          , 2006

CIBC World Markets Piper Jaffray

JMP Securities

Until                     , 2006 (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			10,000
Printing and engraving expenses			250,000
Legal fees and expenses			850,000
Accounting fees and expenses			500,000
Transfer agent and registrar fees and expenses			30,000
Miscellaneous expenses			241,975
	Total	$	2,000,000

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 the registrant’s common stock and preferred stock and the related recapitalization that was effected in April 2005 and the 1-for-2 reverse stock split of the registrant’s common stock that was effected in January 2006. The 1-for-2 reverse stock split of the registrant’s common stock adjusted the conversion ratio of the preferred stock but did not adjust the number of outstanding shares of preferred stock. As a result of the 1-for-2 reverse stock split of the registrant’s common stock, each share of preferred stock will be converted into one-half of a share of the registrant’s common stock upon the completion of this offering.

(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. In December 2005, these warrants were adjusted pursuant to their terms to become exercisable for shares of Series B preferred stock at an exercise price of $4.71 per share. These warrants will be exercisable for an aggregate of 31,846 shares of common stock at an exercise price of $9.42 per share upon the completion of this offering.

(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 became 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. This warrant will be net exercised for 2,692 shares of the registrant’s common stock immediately prior to but contingent upon 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 194,044 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

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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 towards the principal becomes overdue. Upon completion of this offering, this note will automatically convert in a private placement into 500,000 shares of common stock assuming an initial public offering price of $12.00 per share.

(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 and (iii) committed to issue an additional 1,592,354 shares of Series B preferred stock to the accredited investors who irrevocably committed to purchase these shares in April 2005. The registrant issued 1,583,627 of these additional shares of Series B preferred stock in December 2005 pursuant to these irrevocable commitments from April 2005. Upon completion of this offering, these shares of Series A preferred stock and Series B preferred stock will convert into an aggregate of 8,346,316 shares of common stock.

(6) In July 2005, the registrant issued two warrants to purchase up to an aggregate of 115,000 shares of common stock having an exercise price of $1.00 per share to two accredited investors as consideration for past services to the registrant.

(7) In September 2005, in connection with a line of credit and equipment financing agreement, 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 20,381 shares of the registrant’s common stock, at an exercise price of $9.42 per share, upon completion of this offering. In December 2005, in connection with this line of credit and equipment financing agreement, the registrant issued two additional warrants to the lenders to purchase an aggregate of 49,607 shares of the registrant’s Series B preferred stock, at an initial exercise price of $4.71 per share. The warrants are exercisable through December 2015. These warrants will become exercisable for 24,803 shares of the registrant’s common stock, at an exercise price of $9.42 per share, upon completion of this offering.

(8) As of December 31, 2005, the registrant had outstanding options under the registrant’s 2000 equity incentive plan to purchase 1,146,686 shares of common stock (net of exercises and cancellations) to employees, directors and consultants, with a weighted average exercise price of $2.13 per share. In May 2005, the registrant also granted 70,000 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

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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.

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits.

Exhibit
Number			Description of Document
	1	.1	Form of Underwriting Agreement.
	3	.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 Warrants issued by Registrant in July 2002 to GATX Ventures, Inc.
	4	.4(3)	Amended and Restated Warrant issued by Registrant in January 2005 to Oxford Finance Corporation.
	4	.5	Warrant issued by Registrant in July 2002 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.

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Exhibit
Number			Description of Document
	4	.8(2)	Form of Warrant issued by Registrant in September and December 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+	2000 Equity Incentive Plan and Form of Option Agreement and Form of Stock Option Grant Notice thereunder.
	10	.3+	2005 Equity Incentive Plan and Form of Stock Option Agreement and Form of Stock Option Grant Notice thereunder.
	10	.4+	2005 Employee Stock Purchase Plan and Form of Offering Document thereunder.
	10	.5+	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.
	10	.15(1)	Lease Agreement dated June 1, 2001 between Registrant and BRS Torrey I, LLC.
	10	.16*	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*(3)	Collaboration and License Agreement dated April 14, 2003 between Registrant and Eli Lilly and Company.
	10	.18*(3)	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*(3)	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*(3)	Collaboration Agreement dated August 20, 2004 between Registrant, F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.

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Exhibit
Number			Description of Document
	10	.23*(3)	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*(3)	Amendment to Agreement dated February 1, 2005 between Registrant and OSI Pharmaceuticals, Inc.
	10	.26*(3)	Collaboration Agreement dated March 18, 2004 between Registrant and Serono International SA.
	10	.27*(3)	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*	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(2)	First Amendment to Lease Agreement dated August 30, 2005 between Registrant and ARE-3770 Tansy Street, LLC.
	10	.33(2)	Third Amendment to Lease Agreement dated August 30, 2005 between Registrant and ARE-10505 Roselle Street, LLC.
	10	.34(2)	Loan and Security Agreement dated September 16, 2005 among Registrant, Oxford Finance Corporation and Silicon Valley Bank.
	10	.35*(3)	Amendment to Agreement effective as of October 1, 2005 between Registrant, F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.
	10	.36*(3)	Amendment to Agreement dated October 28, 2005 between Registrant and Serono International SA.
	10	.37+	Offer Letter Agreement dated November 16, 2005 between Registrant and William Todd Myers.
	10	.38+	Offer Letter Agreement dated December 13, 2005 between Registrant and Siegfried Reich, Ph.D.
	10	.39+	Separation Agreement dated November 18, 2005 between Registrant and James Rotherham.
	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(1)	Power of Attorney.

†      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.
(2)	Filed with Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 on October 14, 2005.
(3)	Filed with Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 on November 14, 2005.

II-8

(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-9

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 4 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 4th day of January 2006.

SGX PHARMACEUTICALS, INC.

By:  /s/ Michael Grey

Michael Grey

Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 4 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)	January 4, 2006
/s/ W. Todd Myers W. Todd Myers, C.P.A.		Chief Financial Officer (Principal Financial and Accounting Officer)	January 4, 2006
/s/ Christopher S. Henney Christopher S. Henney, Ph.D., D.Sc.		Chairman of the Board of Directors	January 4, 2006
/s/ Louis C. Bock Louis C. Bock		Member of the Board of Directors	January 4, 2006
/s/ Karin Eastham Karin Eastham, C.P.A.		Member of the Board of Directors	January 4, 2006
/s/ Jean-Francois Formela Jean-Francois Formela, M.D.		Member of the Board of Directors	January 4, 2006
* Vijay K. Lathi		Member of the Board of Directors	January 4, 2006
/s/ Stelios Papadopoulos Stelios Papadopoulos, Ph.D.		Member of the Board of Directors	January 4, 2006
*By:	/s/ Michael Grey Michael Grey Attorney-in-Fact

II-10

EXHIBIT INDEX

Exhibit
Number			Description of Document
	1	.1	Form of Underwriting Agreement.
	3	.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 Warrants issued by Registrant in July 2002 to GATX Ventures, Inc.
	4	.4(3)	Amended and Restated Warrant issued by Registrant in January 2005 to Oxford Finance Corporation.
	4	.5	Warrant issued by Registrant in July 2002 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(2)	Form of Warrant issued by Registrant in September and December 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+	2000 Equity Incentive Plan and Form of Option Agreement and Form of Stock Option Grant Notice thereunder.
	10	.3+	2005 Equity Incentive Plan and Form of Stock Option Agreement and Form of Stock Option Grant Notice thereunder.
	10	.4+	2005 Employee Stock Purchase Plan and Form of Offering Document thereunder.
	10	.5+	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.

Exhibit
Number			Description of Document
	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.
	10	.15(1)	Lease Agreement dated June 1, 2001 between Registrant and BRS Torrey I, LLC.
	10	.16*	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*(3)	Collaboration and License Agreement dated April 14, 2003 between Registrant and Eli Lilly and Company.
	10	.18*(3)	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*(3)	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*(3)	Collaboration Agreement dated August 20, 2004 between Registrant, F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.
	10	.23*(3)	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*(3)	Amendment to Agreement dated February 1, 2005 between Registrant and OSI Pharmaceuticals, Inc.
	10	.26*(3)	Collaboration Agreement dated March 18, 2004 between Registrant and Serono International SA.
	10	.27*(3)	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*	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(2)	First Amendment to Lease Agreement dated August 30, 2005 between Registrant and ARE-3770 Tansy Street, LLC.
	10	.33(2)	Third Amendment to Lease Agreement dated August 30, 2005 between Registrant and ARE-10505 Roselle Street, LLC.
	10	.34(2)	Loan and Security Agreement dated September 16, 2005 among Registrant, Oxford Finance Corporation and Silicon Valley Bank.

Exhibit
Number			Description of Document
	10	.35*(3)	Amendment to Agreement effective as of October 1, 2005 between Registrant, F. Hoffmann-La Roche Ltd. and Hoffmann-La Roche Inc.
	10	.36*(3)	Amendment to Agreement dated October 28, 2005 between Registrant and Serono International SA.
	10	.37+	Offer Letter Agreement dated November 16, 2005 between Registrant and William Todd Myers.
	10	.38+	Offer Letter Agreement dated December 13, 2005 between Registrant and Siegfried Reich, Ph.D.
	10	.39+	Separation Agreement dated November 18, 2005 between Registrant and James Rotherham.
	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(1)	Power of Attorney.

†	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.
(2)	Filed with Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 on October 14, 2005.
(3)	Filed with Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 on November 14, 2005.

EX-1.1

                                                                     EXHIBIT 1.1

                              _____________ Shares

                            SGX Pharmaceuticals, Inc.

                                  Common Stock

                             UNDERWRITING AGREEMENT

                                                               ___________, 2006

CIBC World Markets Corp.
Piper Jaffray & Co.
JMP Securities LLC
c/o CIBC World Markets Corp.
300 Madison Avenue
New York, New York 10017

Ladies and Gentlemen:

        SGX Pharmaceuticals, Inc., a Delaware corporation (the "Company")
proposes, subject to the terms and conditions contained herein, to sell to you
and the other underwriters named on Schedule I to this Agreement (the
"Underwriters"), for whom you are acting as Representatives (the
"Representatives"), an aggregate of shares (the "Firm Shares") of the Company's
common stock, $0.001 par value per share (the "Common Stock"). All of the Firm
Shares are to be issued and sold by the Company. The respective amounts of the
Firm Shares to be purchased by each of the several Underwriters are set forth
opposite their names on Schedule I hereto. In addition, the Company proposes to
grant to the Underwriters an option to purchase up to an additional shares (the
"Option Shares") of Common Stock from the Company for the purpose of covering
over-allotments in connection with the sale of the Firm Shares. The Firm Shares
and the Option Shares are collectively called the "Shares."

        The Company has prepared and filed in conformity with the requirements
of the Securities Act of 1933, as amended (the "Securities Act"), and the
published rules and regulations thereunder (the "Rules") adopted by the
Securities and Exchange Commission (the "Commission") a Registration Statement
(as hereinafter defined) on Form S-1 (No. 333-128059), including a preliminary
prospectus relating to the Shares, and such amendments thereof as may have been
required to the date of this Agreement. Copies of such Registration Statement
(including all amendments thereof) and of the related Preliminary Prospectus (as
hereinafter defined) have heretofore been delivered by the Company to you. The
term "Preliminary Prospectus" means the preliminary prospectus included as a
part of the Registration Statement or filed with the Commission by the Company
pursuant to Rule 424(a) of the Rules in the form first used to make offers and
described on Schedule IV hereto. The term "Registration Statement" as used in
this Agreement means the initial registration statement (including all exhibits
and financial schedules thereto), as amended at the time and on the date it
becomes effective (the "Effective Date"), including the information (if any)
contained in the form of final prospectus filed with the Commission pursuant to
Rule 424(b) of the Rules and deemed to be part thereof at the time of
effectiveness pursuant to Rule 430A of the Rules. If the Company has filed an
abbreviated registration statement to register additional Shares pursuant to
Rule 462(b) under the Rules (the "462(b) Registration Statement"), then any
reference herein to the Registration Statement shall also be deemed to include
such 462(b) Registration Statement. The term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement at the time of effectiveness or, if Rule 430A of the Rules is relied
on, the term Prospectus shall also include the final prospectus filed with the
Commission pursuant to and within the time limits described in Rule 424(b) of
the Rules.


                                       1

        The Company understands that the Underwriters propose to make a public
offering of the Shares, as set forth in and pursuant to the Statutory Prospectus
(as hereinafter defined) and the Prospectus, as soon after the Effective Date
and the date of this Agreement as the Representatives deem advisable. The
Company hereby confirms that the Underwriters and dealers have been authorized
to distribute or cause to be distributed each Preliminary Prospectus and each
Issuer Free Writing Prospectus (as hereinafter defined) in connection with the
offering of the Shares and are authorized to distribute the Prospectus (as from
time to time amended or supplemented if the Company furnishes amendments or
supplements thereto to the Underwriters) in connection with the sale of the
Shares.

        1. Sale, Purchase, Delivery and Payment for the Shares. On the basis of
the representations, warranties and agreements contained in, and subject to the
terms and conditions of, this Agreement:

                (a) The Company agrees to issue and sell to each of the
        Underwriters, and each of the Underwriters agrees, severally and not
        jointly, to purchase from the Company, at a purchase price of $ per
        share (the "Initial Price"), the number of Firm Shares set forth
        opposite the name of such Underwriter under the column "Number of Firm
        Shares to be Purchased" on Schedule I to this Agreement, subject to
        adjustment in accordance with Section 8 hereof.

                (b) The Company hereby grants to the several Underwriters an
        option to purchase, severally and not jointly, all or any part of the
        Option Shares at the Initial Price. The number of Option Shares to be
        purchased by each Underwriter shall be the same percentage (adjusted by
        the Representatives to eliminate fractions) of the total number of
        Option Shares to be purchased by the Underwriters as such Underwriter is
        purchasing of the Firm Shares. Such option may be exercised only to
        cover over-allotments in the sales of the Firm Shares by the
        Underwriters and may be exercised in whole or in part at any time on or
        before 12:00 noon, New York City time, on the business day before the
        Firm Shares Closing Date (as defined below), and from time to time
        thereafter within 30 days after the date of this Agreement, in each case
        upon written, facsimile or telegraphic notice, or verbal or telephonic
        notice confirmed by written, facsimile or telegraphic notice, by the
        Representatives to the Company no later than 12:00 noon, New York City
        time, on the business day before the Firm Shares Closing Date or at
        least two business days before the Option Shares Closing Date (as
        defined below), as the case may be, setting forth the number of Option
        Shares to be purchased and the time and date (if other than the Firm
        Shares Closing Date) of such purchase.

                (c) Payment of the purchase price for, and delivery of
        certificates for, the Firm Shares shall be made at the offices of CIBC
        World Markets Corp., 300 Madison Avenue, New York, New York 10017, at
        10:00 a.m., New York City time, on the third business day following the
        date of this Agreement or at such time on such other date, not later
        than ten (10) business days after the date of this Agreement, as shall
        be agreed upon by the Company and the Representatives (such time and
        date of delivery and payment are called the "Firm Shares Closing Date").
        In addition, in the event that any or all of the Option Shares are
        purchased by the Underwriters, payment of the purchase price, and
        delivery of the certificates, for such Option Shares shall be made at
        the above-mentioned offices, or at such other place as shall be agreed
        upon by the Representatives and the Company, on each date of delivery as
        specified in the notice from the Representatives to the Company (such
        time and date of delivery and payment are called the "Option Shares
        Closing Date"). The Firm Shares Closing Date and any Option Shares
        Closing Date are called, individually, a "Closing Date" and, together,
        the "Closing Dates."

                (d) Payment shall be made to the Company by wire transfer of
        immediately available funds or by certified or official bank check or
        checks payable in New York Clearing House (same day) funds drawn to the
        order of the Company against delivery of the respective certificates to
        the


                                       2

        Representatives for the respective accounts of the Underwriters of
        certificates for the Shares to be purchased by them.

                (e) Certificates evidencing the Shares shall be registered in
        such names and shall be in such denominations as the Representatives
        shall request at least two full business days before the Firm Shares
        Closing Date or, in the case of Option Shares, on the day of notice of
        exercise of the option as described in Section 1(b) and shall be
        delivered by or on behalf of the Company to the Representatives through
        the facilities of the Depository Trust Company ("DTC") for the account
        of such Underwriter. The Company will cause the certificates
        representing the Shares to be made available for checking and packaging,
        at such place as is designated by the Representatives, on the full
        business day before the Firm Shares Closing Date (or the Option Shares
        Closing Date in the case of the Option Shares).

        2. Representations and Warranties of the Company. The Company represents
and warrants to each Underwriter as of the date hereof, as of the Firm Shares
Closing Date and as of each Option Shares Closing Date (if any), as follows:

                (a) On the Effective Date, the Registration Statement complied,
        and on the date of the Prospectus, the date any post-effective amendment
        to the Registration Statement becomes effective, the date any supplement
        or amendment to the Prospectus is filed with the Commission and each
        Closing Date, the Registration Statement and the Prospectus (and any
        amendment thereof or supplement thereto) will comply, in all material
        respects, with the requirements of the Securities Act and the Rules and
        the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
        and the rules and regulations of the Commission thereunder. The
        Registration Statement did not, as of the Effective Date, contain any
        untrue statement of a material fact or omit to state any material fact
        required to be stated therein or necessary in order to make the
        statements therein not misleading; and on the Effective Date and the
        other dates referred to above neither the Registration Statement nor the
        Prospectus, nor any amendment thereof or supplement thereto, will
        contain any untrue statement of a material fact or will omit to state
        any material fact required to be stated therein or necessary in order to
        make the statements therein not misleading. When the Preliminary
        Prospectus was first filed with the Commission (whether filed as part of
        the Registration Statement or any amendment thereto or pursuant to Rule
        424(a) of the Rules) and when any amendment thereof or supplement
        thereto was first filed with the Commission, such Preliminary Prospectus
        as amended or supplemented complied in all material respects with the
        applicable provisions of the Securities Act and the Rules and did not
        contain any untrue statement of a material fact or omit to state any
        material fact required to be stated therein or necessary in order to
        make the statements therein not misleading. If applicable, each
        Preliminary Prospectus and the Prospectus delivered to the Underwriters
        for use in connection with this offering was identical to the
        electronically transmitted copies thereof filed with the Commission
        pursuant to EDGAR, except to the extent permitted by Regulation S-T.
        Notwithstanding the foregoing, none of the representations and
        warranties in this paragraph 2(a) shall apply to statements in, or
        omissions from, the Registration Statement or the Prospectus or any
        amendments thereof or supplements thereto made in reliance upon, and in
        conformity with, information herein or otherwise furnished in writing by
        the Representatives on behalf of the several Underwriters for use in the
        Registration Statement or the Prospectus. With respect to the preceding
        sentence, the Company acknowledges that the only information furnished
        in writing by the Representatives on behalf of the several Underwriters
        for use in the Registration Statement or the Prospectus or any
        amendments thereof or supplements thereto is the statements contained in
        the tenth, thirteenth and fourteenth paragraphs under the caption
        "Underwriting" in the Preliminary Prospectus (the "Underwriter
        Information").


                                       3

                (b) As of the Applicable Time (as hereinafter defined), the
        Statutory Prospectus (as hereinafter defined), as then amended or
        supplemented by the Company, if applicable, did not contain any untrue
        statement of a material fact or omit to state any material fact required
        to be stated therein or necessary in order to make the statements
        therein not misleading. Each Issuer Free Writing Prospectus (i) is
        identified in Schedule III hereto, (ii) when considered as part of the
        Statutory Prospectus, did not contain any untrue statement of a material
        fact or omit to state any material fact required to be stated therein or
        necessary in order to make the statements therein not misleading, and
        (iii) that the Company is required to file pursuant to Rule 433(d) of
        the Rules has been, or will be, filed with the Commission in accordance
        with the requirements of the Securities Act and the applicable Rules.
        The Company has made at least one version of the Road Show available
        without restriction by means of graphic communication to any person,
        including any potential investor in the Shares (and if there is more
        than one version of a "bona fide electronic road show" as defined in
        Rule 433(h)(5) under the Securities Act that is a written communication,
        the Road Show was made available no later than the other versions).
        Notwithstanding the foregoing, none of the representations and
        warranties in this paragraph 2(b) shall apply to statements in, or
        omissions from, the Statutory Prospectus or any amendments thereof or
        supplements thereto made in reliance upon, and in conformity with, the
        Underwriter Information.

                As used in the foregoing paragraph and elsewhere in this
        Agreement:

                        "Applicable Time" means ___:00 [a/p]m (Eastern time) on
                        the date of this Underwriting Agreement.

                        "Issuer Free Writing Prospectus" means each "issuer free
                        writing prospectus" (as defined in Rule 405 of the
                        Rules) prepared by or on behalf of the Company or used
                        or referred to by the Company in connection with the
                        offering of the Shares. Each Issuer Free Writing
                        Prospectus is identified in Schedule III hereto.

                        "Statutory Prospectus" as of any time means the
                        Preliminary Prospectus relating to the Shares that is
                        included in the Registration Statement immediately prior
                        to the Applicable Time together with each Issuer Free
                        Writing Prospectus used, issued or filed on or after the
                        date of such Preliminary Prospectus and at or prior to
                        the Applicable Time. For purposes of this definition,
                        information contained in a form of prospectus that is
                        deemed retroactively to be a part of the Registration
                        Statement pursuant to Rule 430A of the Rules shall be
                        considered to be included in the Statutory Prospectus as
                        of the actual time that form of prospectus is filed with
                        the Commission pursuant to Rule 424(b) of the Rules.

                        "Road Show" means the "bona fide electronic road show"
                        as defined in Rule 433(h)(5) under the Securities Act
                        that has been made available by the Company without
                        restriction to any person.

                (c) The Registration Statement is effective under the Securities
        Act and no stop order preventing or suspending the effectiveness of the
        Registration Statement or suspending or preventing the use of any
        Preliminary Prospectus, any "free writing prospectus," as defined in
        Rule 405 of the Rules, pertaining to the Company, the Shares or the
        Public Offering, or the Prospectus has been issued by the Commission
        and, to the Company's knowledge, no proceedings for that purpose have
        been instituted or are threatened under the Securities Act. Any required
        filing of the Prospectus and any supplement thereto pursuant to Rule
        424(b) of the Rules has been or will be made in the manner and within
        the time period required by such Rule 424(b). Any material required


                                       4

        to be filed by the Company pursuant to Rule 433(d) of the Rules has been
        or will be made in the manner and within the time period required by
        such Rules.

                (d) The financial statements of the Company (including all notes
        and schedules thereto) included in the Registration Statement, the
        Statutory Prospectus and the Prospectus present fairly, in all material
        respects, the financial position of the Company and its consolidated
        subsidiaries at the dates indicated and the statement of operations,
        stockholders' equity and cash flows of the Company and its consolidated
        subsidiaries for the periods specified; and such financial statements
        and related schedules and notes thereto, and the unaudited financial
        information filed with the Commission as part of the Registration
        Statement, have been prepared in conformity with generally accepted
        accounting principles, consistently applied throughout the periods
        involved (provided that non-year-end financial statements are subject to
        normal recurring year-end audit adjustments that are not expected to be
        material in the aggregate and do not contain all footnotes required by
        generally accepted accounting principles). The summary and selected
        consolidated financial data included in the Statutory Prospectus and the
        Prospectus present fairly, in all material respects, the information
        shown therein as at the respective dates and for the respective periods
        specified and have been presented on a basis consistent with the
        consolidated financial statements set forth in the Statutory Prospectus
        and the Prospectus and other financial information.

                (e) Ernst & Young LLP (the "Auditor"), whose reports are filed
        with the Commission as a part of the Registration Statement, are and,
        during the periods covered by their reports, were independent public
        accountants as required by the Securities Act and the Rules.

                (f) The Company and each of its subsidiaries is duly organized,
        validly existing and in good standing under the laws of their respective
        jurisdictions of incorporation or organization and is duly qualified to
        do business and is in good standing as a foreign corporation in each
        jurisdiction in which the nature of the business conducted by it or
        location of the assets or properties owned, leased or licensed by it
        requires such qualification, except for such jurisdictions where the
        failure to so qualify or be in good standing, individually or in the
        aggregate, would not have a material adverse effect on the assets,
        properties, condition, financial or otherwise, or in the results of
        operations, business affairs or business prospects of the Company and
        its subsidiaries considered as a whole (a "Material Adverse Effect");
        and to the Company's knowledge, no proceeding has been instituted in any
        such jurisdiction revoking, limiting or curtailing, or seeking to
        revoke, limit or curtail, such power and authority or qualification.

                (g) The Company and each of its subsidiaries has all requisite
        corporate power and authority, and all necessary authorizations,
        approvals, consents, orders, licenses, certificates and permits of and
        from all governmental or regulatory bodies or any other person or entity
        (collectively, the "Permits"), to own, lease and license its assets and
        properties and conduct its business, all of which are valid and in full
        force and effect, except where the lack of such Permits, individually or
        in the aggregate, would not have a Material Adverse Effect. The Company
        and each of its subsidiaries has fulfilled and performed in all material
        respects all of its material obligations with respect to such Permits
        and, to the Company's knowledge, no event has occurred that allows, or
        after notice or lapse of time would allow, revocation or termination
        thereof or results in any other material impairment of the rights of the
        Company thereunder. Except as may be required under the Securities Act,
        the rules of the National Association of Securities Dealers, Inc. (the
        "NASD") and state and foreign Blue Sky laws, no other Permits are
        required to enter into, deliver and perform this Agreement and to issue
        and sell the Shares.

                (h) At the time of the filing of the Registration Statement and
        at the date hereof, the Company was not and is not an "ineligible
        issuer," as defined in Rule 405 of the Rules, including without


                                       5

        limitation the Company or any subsidiary thereof in the preceding three
        years not having been convicted of a felony or misdemeanor or having
        been made the subject of a judicial or administrative decree or order as
        described in Rule 405 of the Rules.

                (i) The Company and each of its subsidiaries owns or possesses
        legally enforceable rights to use all patents, patent rights,
        inventions, trademarks, trademark applications, trade names, service
        marks, copyrights, copyright applications, licenses, know-how and other
        similar rights and proprietary knowledge necessary for the conduct of
        its business (collectively, "Intangibles") as conducted on the date
        hereof and described in the Registration Statement and Prospectus.
        Neither the Company nor any of its subsidiaries has received any written
        notice of and neither the Company nor any of its subsidiaries has any
        knowledge of any infringement of or conflict with asserted rights of
        others with respect to any Intangibles.

                (j) The Company and each of its subsidiaries has good and
        marketable title in fee simple to all real property, and good and
        marketable title to all tangible personal property owned by it, in each
        case free and clear of all liens, encumbrances, claims, security
        interests and defects, except as are disclosed in the Prospectus or such
        as are not material to the Company and its subsidiaries, taken as a
        whole, and do not materially interfere with the use made or proposed to
        be made of such property, as of the date hereof, by the Company and its
        subsidiaries. All property held under lease by the Company and its
        subsidiaries is held by them under valid, existing and enforceable
        leases, with only such exceptions as are not material and do not
        materially interfere with the use made or proposed to be made of such
        property by the Company and its subsidiaries. Subsequent to the
        respective dates as of which information is given in the Registration
        Statement, the Statutory Prospectus and the Prospectus, (i) there has
        not been any Material Adverse Effect; (ii) neither the Company nor any
        of its subsidiaries has sustained any loss or interference with its
        assets, businesses or properties (whether owned or leased) from fire,
        explosion, earthquake, flood or other calamity, whether or not covered
        by insurance, or from any labor dispute or any court or legislative or
        other governmental action, order or decree which would have a Material
        Adverse Effect; and (iii) since the date of the latest balance sheet
        included in the Registration Statement, the Statutory Prospectus and the
        Prospectus, except as otherwise disclosed in the Prospectus, neither the
        Company nor its subsidiaries has (A) incurred any liability or
        obligation, direct or contingent, for borrowed money, except such
        liabilities or obligations incurred in the ordinary course of business,
        (B) entered into any transaction not in the ordinary course of business
        or (C) declared or paid any dividend or made any distribution on any
        shares of its stock or redeemed, purchased or otherwise acquired or
        agreed to redeem, purchase or otherwise acquire any shares of its
        capital stock.

                (k) There is no document, contract or other agreement required
        to be described in the Registration Statement, the Statutory Prospectus
        and the Prospectus or to be filed as an exhibit to the Registration
        Statement which is not described or filed as required by the Securities
        Act or Rules. Each description of a contract, document or other
        agreement in the Registration Statement, the Statutory Prospectus and
        the Prospectus accurately reflects in all material respects the terms of
        the underlying contract, document or other agreement. Each contract,
        document or other agreement described in the Registration Statement, the
        Statutory Prospectus and the Prospectus or listed in the Exhibits to the
        Registration Statement is in full force and effect and is valid and
        enforceable by and against the Company or its subsidiaries, as the case
        may be, in accordance with its terms. Neither the Company nor any of its
        subsidiaries, if a subsidiary is a party, nor to the Company's
        knowledge, any other party is in default in the observance or
        performance of any term or obligation to be performed by it under any
        such contract, document or other agreement and no event has occurred
        which with notice or lapse of time or both would constitute such a
        default, in any such case which default or event, individually or in the
        aggregate, would have a Material Adverse Effect. No default exists, and
        no event has occurred which with notice or lapse of time or both would
        constitute a default, in the


                                       6

        due performance and observance of any term, covenant or condition, by
        the Company or its subsidiary, if a subsidiary is a party thereto, of
        any other agreement or instrument to which the Company or any of its
        subsidiaries is a party or by which Company or its properties or
        business of a subsidiary or its properties or business may be bound or
        affected which default or event, individually or in the aggregate, would
        have a Material Adverse Effect.

                (l) The statistical and market related data included in the
        Registration Statement, the Statutory Prospectus and the Prospectus are
        based on or derived from sources that the Company believes to be
        reliable and accurate.

                (m) Neither the Company nor any of its subsidiaries is in
        violation of any term or provision of its charter or bylaws or of any
        franchise, license, permit, judgment, decree, order, statute, rule or
        regulation, where the consequences of such violation, individually or in
        the aggregate, would have a Material Adverse Effect.

                (n) This Agreement has been duly authorized, executed and
        delivered by the Company.

                (o) Neither the execution, delivery and performance of this
        Agreement by the Company nor the consummation of any of the transactions
        contemplated hereby (including, without limitation, the issuance and
        sale by the Company of the Shares) will give rise to a right to
        terminate or accelerate the due date of any payment due under, or
        conflict with or result in the breach of any term or provision of, or
        constitute a default (or an event which with notice or lapse of time or
        both would constitute a default) under, or require any consent or waiver
        under, or result in the execution or imposition of any lien, charge or
        encumbrance upon any properties or assets of the Company or its
        subsidiaries pursuant to the terms of, any indenture, mortgage, deed of
        trust or other agreement or instrument to which the Company or any of
        its subsidiaries is a party or by which either the Company or its
        subsidiaries or any of their properties or businesses is bound, or any
        franchise, license, permit, judgment, decree, order, statute, rule or
        regulation applicable to the Company or any of its subsidiaries, expect
        where it would not have a Material Adverse Effect, or violate any
        provision of the charter or by-laws of the Company or any of its
        subsidiaries, except for such consents or waivers which have already
        been obtained and are in full force and effect.

                (p) On the date set forth therein, the Company had the
        authorized and outstanding capital stock as set forth under the caption
        "Capitalization" in the Statutory Prospectus and the Prospectus. The
        certificates evidencing the Shares are in due and proper legal form and
        have been duly authorized for issuance by the Company. All of the issued
        and outstanding shares of Common Stock have been duly and validly issued
        and are fully paid and nonassessable. Except as disclosed in the
        Registration Statement, the Statutory Prospectus and the Prospectus or
        as set forth in the Amended and Restated Investor Rights Agreement dated
        April 21, 2005 by and among the Company and the parties named therein,
        there are no statutory preemptive or other similar rights granted by the
        Company to subscribe for or to purchase or acquire any shares of Common
        Stock of the Company or any of its subsidiaries or any such rights
        pursuant to its Certificate of Incorporation or bylaws or any agreement
        or instrument to or by which the Company or any of its subsidiaries is a
        party or bound, other than such rights that have been properly waived.
        The Shares, when issued and sold pursuant to this Agreement, will be
        duly and validly issued, fully paid and nonassessable and none of them
        will be issued in violation of any preemptive or other similar right
        granted by the Company. Except as disclosed in the Registration
        Statement, the Statutory Prospectus and the Prospectus, there is no
        outstanding option, warrant or other right calling for the issuance of,
        and there is no commitment, plan or arrangement to issue, any share of
        stock of the Company or any of its subsidiaries or any security
        convertible into, or exercisable or exchangeable for, such stock. The
        Common Stock and the Shares conform in all material respects to all
        statements in relation thereto


                                       7

        contained in the Registration Statement, the Statutory Prospectus and
        the Prospectus. All outstanding shares of capital stock of each of the
        Company's subsidiaries have been duly authorized and validly issued, and
        are fully paid and nonassessable and are owned directly by the Company
        or by another wholly-owned subsidiary of the Company free and clear of
        any security interests, liens, encumbrances, equities or claims, other
        than those described in the Statutory Prospectus and the Prospectus.

                (q) There are no legal or governmental proceedings pending to
        which the Company or any of its subsidiaries is a party or of which any
        property of the Company or any of its subsidiaries is the subject which
        would individually or in the aggregate have a Material Adverse Effect;
        and, to the knowledge of the Company, no such proceedings are threatened
        or contemplated by governmental authorities or threatened by others.

                (r) No holder of any security of the Company has any right,
        which has not been waived, to have any security owned by such holder
        included in the Registration Statement or to demand registration of any
        security owned by such holder for a period of 180 days after the date of
        this Agreement. Each director and executive officer of the Company and
        each stockholder of the Company listed on Schedule II has delivered to
        the Representatives his enforceable written lock-up agreement in the
        form attached to this Agreement as Exhibit A hereto ("Lock-Up
        Agreement").

                (s) All necessary corporate action has been duly and validly
        taken by the Company and to authorize the execution, delivery and
        performance of this Agreement and the issuance and sale of the Shares by
        the Company. This Agreement has been duly and validly authorized,
        executed and delivered by the Company and constitute and will constitute
        legal, valid and binding obligations of the Company enforceable against
        the Company in accordance with their respective terms, except as the
        enforceability thereof may be limited by bankruptcy, insolvency,
        reorganization, moratorium or other similar laws affecting the
        enforcement of creditors' rights generally and by general equitable
        principles.

                (t) Neither the Company nor any of its subsidiaries is involved
        in any labor dispute nor, to the knowledge of the Company, is any such
        dispute threatened, which dispute would have a Material Adverse Effect.
        The Company is not aware of any existing or imminent labor disturbance
        by the employees of any of its principal suppliers or contractors which
        would have a Material Adverse Effect. The Company is not aware of any
        threatened or pending litigation between the Company or its subsidiaries
        and any of its executive officers which, if adversely determined, could
        have a Material Adverse Effect.

                (u) No transaction has occurred between or among the Company and
        any of its officers or directors, stockholders or any affiliate or
        affiliates of any such officer or director or stockholder that is
        required to be described in and is not described in the Registration
        Statement, the Statutory Prospectus and the Prospectus.

                (v) The Company has not taken, nor will it take, directly or
        indirectly, any action designed to or which might reasonably be expected
        to cause or result in, or which has constituted or which might
        reasonably be expected to constitute, the stabilization or manipulation
        of the price of the Common Stock or any security of the Company to
        facilitate the sale or resale of any of the Shares.

                (w) The Company and each of its subsidiaries has filed all
        Federal, state, local and foreign tax returns which are required to be
        filed through the date hereof, which returns are true and correct in all
        material respects or has received valid extensions thereof, and has paid
        all taxes shown on such returns and all assessments received by it to
        the extent that the same are material and have become


                                       8

        due. To the Company's knowledge, there are no tax audits or
        investigations pending, which if adversely determined would have a
        Material Adverse Effect; nor to the Company's knowledge are there any
        material proposed additional tax assessments against the Company or any
        of its subsidiaries.

                (x) The Shares have been duly authorized for quotation on the
        National Association of Securities Dealers Automated Quotation
        ("Nasdaq") National Market System, subject to official Notice of
        Issuance. A registration statement has been filed on Form 8-A pursuant
        to Section 12 of the Exchange Act, which registration statement complies
        in all material respects with the Exchange Act.

                (y) The Company has taken no action designed to, or likely to
        have the effect of, terminating the registration of the Common Stock
        under the Exchange Act or the quotation of the Common Stock on the
        Nasdaq National Market, nor has the Company received any notification
        that the Commission or the Nasdaq National Market is contemplating
        terminating such registration or quotation.

                (z) The books, records and accounts of the Company and its
        subsidiaries accurately and fairly reflect, in reasonable detail, the
        transactions in, and dispositions of, the assets of, and the results of
        operations of, the Company and its subsidiaries. The Company and each of
        its subsidiaries maintains a system of internal accounting controls
        sufficient to provide reasonable assurances that (i) transactions are
        executed in accordance with management's general or specific
        authorizations, (ii) transactions are recorded as necessary to permit
        preparation of financial statements in accordance with generally
        accepted accounting principles and to maintain asset accountability,
        (iii) access to assets is permitted only in accordance with management's
        general or specific authorization and (iv) the recorded accountability
        for assets is compared with the existing assets at reasonable intervals
        and appropriate action is taken with respect to any differences.

                (aa) The Company is actively taking steps to establish
        disclosure controls and procedures (as such term is defined in Rule
        13a-15 under the Exchange Act), which: (i) are designed to ensure that
        material information relating to the Company is made known to the
        Company's principal executive officer and its principal financial
        officer by others within the Company, particularly during the periods in
        which the periodic reports required under the Exchange Act are required
        to be prepared; (ii) provide for the periodic evaluation of the
        effectiveness of such disclosure controls and procedures at the end of
        the periods in which the periodic reports are required to be prepared;
        and (iii) are effective in all material respects to perform the
        functions for which they were established.

                (bb) Based on the evaluation of its disclosure controls and
        procedures as established to date, the Company is not aware of (i) any
        significant deficiency in the design or operation of internal controls
        which could adversely affect the Company's ability to record, process,
        summarize and report financial data or any material weaknesses in
        internal controls; or (ii) any fraud, whether or not material, that
        involves management or other employees who have a role in the Company's
        internal controls.

                (cc) Except as described in the Statutory Prospectus and the
        Prospectus, there are no material off-balance sheet arrangements (as
        defined in Item 303 of Regulation S-K) that have or are reasonably
        likely to have a material current or future effect on the Company's
        financial condition, revenues or expenses, changes in financial
        condition, results of operations, liquidity, capital expenditures or
        capital resources.


                                       9

                (dd) Except as described in the Statutory Prospectus and the
        Prospectus and as preapproved in accordance with the requirements set
        forth in Section 10A of the Exchange Act, the Auditor has not been
        engaged by the Company to perform any "prohibited activities" (as
        defined in Section 10A of the Exchange Act).

                (ee) The Company's Board of Directors has validly appointed an
        audit committee whose composition satisfies the requirements of Rule
        4350(d)(2) of the Rules of the National Association of Securities
        Dealers, Inc. (the "NASD Rules") and the Board of Directors and/or the
        audit committee has adopted a charter that satisfies the requirements of
        Rule 4350(d)(1) of the NASD Rules.

                (ff) The Company is actively taking steps to ensure that it will
        be in compliance with all other applicable provisions of the
        Sarbanes-Oxley Act of 2002, any related rules and regulations
        promulgated by the Commission and corporate governance requirements
        under the NASD Rules upon the effectiveness of such provisions as may be
        applicable.

                (gg) The Company and its subsidiaries are insured by insurers of
        recognized financial responsibility against such losses and risks and in
        such amounts as are customary in the businesses in which they are
        engaged or propose to engage after giving effect to the transactions as
        described in the Statutory Prospectus and the Prospectus; all policies
        of insurance insuring the Company or any of its subsidiaries or the
        Company's or its subsidiaries' respective businesses, assets, employees,
        officers and directors are in full force and effect; the Company and
        each of its subsidiaries are in compliance with the terms of such
        policies and instruments in all material respects; and neither the
        Company nor any subsidiary of the Company has any reason to believe that
        it will not be able to renew its existing insurance coverage as and when
        such coverage expires or to obtain similar coverage from similar
        insurers as may be necessary to continue its business. Neither the
        Company nor any of its subsidiaries has been denied any insurance
        coverage which it has sought or for which it has applied.

                (hh) Each approval, consent, order, authorization, designation,
        declaration or filing of, by or with any regulatory, administrative or
        other governmental body necessary in connection with the execution and
        delivery by the Company of this Agreement and the consummation of the
        transactions herein contemplated required to be obtained or performed by
        the Company (except such additional steps as may be required by the NASD
        or may be necessary to qualify the Shares for public offering by the
        Underwriters under the state securities or Blue Sky laws) has been
        obtained or made and is in full force and effect.

                (ii) There are no affiliations with the NASD among the Company's
        officers, directors or, to the best of the knowledge of the Company, any
        five percent or greater stockholder of the Company, except as set forth
        in the Registration Statement or otherwise disclosed in writing to the
        Representatives.

                (jj) (i) Neither the Company nor any of its subsidiaries are in
        violation of any applicable rules, laws and regulation relating to the
        use, treatment, storage and disposal of toxic substances and protection
        of health or the environment ("Environmental Law") which are applicable
        to its business except for any violation which would not have a Material
        Adverse Effect; (ii) neither the Company nor its subsidiaries has
        received any notice from any governmental authority or third party of an
        asserted claim under Environmental Laws; (iii) each of the Company and
        each of its subsidiaries has received all permits, licenses or other
        approvals required of it under applicable Environmental Laws to the
        conduct its business and is in compliance with all terms and conditions
        of any such permit, license or approval, except for where non-compliance
        would not have a Material Adverse Effect;


                                       10

        (iv) to the Company's knowledge, no facts currently exist that will
        require the Company or any of its subsidiaries to make future material
        capital expenditures to comply with Environmental Laws; and (v) no
        property which is or has been owned, or to the Company's knowledge,
        leased or occupied by the Company or its subsidiaries has been
        designated as a Superfund site pursuant to the Comprehensive
        Environmental Response, Compensation of Liability Act of 1980, as
        amended (42 U.S.C. Section 9601, et. seq.) ("CERCLA") or otherwise
        designated as a contaminated site under applicable state or local law.
        Neither the Company nor any of its subsidiaries has been named as a
        "potentially responsible party" under CERCLA.

                (kk) The Company is not and, after giving effect to the offering
        and sale of the Shares and the application of the net proceeds therefrom
        as described in the Statutory Prospectus and the Prospectus, will not be
        subject to registration as an "investment company" within the meaning of
        the Investment Company Act of 1940, as amended (the "Investment Company
        Act").

                (ll) Neither the Company nor any other person associated with or
        acting on behalf of the Company including, without limitation, any
        director or officer or, to the Company's knowledge, any agent or
        employee of the Company or its subsidiaries, has, directly or indirectly
        while acting on behalf of the Company or its subsidiaries, (i) used any
        corporate funds for unlawful contributions, gifts, entertainment or
        other unlawful expenses relating to political activity; (ii) made any
        unlawful payment to foreign or domestic government officials or
        employees or to foreign or domestic political parties or campaigns from
        corporate funds; (iii) violated any provision of the Foreign Corrupt
        Practices Act of 1977, as amended; or (iv) made any other unlawful
        payment.

                (mm) The operations of the Company and its subsidiaries are and
        have been conducted at all times in material compliance with applicable
        financial recordkeeping and reporting requirements of the Currency and
        Foreign Transactions Reporting Act of 1970, as amended, the money
        laundering statutes of all jurisdictions applicable to the Company, the
        rules and regulations thereunder and any related or similar rules,
        regulations or guidelines, issued, administered or enforced by any
        governmental agency (collectively, the "Money Laundering Laws") and no
        action, suit or proceeding by or before any court or governmental
        agency, authority or body or any arbitrator involving the Company or any
        of it subsidiaries with respect to the Money Laundering Laws is pending,
        or to the best knowledge of the Company, threatened.

                (nn) Neither the Company nor any of its subsidiaries nor, to the
        knowledge of the Company, any director, officer, agent, employee or
        affiliate of the Company or any of its subsidiaries is currently subject
        to any U.S. sanctions administered by the Office of Foreign Assets
        Control of the U.S. Treasury Department ("OFAC"); and the Company will
        not directly or indirectly use the proceeds of the offering, or lend,
        contribute or otherwise make available such proceeds to any subsidiary,
        joint venture partner or other person or entity, for the purpose of
        financing the activities of any person who, to the Company's knowledge,
        is currently subject to any U.S. sanctions administered by OFAC.

                (oo) The clinical, pre-clinical and other trials, studies and
        tests conducted by or on behalf of or sponsored by the Company or in
        which the Company or its products or product candidates have
        participated that are described in the Registration Statement and
        Prospectus or the results of which are referred to in the Registration
        Statement or Prospectus were and, if still pending, are being conducted
        in all material respect in accordance with medical and scientific
        protocols and research procedures that the Company reasonably believes
        are appropriate. The descriptions in the Registration Statement and
        Prospectus of the results of such trials, studies and tests are accurate
        in all material respects and fairly present the data derived from such
        trials, studies and tests, and the Company has no knowledge of any other
        trials, studies or tests the results of which are materially
        inconsistent with or otherwise materially


                                       11

        call into question the results described or referred to in the
        Registration Statement and Prospectus. The Company has operated and
        currently is in compliance in all material respects with applicable
        statutes and implementing regulations administered or enforced by the
        United States Food and Drug Administration ("FDA"), except where the
        failure to so comply would not have a Material Adverse Effect. Except to
        the extent disclosed in the Registration Statement and the Prospectus,
        the Company has not received any notices or other correspondence from
        the FDA or any other governmental agency requiring the termination,
        suspension or modification of any clinical trials or pre-clinical
        studies or tests that are described in the Registration Statement or
        Prospectus or the results of which are referred to in the Registration
        Statement or Prospectus.

                (pp) Except as described in the Registration Statement, the
        Statutory Prospectus and the Prospectus, the Company has not sold or
        issued any shares of Common Stock during the six-month period preceding
        the Applicable Time, including any sales pursuant to Rule 144A under, or
        Regulations D or S of, the Securities Act, other than shares issued
        pursuant to employee benefit plans, equity incentive plans or other
        employee compensation plans or pursuant to outstanding options, rights
        or warrants.

                (qq) The Company has fulfilled its obligations, if any, in all
        material respects, under the minimum funding standards of Section 302 of
        the U.S. Employee Retirement Income Security Act of 1974 ("ERISA") and
        the regulations and published interpretations thereunder with respect to
        each "plan" as defined in Section 3(3) of ERISA and such regulations and
        published interpretations in which its employees are eligible to
        participate and each such plan is in compliance in all material respects
        with the presently applicable provisions of ERISA and such regulations
        and published interpretations. No "Reportable Event" (as defined in 12
        ERISA) has occurred with respect to any "Pension Plan" (as defined in
        ERISA) for which the Company would have any material liability.

                (rr) None of the Company, its directors or its officers has
        distributed nor will distribute prior to the later of (i) the Firm
        Shares Closing Date, or the Option Shares Closing Date, and (ii)
        completion of the distribution of the Shares, any offering material in
        connection with the offering and sale of the Shares other than any
        Preliminary Prospectus, the Prospectus, the Registration Statement and
        other materials, if any, permitted by the Securities Act and consistent
        with Section 4(e) below.

        3. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:

                (a) Notification that the Registration Statement became
        effective on the Effective Date shall have been received by the
        Representatives and the Prospectus shall have been timely filed with the
        Commission in accordance with Section 4(a) of this Agreement and any
        material required to be filed by the Company pursuant to Rule 433(d) of
        the Rules shall have been timely filed with the Commission in accordance
        with such rule.

                (b) No order preventing or suspending the use of any preliminary
        prospectus, the Prospectus or any "free writing prospectus", as defined
        in Rule 405 of the Rules, pertaining to the Company, the Shares or the
        Public Offering, shall have been or shall be in effect and no order
        suspending the effectiveness of the Registration Statement shall be in
        effect and no proceedings for such purpose shall be pending before or
        threatened by the Commission, and any requests for additional
        information on the part of the Commission to be included in the
        Registration Statement or the Prospectus or otherwise shall have been
        complied with to the satisfaction of the Commission and the
        Representatives. If the Company has elected to rely upon Rule 430A, Rule
        430A information


                                       12

        previously omitted from the effective Registration Statement pursuant to
        Rule 430A shall have been transmitted to the Commission for filing
        pursuant to Rule 424(b) within the prescribed time period and the
        Company shall have provided evidence satisfactory to the Underwriters of
        such timely filing, or a post-effective amendment providing such
        information shall have been promptly filed and declared effective in
        accordance with the requirements of Rule 430A.

                (c) The representations and warranties of the Company contained
        in this Agreement and in the certificates delivered pursuant to Section
        3(d) shall be true and correct when made and on and as of each Closing
        Date as if made on such date. The Company shall have performed all
        covenants and agreements and satisfied all the conditions contained in
        this Agreement required to be performed or satisfied by them at or
        before such Closing Date.

                (d) The Representatives shall have received on each Closing Date
        a certificate, addressed to the Representatives and dated such Closing
        Date, of the chief executive or chief operating officer and the chief
        financial officer or chief accounting officer of the Company to the
        effect that: (i) the representations and warranties and agreements of
        the Company in this Agreement were true and correct when made and are
        true and correct as of such Closing Date; (ii) the Company has performed
        all covenants and agreements and satisfied all conditions contained
        herein required to be performed or satisfied by it at or prior to the
        Closing Date; (iii) they have examined the Registration Statement, the
        Statutory Prospectus (including any individual Issuer Free Writing
        Prospectus) and the Prospectus and, in their opinion (A) as of the
        Effective Date, the Registration Statement, the Prospectus and each
        Issuer Free Writing Prospectus, when considered as part of the Statutory
        Prospectus, did not, and as of the Applicable Time, the Statutory
        Prospectus did not, include any untrue statement of a material fact and
        did not omit to state a material fact required to be stated therein or
        necessary to make the statements therein, in light of the circumstances
        under which they were made, not misleading, and (B) since the Effective
        Date no event has occurred which should have been set forth in a
        supplement or an amendment to the Registration Statement, the Statutory
        Prospectus or the Prospectus; and (iv) to their knowledge, no stop order
        suspending the effectiveness of the Registration Statement has been
        issued and no proceedings for that purpose have been instituted or are
        pending under the Securities Act.

                (e) The Representatives shall have received (i) simultaneously
        with the execution of this Agreement a signed letter from the Auditor
        addressed to the Representatives and dated the date of this Agreement,
        in form and substance reasonably satisfactory to the Representatives,
        containing statements and information of the type ordinarily included in
        accountants' "comfort letters" to underwriters with respect to the
        financial statements and certain financial information contained in the
        Statutory Prospectus, and (ii) on each such Closing Date, in form and
        substance reasonably satisfactory to the Representatives, containing
        statements and information of the type ordinarily included in
        accountants' "comfort letters" to underwriters with respect to the
        financial statements and certain financial information contained in the
        Registration Statement and the Prospectus.

                (f) The Representatives shall have received on each Closing Date
        from Cooley Godward LLP, counsel for the Company, an opinion, addressed
        to the Representatives and dated such Closing Date containing the
        opinions substantially as set forth in Exhibit B attached hereto.

                (g) The Representatives shall have received on each Closing Date
        from Hyman, Phelps & McNamera, P.C., special counsel for the Company
        with respect to FDA regulatory matters, an opinion, addressed to the
        Representatives and dated such Closing Date, containing the opinions
        substantially as set forth in Exhibit C attached hereto.


                                       13

                (h) The Representatives shall have received on each Closing Date
        from Townsend and Townsend and Crew LLP and Millen, White, Zelano &
        Branigan, P.C., intellectual property counsel for the Company, opinions,
        addressed to the Representatives and dated such Closing Date, containing
        the opinions substantially as set forth in Exhibits D and E,
        respectively, attached hereto.

                (i) The Representatives shall have received on each Closing Date
        from Latham & Watkins LLP, counsel for the Representatives, an opinion,
        addressed to the Representatives and dated such Closing Date, containing
        the opinions substantially as set forth in Exhibit F attached hereto.

                (j) All proceedings taken in connection with the sale of the
        Firm Shares and the Option Shares as herein contemplated shall be
        reasonably satisfactory in form and substance to the Representatives
        with respect to the Shares, the Registration Statement and the
        Prospectus, and such other related matters, as the Representatives may
        reasonably request, and the Company shall have furnished to Underwriters
        counsel such documents as they may reasonably request for the purpose of
        enabling them to pass upon such matters.

                (k) The Representatives shall have received copies of the
        Lock-up Agreements executed by each entity or person listed on Schedule
        II hereto.

                (l) The Shares shall have been approved for quotation on the
        Nasdaq National Market, subject only to official notice of issuance.

                (m) The Company shall have furnished or caused to be furnished
        to the Representatives such further certificates or documents as the
        Representatives shall have reasonably requested.

        4. Certain Covenants of the Company and the Underwriters.

                (a) The Company covenants and agrees as follows:

                        (i) The Company will use its reasonable efforts to cause
                the Registration Statement, if not effective at the time of
                execution of this Agreement, and any amendments thereto, to
                become effective as promptly as possible. The Company shall
                prepare the Prospectus in a form reasonably approved by the
                Representatives and file such Prospectus pursuant to Rule 424(b)
                under the Securities Act not later than the Commission's close
                of business on the second business day following the execution
                and delivery of this Agreement, or, if applicable, such earlier
                time as may be required by the Rules. The Company will file with
                the Commission all Issuer Free Writing Prospectuses that are
                required to be filed under Rule 433(d) of the Rules in the time
                and manner required under Rule 433(d) of the Rules.

                        (ii) The Company shall promptly advise the
                Representatives in writing after it receives notice thereof (A)
                when any post-effective amendment to the Registration Statement
                shall have become effective or any supplement to the Prospectus
                shall have been filed, (B) of any request by the Commission for
                any amendment of the Registration Statement or the Prospectus or
                for any additional information, (C) of the issuance by the
                Commission of any stop order suspending the effectiveness of the
                Registration Statement or of any order preventing or suspending
                the use of any preliminary prospectus or any "free writing
                prospectus," as defined in Rule 405 of the Rules, pertaining to
                the Company, the Shares or the Public Offering, or the
                institution or threatening of any proceeding for that purpose
                and (D) of the suspension of the qualification of the Shares for
                sale in any jurisdiction or the initiation or threatening of any
                proceeding for such purpose. The Company shall not file any
                amendment of the Registration Statement or supplement to the
                Prospectus unless the Company has furnished the


                                       14

                Representatives a copy for its review prior to filing and shall
                not file any such proposed amendment or supplement to which the
                Representatives reasonably object. The Company shall use its
                best efforts to prevent the issuance of any such stop order and,
                if issued, to obtain as soon as possible the withdrawal thereof.

                        (iii) If, at any time when a prospectus relating to the
                Shares is required to be delivered under the Securities Act and
                the Rules (or, in lieu thereof, the notice referred to in Rule
                173(a) of the Rules), any event occurs as a result of which the
                Prospectus as then amended or supplemented would include any
                untrue statement of a material fact or omit to state any
                material fact necessary to make the statements therein in the
                light of the circumstances under which they were made not
                misleading, or if it shall be necessary, in the Company's
                reasonable judgment, to amend or supplement the Prospectus to
                comply with the Securities Act or the Rules, the Company
                promptly shall prepare and file with the Commission, subject to
                the second sentence of paragraph (ii) of this Section 4(a), an
                amendment or supplement which shall correct such statement or
                omission or an amendment which shall effect such compliance.

                        (iv) If at any time following issuance of an Issuer Free
                Writing Prospectus there occurs an event or development as a
                result of which such Issuer Free Writing Prospectus would
                conflict with the information contained in the Registration
                Statement or would include an untrue statement of a material
                fact or would omit to state a material fact required to be
                stated therein or necessary in order to make the statements
                therein, in the light of the circumstances prevailing at the
                subsequent time, not misleading, the Company will promptly
                notify the Representatives and will promptly, at its own
                expense, correct such conflict, untrue statement or omission by
                amending or supplementing such Issuer Free Writing Prospectus
                or, after consultation with the Representatives, as otherwise
                may be permitted under the Rules.

                        (v) The Company shall make generally available to its
                security holders and to the Representatives as soon as
                practicable, but not later than 45 days after the end of the
                12-month period beginning at the end of the fiscal quarter of
                the Company during which the Effective Date occurs (or 90 days
                if such 12-month period coincides with the Company's fiscal
                year), an earning statement (which need not be audited) of the
                Company, covering such 12-month period, which shall satisfy the
                provisions of Section 11(a) of the Securities Act or Rule 158 of
                the Rules.

                        (vi) The Company shall furnish to the Representatives
                and counsel for the Underwriters, without charge, such number of
                the following documents as the Representatives shall reasonably
                request: conformed copies of the Registration Statement
                (including all exhibits thereto and amendments thereof) and to
                each other Underwriter a copy of the Registration Statement
                (without exhibits thereto) and all amendments thereof and, so
                long as delivery of a prospectus by an Underwriter or dealer may
                be required by the Securities Act or the Rules, as many copies
                of any preliminary prospectus, any Issuer Free Writing
                Prospectus and the Prospectus and any amendments thereof and
                supplements thereto as the Representatives may reasonable
                request. If applicable, the copies of the Registration
                Statement, any Preliminary Prospectus, any Issuer Free Writing
                Prospectus and the Prospectus and each amendment and supplement
                thereto furnished to the Underwriters will be identical to the
                electronically transmitted copies thereof filed with the
                Commission pursuant to EDGAR, except to the extent permitted by
                Regulation S-T.

                        (vii) The Company shall cooperate with the
                Representatives and their counsel in endeavoring to qualify the
                Shares for offer and sale in connection with the offering under
                the laws of such jurisdictions as the Representatives may
                designate and shall maintain such


                                       15

                qualifications in effect so long as required for the
                distribution of the Shares; provided, however, that the Company
                shall not be required in connection therewith, or as a condition
                thereof, to qualify as a foreign corporation or to execute a
                general consent to service of process in any jurisdiction or
                subject itself to taxation as doing business in any
                jurisdiction.

                        (viii) The Company, during the period when the
                Prospectus is required to be delivered under the Securities Act
                and the Rules or the Exchange Act (or in lieu thereof, the
                notice referred to in Rule 173(a) of the Rules), will file all
                reports and other documents required to be filed with the
                Commission pursuant to Section 13, 14 or 15 of the Exchange Act
                within the time periods required by the Exchange Act and the
                regulations promulgated thereunder.

                        (ix) Without the prior written consent of CIBC World
                Markets Corp. and Piper Jaffray & Co., for a period of 180 days
                after the date of this Agreement, the Company shall not issue,
                sell or register with the Commission (other than on Form S-8 or
                on any successor form), or otherwise dispose of, directly or
                indirectly, any equity securities of the Company (or any
                securities convertible into, exercisable for or exchangeable for
                equity securities of the Company), except for (A) the issuance
                of the Shares pursuant to the Registration Statement, and (B)
                the issuance of equity securities of the Company (or any
                securities convertible into, exercisable for or exchangeable for
                equity securities of the Company), (i) pursuant to the Company's
                existing equity plans or bonus plan as described in the
                Registration Statement and the Prospectus, (ii) pursuant to
                currently outstanding options, warrants or convertible notes as
                described in the Registration Statement, (iii) upon the
                conversion of the Company's Series A or Series B Preferred
                Stock, (iv) in connection with a strategic partnership, joint
                venture, collaboration, lending or other similar arrangement, or
                (v) in connection with the acquisition or license by the Company
                of any business, products or technologies; provided, however,
                that the shares issuable under clauses (iv) and (v) shall not
                exceed, in the aggregate during such 180-day period, ten percent
                (10.0%) of the Company's outstanding capital stock measured as
                of the Firm Shares Closing Date, including the Shares to be
                issued and sold hereunder. In the event that during this period,
                (A) any such shares are issued or (B) any registration is
                effected on Form S-8 or any successor form relating to shares
                that are exercisable within such 180-day period, the Company
                shall obtain the written agreement of such grantee or purchaser
                or holder of such registered securities that, for a period of
                180 days after the date of this Agreement, such person will not,
                without the prior written consent of CIBC World Markets Corp.
                and Piper Jaffray & Co., offer for sale, sell, distribute, grant
                any option for the sale of, or otherwise dispose of, directly or
                indirectly, or exercise any registration rights with respect to,
                any shares of Common Stock (or any securities convertible into,
                exercisable for, or exchangeable for any shares of Common Stock)
                owned by such person. Notwithstanding the foregoing, (i) the
                Company represents and warrants that each such grantee or
                purchaser or holder of such registered securities shall be
                subject to lockup restrictions materially consistent with those
                set forth on Exhibit A attached hereto and the Company shall
                enforce such rights and impose stop-transfer restrictions on any
                such sale or other transfer or disposition of such shares until
                the end of the period set forth in the applicable lock-up
                restrictions, and to the extent such grantee or purchaser or
                holder of such registered securities is subject to the lock-up
                attached hereto as Exhibit A (ii) if (x) during the last 17 days
                of the 180 day period described in this Section 4(a)(viii) the
                Company issues an earnings release or material news or a
                material event relating to the Company occurs; or (y) prior to
                the expiration of such 180 day period, the Company announces
                that it will release earnings results during the 16-day period
                beginning on the last day of the 180 day period; the
                restrictions imposed in this Section 4(a)(viii) 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; provided, however, that this
                sentence shall not apply if the research published or
                distributed on the Company is compliant




                                       16

                under Rule 139 of the Securities Act and the Company's
                securities are actively traded as defined in Rule 101(c)(1) of
                Regulation M of the Exchange Act.

                        (x) On or before completion of this offering, the
                Company shall make all filings required to be made by the
                Company under applicable securities laws and by the Nasdaq
                National Market (including any required registration under the
                Exchange Act).

                        (xi) Prior to the Closing Date, the Company will issue
                no press release or other communications directly or indirectly
                and hold no press conference with respect to the Company, the
                condition, financial or otherwise, or the earnings, business
                affairs or business prospects of any of them, or the offering of
                the Shares without giving prior notification and a copy or
                summary of such press release or other communication to legal
                counsel for the Representatives, not less than two business days
                prior to the intended release date of such press release or
                other communication, and discussing with the Representative and
                its counsel promptly and in good faith any modifications or
                amendments thereto requested by the Representative unless in the
                judgment of the Company and its counsel, and after notification
                to the Representatives, such press release or communication is
                required by law; provided, however, that any such press release
                or other communication which refers to any of the
                Representatives shall require the prior written consent of the
                Representatives.

                        (xii) The Company will apply the net proceeds from the
                offering of the Shares in the manner set forth under "Use of
                Proceeds" in the Prospectus.

                (b) The Company agrees to pay, or reimburse if paid by the
        Representatives, whether or not the transactions contemplated hereby are
        consummated or this Agreement is terminated, all costs and expenses
        incident to the public offering of the Shares and the performance of the
        obligations of the Company under this Agreement including those relating
        to: (i) the preparation, printing, filing, reproduction and distribution
        of the Registration Statement including all exhibits thereto, each
        Preliminary Prospectus, each Issuer Free Writing Prospectus, the
        Prospectus, all amendments and supplements to the Registration Statement
        and the Prospectus and the printing, filing and distribution of this
        Agreement; (ii) the preparation and delivery of certificates for the
        Shares to the Underwriters; (iii) the registration or qualification of
        the Shares for offer and sale under the securities or Blue Sky laws of
        the various jurisdictions referred to in Section 4(a)(vi), including the
        reasonable fees and disbursements of counsel for the Underwriters in
        connection with such registration and qualification and the preparation,
        printing, distribution and shipment of preliminary and supplementary
        Blue Sky memoranda; (iv) the furnishing (including costs of shipping and
        mailing) to the Representatives and to the Underwriters of copies of
        each preliminary prospectus, the Prospectus and all amendments or
        supplements to the Prospectus, and of the several documents required by
        this Section to be so furnished, as may be reasonably requested for use
        in connection with the offering and sale of the Shares by the
        Underwriters or by dealers to whom Shares may be sold; (v) the filing
        fees of the NASD in connection with its review of the terms of the
        public offering and reasonable fees and disbursements of counsel for the
        Underwriters in connection with such review; (vi) inclusion of the
        Shares for quotation on the Nasdaq National Market; and (vii) all
        transfer taxes, if any, with respect to the sale and delivery of the
        Shares by the Company to the Underwriters. Subject to the provisions of
        Section 7, the Underwriters agree to pay, whether or not the
        transactions contemplated hereby are consummated or this Agreement is
        terminated, all costs and expenses incident to the performance of the
        obligations of the Underwriters under this Agreement not payable by the
        Company pursuant to the preceding sentence, including, without
        limitation, the fees and disbursements of counsel for the Underwriters.



                                       17

                (c) The Company acknowledges and agrees that each of the
        Underwriters has acted and is acting solely in the capacity of a
        principal in an arm's length transaction between the Company, on the one
        hand, and the Underwriters, on the other hand, with respect to the
        offering of Shares contemplated hereby (including in connection with
        determining the terms of the offering) and not as a financial advisor,
        agent or fiduciary to the Company or any other person. Additionally, the
        Company acknowledges and agrees that the Underwriters have not and will
        not advise the Company or any other person as to any legal, tax,
        investment, accounting or regulatory matters in any jurisdiction. The
        Company has consulted with its own advisors concerning such matters and
        shall be responsible for making its own independent investigation and
        appraisal of the transactions contemplated hereby, and the Underwriters
        shall have no responsibility or liability to the Company or any other
        person with respect thereto, whether arising prior to or after the date
        hereof. Any review by the Underwriters of the Company, the transactions
        contemplated hereby or other matters relating to such transactions have
        been and will be performed solely for the benefit of the Underwriters
        and shall not be on behalf of the Company. The Company agrees that it
        will not claim that the Underwriters, or any of them, has rendered
        advisory services of any nature or respect, or owes a fiduciary duty to
        the Company or any other person in connection with any such transaction
        or the process leading thereto.

                (d) The Company represents and agrees that, unless it obtains
        the prior consent of CIBC World Markets Corp. and Piper Jaffray & Co.,
        and each Underwriter represents and agrees that, unless it obtains the
        prior consent of the Company and CIBC World Markets Corp. and Piper
        Jaffray & Co., it has not made and will not make any offer relating to
        the Shares that would constitute an "issuer free writing prospectus," as
        defined in Rule 433 of the Rules, or that would otherwise constitute a
        "free writing prospectus," as defined in Rule 405 of the Rules, required
        to be filed with the Commission. The Company represents that it has
        complied and will comply with the requirements of Rule 433 of the Rules
        applicable to any Issuer Free Writing Prospectus, including timely
        filing with the Commission where required, legending and record keeping.
        The Company represents that is has satisfied and agrees that it will
        satisfy the conditions in Rule 433 of the Rules to avoid a requirement
        to file with the Commission any Road Show.

        5. Indemnification.

                (a) The Company agrees to indemnify and hold harmless each
        Underwriter and each person, if any, who controls any Underwriter within
        the meaning of Section 15 of the Securities Act or Section 20 of the
        Exchange Act against any and all losses, claims, damages and
        liabilities, joint or several (including any reasonable investigation,
        legal and other expenses incurred in connection with, and any amount
        paid in settlement of, any action, suit or proceeding or any claim
        asserted), to which they, or any of them, become subject under the
        Securities Act, the Exchange Act or other Federal or state law or
        regulation, at common law or otherwise, insofar as such losses, claims,
        damages or liabilities arise out of or are based upon any untrue
        statement or alleged untrue statement of a material fact contained in
        any Preliminary Prospectus, the Registration Statement, the Prospectus,
        any Issuer Free Writing Prospectus or any "issuer-information" filed or
        required to be filed pursuant to Rule 433(d) of the Rules, or any
        amendment thereof or supplement thereto, or in any Blue Sky application
        or other information or other documents executed by the Company filed in
        any state or other jurisdiction to qualify any or all of the Shares
        under the securities laws thereof (any such application, document or
        information being hereinafter referred to as a "Blue Sky Application")
        or arise out of or are based upon any omission or alleged omission to
        state therein a material fact required to be stated therein or necessary
        to make the statements therein not misleading; provided, however, that
        such indemnity shall not inure to the benefit of any Underwriter (or any
        person controlling such Underwriter) on account of any losses, claims,
        damages or liabilities if such untrue statement or omission or alleged
        untrue statement or omission was made in any Preliminary


                                       18

        Prospectus, the Registration Statement, any Issuer Free Writing
        Prospectus or the Prospectus, or such amendment or supplement thereto,
        or in any Blue Sky Application, in reliance upon and in conformity with
        the Underwriter Information. This indemnity agreement will be in
        addition to any liability which the Company may otherwise have.

                (b) Each Underwriter agrees to indemnify and hold harmless the
        Company, and each person, if any, who controls the Company within the
        meaning of Section 15 of the Securities Act or Section 20 of the
        Exchange Act, each director of the Company, and each officer of the
        Company who signs the Registration Statement, against any losses,
        claims, damages or liabilities, joint or several (including any
        reasonable investigation, legal and other expenses incurred in
        connection with, and any amount paid in settlement of, any action, suit
        or proceeding or any claim asserted), to which such party may become
        subject, under the Securities Act or otherwise, insofar as such losses,
        claims, damages or liabilities (or actions in respect thereof) arise out
        of or are based upon any untrue statement or alleged untrue statement of
        a material fact contained in any Preliminary Prospectus, the
        Registration Statement or the Prospectus, or any amendment or supplement
        thereto, or arise out of or are based upon the omission or alleged
        omission to state therein a material fact required to be stated therein
        or necessary to make the statements therein not misleading, in each case
        to the extent, but only to the extent, that such untrue statement or
        alleged untrue statement or omission or alleged omission was made in any
        preliminary prospectus, the Registration Statement or the Prospectus or
        any such amendment or supplement in reliance upon and in conformity with
        the Underwriter Information; provided, however, that the obligation of
        each Underwriter to indemnify the Company (including any controlling
        person, director or officer thereof) shall be limited to the net
        proceeds received by the Company from such Underwriter. This indemnity
        agreement will be in addition to any liability which any Underwriter may
        otherwise have.

                (c) Any party that proposes to assert the right to be
        indemnified under this Section will, promptly after receipt of notice of
        commencement of any action, suit or proceeding against such party in
        respect of which a claim is to be made against an indemnifying party or
        parties under this Section, notify each such indemnifying party of the
        commencement of such action, suit or proceeding, enclosing a copy of all
        papers served. No indemnification provided for in Section 5(a) or 5(b)
        shall be available to any party who shall fail to give notice as
        provided in this Section 5(c) if the party to whom notice was not given
        was unaware of the proceeding to which such notice would have related
        and was prejudiced by the failure to give such notice but the omission
        so to notify such indemnifying party of any such action, suit or
        proceeding shall not relieve it from any liability that it may have to
        any indemnified party for contribution or otherwise than under this
        Section. In case any such action, suit or proceeding shall be brought
        against any indemnified party and it shall notify the indemnifying party
        of the commencement thereof, the indemnifying party shall be entitled to
        participate in, and, to the extent that it shall wish, jointly with any
        other indemnifying party similarly notified, to assume the defense
        thereof, with counsel reasonably satisfactory to such indemnified party,
        and after notice from the indemnifying party to such indemnified party
        of its election so to assume the defense thereof and the approval by the
        indemnified party of such counsel (not to be unreasonably withheld or
        delayed), the indemnifying party shall not be liable to such indemnified
        party for any legal or other expenses, except as provided below and
        except for the reasonable costs of investigation subsequently incurred
        by such indemnified party in connection with the defense thereof. The
        indemnified party shall have the right to employ its counsel in any such
        action, but the fees and expenses of such counsel shall be at the
        expense of such indemnified party unless (i) the employment of counsel
        by such indemnified party has been authorized in writing by the
        indemnifying parties, (ii) the indemnified party shall have been advised
        by counsel that there may be one or more legal defenses available to it
        which are different from or in addition to those available to the
        indemnifying party (in which case the indemnifying parties shall not
        have the right to direct the defense of such action on behalf of the
        indemnified party) or (iii) the indemnifying


                                       19

        parties shall not have employed counsel to assume the defense of such
        action within a reasonable time after notice of the commencement
        thereof, in each of which cases the fees and expenses of counsel to the
        indemnified party shall be at the expense of the indemnifying parties.
        An indemnifying party shall not be liable for any settlement of any
        action, suit, and proceeding or claim effected without its written
        consent, which consent shall not be unreasonably withheld or delayed.

        6. Contribution. In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in Section 5(a) or
5(b) is due in accordance with its terms but for any reason is unavailable to or
insufficient to hold harmless an indemnified party in respect to any losses,
liabilities, claims, damages or expenses referred to therein, then each
indemnifying party shall contribute to the aggregate losses, liabilities,
claims, damages and expenses (including any investigation, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but after
deducting any contribution received by any person entitled hereunder to
contribution from any person who may be liable for contribution) incurred by
such indemnified party, as incurred, in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Shares pursuant to this
Agreement or, if such allocation is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to above but also the relative fault of the Company on the one hand and the
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 6 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission. Notwithstanding the provisions of
this Section 6, no Underwriter (except as may be provided in the Agreement Among
Underwriters) shall be required to contribute any amount in excess of the amount
by which the total price at which the shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of damages which
such underwriter has otherwise been required to pay by reason of any such untrue
or alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 6,
each person, if any, who controls an Underwriter within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act shall have the same
rights to contribution as such Underwriter, and each director of the Company,
each officer of the Company who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, shall have the same rights to
contribution as the Company. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect of which a claim for contribution may be made
against another party or parties under this Section 6, notify such party or
parties from whom contribution may be sought, but the omission so to notify such
party or parties from whom contribution may be sought shall not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have hereunder or otherwise than under this Section 6. No party
shall be liable for contribution with respect to any action, suit, proceeding or
claim settled without its written consent. The Underwriter's obligations to
contribute pursuant to this Section 6 are several in proportion to their
respective underwriting commitments and not joint.




                                       20

        7. Termination.

                (a) This Agreement may be terminated with respect to the Shares
        to be purchased on a Closing Date by the Representatives by notifying
        the Company at any time at or before a Closing Date in the absolute
        discretion of the Representatives if: (i) there has occurred any
        material adverse change in the securities markets or any event, act or
        occurrence that has materially disrupted, or in the opinion of the
        Representatives, will in the future materially disrupt, the securities
        markets or there shall be such a material adverse change in general
        financial, political or economic conditions or the effect of
        international conditions on the financial markets in the United States
        is such as to make it, in the judgment of the Representatives,
        inadvisable or impracticable to market the Shares or enforce contracts
        for the sale of the Shares; (ii) there has occurred any outbreak or
        material escalation of hostilities or other calamity or crisis the
        effect of which on the financial markets of the United States is such as
        to make it, in the judgment of the Representatives, inadvisable or
        impracticable to market the Shares or enforce contracts for the sale of
        the Shares; (iii) trading in the Shares or any securities of the Company
        has been suspended or materially limited by the Commission or trading
        generally on the New York Stock Exchange, Inc., the American Stock
        Exchange, Inc. or the Nasdaq National Market has been suspended or
        materially limited, or minimum or maximum ranges for prices for
        securities shall have been fixed, or maximum ranges for prices for
        securities have been required, by any of said exchanges or by such
        system or by order of the Commission, the National Association of
        Securities Dealers, Inc., or any other governmental or regulatory
        authority; or (iv) a banking moratorium has been declared by any state
        or Federal authority; or (v) in the judgment of the Representatives,
        there has been, since the time of execution of this Agreement or since
        the respective dates as of which information is given in the Prospectus,
        any material adverse change in the assets, properties, condition,
        financial or otherwise, or in the results of operations, business
        affairs or business prospects of the Company and its subsidiaries
        considered as a whole, whether or not arising in the ordinary course of
        business.

                (b) If this Agreement is terminated pursuant to any of its
        provisions, the Company shall not be under any liability to any
        Underwriter, and no Underwriter shall be under any liability to the
        Company, except that (y) if this Agreement is terminated by the
        Representatives or the Underwriters because of any failure, refusal or
        inability on the part of the Company to comply with the terms or to
        fulfill any of the conditions of this Agreement, the Company will
        reimburse the Underwriters for all out-of-pocket expenses (including the
        reasonable fees and disbursements of their counsel) incurred by them in
        connection with the proposed purchase and sale of the Shares or in
        contemplation of performing their obligations hereunder and (z) no
        Underwriter who shall have failed or refused to purchase the Shares
        agreed to be purchased by it under this Agreement, without reason
        sufficient hereunder to justify cancellation or termination of its
        obligations under this Agreement, shall be relieved of liability to the
        Company or to the other Underwriters for damages occasioned by its
        failure or refusal.

        8. Substitution of Underwriters. If any Underwriter shall default in its
obligation to purchase on any Closing Date the Shares agreed to be purchased
hereunder on such Closing Date, the Representatives shall have the right, within
36 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase such Shares on the terms
contained herein. If, however, the Representatives shall not have completed such
arrangements within such 36-hour period, then the Company shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to the Underwriters to purchase such Shares on such
terms. If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by the Representatives and
the Company as provided above, the aggregate number of Shares which remains
unpurchased on such Closing Date does not exceed one-eleventh of the aggregate
number of all the Shares that all the Underwriters are obligated to purchase on
such date, then the


                                       21

Company shall have the right to require each non-defaulting Underwriter to
purchase the number of Shares which such Underwriter agreed to purchase
hereunder at such date and, in addition, to require each non-defaulting
Underwriter to purchase its pro rata share (based on the number of Shares which
such Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default. In any such case, either the Representatives or the Company shall have
the right to postpone the applicable Closing Date for a period of not more than
seven days in order to effect any necessary changes and arrangements (including
any necessary amendments or supplements to the Registration Statement or
Prospectus or any other documents), and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in the opinion
of the Company and the Underwriters and their counsel may thereby be made
necessary.

        If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by the Representatives and
the Company as provided above, the aggregate number of such Shares which remains
unpurchased exceeds 10% of the aggregate number of all the Shares to be
purchased at such date, then this Agreement, or, with respect to a Closing Date
which occurs after the First Closing Date, the obligations of the Underwriters
to purchase and of the Company, as the case may be, to sell the Option Shares to
be purchased and sold on such date, shall terminate, without liability on the
part of any non-defaulting Underwriter to the Company, and without liability on
the part of the Company, except as provided in Sections 4(b), 5, 6 and 7. The
provisions of this Section 8 shall not in any way affect the liability of any
defaulting Underwriter to the Company or the nondefaulting Underwriters arising
out of such default. The term "Underwriter" as used in this Agreement shall
include any person substituted under this Section 8 with like effect as if such
person had originally been a party to this Agreement with respect to such
Shares.

     9. Miscellaneous. The respective agreements, representations, warranties,
indemnities and other statements of the Company and the several Underwriters, as
set forth in this Agreement or made by or on behalf of them pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or the Company or any of their respective officers, directors
or controlling persons referred to in Sections 5 and 6 hereof, and shall survive
delivery of and payment for the Shares. In addition, the provisions of Sections
4(b), 5, 6 and 7 shall survive the termination or cancellation of this
Agreement.

     This Agreement has been and is made for the benefit of the Underwriters,
the Company and their respective successors and assigns, and, to the extent
expressed herein, for the benefit of persons controlling any of the
Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.

        All notices and communications hereunder shall be in writing and mailed
or delivered or by telephone or telegraph if subsequently confirmed in writing,
(a) if to the Representatives, c/o CIBC World Markets Corp., 300 Madison Avenue,
New York, New York 10017 Attention: Legal Department, and Piper Jaffray & Co.,
U.S. Bancorp Center, 800 Nicollet Mall, Minneapolis, Minnesota 55402, Attention:
Legal Department, with a copy to Latham & Watkins LLP, 135 Commonwealth Drive,
Menlo Park, CA 94025-3656, Attention: Ora T. Fisher, Esq. and (b) if to the
Company, to its agent for service as such agent's address appears on the cover
page of the Registration Statement with a copy to Cooley Godward LLP, 4401
Eastgate Mall, San Diego, CA 92121, Attention: Frederick T. Muto, Esq.

     THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.



                                       22

     This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.

     Please confirm that the foregoing correctly sets forth the agreement among
us.

                                      Very truly yours,

                                      SGX Pharmaceuticals, Inc.

                                      By:
                                         ---------------------------------

                                      Print Name:
                                                 -------------------------

                                      Title:
                                            ------------------------------


                                       23

CONFIRMED:

CIBC World Markets Corp.
Piper Jaffray & Co.
JMP Securities LLC

Acting severally on behalf of itself and as representative of the several
Underwriters named in Schedule I annexed hereto.

CIBC World Markets Corp                 Piper Jaffray & Co.

By:                                     By:
   ------------------------------          --------------------------------


Print Name:                             Print Name:
           ----------------------                  ------------------------


Title:                                  Title:
      ---------------------------             -----------------------------



                                       24

                                   SCHEDULE I




                                                                NUMBER OF
                                                             FIRM SHARES TO
NAME                                                          BE PURCHASED
- ----                                                         --------------
                                                          
CIBC World Markets Corp.
Piper Jaffray & Co.
JMP Securities LLC


                                                             --------------
     Total














                                   SCHEDULE I


                                   SCHEDULE II

                                    LOCK-UPS

Each director and executive officer of the Company.

The holders of [   ]% of the Company's outstanding capital stock.

The holders of [   ]% of the Company's outstanding stock options, warrants,
convertible notes and other convertible securities.














                                   SCHEDULE II

                                  SCHEDULE III


                        ISSUER FREE WRITING PROSPECTUSES










                                  SCHEDULE III

                                   SCHEDULE IV


                             PRELIMINARY PROSPECTUS
















                                   SCHEDULE IV

                                    EXHIBIT A

                            FORM OF LOCK-UP AGREEMENT


                                                                 _________, 200_


CIBC World Markets Corp.
Piper Jaffray & Co.
JMP Securities LLC
As Representative of the Several Underwriters
c/o CIBC World Markets Corp.
300 Madison Avenue
New York, New York  10017

        Re:     Public Offering of SGX Pharmaceuticals, Inc.

Ladies and Gentlemen:

        The undersigned, a holder of common stock, par value $0.001 per share
("Common Stock") or rights to acquire Common Stock of SGX Pharmaceuticals, Inc.
(the "Company"), understands that you, as Representative of the several
Underwriters, propose to enter into an Underwriting Agreement (the "Underwriting
Agreement") with the Company, providing for the public offering (the "Public
Offering") by the several Underwriters named in Schedule I to the Underwriting
Agreement (the "Underwriters"), of shares of Common Stock of the Company (the
"Securities"). Capitalized terms used herein and not otherwise defined shall
have the meanings set forth in the Underwriting Agreement.

        In consideration of the Underwriters' agreement to enter into the
Underwriting Agreement and to proceed with the Public Offering of the
Securities, and for other good and valuable consideration receipt of which is
hereby acknowledged, the undersigned hereby agrees for the benefit of the
Company, you and the other Underwriters that, without the prior written consent
of CIBC World Markets Corp. on behalf of the Underwriters, the undersigned will
not, during the period ending 180 days after the date of the prospectus relating
to the Public Offering (the "Lock-Up Period"), directly or indirectly (1) offer,
pledge, assign, encumber, announce the intention to sell, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, any shares of Common Stock of the Company or any securities
convertible into or exercisable or exchangeable for Common Stock owned either of
record or beneficially (as defined in the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) by the undersigned on the date hereof or hereafter
acquired or (2) enter into any swap or other agreement that transfers, in whole
or in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise, or publicly announce an intention to do any of the foregoing. In
addition, the undersigned agrees that, without the prior written consent of CIBC
World Markets Corp. on behalf of the Underwriters, it will not, during the
Lock-Up Period, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock. The foregoing shall not apply to:
(i) the sale of the Securities to be sold pursuant to the prospectus relating to
the Public Offering; (ii) sales under any 10b-5 plan; or (iii) transfers of
Common Stock (A) as a bona fide gift or gifts, (B) to any trust for the direct
or indirect benefit of the undersigned or the immediate family of the
undersigned, (C) if the








                                    EXHIBIT A

undersigned is a corporation, to any wholly-owned subsidiary of such
corporation, (D) if the undersigned is a limited liability company, to a member
or affiliated limited liability company, or (E) if the undersigned is a
partnership, to a partner or affiliated partnership; provided, however, that in
each such case under clause (iii) above, (1) it shall be a condition to the
transfer that the donee or transferee execute an agreement stating that the
donee or transferee is receiving and holding such capital stock subject to the
provisions of this Lock-Up Agreement and there shall be no further transfer of
such capital stock except in accordance with this Lock-Up Agreement, (2) any
such transfer shall not involve a disposition for value, (3) no filing by any
party (donor, donee, transferor or transferee) under the Exchange Act shall be
required or shall be voluntarily made in connection with such transfer (other
than a filing on a Form 5, Schedule 13D or Schedule 13G made after the
expiration of the Lock-Up Period), (4) each party (donor, donee, transferor or
transferee) shall not be required by law (including without limitation the
disclosure requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the Exchange Act) to make, and shall agree to not
voluntarily make, any public announcement of the transfer or disposition, and
(5) the undersigned notifies CIBC World Markets Corp. at least two business days
prior to the proposed transfer or disposition. For purposes of this Lock-Up
Agreement, "immediate family" shall mean any relationship by blood, marriage or
adoption, not more remote than first cousin.

        Notwithstanding the foregoing, if (1) during the last 17 days of the
Lock-Up Period the Company issues an earnings release or material news or a
material event relating to the Company occurs; or (2) prior to the expiration of
the Lock-Up Period, the Company announces that it will release earnings results
during the 16-day period beginning on the last day of the Lock-Up Period, the
restrictions imposed in this Lock-Up Agreement 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; provided,
however, that this sentence shall not apply if the research published or
distributed on the Company is compliant under Rule 139 of the Securities Act and
the Company's securities are actively traded as defined in Rule 101(c)(1) of
Regulation M of the Exchange Act.

        In furtherance of the foregoing, the Company, and any duly appointed
transfer agent for the registration or transfer of the securities described
herein, are hereby authorized to decline to make any transfer of securities if
such transfer would constitute a violation or breach of this Lock-Up Agreement.

        The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into this Lock-Up Agreement. All authority
herein conferred or agreed to be conferred and any obligations of the
undersigned shall be binding upon the successors, assigns, heirs or personal
representatives of the undersigned.

        The undersigned understands that, if the Underwriting Agreement does not
become effective, or if the Underwriting Agreement (other than the provisions
thereof which survive termination) shall terminate or be terminated prior to
payment for and delivery of the Common Stock to be sold thereunder, the
undersigned shall be released form all obligations under this Lock-Up Agreement.

        The undersigned, whether or not participating in the Public Offering,
understands that the Underwriters are entering into the Underwriting Agreement
and proceeding with the Public Offering in reliance upon this Lock-Up Agreement.

                            [signature page follows]









                                    EXHIBIT A

        This Lock-Up Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without regard to the conflict of laws
principles thereof.

                                            Very truly yours,

                                            [STOCKHOLDER]



                                            By:
                                               --------------------------------
                                               Name:
                                               Title:













                                    EXHIBIT A

                                    EXHIBIT B




                      FORM OF OPINION OF COOLEY GODWARD LLP


















                                    EXHIBIT B

                                    EXHIBIT C





                FORM OF OPINION OF HYMAN, PHELPS & MCNAMERA, P.C.




















                                    EXHIBIT C

                                    EXHIBIT D





              FORM OF OPINION OF TOWNSEND AND TOWNSEND AND CREW LLP




















                                    EXHIBIT D

                                    EXHIBIT E





            FORM OF OPINION OF MILLEN, WHITE, ZELANO & BRANIGAN, P.C















                                    EXHIBIT E

                                    EXHIBIT F

                     FORM OF OPINION OF LATHAM & WATKINS LLP














                                    EXHIBIT F

EX-3.1

                                                                     EXHIBIT 3.1

                AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
                                       OF
                            STRUCTURAL GENOMIX, INC.

      Structural GenomiX, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:

      A.    The corporation was originally incorporated under the name Protarch,
Inc., and the date of filing the original Certificate of Incorporation of this
corporation with the Secretary of State of the State of Delaware is July 16,
1998.

      B.    Pursuant to sections 242 and 245 of the General Corporation Law of
the State of Delaware, this Amended and Restated Certificate of Incorporation
amends and restates the provisions of the Amended and Restated Certificate of
Incorporation of this corporation.

      C.    The Amended and Restated Certificate of Incorporation of this
corporation is hereby amended and restated to read in its entirety as follows:

      ONE. The name of the corporation is Structural GenomiX, Inc. (the
"CORPORATION").

      TWO. The address of the registered office of the Corporation in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, New
Castle County, Delaware 19801 and the name of the registered agent at that
address is The Corporation Trust Company.

      THREE. The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.

      FOUR.

      A.    AUTHORIZED CAPITAL; DESIGNATION OF PREFERRED STOCK INTO SERIES.

            1.    The Corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation is authorized to issue is Fifty Million
(50,000,000) shares of Common Stock (the "COMMON STOCK") and Nineteen Million
(19,000,000) shares of Preferred Stock (the "PREFERRED STOCK"), of which Fifteen
Million (15,000,000) shares of Preferred Stock are designated Series A Preferred
Stock (the "SERIES A PREFERRED") and Four Million (4,000,000) shares of
Preferred Stock are designated Series B Preferred Stock (the "SERIES B
PREFERRED" and, together with the Series A Preferred, the "SERIES PREFERRED").
The Preferred Stock shall have a par value of one tenth of one cent ($0.001) per
share, and the Common Stock shall have a par value of one tenth of one cent
($0.001) per share.



      B.    RIGHTS, PREFERENCES AND PRIVILEGES OF PREFERRED STOCK.

      The rights, preferences, privileges and restrictions granted to or imposed
upon the Preferred Stock and the holders thereof are as follows in this Section
B and as stated elsewhere in this Amended and Restated Certificate of
Incorporation. Such rights, preferences and privileges, as well as those of the
Common Stock and the holders thereof, are expressly subject to the rights,
preferences and privileges of any other series of Preferred Stock that may be
authorized or designated and issued in the future which may have rights,
preferences and privileges that are senior to or on parity with those of
existing series of Preferred Stock.

            1.    DIVIDENDS. The holders of Series B Preferred shall be entitled
to receive dividends out of funds legally available therefor, at the annual rate
of $0.3768 per share of Series B Preferred held by them (as adjusted for stock
splits, stock combinations, stock dividends, recapitalizations, and similar
events), prior and in preference to the declaration or payment of any dividend
or other distribution (payable other than in Common Stock) with respect to the
Series A Preferred and Common Stock, when, as and if declared by the
Corporation's Board of Directors (the "BOARD OF DIRECTORS"). After payment to
the holders of the Series B Preferred of the full amount of any dividend
declared by the Board of Directors out of funds legally available therefor to
which such holders of Series B Preferred are entitled hereunder, the holders of
the Series A Preferred shall be entitled to receive dividends out of funds
legally available therefor, at the annual rate of $0.1971 per share of Series A
Preferred held by them (as adjusted for stock splits, stock combinations, stock
dividends, recapitalizations, and similar events), prior and in preference to
the declaration or payment of any dividend or other distribution (payable other
than in Common Stock) with respect to the Common Stock, when, as and if declared
by the Board of Directors. Such dividends shall not be cumulative and no right
to such dividends shall accrue to holders of Series Preferred unless declared by
the Board of Directors. No dividends or other distributions shall be made with
respect to the Series A Preferred, other than dividends payable solely in Common
Stock, unless dividends shall have been paid or declared and set apart for
payment, on account of all shares of Series B Preferred then issued and
outstanding, at the aforesaid rate for such calendar year. No dividends or other
distributions shall be made with respect to the Common Stock, other than
dividends payable solely in Common Stock, unless dividends shall have been paid
or declared and set apart for payment, on account of all shares of Series
Preferred then issued and outstanding, at the aforesaid rate for such calendar
year. After payment of dividends at the annual rate set forth above, any
additional dividends declared shall be distributed among all holders of Series
Preferred and Common Stock in proportion to the number of shares of Common Stock
which would be held by such holder if all shares of Series Preferred were
converted into Common Stock at the then effective and applicable Conversion
Price (as defined in Section B.3(a) below).

            2.    LIQUIDATION PREFERENCE.

                  (a)   SERIES PREFERRED PREFERENCES.

                        (i)   In the event of any liquidation, dissolution or
winding up of the corporation, either voluntary or involuntary (each a
"LIQUIDATION EVENT"), the holders of Series B Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the corporation to the holders of Series A Preferred and

                                       2.


Common Stock by reason of their ownership thereof, the amount of $4.71 per share
(as adjusted for any stock dividends, combinations or splits, recapitalizations
or other similar events with respect to such shares) for each share of Series B
Preferred then held and, in addition, an amount equal to all declared but unpaid
dividends on the Series B Preferred. If the assets and funds thus distributed
among the holders of the Series B Preferred are insufficient to permit the
payment to such holders of their full preferential amount, then the entire
assets and funds of the Corporation legally available for distribution shall be
distributed ratably among the holders of Series B Preferred in proportion to the
preferential amount each such holder is otherwise entitled to receive, prior and
in preference to any distribution of any of the assets or surplus funds of the
corporation to the holders of Series A Preferred and Common Stock by reason of
their ownership thereof.

                        (ii)  In the event of any Liquidation Event, after
payment to the holders of the Series B Preferred of the full amounts set forth
in Section B.2(a)(i) above, the holders of Series A Preferred shall be entitled
to receive, prior and in preference to any distribution of any of the assets or
surplus funds of the corporation to the holders of Common Stock by reason of
their ownership thereof, the amount of $2.4632352 per share (as adjusted for any
stock dividends, combinations or splits, recapitalizations or other similar
events with respect to such shares) for each share of Series A Preferred then
held and, in addition, an amount equal to all declared but unpaid dividends on
the Series A Preferred. If the assets and funds thus distributed among the
holders of the Series A Preferred are insufficient to permit the payment to such
holders of their full preferential amount, then the entire assets and funds of
the Corporation legally available for distribution shall be distributed ratably
among the holders of Series A Preferred in proportion to the preferential amount
each such holder is otherwise entitled to receive, prior and in preference to
any distribution of any of the assets or surplus funds of the corporation to the
holders of Common Stock by reason of their ownership thereof.

                  (b)   REMAINING ASSETS. After payment to the holders of the
Series Preferred of the amounts set forth in Sections B.2(a)(i) and B.2(a)(ii)
above, the remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed ratably among the holders of Common
Stock and Series Preferred in proportion to the shares of Common Stock then held
by each such holder on an as-converted to Common Stock basis.

                  (c)   REORGANIZATION OR MERGER. A Liquidation Event within the
meaning of this Section B shall be deemed to be occasioned by, or to include,
(i) any consolidation or merger of the Corporation with or into any other
corporation or other entity or person, or any other corporate reorganization, in
which the stockholders of the Corporation immediately prior to such
consolidation, merger or reorganization, own less than fifty percent (50%) of
the Corporation's voting power (or of the surviving or resulting entity's voting
power or of the voting power of the parent entity of such Corporation or
surviving or resulting entity immediately after such consolidation, merger or
reorganization), or any transaction or series of related transactions to which
the Corporation is a party in which in excess of fifty percent (50%) of the
Corporation's voting power is transferred, excluding any equity financing in
which the Corporation is the surviving corporation and any consolidation or
merger effected exclusively to change the domicile of the Corporation; or (ii) a
sale or lease of all or substantially all of the assets of this Corporation.

                                       3.


                  (d)   NON-CASH CONSIDERATION. If the consideration received by
this Corporation is other than cash, its value will be deemed its fair market
value as determined in good faith by the Board of Directors. Any securities
shall be valued as follows:

                        (i)   Securities not subject to investment letter or
other similar restrictions on free marketability covered by (ii) below:

                              (A)   if traded on a securities exchange or
through the Nasdaq National Market, the value shall be deemed to be the average
of the closing prices of the securities on such quotation system over the thirty
(30) day period ending three (3) days prior to the closing;

                              (B)   if actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and

                              (C)   if there is no active public market, the
value shall be the fair market value thereof, as mutually determined by the
Board of Directors and the holders of at least a majority of the voting power of
all then outstanding shares of Series Preferred.

                        (ii)  The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a shareholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (i)(A), (B) or (C) to reflect the approximate fair
market value thereof, as mutually determined by the Board of Directors and the
holders of at least a majority of the voting power of all then outstanding
shares of such Series Preferred.

            3.    CONVERSION. The holders of Series Preferred shall have
conversion rights as follows (the "CONVERSION RIGHTS"):

                  (a)   RIGHT TO CONVERT. Each share of Series Preferred shall
be convertible, at the option of and without the payment of any additional
consideration by the holder thereof, at any time into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing the
applicable Issuance Price (as defined below) by the applicable Conversion Price
(as defined below) in effect at the time of conversion. The "ISSUANCE PRICE" for
the Series A Preferred shall be $2.46 and for the Series B Preferred shall be
$4.71. The "CONVERSION PRICE" for the Series A Preferred shall initially be
$2.46 and for the Series B Preferred shall initially be $4.71, each subject to
adjustment as provided below. The number of shares of Common Stock into which a
share of Series A Preferred is convertible is hereinafter referred to as the
"SERIES A CONVERSION RATE" and the number of shares of Common Stock into which a
share of Series B Preferred is convertible is hereinafter referred to as the
"SERIES B CONVERSION RATE." The Series A Conversion Rate and the Series B
Conversion Rate are each referred to herein as a "CONVERSION RATE."

                  (b)   AUTOMATIC CONVERSION. Each share of Series Preferred
shall automatically be converted into shares of Common Stock at the then
effective applicable Conversion Rate: (i) immediately prior to the closing of a
firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as

                                       4.


amended (the "ACT") covering the offer and sale of Common Stock for the account
of the Corporation to the public at a minimum per share purchase price of $5.00
(as adjusted for stock splits, dividends, combinations and the like) with net
proceeds to the Corporation (after deduction of underwriters commissions and
expenses) of not less than $25,000,000 (a "QUALIFIED INITIAL PUBLIC OFFERING"),
or (ii) the date specified by the written consent or vote of the holders of more
than fifty percent (50%) of the Series Preferred then outstanding.

                  (c)   MECHANICS OF CONVERSION. Before any holder of Series
Preferred shall be entitled to convert the same into full shares of Common Stock
and to receive certificates therefor, the holder shall surrender the certificate
or certificates therefor, duly endorsed, at the office of the Corporation or of
any transfer agent for the Series Preferred, and shall give written notice to
the Corporation at such office that such holder elects to convert the same;
provided, however, that in the event of any automatic conversion pursuant to
Section B.3(b) above, the outstanding shares of Series Preferred shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent; provided further, that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon any automatic conversion pursuant to Section B.3(b) above
unless the certificates evidencing such shares of Series Preferred are either
delivered to the Corporation or its transfer agent as provided above, or the
holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement reasonably
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with the loss of such certificates. The Corporation
shall, as soon as practicable after such delivery, or such agreement and
indemnification in the case of a lost certificate, issue and deliver at such
office to such holder of Series Preferred, a certificate or certificates for the
number of shares of Common Stock to which the holder shall be entitled and a
check payable to the holder in the amount of any cash amounts payable as the
result of a conversion into fractional shares of Common Stock. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series Preferred to be converted, or
in the case of automatic conversion pursuant to Section B.3(b) above,
immediately prior to the closing of the offering or on the date specified by the
written consent or vote of the holders of more than fifty percent (50%) of the
Series Preferred then outstanding, as applicable, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date.

                  (d)   ADJUSTMENTS TO CONVERSION PRICE OF SERIES PREFERRED FOR
DILUTIVE ISSUES.

                        (i)   SPECIAL DEFINITIONS. For purposes of this Section
B.3(d), the following definitions shall apply:

                              (A)   "ADDITIONAL SHARES OF COMMON STOCK" shall
mean all shares of Common Stock issued (or, pursuant to Section B.3(d)(ii),
deemed to be issued) by the Corporation, other than:

                                       5.


                                    (1)   shares of Common Stock issued upon
conversion of the Series Preferred;

                                    (2)   up to 3,510,000 shares (or such
greater number of shares as may be approved in writing by the holders of a
majority of the then outstanding shares of Series Preferred, voting together as
a single class) of Common Stock, or the grant of options therefor, including
shares issued after the Original Issue Date upon exercise of options outstanding
on the date of filing of this Amended and Restated Certificate of Incorporation
(such number to be proportionately adjusted in the event of any stock splits,
stock dividends, recapitalizations or similar events occurring after the
Original Issue Date) to officers, directors, consultants and employees of the
Corporation or any subsidiary pursuant to any stock option plan or restricted
stock plan approved by a vote of not less than a majority of the Board of
Directors, and shares of Common Stock issued or issuable upon exercise of the
warrant issued to Russell Reynolds Associates, Inc. dated November 13, 2001 in
connection with services provided to the Corporation;

                                    (3)   shares of Common Stock issued in
connection with any stock split or stock dividend by the Corporation;

                                    (4)   up to 200,000 shares (or such greater
number of shares as may be approved in writing by the holders of a majority of
the then outstanding shares of Series Preferred, voting together as a single
class) of Common Stock issued (or, pursuant to Section B.3(d)(ii), deemed to be
issued) after the Original Issue Date in connection with strategic transactions
involving the Corporation and other entities, including (i) joint ventures,
manufacturing, marketing or distribution arrangements or (ii) technology
transfer, licensing, development or similar arrangements; provided that such
strategic transactions and the issuance of shares therein, has been approved by
the Board of Directors;

                                    (5)   shares of Common Stock issued (or,
pursuant to Section B.3(d)(ii), deemed to be issued) in connection with any
equipment leasing or loan arrangement, or debt financing from a bank or similar
financial or lending institution, including but not limited to the warrant
issued to General Electric Capital Corporation in 2000, warrants issued to GATX
Ventures, Inc. and Silicon Valley Bank each dated July 15, 2002, the warrant
issued to Oxford Finance Corporation dated August 28, 2002 (and in each case any
amendments thereof or warrants issued in exchange therefor) and in each case the
shares issuable upon exercise and conversion thereof; provided that such
transactions and amendments (and any warrants issued in exchange therefor) and
the issuance of shares therein, have been approved by the Board of Directors;

                                    (6)   up to 7,256 shares of Common Stock
issued in August 2003 to a former employee and up to 230,000 shares of Common
Stock issued (or, pursuant to Section B.3(d)(ii), deemed to be issued) upon
exercise of the warrants issued to Tim Harris and Linda Grais in July 2005; or

                                    (7)   shares of Common Stock issued (or,
pursuant to Section B.3(d)(ii), deemed to be issued) upon conversion of shares
of Series A Preferred, Series

                                       6.


B Preferred or other securities issued pursuant to the Series B Preferred Stock
Purchase Agreement (as defined below).

                              (B)   "CONVERTIBLE SECURITIES" shall mean any
evidences of indebtedness, shares (other than the Common Stock) or other
securities convertible into or exchangeable for Common Stock.

                              (C)   "OPTIONS" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.

                              (D)   "ORIGINAL ISSUE DATE" shall mean the date
shares of Series B Preferred are first issued pursuant to the Series B Preferred
Stock Purchase Agreement.

                        (ii)  DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK.
In the event the Corporation at any time or from time to time after the Original
Issue Date shall issue any Options or Convertible Securities or shall fix a
record date for the determination of holders of any class of securities entitled
to receive any such Options or Convertible Securities, then the maximum number
of shares (as set forth in the instrument relating thereto assuming the
satisfaction of any conditions to exercisability, including, without limitation,
the passage of time and without regard to any provisions contained therein for a
subsequent adjustment of such number) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that Additional Shares of Common Stock shall not be
deemed to have been issued, with respect to the Series Preferred, as applicable,
unless the consideration per share (determined pursuant to Section B.3(d)(iv)
hereof) of such Additional Shares of Common Stock would be less than the
Conversion Price for the Series Preferred, as applicable, in effect on the date
of and immediately prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:

                              (A)   no further adjustment in the applicable
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;

                              (B)   if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the applicable Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;

                                       7.


                              (C)   upon the expiration of any such Options or
any rights of conversion or exchange under such Convertible Securities which
shall not have been exercised, the applicable Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:

                                    i.    in the case of Convertible Securities
or Options for Common Stock, the only Additional Shares of Common Stock issued
were shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the Corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or exchanged, plus the additional consideration, if any, actually received by
the Corporation upon such conversion or exchange, and

                                    ii.   in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the Corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the Corporation upon the
issue of the Convertible Securities with respect to which such Options were
actually exercised;

                              (D)   no readjustment pursuant to clause (B) or
(C) above shall have the effect of increasing the applicable Conversion Price to
an amount which exceeds the lower of (i) the applicable Conversion Price on the
original adjustment date just prior to such adjustment, or (ii) the applicable
Conversion Price that would have resulted, had the original adjustment not taken
place, from an issuance(s) of Additional Shares of Common Stock, with respect to
the applicable series of Series Preferred, between the original adjustment date
and such readjustment date; and

                              (E)   in the case of any Options which expire by
their terms not more than 90 days after the date of issue thereof, no adjustment
of the applicable Conversion Price shall be made until the expiration or
exercise of all such Options.

                        (iii) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. In the event this Corporation shall issue
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section B.3(d)(ii)) after the Original Issue
Date without consideration or for consideration per share less than the
Conversion Price for the Series Preferred, as applicable, in effect on the date
of and immediately prior to such issue, then and in such event, the Conversion
Price for the Series Preferred, as applicable, shall be reduced, concurrently
with such issue, to a price determined by multiplying such applicable Conversion
Price by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue (including shares
issuable upon conversion of the outstanding Series Preferred) plus the number of
shares of Common Stock which the aggregate consideration received by the

                                       8.


Corporation for the total number of Additional Shares of Common Stock so issued
would purchase at such applicable Conversion Price; and the denominator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issue (including shares issuable upon conversion of the outstanding Series
Preferred) plus the number of such Additional Shares of Common Stock so issued.
For the purpose of this Section, the number of shares of Common Stock
outstanding shall be deemed to include the Common Stock issuable upon conversion
of all outstanding Series Preferred, upon conversion of all other outstanding
Convertible Securities and upon exercise of all outstanding Options (and
assuming conversion of Convertible Securities issuable upon exercise of
Options).

                        (iv)  DETERMINATION OF CONSIDERATION. For purposes of
this Section B.3(d), the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as follows:

                              (A)   CASH AND PROPERTY: Such consideration shall:

                                    (1)   insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Corporation;

                                    (2)   insofar as it consists of property
other than cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board irrespective of any accounting
treatment; and

                                    (3)   in the event Additional Shares of
Common Stock are issued together with other shares or securities or other assets
of the Corporation for consideration which covers both, be the proportion of
such consideration so received, computed as provided in clauses (1) and (2)
above, as determined in good faith by the Board of Directors.

                        (v)   OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section B.3(d)(ii), relating
to Options and Convertible Securities, shall be determined by dividing:

                              (A)   the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Corporation upon the exercise of such Options or
the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by

                              (B)   the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.

                                       9.


                        (vi)  SPECIAL MANDATORY CONVERSION.

                              (A)   For purposes of this Section B.3(d)(vi), the
following definitions shall apply:

                                    (1)   An "AFFILIATE" of a Holder (i) shall
mean any person, association or entity that, directly or indirectly, through one
or more intermediaries, has voting control of, has its voting controlled by, or
is under common voting control with, such Holder and (ii) shall also include,
without limitation, (a) any partner or retired partner of such Holder, if such
Holder is a partnership, (b) any member or former member of such Holder, if such
Holder is a limited liability company, (c) all related funds, affiliated funds,
sister funds, predecessor and successor funds, annex funds and associate funds,
if such Holder is a venture capital fund and (d) any immediate family member of
such Holder and any trust for the benefit of such Holder or any immediate family
of such Holder. For purposes of this Section B.3(d)(iv), "IMMEDIATE FAMILY"
shall mean any relationship by blood, marriage or adoption, not more remote than
first cousin.

                                    (2)   "HOLDER" shall mean any purchaser of
shares of Series B Preferred pursuant to the Series B Preferred Stock Purchase
Agreement (as defined below) and any transferee of shares of Series Preferred
from such purchaser.

                                    (3)   "INITIAL CLOSING" shall mean the
Initial Closing as defined in the Series B Preferred Stock Purchase Agreement.

                                    (4)   "INITIAL CLOSING DATE" shall mean the
Initial Closing Date as defined in the Series B Preferred Stock Purchase
Agreement.

                                    (5)   "NON-PARTICIPATING HOLDER" shall mean
any Holder that is not a Participating Investor (as defined below); provided,
however, that notwithstanding anything to the contrary set forth herein, a
Holder shall not be deemed a "Non-Participating Holder" if such Holder and its
Affiliates collectively acquire at the Second Closing (as defined below) at
least the Second Closing Commitment Dollar Amount of such Holder collectively
with the Second Closing Commitment Dollar Amount of its Affiliates;

                                    (6)   "PARTICIPATING INVESTOR" shall mean
any Holder that purchases such Holder's full Second Closing Commitment Dollar
Amount of shares of Series B Preferred at the Second Closing (each as defined
below) pursuant to the Series B Preferred Stock Purchase Agreement.

                                    (7)   "SECOND CLOSING" shall mean the Second
Closing as defined in the Series B Preferred Stock Purchase Agreement.

                                    (8)   "SECOND CLOSING COMMITMENT DOLLAR
AMOUNT" shall mean the Second Closing Commitment Dollar Amount set forth on
Exhibit A to the Series B Preferred Stock Purchase Agreement.

                                    (9)   "SECOND CLOSING DATE" shall mean the
Second Closing Date as defined in the Series B Preferred Stock Purchase
Agreement.

                                      10.


                                    (10)  "SECOND CLOSING NOTICE" shall mean the
Second Closing Notice as defined in the Series B Preferred Stock Purchase
Agreement.

                                    (11)  "SERIES B FINANCING" shall mean the
sale of up to approximately 3,200,000 shares of Series B Preferred at a purchase
price of $4.71 per share pursuant to the Series B Preferred Stock Purchase
Agreement.

                                    (12)  "SERIES B PREFERRED STOCK PURCHASE
AGREEMENT" shall mean that certain Series B Preferred Stock Purchase and
Recapitalization Agreement relating to the Series B Financing, dated as of April
21, 2005, entered into by and among the Corporation and the Holders named
therein, as such may be amended from time to time.

                              (B)   In the event:

                                    (1)   after the completion of the Initial
Closing and delivery by the Corporation of the Second Closing Notice to each
Holder as set forth in Section 2.2(a) of the Series B Preferred Stock Purchase
Agreement not less than ten (10) nor more than forty-five (45) calendar days
prior to the proposed Second Closing Date;

                                    (2)   the Corporation does not receive or
has not received from such Holder on or prior to the Second Closing Date such
Holder's Second Closing Commitment Dollar Amount (each such Holder that fails to
deliver or has not delivered to the Corporation such funds being deemed a
Non-Participating Holder);

then all of such Non-Participating Holder's shares of Series Preferred (and any
right to any dividend, payment or other distribution thereon) shall
automatically and without further action on the part of such holder be
converted, effective immediately following such Second Closing into shares of
Common Stock at the applicable Conversion Price then in effect.

                              (C)   The holder of any shares of Series Preferred
converted into shares of Common Stock pursuant to this Section B.3(d)(vi) shall
deliver to the Corporation during regular business hours at the office of any
transfer agent of the Corporation for the Series Preferred, or at such other
place as may be designated by the Corporation, the certificate or certificates
for the shares so converted, duly endorsed or assigned in blank or to the
Corporation. As promptly as practicable thereafter, the Corporation shall issue
and deliver to such Non-Participating Holder, at the place designated by such
Non-Participating Holder, a certificate or certificates for the whole number of
shares of Common Stock to be issued hereunder. Such conversion shall be deemed
to have occurred, and such Non-Participating Holder shall be deemed to have
become a stockholder of record of Common Stock, immediately upon the
consummation of the Second Closing. Upon such conversion of any shares of Series
Preferred to Common Stock pursuant to this Section B.3(d)(vi), all rights of the
holder of such shares as a holder of Series Preferred shall cease and terminate
with respect to such shares so converted even if the holder fails to deliver the
certificate or certificates for the shares so converted duly endorsed or
assigned in blank or to the Corporation. Immediately following such conversion
to Common Stock and until such time as the holder surrenders to the Corporation
the duly endorsed and assigned certificate or certificates for the shares so
converted, the certificate

                                      11.


or certificates representing such holder's shares of Series Preferred shall be
deemed a certificate representing that number of shares of Common Stock into
which such shares of Series Preferred were converted pursuant to this
B.3(d)(vi). Following the Second Closing, the Corporation shall provide written
notice to each Non-Participating Holder whose shares of Series Preferred were
converted to Common Stock pursuant to this Section B.3(d)(vi).

                  (e)   FRACTIONAL SHARES. In lieu of any fractional shares to
which the holder of Series Preferred would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the fair market
value of one share of such Series Preferred as determined by the Board of
Directors. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of Series
Preferred of each holder at the time converting into Common Stock and the number
of shares of Common Stock issuable upon such aggregate conversion.

                  (f)   ADJUSTMENT OF CONVERSION PRICE. The Conversion Price of
each share of Series Preferred shall be subject to adjustment from time to time
as follows:

                        (i)   If the number of shares of Common Stock
outstanding at any time after the date hereof is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then, on the date such payment is made or such change is
effective, the Conversion Prices applicable to the Series Preferred shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of any shares of Series Preferred shall be increased in proportion to
such increase of outstanding shares.

                        (ii)  If the number of shares of Common Stock
outstanding at any time after the date hereof is decreased by a combination of
the outstanding shares of Common Stock, then, on the effective date of such
combination, the Conversion Prices applicable to the Series Preferred shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of any shares of Series Preferred shall be decreased in proportion to
such decrease in outstanding shares.

                        (iii) In case the Corporation shall distribute to
holders of its Common Stock shares of its capital stock or other property of the
Corporation other than Common Stock (excluding any distribution in which the
Series Preferred participate on an as-converted basis, and any distribution for
which adjustment is otherwise made pursuant to this Section), then in such case
the holders of the Series Preferred shall, concurrent with the distribution to
holders of Common Stock, receive a like distribution based upon the number of
shares of Common Stock into which such Series Preferred is then convertible.

                        (iv)  In case, at any time after the date hereof, of any
capital reorganization, or any reclassification of the stock of the corporation
(other than as a result of a stock dividend or subdivision, split-up or
combination of shares), or the consolidation or merger of the Corporation with
or into another person (other than a consolidation or merger in which the
corporation is the continuing entity and which does not result in any change in
the Common Stock), the shares of Series Preferred shall, after such
reorganization, reclassification, consolidation, merger, sale or other
disposition, be convertible into the kind and number of

                                      12.


shares of stock or other securities or property of the Corporation or otherwise
to which a holder of such Series Preferred would have been entitled if
immediately prior to such reorganization, reclassification, consolidation,
merger, sale or other disposition such holder had converted its shares of such
Series Preferred into Common Stock. The provisions of this clause C.3(f)(iv)
shall similarly apply to successive reorganizations, reclassification,
consolidations, mergers, sales or other dispositions.

                        (v)   All calculations under this Section B.3(f) shall
be made to the nearest cent or to the nearest one hundredth (1/100) of a share,
as the case may be.

                  (g)   MINIMAL ADJUSTMENTS. No adjustment in the Conversion
Price for any series of Series Preferred need be made if such adjustment would
result in a change in the Conversion Price of less than $0.01. Any adjustment of
less than $0.01 which is not made shall be carried forward and shall be made at
the time of and together with any subsequent adjustment which, on a cumulative
basis, amounts to an adjustment of $0.01 or more in the Conversion Price.

                  (h)   NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, 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
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section B.3 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of Series Preferred against impairment. This
provision shall not restrict the Corporation's right to amend its Certificate of
Incorporation with the requisite board and stockholder consent.

                  (i)   CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Conversion Price pursuant to Section
B.3(d), the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
applicable holder of Series Preferred a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon written request
at any time of any holder of Series Preferred, furnish or cause to be furnished
to such holder a like certificate setting forth (i) all such adjustments and
readjustments, (ii) the Series A Conversion Rate and the Series B Conversion
Rate (as applicable) at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of such holder's shares of Series Preferred.

                  (j)   NOTICES OF RECORD DATE. In the event the Corporation
shall propose at any time to (i) declare any dividend or other distribution upon
its Common Stock, (ii) other than with respect to a transaction contemplated by
Section B.3(d)(vi), which transaction shall be governed by the provisions of
Section B.3(d)(vi), declare any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property,
(iii) effect any capital reorganization, reclassification of its Common Stock,
consolidation or merger with or into any other corporation or transfer of all or
substantially all of its assets or (iv) liquidate, dissolve or wind up the
Corporation, the Corporation shall mail to each holder of

                                      13.


Series Preferred at least twenty (20) days prior to the date on which a record
shall be taken for such dividend, distribution or subscription rights or the
effective date of such reorganization, reclassification, consolidation, merger,
liquidation, dissolution or winding up, as applicable, a notice containing such
record date or effective date, as applicable.

                  (k)   NOTICES. Any notice required by the provisions of this
Section B.3 to be given to any holder of Series Preferred shall be deemed given
if deposited in the United States mail, postage prepaid, and addressed to each
holder of record at such holder's address appearing on the Corporation's books;
provided, however that any notice required by the provisions of Section
B.3(d)(vi) shall also be deemed effectively given when sent by confirmed
electronic mail or facsimile if sent during normal business hours of the
recipient (or, if not, then on the next business day), or one (1) day after
deposit with a nationally recognized overnight courier, specifying next day
delivery.

      C.    VOTING RIGHTS.

            1.    Except as otherwise required by law or as set forth herein,
the holder of each share of Common Stock issued and outstanding shall have one
vote for each share of Common Stock held by such holder, and the holder of each
share of Series Preferred shall be entitled to the number of votes equal to the
number of shares of Common Stock into which such share of Series Preferred could
be converted at the record date for determination of the stockholders entitled
to vote on such matters, or, if no such record date is established, at the date
such vote is taken or any written consent of stockholders is solicited, such
votes to be counted together with all other shares of stock of the Corporation
having general voting power and not counted separately as a class, except with
respect to those matters required by law to be submitted to a class vote and
except as otherwise set forth herein. Holders of Series Preferred, voting
together as a separate class, shall be entitled to elect four (4) members of the
Board of Directors and the holders of Series Preferred and Common Stock, voting
together on an as-converted basis, shall elect the remaining directors. Holders
of Common Stock and Series Preferred shall be entitled to notice of any
stockholders' meeting in accordance with the Bylaws of the Corporation.
Fractional votes by the holders of Series Preferred shall not, however, be
permitted and any fractional voting rights shall (after aggregating all shares
into which shares of Series Preferred held by each holder could be converted) be
rounded to the nearest whole number.

            2.    In the case of any vacancy (other than a vacancy caused by
removal) in the office of a director occurring among the directors elected by
the holders of a series and/or class or classes (as applicable) of stock
pursuant to this Section C, the remaining directors so elected by that series
and/or class or classes (as applicable) may by affirmative vote of a majority
thereof (or the remaining director so elected if there be but one, or if there
are no such directors remaining, by the affirmative vote of the holders of a
majority of the shares of that class and/or series), elect a successor or
successors to hold office for the unexpired term of the director or directors
whose place or places shall be vacant. Any director who shall have been elected
by the holders of a series and/or class or classes (as applicable) of stock or
by any directors so elected as provided in the immediately preceding sentence
hereof may be removed during the aforesaid term of office, either with or
without cause, by, and only by, the affirmative vote of the holders of the
shares of the series and/or class or classes (as applicable) of stock entitled
to elect such

                                      14.


director or directors, given either at a special meeting of such stockholders
duly called for that purpose or pursuant to a written consent of stockholders,
and any vacancy thereby created may be filled by the holders of that class
and/or classes or series (as applicable) of stock represented at the meeting or
pursuant to unanimous written consent.

      D.    REDEMPTION.

            1.    If requested by the holders of not less than sixty-six and two
thirds percent (66 2/3%) of the outstanding shares of Series Preferred, the
Corporation shall, on any date after April 21, 2008 and on each of the first and
second anniversaries thereof, redeem the Series Preferred in three annual
installments (the date of each such annual installment a "REDEMPTION DATE"),
from any funds legally available for such purpose. The number of shares to be
redeemed from each holder on each Redemption Date shall equal the total number
of shares of Series Preferred held by such holder on the date of the Redemption
Notice (as defined below), divided by the number of Redemption Dates remaining
as of the date of the Redemption Notice, minus the number of shares of Series
Preferred that such holder converts into Common Stock after the date of the
Redemption Notice and prior to such Redemption Date, provided that for a holder
of more than one series of Series Preferred, such number of shares to be
redeemed shall be allocated pro rata to each such series of Series Preferred in
proportion to the total number of shares of each such series of Series Preferred
held by such holder just prior to the Redemption Date. The Corporation shall
effect redemptions by paying cash in an amount equal to $2.4632352 per share of
Series A Preferred and $4.71 per share of Series B Preferred (each as adjusted
for any stock dividends, combinations, splits, recapitalizations, or other
similar events with respect to such shares) plus declared but unpaid dividends
on such shares (the "REDEMPTION PRICES"). Upon the Corporation's default in the
payment of any required redemption of an installment hereunder, the unpaid
balance shall accrue interest at the rate of eight percent (8%) per annum,
payable quarterly in arrears.

            2.    If the funds of the Corporation legally available for
redemption of shares of Series Preferred on any Redemption Date are insufficient
to redeem the total number of shares of Series Preferred to be redeemed on such
date, those funds which are legally available will be used to redeem shares from
the holders of Series Preferred ratably in proportion to the aggregate
Redemption Prices that would be payable to each holder if all shares required to
be redeemed were being redeemed. The shares of Series Preferred not redeemed
shall remain outstanding and entitled to all the rights and preferences provided
herein, including the rights of conversion set forth herein. If any time
thereafter additional funds become legally available for the redemption, such
funds will immediately be used to redeem the balance of the shares which the
Corporation has become obliged to redeem on any Redemption Date but which it has
not redeemed.

            3.    At least thirty (30) days prior to each Redemption Date, the
Corporation shall mail a Redemption Notice, first class postage prepaid, to each
holder of record of Series Preferred as of the close of business two business
days preceding the mailing date, at the address last shown on the records of the
Corporation for such holder. The Redemption Notice shall specify the number of
shares to be redeemed from such holder, the Redemption Date, the Redemption
Price and the place at which payment may be obtained, and shall call upon such
holder to surrender to the Corporation, in the manner and at the place
designated, the certificate or certificates representing the shares to be
redeemed. On or after the Redemption Date, each

                                      15.


holder of Series Preferred to be redeemed shall surrender to the Corporation the
certificate or certificates representing such shares, in the manner and at the
place designated in the Redemption Notice. Each surrendered certificate shall be
canceled, and the Redemption Price for such shares shall then be payable to the
order of the person whose name appears on such certificate or certificates as
the owner thereof. If less than all the shares represented by any such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares. Nothing herein shall be deemed to prevent a holder of Series
Preferred from converting all or part of such holder's shares into Common Stock
in accordance with the terms of Section B.3(a) hereof at any time prior to a
Redemption Date covering such shares, and the provisions of this section shall
not apply to any shares so converted.

            4.    From and after the Redemption Date, unless there has been a
default in payment of the Redemption Price, the shares of Series Preferred
designated for redemption in the Redemption Notice shall cease to be outstanding
and shall no longer be transferred on the books of the Corporation, and all
rights of the holders with respect to such shares shall cease, except the right
to receive the Redemption Price without interest upon surrender of their
certificate or certificates.

      E.    PROTECTIVE PROVISIONS.

            1.    In addition to any other class vote that may be required by
law and without limiting any such required vote, so long as at least thirty-five
percent (35%) of the Series Preferred outstanding as of the Original Issue Date
remains outstanding, this Corporation shall not (by amendment, merger,
consolidation or otherwise) without first obtaining the approval (by vote or
written consent, as provided by law) of the holders of a majority of the then
outstanding shares of Series Preferred, voting together as a single class:

                  (a)   create any new class or series of shares having any
rights, preferences, or privileges senior to or on a parity with the Series
Preferred;

                  (b)   adversely alter or change the rights, preferences or
privileges of the Series Preferred or amend the Corporation's Certificate of
Incorporation or Bylaws in a manner that would have such effect;

                  (c)   increase or decrease the aggregate number of authorized
shares of Series Preferred;

                  (d)   sell, convey, or otherwise dispose of all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly-owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of this corporation is disposed of;

                  (e)   redeem, repurchase, or make other distributions with
respect to Common Stock or Series Preferred (except for acquisitions of Common
Stock by the Corporation pursuant to agreements which permit the Corporation to
repurchase such shares upon termination of services to the Corporation or in
exercise of the Corporation's right of first refusal upon a proposed transfer or
redemptions under the terms of the Corporation's Certificate of Incorporation,
as amended from time to time);

                                      16.


                  (f)   declare any dividends on the Common Stock or Series
Preferred;

                  (g)   increase or decrease the size of the Board of Directors;
or

                  (h)   voluntarily liquidate or dissolve.

            2.    The consent of the holders of a majority of the outstanding
shares of a particular series of the Series Preferred, voting as a separate
series, shall be required to amend or repeal any provision of, or add any
provision to, the Corporation's Certificate of Incorporation or Bylaws that
adversely changes the rights, preferences or privileges of such series of the
Series Preferred in a manner different from other series of Series Preferred.

      F.    STATUS OF CONVERTED STOCK. In the event any shares of Series
Preferred shall be converted pursuant to Section B.3 hereof, the shares so
converted shall be canceled and shall not be issuable by the Corporation.

      G.    COMMON STOCK. The rights, preferences, privileges and restrictions
granted to and imposed on the Common Stock are as set forth below:

            1.    DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of this corporation
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.

            2.    LIQUIDATION RIGHTS. Upon the liquidation, dissolution or
winding up of this Corporation, the assets of this corporation shall be
distributed as provided in Section B hereof.

            3.    REDEMPTION. The Common Stock is not redeemable.

            4.    VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote for each such share, and shall be entitled to notice
of any stockholders' meeting in accordance with the bylaws of this Corporation,
and shall be entitled to vote upon such matters and in such manner as may be
provided by law.

      FIVE. The Corporation is to have perpetual existence.

      SIX. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation.

      SEVEN. The number of directors which will constitute the whole Board of
Directors of the Corporation shall be as specified in the Bylaws of the
Corporation.

      EIGHT. The election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.

                                      17.


      NINE. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provisions contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.

      TEN. To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
The Corporation may indemnify to the fullest extent permitted by law any person
made or threatened to be made a party to an action or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that
such person or his or her testator or intestate is or was a director, officer or
employee of the Corporation, or any predecessor of the Corporation, or serves or
served at any other enterprise as a director, officer or employee at the request
of the Corporation or any predecessor to the Corporation. Neither any amendment
nor repeal of this Article, nor the adoption of any provision of this Amended
and Restated Certificate of Incorporation inconsistent with this Article, shall
eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.

      ELEVEN. Advance notice of new business and stockholder nomination for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the Corporation.

      TWELVE. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.

                                       18.


      IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be signed by its President and Chief Executive
Officer in San Diego, California, this 25th day of July 2005.

                                          /s/ Michael Grey
                                          ______________________________________
                                          Michael Grey
                                          President and Chief Executive Officer

                                       19.


                           CERTIFICATE OF AMENDMENT OF
                          CERTIFICATE OF INCORPORATION
                                       OF
                            STRUCTURAL GENOMIX, INC.

            STRUCTURAL GENOMIX, INC., a Delaware corporation (the
"CORPORATION"), does hereby certify that:

      FIRST: The name of the Corporation is Structural GenomiX, Inc.

      SECOND: The date on which the Certificate of Incorporation of the
Corporation was originally filed with the Secretary of State of the State of
Delaware is July 16, 1998.

      THIRD: The Board of Directors of the Corporation, acting in accordance
with the provisions of Sections 141 and 242 of the General Corporation Law of
the State of Delaware, adopted resolutions amending its Certificate of
Incorporation as follows:

      Article ONE of the Company's Amended and Restated Certificate of
      Incorporation shall be amended and restated to read in its entirety as
      follows:

            "The name of the corporation is SGX Pharmaceuticals, Inc. (the
            "CORPORATION")."

      FOURTH: Thereafter, pursuant to a resolution of the Board of Directors,
this Certificate of Amendment was submitted to the stockholders of the
Corporation for their approval, and was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.

      IN WITNESS WHEREOF, Structural GenomiX, Inc. has caused this Certificate
of Amendment to be signed by its President and Chief Executive officer this 30th
day of August, 2005.


                                       STRUCTURAL GENOMIX, INC.


                                       By: /s/ Michael Grey
                                           -------------------------------------
                                           Michael Grey
                                           President and Chief Executive Officer


                           CERTIFICATE OF AMENDMENT OF
                          CERTIFICATE OF INCORPORATION
                                       OF
                            SGX PHARMACEUTICALS, INC.

        SGX PHARMACEUTICALS, INC., a Delaware corporation (the "CORPORATION"),
does hereby certify that:

        FIRST: The name of the Corporation is SGX Pharmaceuticals, Inc.

        SECOND: The Corporation was originally incorporated under the name
Protarch, Inc., and the date on which the Certificate of Incorporation of the
Corporation was originally filed with the Secretary of State of the State of
Delaware is July 16, 1998.

        THIRD: Section A.1. of Article Four of the Corporation's Amended and
Restated Certificate of Incorporation shall be amended to become Section A.2 of
Article Four and a new Section A.1 shall be inserted before Section A.2 as
follows:

                "1. Effective at the time of filing of this Certificate of
                Amendment with the Secretary of State of the State of Delaware,
                each two (2) shares of Common Stock issued and outstanding
                shall, automatically and without any action on the part of the
                respective holders thereof, be combined and converted into one
                (1) share of Common Stock (the "REVERSE SPLIT"); provided,
                however, that this Corporation shall issue no fractional shares
                of Common Stock as a result of the Reverse Split, but shall
                instead pay to any stockholder who would be entitled to receive
                a fractional share as a result of the actions set forth herein a
                sum in cash equal to the fair market value of the shares
                constituting such fractional share as determined by the Board of
                Directors of the Corporation. The Reverse Split shall occur
                whether or not the certificates representing such shares of
                Common Stock are surrendered to the Corporation or its transfer
                agent. The Reverse Split shall be effected on a record
                holder-by-record holder basis, such that any fractional shares
                of Common Stock resulting from the Reverse Split shall be
                aggregated."

        FOURTH: Section B.3(d)(i)(A) of Article Four of the Corporation's
Amended and Restated Certificate of Incorporation shall be amended to remove the
word "or" at the end of subsection (6) and replace the "." at the end of
subsection (7) with the following:

                "; or

                        (8) shares of common stock issued (or, pursuant to
                Section B.3(d)(ii), deemed to be issued) upon the closing of a
                firm commitment underwritten initial public offering, pursuant
                to an effective registration statement under the Act covering
                the offer and sale of shares of the Corporation's Common Stock
                (an "IPO"), whether or not such IPO


                                       1.





                constitutes a Qualified Initial Public Offering, provided that
                the price per share of the Common Stock sold in such IPO to the
                public is approved by the Board of Directors or a Pricing
                Committee of the Board of Directors."

        FIFTH: This Certificate of Amendment has been duly approved by the
Corporation's Board of Directors in accordance with the provisions of Sections
141 and 242 of the General Corporation Law of the State of Delaware (the "DGCL")
and was duly adopted by the stockholders of the Corporation in accordance with
the provisions of Section 242 of the DGCL.

        IN WITNESS WHEREOF, SGX Pharmaceuticals, Inc. has caused this
Certificate of Amendment to be signed by its President and Chief Executive
officer this 3rd day of January, 2006.


                                SGX PHARMACEUTICALS, INC.


                                By: /s/ Michael Grey
                                   ------------------------------------------
                                   Michael Grey
                                   President and Chief Executive Officer



                                       2.

EX-4.1

EXHIBIT 4.1

COMMON STOCK COMMON STOCK SGX SEE REVERSE FOR INCORPORATED UNDER THE LAWS SGX PHARMACEUTICALS, INC. CERTAIN DEFINITIONS OF THE STATE OF DELAWARE CUSIP 78423C 10 8 THIS CERTIFIES THAT is the record holder of FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF SGX PHARMACEUTICALS, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: SIGNATURE TO COME SIGNATURE TO COME SECRETARY PRESIDENT SIGNATURE AUTHORIZED BY REGISTRAR AND AGENT TRANSFER CORPORATION TRANSFER STOCK. S. U REGISTERED: AND COUNTERSIGNED

     The Corporation shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation’s Secretary at the principal office of the Corporation.

     KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, OR DESTROYED THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.

     The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM	—	as tenants in common
TEN ENT	—	as tenants by the entireties
JT TEN	—	as joint tenants with right of survivorship and not as tenants in common

UNIF GIFT MIN ACT —		Custodian
	(Cust)		(Minor)
	under Uniform Gifts to Minors
	Act
	(State)
UNIF TRF MIN ACT —		Custodian (until age           )
	(Cust)
	under Uniform Transfers
	(Minor)
	to Minors Act
	(State)

Additional abbreviations may also be used though not in the above list.

     For Value Received, hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

	Shares
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint

	Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.

Dated
	X
	X
	NOTICE:	THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed

By

THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

EX-4.3

EXHIBIT 4.3

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY.

STRUCTURAL GENOMIX, INC.

FORM OF
WARRANT TO PURCHASE SHARES
OF PREFERRED STOCK

     THIS CERTIFIES THAT, for value received, GATX VENTURES, INC. and its assignees are entitled to subscribe for and purchase that number of the fully paid and nonassessable shares of Series Preferred (as defined below and as adjusted pursuant to Section 4 hereof, the “Shares”) of STRUCTURAL GENOMIX, INC., a Delaware corporation (the “Company”), as is determined pursuant to the next paragraph hereof at the price per share as is determined pursuant to the next paragraph hereof (such price and such other price as shall result, from time to time, from the adjustments specified in Section 4 hereof is herein referred to as the “Warrant Price”), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term “Series Preferred” shall mean: (x the Company’s presently authorized Series C Preferred Stock, or (y) in the event that immediately following a Qualified Financing (as defined below) the initial Warrant Price is less than $8.45 (as equitably adjusted for any stock split, recapitalization or the like affecting the Company’s presently authorized Series C Preferred Stock), the same series of convertible preferred stock as sold by the Company in its next Qualified Financing, and, in either case, any stock into or for which such stock may hereafter be converted or exchanged, and (z) after the automatic conversion of the series preferred stock issuable hereunder to common stock, the Company’s Common Stock; (b) the term “Date of Grant” shall mean July 15, 2002; and (c) the term “Other Warrants” shall mean any other warrants issued by the Company in connection with the transaction with respect to which this Warrant was issued, and any warrant issued upon transfer or partial exercise of or in lieu of this Warrant. The term “Warrant” as used herein shall be deemed to include Other Warrants unless the context clearly requires otherwise.

     The Warrant Price shall be the lower of (a) $8.45 (as equitably adjusted for any stock split, recapitalization or the like affecting the Company’s presently authorized Series C Preferred Stock) and (b) the lowest effective price per share (on a common stock equivalent basis and taking into account any securities issued together with the preferred stock) at which shares of the Company’s convertible preferred stock are sold in a Qualified Financing; provided that if a Qualified Financing has not closed prior to the exercise of this Warrant, then the Warrant Price shall be the price determined pursuant to the preceding clause (a). A “Qualified Financing” shall mean the sale of the convertible preferred stock (anticipated to be Series E Preferred Stock) of the Company to purchasers which include venture capital investors in an aggregate cash amount not less than $15,000,000. The number of shares for which this Warrant is exercisable shall be the nearest whole number determined by dividing $               by the Warrant Price determined pursuant to this paragraph.

-1-

     1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from the Date of Grant through the later of (i) ten (10) years after the Date of Grant or (ii) five (5) years after the closing of the Company’s initial public offering of its Common Stock (“IPO”) effected pursuant to a Registration Statement on Form S-1 (or its successor) filed under the Securities Act of 1933, as amended (the “Act”).

     2. Method of Exercise; Payment; Issuance of New Warrant. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, at the election of the holder hereof, by (a) the surrender of this Warrant (with the notice of exercise substantially in the form attached hereto as Exhibit A-1 duly completed and executed) at the principal office of the Company and by the payment to the Company, by certified or bank check, or by wire transfer to an account designated by the Company (a “Wire Transfer”) of an amount equal to the then applicable Warrant Price multiplied by the number of Shares then being purchased; (b) if in connection with a registered public offering (other than the IPO) of the Company’s securities in which securities of selling stockholders (other than the Company) are registered, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-2 duly completed and executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by certified or bank check or by Wire Transfer from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased; or (c) exercise of the “net issuance” right provided for in Section 10.2 hereof. The person or persons in whose name(s) any certificate(s) representing shares of Series Preferred shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the Shares represented thereby (and such Shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the Shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period; provided that at such time as the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, if requested by the holder of this Warrant, the Company shall cause its transfer agent to deliver the certificate representing Shares issued upon exercise of this Warrant to a broker or other person (as directed by the holder exercising this Warrant) within the time period required to settle any trade made by the holder after exercise of this Warrant.

     3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all preemptive rights and taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Series Preferred to provide for the exercise of the rights represented by this Warrant and a sufficient number of shares of its Common Stock to provide for the conversion of the Series Preferred into Common Stock.

-2-

     4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

          (a) Reclassification or Merger. In case of any reclassification or change of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and substance satisfactory to the holder of this Warrant), or the Company shall make appropriate provision without the issuance of a new Warrant, so that the holder of this Warrant shall have the right to receive upon exercise of this Warrant, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Series Preferred theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, assets and property receivable upon such reclassification, change, merger or sale by a holder of the number of shares of Series Preferred then purchasable under this Warrant. Any new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Section 4(a) shall similarly apply to successive reclassifications, changes, mergers and sales.

          (b) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of Series Preferred, the Warrant Price shall be proportionately decreased and the number of Shares issuable hereunder shall be proportionately increased in the case of a subdivision and the Warrant Price shall be proportionately increased and the number of Shares issuable hereunder shall be proportionately decreased in the case of a combination; provided that the holder of this Warrant shall not be entitled to any adjustment pursuant to this Section 4(b) that would duplicate the effect of any adjustments effecting the Series Preferred made pursuant to the Charter (as defined below).

          (c) Stock Dividends and Other Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall (x) pay a dividend with respect to Series Preferred payable in Series Preferred, then the Warrant Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (A) the numerator of which shall be the total number of shares of Series Preferred outstanding immediately prior to such dividend or distribution, and (B) the denominator of which shall be the total number of shares of Series Preferred outstanding

-3-

           immediately after such dividend or distribution; or (y) make any other distribution not covered under the immediately preceding clause (x) with respect to Series Preferred (except any distribution specifically provided for in Sections 4(a) and 4(b)), then, in each such case, provision shall be made by the Company such that the holder of this Warrant shall receive upon exercise of this Warrant a proportionate share of any such dividend or distribution as though it were the holder of the Series Preferred (or Common Stock issuable upon conversion thereof) as of the record date fixed for the determination of the stockholders of the Company entitled to receive such dividend or distribution; provided that the holder of this Warrant shall not be entitled to any adjustment pursuant to this Section 4(c) that would duplicate the effect of any adjustments effecting the Series Preferred made pursuant to the Charter.

          (d) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price pursuant to this Section 4, the number of Shares of Series Preferred purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter.

          (e) Antidilution Rights. The other antidilution rights applicable to the Shares of Series Preferred purchasable hereunder are set forth in the Company’s Certificate of Incorporation, as amended through the Date of Grant, a true and complete copy of which is attached hereto as Exhibit B (the “Charter”). The Company shall promptly provide the holder hereof with any restatement, amendment, modification or waiver of the Charter promptly after the same has been made.

     5. Notice of Adjustments. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its Chief Financial Officer or Vice President of Finance setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. In addition, whenever the conversion price or conversion ratio of the Series Preferred shall be adjusted, the Company shall make a certificate signed by its Chief Financial Officer or Vice President of Finance setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the conversion price or ratio of the Series Preferred after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to the occurrence of a Qualified Financing, the Company shall make a certificate signed by its Chief Financial Officer or Vice President of Finance setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant.

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     6. Fractional Shares. No fractional shares of Series Preferred will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value of the Series Preferred on the date of exercise as reasonably determined in good faith by the Company’s Board of Directors.

     7. Compliance with Act; Disposition of Warrant or Shares of Series Preferred.

          (a) Compliance with Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, and the shares of Series Preferred to be issued upon exercise hereof and any Common Stock issued upon conversion thereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant, or any shares of Series Preferred to be issued upon exercise hereof or any Common Stock issued upon conversion thereof except under circumstances which will not result in a violation of the Act or any applicable state securities laws. Upon exercise of this Warrant, unless the Shares being acquired are registered under the Act and any applicable state securities laws or an exemption from such registration is available, the holder hereof shall confirm in writing that the shares of Series Preferred so purchased (and any shares of Common Stock issued upon conversion thereof) are being acquired for investment and not with a view toward distribution or resale in violation of the Act and shall confirm such other matters related thereto as may be reasonably requested by the Company. This Warrant and all shares of Series Preferred issued upon exercise of this Warrant and all shares of Common Stock issued upon conversion thereof (unless registered under the Act and any applicable state securities laws) shall be stamped or imprinted with a legend in substantially the following form:

“THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY.”

     Said legend shall be removed by the Company, upon the request of a holder, at such time as the restrictions on the transfer of the applicable security shall have terminated. In addition, in connection with the issuance of this Warrant, the holder specifically represents to the Company by acceptance of this Warrant as follows:

               (1) The holder is aware of the Company’s business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant and the shares of Series Preferred issuable upon exercise hereof and any Common Stock issuable upon conversion thereof. The holder is acquiring this Warrant and the shares of Series Preferred issuable upon exercise hereof and any Common Stock issuable upon conversion thereof for its own account for investment purposes only and not with a view to, or for the resale in connection with, any “distribution” thereof in violation of the Act.

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               (2) The holder understands that this Warrant and the shares of Series Preferred issuable upon exercise hereof and any Common Stock issuable upon conversion thereof 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 realizes that the basis for the exemption may not be present if, notwithstanding its representations, the holder has a present intention of acquiring the securities for a fixed or determinable period in the future, selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the securities. The holder has no such present intention, other than potential transfers between affiliates

               (3) The holder further understands that this Warrant and the shares of Series Preferred issuable upon exercise hereof and any Common Stock issuable upon conversion thereof must be held indefinitely unless subsequently registered under the Act and qualified under any applicable state securities laws, or unless exemptions from registration and qualification are otherwise available. The holder is aware of the provisions of Rule 144, promulgated under the Act. The holder is further aware that certain conditions for resale set forth in Rule 144 have not been satisfied and that the Company presently has no plans to satisfy these conditions in the foreseeable future.

               (4) The holder is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Act.

          (b) Disposition of Warrant or Shares. With respect to any offer, sale or other disposition of this Warrant or any shares of Series Preferred acquired pursuant to the exercise of this Warrant or Common Stock issued upon conversion thereof prior to registration of such Warrant or shares, the holder hereof agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder’s counsel, or other evidence, if reasonably satisfactory to the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state securities law then in effect) of this Warrant or such shares of Series Preferred or Common Stock and indicating whether or not under the Act certificates for this Warrant or such shares of Series Preferred or Common Stock to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Upon receiving such written notice and reasonably satisfactory opinion or other evidence, the Company, as promptly as practicable but no later than fifteen (15) days after receipt of the written notice, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such shares of Series Preferred or Common Stock, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 7(b) that the opinion of counsel for the holder or other evidence is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly with details thereof after such determination has been made. Notwithstanding the foregoing, this Warrant or such shares of Series Preferred or Common Stock may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with Rule 144 or 144A under the Act;

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provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 or 144A have been satisfied. Each certificate representing this Warrant or the shares of Series Preferred or Common Stock thus transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Notwithstanding the foregoing, the holder (including any transferee of the original holder) shall not transfer this Warrant or shares of Series Preferred or Common Stock to any competitor of the Company, as determined in good faith by the Company’s Board of Directors.

          (c) Applicability of Restrictions. Neither any restrictions of any legend described in this Warrant nor the requirements of Section 7(b) above shall apply to any transfer of, or grant of a security interest in, this Warrant (or the Series Preferred or Common Stock obtainable upon exercise thereof) or any part hereof (i) to a partner of the holder if the holder is a partnership or to a member of the holder if the holder is a limited liability company, (ii) to a partnership of which the holder is a partner or to a limited liability company of which the holder is a member, or (iii) to any affiliate of the holder if the holder is a corporation; provided that in any such transfer, if applicable, the transferee shall agree in writing to be bound by the terms of this Warrant as if an original holder hereof.

     8. Rights as Stockholders; Information. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Series Preferred or any other securities of the Company which may at any time be issuable upon the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. Notwithstanding the foregoing, the Company will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the stockholders.

     9. Registration Rights; Market Stand-Off Agreement.

          (a) Registration Rights. The Company shall promptly, and in any event within one (1) year from the Date of Grant and prior to the closing of the IPO, use its best efforts to amend that certain Restated Investor Rights Agreement dated as of September 12, 2000 by and among the Company and the investors party thereto (the “Rights Agreement”) so as to include the holder of this Warrant as an “Investor” thereunder and to treat the Series Preferred as “Shares” thereunder, in each case solely for purposes of Section 2 of the Rights Agreement, with the following exceptions and clarifications:

               (1) The holder will have not have the right to demand registration, but can otherwise participate in any registration demanded by others.

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               (2) The Company will use its best efforts to amend the Rights Agreement so that the registration rights granted hereunder are freely assignable by the holder of this Warrant in connection with a permitted transfer of this Warrant or the Shares.

               (3) If and when the holder of this Warrant becomes a party to the Rights Agreement as herein provided, the terms of the Rights Agreement shall supercede and replace all corresponding terms of this Warrant relating to the registration of the Shares and any market stand-off or lock-up agreements.

               (4) From and after the Date of Grant, the holder of this Warrant shall be entitled to receive copies of all notices required pursuant to the terms of the Rights Agreement to be given by the Company to all holders of “Registrable Securities” and, for purposes of such notices, the holder hereof shall be treated as if the holder were a holder of “Registrable Securities” as of the Date of Grant.

          (b) Market Stand-Off Agreement. In connection with the IPO and upon request of the Company or the underwriters managing such offering of the Company’s securities, the holder of this Warrant agrees not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any Common Stock (or other securities) of the Company held by such holder, for a period of time specified by the managing underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of a registration statement relating to the IPO; provided that all other persons selling shares of Common Stock in such offering and all executive officers, directors and one percent (1%) shareholders of the Company shall also have agreed not to sell publicly their Common Stock under the circumstances and pursuant to the terms set forth in this Section 9(b). Holder agrees to execute and deliver such other agreements as may be reasonably requested by the Company and/or the managing underwriter(s) which are consistent with the foregoing or which are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to such Common Stock (or other securities) until the end of such period.

          (c) Holder’s Acceptance. The holder of this Warrant agrees, by its acceptance hereof and effective upon the amendment of the Rights Agreement as contemplated pursuant to Section 9(a) above, to become a party to the Rights Agreement and be bound by the provisions thereof with respect to those matters addressed in Section 2 and Section 5 (exclusive of Section 5.4) thereof.

     10. Additional Rights.

          10.1 Acquisition Transactions. The Company shall provide the holder of this Warrant with at least twenty (20) days’ written notice prior to closing thereof of the terms and conditions of any of the following transactions (to the extent the Company has notice thereof): (i) the sale, lease, exchange, conveyance or other disposition of all or substantially all of the Company’s property or business, or (ii) its merger into or consolidation with any other corporation (other than a wholly-owned subsidiary of the Company), or any transaction (including a merger or other reorganization) or series of related transactions, in which more than fifty percent (50%) of the voting power of the Company is disposed of; provided that following

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the IPO, the Company’s obligations under this Section 10.1 shall be deemed replaced with a requirement to give the holder of this Warrant such advanced notice as the Company is required by law to give to its stockholders prior to any transaction of the nature described in the preceding clauses (i) or (ii) of this Section 10.1.

          10.2 Right to Convert Warrant into Stock: Net Issuance.

          (a) Right to Convert. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or any portion thereof (the “Conversion Right”) into shares of Series Preferred as provided in this Section 10.2 at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right with respect to a specified number of shares subject to this Warrant (the “Converted Warrant Shares”), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Series Preferred as is determined according to the following formula:

X	=	B-A
		Y

      Where: X = the number of shares of Series Preferred that shall be issued to holder

                    Y = the fair market value of one share of Series Preferred

                    A = the aggregate Warrant Price of the specified number of Converted Warrant Shares immediately prior to the exercise of the Conversion Right (i.e., the number of Converted Warrant Shares multiplied by the Warrant Price)

                    B = the aggregate fair market value of the specified number of Converted Warrant Shares (i.e., the number of Converted Warrant Shares multiplied by the fair market value of one Converted Warrant Share)

     No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as hereinafter defined). For purposes of Section 10 of this Warrant, shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant.

          (b) Method of Exercise. The Conversion Right may be exercised by the holder by the surrender of this Warrant at the principal office of the Company together with a written statement (which may be in the form of Exhibit A-1 or Exhibit A-2 hereto) specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in Section 10.2(a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written

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statement, or on such later date as is specified therein (the “Conversion Date”), and, at the election of the holder hereof, may be made contingent upon the closing of the sale of the Company’s Common Stock to the public in a public offering pursuant to a Registration Statement under the Act (a “Public Offering”). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date.

          (c) Determination of Fair Market Value. For purposes of this Section 10.2, “fair market value” of a share of Series Preferred (or Common Stock if the Series Preferred has been automatically converted into Common Stock) as of a particular date (the “Determination Date”) shall mean:

               (i) If the Conversion Right is exercised in connection with and contingent upon a Public Offering, and if the Company’s Registration Statement relating to such Public Offering (“Registration Statement”) has been declared effective by the Securities and Exchange Commission, then the initial “Price to Public” specified in the final prospectus with respect to such offering.

               (ii) If the Conversion Right is not exercised in connection with and contingent upon a Public Offering, then as follows:

                    (A) If traded on a securities exchange, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock on such exchange over the five trading days immediately prior to the Determination Date, and the fair market value of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible;

                    (B) If traded on the Nasdaq Stock Market or other over-the-counter system, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock as reported in the Wall Street Journal over the five trading days immediately prior to the Determination Date, and the fair market value of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible; and

                    (C) If there is no public market for the Common Stock, then fair market value of the Common Stock shall be determined in good faith by the Board of Directors of the Company. If there is no public market for the Series Preferred, then fair market value of the Series Preferred shall be determined in good faith by the Board of Directors of the Company.

In making a determination under clauses (A) or (B) above, if on the Determination Date, five trading days had not passed since the IPO, then the fair market value of the Common Stock shall be the average closing prices for the shorter period beginning on and including the date of the IPO and ending on the trading day prior to the Determination Date (or if such period includes

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only one trading day the closing price for such trading day). If closing prices are no longer reported by a securities exchange or other trading system, the closing price shall be that which is reported by such securities exchange or other trading system at 4:00 p.m. New York City time on the applicable trading day.

          10.3 Exercise Prior to Expiration. To the extent this Warrant is not previously exercised as to all of the Shares subject hereto, and if the fair market value of one share of the Series Preferred is greater than the Warrant Price then in effect, this Warrant shall be deemed automatically exercised pursuant to Section 10.2 (even if not surrendered) immediately before its expiration. For purposes of such automatic exercise, the fair market value of one share of the Series Preferred upon such expiration shall be determined pursuant to Section 10.2(c). To the extent this Warrant or any portion thereof is deemed automatically exercised pursuant to this Section 10.3, the Company agrees to promptly notify the holder hereof of the number of Shares, if any, the holder hereof is to receive by reason of such automatic exercise. The holder hereof will promptly surrender this Warrant following receipt from the Company of certificates representing such Shares.

     11. Representations, Warranties and Covenants. The Company represents, warrants and covenants to the holder of this Warrant as follows:

          (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies.

          (b) The shares of Series C Preferred stock issuable upon exercise of this Warrant have been duly authorized and reserved for issuance by the Company and, if issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free from preemptive rights.

          (c) The rights, preferences, privileges and restrictions granted to or imposed upon the Series Preferred Stock and the holders thereof are as set forth in the Charter. Assuming this Warrant is exercisable for shares of Series C Preferred Stock, on the Date of Grant each share of the Series Preferred represented by this Warrant is convertible into one share of Common Stock. If shares of Series Preferred are sold by the Company in a Qualified Financing following the Date of Grant and prior to the expiration or exercise of this Warrant for a purchase price of less than $8.45 per share, the Company will authorize and reserve for issuance by the Company all shares of Series Preferred issuable upon exercise of this Warrant and, if issued in accordance with the terms hereof, such shares of Series Preferred will be validly issued, fully paid and nonassessable and free from preemptive rights

          (d) The shares of Common Stock issuable upon conversion of the Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms of the Charter will be validly issued, fully paid and nonassessable.

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          (e) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company’s Charter or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company (in each case as such laws, governmental rules and regulations, judgments or orders are currently in effect), and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or, as of the Date of Grant, require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby. The Company covenants to take all necessary steps to ensure that from and after the Date of Grant the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company at any time.

          (f) As of the Date of Grant, there are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, could have a material adverse effect on the ability of the Company to perform its obligations under this Warrant.

          (g) The number of shares of Common Stock of the Company outstanding on the date hereof, on a fully diluted basis (assuming the conversion of all outstanding convertible securities and the exercise of all outstanding options and warrants other than this Warrant and the Other Warrants, and excluding any shares of Common Stock issuable pursuant to that certain Convertible Promissory Note dated as of December 21, 2001, issued to Holdings Trust), does not exceed 26,184,348 shares.

     12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought.

     13. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, or by internationally recognized overnight courier, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant or such other address as the Company may specify pursuant to this Section 13. A copy of any notices sent to the Company shall be simultaneously sent to the Company’s counsel, Annette North, at the Company’s address indicated therefor on the signature page of this Warrant or such other address as the Company may specify pursuant to this Section 13.

     14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company’s assets, and all of the obligations of the Company relating to the Series Preferred issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof.

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     15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate.

     16. Descriptive Headings. The descriptive headings of the various Sections of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The language in this Warrant shall be construed as to its fair meaning without regard to which party drafted this Warrant.

     17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California, without regard to principles of conflicts of law.

     18. Survival of Representations, Warranties and Agreements. All representations and warranties of the Company and the holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) or the termination or expiration of rights hereunder. All agreements of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative.

     19. Remedies. In case any one or more of the covenants and agreements contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by the Company), or the Company (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant.

     20. No Impairment of Rights. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment.

     21. Severability. The invalidity or unenforceability of any provision of this Warrant in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction, or affect any other provision of this Warrant, which shall remain in full force and effect.

     22. Recovery of Litigation Costs. If any legal action or other proceeding is brought for the enforcement of this Warrant, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Warrant, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys’ fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled.

     23. Entire Agreement; Modification. This Warrant constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, and undertakings of the parties, whether oral or written, with respect to such subject matter.

     24. Acceptance. Acceptance of this Warrant by the holder shall constitute acceptance of and agreement to all of the terms and conditions contained herein.

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     The Company has caused this Warrant to be duly executed and delivered as of the Date of Grant specified above.

STRUCTURAL GENOMIX, INC.
By:
Name:
Title:
Address:	10505 Roselle Street
	San Diego, California 92121

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EXHIBIT A-1

NOTICE OF EXERCISE

To: STRUCTURAL GENOMIX, INC. (the “Company”)

     1. The undersigned hereby:

o elects to purchase                      shares of [Series Preferred Stock] [Common Stock] of the Company pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full, or

o elects to exercise its net issuance rights pursuant to Section 10.2 of the attached Warrant with respect to                      shares of [Series Preferred Stock] [Common Stock].

     2. Please issue a certificate or certificates representing                      shares in the name of the undersigned or in such other name or names as are specified below:

(Name)

(Address)

     3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, all except as in compliance with applicable securities laws.

	(Signature)
(Date)

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EXHIBIT A-2

NOTICE OF EXERCISE

To: STRUCTURAL GENOMIX, INC. (the “Company”)

     l. Contingent upon and effective immediately prior to the closing (the “Closing”) of the Company’s public offering contemplated by the Registration Statement on Form S      filed                     , 200     , the undersigned hereby:

o elects to purchase                      shares of [Series Preferred Stock] [Common Stock] of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant, or

o elects to exercise its net issuance rights pursuant to Section 10.2 of the attached Warrant with respect to                      shares of [Series Preferred Stock] [Common Stock].

     2. Please deliver to the custodian for the selling shareholders a stock certificate representing such                      shares.

     3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $                     or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing.

	(Signature)
(Date)

EXHIBIT B

CHARTER

EX-4.5

EXHIBIT 4.5

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY.

STRUCTURAL GENOMIX, INC.

WARRANT TO PURCHASE SHARES
OF PREFERRED STOCK

     THIS CERTIFIES THAT, for value received, SILICON VALLEY BANK and its assignees are entitled to subscribe for and purchase that number of the fully paid and nonassessable shares of Series Preferred (as defined below and as adjusted pursuant to Section 4 hereof, the “Shares”) of STRUCTURAL GENOMIX, INC., a Delaware corporation (the “Company”), as is determined pursuant to the next paragraph hereof at the price per share as is determined pursuant to the next paragraph hereof (such price and such other price as shall result, from time to time, from the adjustments specified in Section 4 hereof is herein referred to as the “Warrant Price”), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term “Series Preferred” shall mean: (x) the Company’s presently authorized Series C Preferred Stock, or (y) in the event that immediately following a Qualified Financing (as defined below) the initial Warrant Price is less than $8.45 (as equitably adjusted for any stock split, recapitalization or the like affecting the Company’s presently authorized Series C Preferred Stock), the same series of convertible preferred stock as sold by the Company in its next Qualified Financing, and, in either case, any stock into or for which such stock may hereafter be converted or exchanged, and (z) after the automatic conversion of the series preferred stock issuable hereunder to common stock, the Company’s Common Stock; (b) the term “Date of Grant” shall mean July 15, 2002; and (c) the term “Other Warrants” shall mean any other warrants issued by the Company in connection with the transaction with respect to which this Warrant was issued, and any warrant issued upon transfer or partial exercise of or in lieu of this Warrant. The term “Warrant” as used herein shall be deemed to include Other Warrants unless the context clearly requires otherwise.

     The Warrant Price shall be the lower of (a) $8.45 (as equitably adjusted for any stock split, recapitalization or the like affecting the Company’s presently authorized Series C Preferred Stock) and (b) the lowest effective price per share (on a common stock equivalent basis and taking into account any securities issued together with the preferred stock) at which shares of the Company’s convertible preferred stock are sold in a Qualified Financing; provided that if a Qualified Financing has not closed prior to the exercise of this Warrant, then the Warrant Price shall be the price determined pursuant to the preceding clause (a). A “Qualified Financing” shall mean the sale of the convertible preferred stock (anticipated to be Series E Preferred Stock) of the Company to purchasers which include venture capital investors in an aggregate cash amount not less than $15,000,000. The number of shares for which this Warrant is exercisable shall be the nearest whole number determined by dividing $150,000 by the Warrant Price determined pursuant to this paragraph.

     1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from the Date of Grant through the later of (i) ten (10) years after the Date of Grant or (ii) five (5) years after the closing of the Company’s initial public offering of its Common Stock (“IPO”) effected pursuant to a Registration Statement on Form S-1 (or its successor) filed under the Securities Act of 1933, as amended (the “Act”).

     2. Method of Exercise; Payment; Issuance of New Warrant. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, at the election of the holder hereof, by (a) the surrender of this Warrant (with the notice of exercise substantially in the form attached hereto as Exhibit A-1 duly completed and executed) at the principal office of the Company and by the payment to the Company, by certified or bank check, or by wire transfer to an account designated by the Company (a “Wire Transfer”) of an amount equal to the then applicable Warrant Price multiplied by the number of Shares then being purchased; (b) if in connection with a registered public offering (other than the IPO) of the Company’s securities in which securities of selling stockholders (other than the Company) are registered, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-2 duly completed and executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by certified or bank check or by Wire Transfer from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased; or (c) exercise of the “net issuance” right provided for in Section 10.2 hereof. The person or persons in whose name(s) any certificate(s) representing shares of Series Preferred shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the Shares represented thereby (and such Shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the Shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty (30) days after such exercise and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period; provided that at such time as the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, if requested by the holder of this Warrant, the Company shall cause its transfer agent to deliver the certificate representing Shares issued upon exercise of this Warrant to a broker or other person (as directed by the holder exercising this Warrant) within the time period required to settle any trade made by the holder after exercise of this Warrant.

     3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all preemptive rights and taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Series Preferred to provide for the exercise of the rights represented by this Warrant and a sufficient number of shares of its Common Stock to provide for the conversion of the Series Preferred into Common Stock.

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     4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

          (a) Reclassification or Merger. In case of any reclassification or change of securities of the class issuable upon exercise of this Warrant (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and substance satisfactory to the holder of this Warrant), or the Company shall make appropriate provision without the issuance of a new Warrant, so that the holder of this Warrant shall have the right to receive upon exercise of this Warrant, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Series Preferred theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, assets and property receivable upon such reclassification, change, merger or sale by a holder of the number of shares of Series Preferred then purchasable under this Warrant. Any new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Section 4(a) shall similarly apply to successive reclassifications, changes, mergers and sales.

          (b) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of Series Preferred, the Warrant Price shall be proportionately decreased and the number of Shares issuable hereunder shall be proportionately increased in the case of a subdivision and the Warrant Price shall be proportionately increased and the number of Shares issuable hereunder shall be proportionately decreased in the case of a combination; provided that the holder of this Warrant shall not be entitled to any adjustment pursuant to this Section 4(b) that would duplicate the effect of any adjustments effecting the Series Preferred made pursuant to the Charter (as defined below).

          (c) Stock Dividends and Other Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall (x) pay a dividend with respect to Series Preferred payable in Series Preferred, then the Warrant Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (A) the numerator of which shall be the total number of shares of Series Preferred outstanding immediately prior to such dividend or distribution, and (B) the denominator of which shall be the total number of shares of Series Preferred outstanding

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immediately after such dividend or distribution; or (y) make any other distribution not covered under the immediately preceding clause (x) with respect to Series Preferred (except any distribution specifically provided for in Sections 4(a) and 4(b)), then, in each such case, provision shall be made by the Company such that the holder of this Warrant shall receive upon exercise of this Warrant a proportionate share of any such dividend or distribution as though it were the holder of the Series Preferred (or Common Stock issuable upon conversion thereof) as of the record date fixed for the determination of the stockholders of the Company entitled to receive such dividend or distribution; provided that the holder of this Warrant shall not be entitled to any adjustment pursuant to this Section 4(c) that would duplicate the effect of any adjustments effecting the Series Preferred made pursuant to the Charter.

          (d) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price pursuant to this Section 4, the number of Shares of Series Preferred purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter.

          (e) Antidilution Rights. The other antidilution rights applicable to the Shares of Series Preferred purchasable hereunder are set forth in the Company’s Certificate of Incorporation, as amended through the Date of Grant, a true and complete copy of which is attached hereto as Exhibit B (the “Charter”). The Company shall promptly provide the holder hereof with any restatement, amendment, modification or waiver of the Charter promptly after the same has been made.

     5. Notice of Adjustments. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its Chief Financial Officer or Vice President of Finance setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. In addition, whenever the conversion price or conversion ratio of the Series Preferred shall be adjusted, the Company shall make a certificate signed by its Chief Financial Officer or Vice President of Finance setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the conversion price or ratio of the Series Preferred after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to the occurrence of a Qualified Financing, the Company shall make a certificate signed by its Chief Financial Officer or Vice President of Finance setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant.

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     6. Fractional Shares. No fractional shares of Series Preferred will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value of the Series Preferred on the date of exercise as reasonably determined in good faith by the Company’s Board of Directors.

     7. Compliance with Act; Disposition of Warrant or Shares of Series Preferred.

          (a) Compliance with Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, and the shares of Series Preferred to be issued upon exercise hereof and any Common Stock issued upon conversion thereof are being acquired for investment and that such holder will not offer, sell or otherwise dispose of this Warrant, or any shares of Series Preferred to be issued upon exercise hereof or any Common Stock issued upon conversion thereof except under circumstances which will not result in a violation of the Act or any applicable state securities laws. Upon exercise of this Warrant, unless the Shares being acquired are registered under the Act and any applicable state securities laws or an exemption from such registration is available, the holder hereof shall confirm in writing that the shares of Series Preferred so purchased (and any shares of Common Stock issued upon conversion thereof) are being acquired for investment and not with a view toward distribution or resale in violation of the Act and shall confirm such other matters related thereto as may be reasonably requested by the Company. This Warrant and all shares of Series Preferred issued upon exercise of this Warrant and all shares of Common Stock issued upon conversion thereof (unless registered under the Act and any applicable state securities laws) shall be stamped or imprinted with a legend in substantially the following form:

“THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL OR OTHER EVIDENCE, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY.”

     Said legend shall be removed by the Company, upon the request of a holder, at such time as the restrictions on the transfer of the applicable security shall have terminated. In addition, in connection with the issuance of this Warrant, the holder specifically represents to the Company by acceptance of this Warrant as follows:

               (1) The holder is aware of the Company’s business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant and the shares of Series Preferred issuable upon exercise hereof and any Common Stock issuable upon conversion thereof. The holder is acquiring this Warrant and the shares of Series Preferred issuable upon exercise hereof and any Common Stock issuable upon conversion thereof for its own account for investment purposes only and not with a view to, or for the resale in connection with, any “distribution” thereof in violation of the Act.

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               (2) The holder understands that this Warrant and the shares of Series Preferred issuable upon exercise hereof and any Common Stock issuable upon conversion thereof 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 realizes that the basis for the exemption may not be present if, notwithstanding its representations, the holder has a present intention of acquiring the securities for a fixed or determinable period in the future, selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the securities. The holder has no such present intention, other than potential transfers between affiliates

               (3) The holder further understands that this Warrant and the shares of Series Preferred issuable upon exercise hereof and any Common Stock issuable upon conversion thereof must be held indefinitely unless subsequently registered under the Act and qualified under any applicable state securities laws, or unless exemptions from registration and qualification are otherwise available. The holder is aware of the provisions of Rule 144, promulgated under the Act. The holder is further aware that certain conditions for resale set forth in Rule 144 have not been satisfied and that the Company presently has no plans to satisfy these conditions in the foreseeable future.

               (4) The holder is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Act.

          (b) Disposition of Warrant or Shares. With respect to any offer, sale or other disposition of this Warrant or any shares of Series Preferred acquired pursuant to the exercise of this Warrant or Common Stock issued upon conversion thereof prior to registration of such Warrant or shares, the holder hereof agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder’s counsel, or other evidence, if reasonably satisfactory to the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state securities law then in effect) of this Warrant or such shares of Series Preferred or Common Stock and indicating whether or not under the Act certificates for this Warrant or such shares of Series Preferred or Common Stock to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Upon receiving such written notice and reasonably satisfactory opinion or other evidence, the Company, as promptly as practicable but no later than fifteen (15) days after receipt of the written notice, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such shares of Series Preferred or Common Stock, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 7(b) that the opinion of counsel for the holder or other evidence is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly with details thereof after such determination has been made. Notwithstanding the foregoing, this Warrant or such shares of Series Preferred or Common Stock may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with Rule 144 or 144A under the Act; provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 or 144A have been satisfied. Each certificate representing this Warrant or the shares of Series

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Preferred or Common Stock thus transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Notwithstanding the foregoing, the holder (including any transferee of the original holder) shall not transfer this Warrant or shares of Series Preferred or Common Stock to any competitor of the Company, as determined in good faith by the Company’s Board of Directors.

          (c) Applicability of Restrictions. Neither any restrictions of any legend described in this Warrant nor the requirements of Section 7(b) above shall apply to any transfer of, or grant of a security interest in, this Warrant (or the Series Preferred or Common Stock obtainable upon exercise thereof) or any part hereof (i) to a partner of the holder if the holder is a partnership or to a member of the holder if the holder is a limited liability company, or (ii) to Silicon Valley Bancshares (holder’s parent company) or any affiliate of the holder if the holder is a corporation or bank; provided that in any such transfer, (x) the transferee shall agree in writing to be bound by the terms of this Warrant as if an original holder hereof, and (z) other than the transfer to Silicon Valley Bancshares the transferor shall give the Company prior written notice thereof in reasonable detail, including the name of the transferee and the extent of the rights and/or number of shares to be transferred. Subject to the provisions of this Section 7(c), upon receipt by holder of the executed Warrant, holder will transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) to Silicon Valley Bancshares, holder’s parent company. Subject to the provisions of this Section 7(c) and upon providing Company with written notice and the transferee providing the Company with transferee’s agreement to be bound by the terms of this Warrant, holder or Silicon Valley Bancshares may transfer all or part of this Warrant or the Shares issuable upon exercise of this Warrant (or the securities issuable, directly or indirectly, upon conversion of the Shares, if any) to The Silicon Valley Bank Foundation.

     8. Rights as Stockholders; Information. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Series Preferred or any other securities of the Company which may at any time be issuable upon the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. Notwithstanding the foregoing, the Company will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the stockholders.

     9. Registration Rights; Market Stand-Off Agreement.

          (a) Registration Rights. The Company shall promptly, and in any event within one (1) year from the Date of Grant and prior to the closing of the IPO, use its best efforts to amend that certain Restated Investor Rights Agreement dated as of September 12, 2000 by and

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among the Company and the investors party thereto (the “Rights Agreement”) so as to include the holder of this Warrant as an “Investor” thereunder and to treat the Series Preferred as “Shares” thereunder, in each case solely for purposes of Section 2 of the Rights Agreement, with the following exceptions and clarifications:

               (1) The holder will have not have the right to demand registration, but can otherwise participate in any registration demanded by others.

               (2) The Company will use its best efforts to amend the Rights Agreement so that the registration rights granted hereunder are freely assignable by the holder of this Warrant in connection with a permitted transfer of this Warrant or the Shares.

               (3) If and when the holder of this Warrant becomes a party to the Rights Agreement as herein provided, the terms of the Rights Agreement shall supercede and replace all corresponding terms of this Warrant relating to the registration of the Shares and any market stand-off or lock-up agreements.

               (4) From and after the Date of Grant, the holder of this Warrant shall be entitled to receive copies of all notices required pursuant to the terms of the Rights Agreement to be given by the Company to all holders of “Registrable Securities” and, for purposes of such notices, the holder hereof shall be treated as if the holder were a holder of “Registrable Securities” as of the Date of Grant.

          (b) Market Stand-Off Agreement. In connection with the IPO and upon request of the Company or the underwriters managing such offering of the Company’s securities, the holder of this Warrant agrees not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any Common Stock (or other securities) of the Company held by such holder, for a period of time specified by the managing underwriter(s) (not to exceed one hundred eighty (180) days) following the effective date of a registration statement relating to the IPO; provided that all other persons selling shares of Common Stock in such offering and all executive officers, directors and one percent (1%) shareholders of the Company shall also have agreed not to sell publicly their Common Stock under the circumstances and pursuant to the terms set forth in this Section 9(b). Holder agrees to execute and deliver such other agreements as may be reasonably requested by the Company and/or the managing underwriter(s) which are consistent with the foregoing or which are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to such Common Stock (or other securities) until the end of such period.

          (c) Holder’s Acceptance. The holder of this Warrant agrees, by its acceptance hereof and effective upon the amendment of the Rights Agreement as contemplated pursuant to Section 9(a) above, to become a party to the Rights Agreement and be bound by the provisions thereof with respect to those matters addressed in Section 2 and Section 5 (exclusive of Section 5.4) thereof.

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     10. Additional Rights.

     10.1 Acquisition Transactions. The Company shall provide the holder of this Warrant with at least twenty (20) days’ written notice prior to closing thereof of the terms and conditions of any of the following transactions (to the extent the Company has notice thereof): (i) the sale, lease, exchange, conveyance or other disposition of all or substantially all of the Company’s property or business, or (ii) its merger into or consolidation with any other corporation (other than a whollyowned subsidiary of the Company), or any transaction (including a merger or other reorganization) or series of related transactions, in which more than fifty percent (50%) of the voting power of the Company is disposed of; provided that following the IPO, the Company’s obligations under this Section 10.1 shall be deemed replaced with a requirement to give the holder of this Warrant such advanced notice as the Company is required by law to give to its stockholders prior to any transaction of the nature described in the preceding clauses (i) or (ii) of this Section 10.1.

     10.2 Right to Convert Warrant into Stock: Net Issuance.

          (a) Right to Convert. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or any portion thereof (the “Conversion Right”) into shares of Series Preferred as provided in this Section 10.2 at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right with respect to a specified number of shares subject to this Warrant (the “Converted Warrant Shares”), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Series Preferred as is determined according to the following formula:

X	=	B – A
		Y

Where: X =	the number of shares of Series Preferred that shall be issued to holder
Y =	the fair market value of one share of Series Preferred
A =	the aggregate Warrant Price of the specified number of Converted Warrant Shares immediately prior to the exercise of the Conversion Right (i.e., the number of Converted Warrant Shares multiplied by the Warrant Price)
B =	the aggregate fair market value of the specified number of Converted Warrant Shares (i.e., the number of Converted Warrant Shares multiplied by the fair market value of one Converted Warrant Share)

     No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as hereinafter defined). For purposes of Section 10 of this Warrant, shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of this Warrant.

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          (b) Method of Exercise. The Conversion Right may be exercised by the holder by the surrender of this Warrant at the principal office of the Company together with a written statement (which may be in the form of Exhibit A-1 or Exhibit A-2 hereto) specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant which are being surrendered (referred to in Section 10.2(a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date as is specified therein (the “Conversion Date”), and, at the election of the holder hereof, may be made contingent upon the closing of the sale of the Company’s Common Stock to the public in a public offering pursuant to a Registration Statement under the Act (a “Public Offering”). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date.

          (c) Determination of Fair Market Value. For purposes of this Section 10.2, “fair market value” of a share of Series Preferred (or Common Stock if the Series Preferred has been automatically converted into Common Stock) as of a particular date (the “Determination Date”) shall mean:

               (i) If the Conversion Right is exercised in connection with and contingent upon a Public Offering, and if the Company’s Registration Statement relating to such Public Offering (“Registration Statement”) has been declared effective by the Securities and Exchange Commission, then the initial “Price to Public” specified in the final prospectus with respect to such offering.

               (ii) If the Conversion Right is not exercised in connection with and contingent upon a Public Offering, then as follows:

          (A) If traded on a securities exchange, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock on such exchange over the five trading days immediately prior to the Determination Date, and the fair market value of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible;

          (B) If traded on the Nasdaq Stock Market or other over-the-counter system, the fair market value of the Common Stock shall be deemed to be the average of the closing prices of the Common Stock as reported in the Wall Street Journal over the five trading days immediately prior to the Determination Date, and the fair market value of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible; and

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          (C) If there is no public market for the Common Stock, then fair market value of the Common Stock shall be determined in good faith by the Board of Directors of the Company. If there is no public market for the Series Preferred, then fair market value of the Series Preferred shall be determined in good faith by the Board of Directors of the Company.

In making a determination under clauses (A) or (B) above, if on the Determination Date, five trading days had not passed since the IPO, then the fair market value of the Common Stock shall be the average closing prices for the shorter period beginning on and including the date of the IPO and ending on the trading day prior to the Determination Date (or if such period includes only one trading day the closing price for such trading day). If closing prices are no longer reported by a securities exchange or other trading system, the closing price shall be that which is reported by such securities exchange or other trading system at 4:00 p.m. New York City time on the applicable trading day.

     10.3 Exercise Prior to Expiration. To the extent this Warrant is not previously exercised as to all of the Shares subject hereto, and if the fair market value of one share of the Series Preferred is greater than the Warrant Price then in effect, this Warrant shall be deemed automatically exercised pursuant to Section 10.2 (even if not surrendered) immediately before its expiration. For purposes of such automatic exercise, the fair market value of one share of the Series Preferred upon such expiration shall be determined pursuant to Section 10.2(c). To the extent this Warrant or any portion thereof is deemed automatically exercised pursuant to this Section 10.3, the Company agrees to promptly notify the holder hereof of the number of Shares, if any, the holder hereof is to receive by reason of such automatic exercise. The holder hereof will promptly surrender this Warrant following receipt from the Company of certificates representing such Shares.

     11. Representations, Warranties and Covenants. The Company represents, warrants and covenants to the holder of this Warrant as follows:

          (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies.

          (b) The shares of Series C Preferred stock issuable upon exercise of this Warrant have been duly authorized and reserved for issuance by the Company and, if issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free from preemptive rights.

          (c) The rights, preferences, privileges and restrictions granted to or imposed upon the Series Preferred Stock and the holders thereof are as set forth in the Charter. Assuming this Warrant is exercisable for shares of Series C Preferred Stock, on the Date of Grant each share of the Series Preferred represented by this Warrant is convertible into one share of Common Stock. If shares of Series Preferred are sold by the Company in a Qualified Financing following the Date of Grant and prior to the expiration or exercise of this Warrant for a purchase price of less than $8.45 per share, the Company will authorize and reserve for issuance by the

-11-

Company all shares of Series Preferred issuable upon exercise of this Warrant and, if issued in accordance with the terms hereof, such shares of Series Preferred will be validly issued, fully paid and nonassessable and free from preemptive rights

          (d) The shares of Common Stock issuable upon conversion of the Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms of the Charter will be validly issued, fully paid and nonassessable.

          (e) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company’s Charter or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company (in each case as such laws, governmental rules and regulations, judgments or orders are currently in effect), and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or, as of the Date of Grant, require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby. The Company covenants to take all necessary steps to ensure that from and after the Date of Grant the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company at any time.

          (f) As of the Date of Grant, there are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, could have a material adverse effect on the ability of the Company to perform its obligations under this Warrant.

          (g) The number of shares of Common Stock of the Company outstanding on the date hereof, on a fully diluted basis (assuming the conversion of all outstanding convertible securities and the exercise of all outstanding options and warrants other than this Warrant and the Other Warrants, and excluding any shares of Common Stock issuable pursuant to that certain Convertible Promissory Note dated as of December 21, 2001, issued to mHoldings Trust), does not exceed 26,184,348 shares.

     12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought.

     13. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, or by internationally recognized overnight courier, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant or such other address as the Company may specify pursuant to this Section 13. A copy of any notices sent to

-12-

the Company shall be simultaneously sent to the Company’s counsel, Annette North, at the Company’s address indicated therefor on the signature page of this Warrant or such other address as the Company may specify pursuant to this Section 13.

     14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company’s assets, and all of the obligations of the Company relating to the Series Preferred issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof.

     15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate.

     16. Descriptive Headings. The descriptive headings of the various Sections of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. The language in this Warrant shall be construed as to its fair meaning without regard to which party drafted this Warrant.

     17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California, without regard to principles of conflicts of law.

     18. Survival of Representations, Warranties and Agreements. All representations and warranties of the Company and the holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) or the termination or expiration of rights hereunder. All agreements of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative.

     19. Remedies. In case any one or more of the covenants and agreements contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by the Company), or the Company (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant.

     20. No Impairment of Rights. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment.

-13-

     21. Severability. The invalidity or unenforceability of any provision of this Warrant in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction, or affect any other provision of this Warrant, which shall remain in full force and effect.

     22. Recovery of Litigation Costs. If any legal action or other proceeding is brought for the enforcement of this Warrant, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Warrant, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys’ fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled.

     23. Entire Agreement; Modification. This Warrant constitutes the entire agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporaneous agreements, representations, and undertakings of the parties, whether oral or written, with respect to such subject matter.

     24. Acceptance. Acceptance of this Warrant by the holder shall constitute acceptance of and agreement to all of the terms and conditions contained herein

-14-

     The Company has caused this Warrant to be duly executed and delivered as of the Date of Grant specified above.

STRUCTURAL GENOMIX, INC.
By:	/s/ Herbert G. Mutter
Name:	Herbert G. Mutter
Title:	Vice President, Finance
Address:	10505 Roselle Street San Diego, California 92121

-15-

EXHIBIT A-1

NOTICE OF EXERCISE

To: STRUCTURAL GENOMIX, INC. (the “Company”)

     1. The undersigned hereby:

¨ elects to purchase ______ shares of [Series Preferred Stock] [Common Stock] of the Company pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full, or

¨ elects to exercise its net issuance rights pursuant to Section 10.2 of the attached Warrant with respect to ______ shares of [Series Preferred Stock] [Common Stock].

     2. Please issue a certificate or certificates representing ______ shares in the name of the undersigned or in such other name or names as are specified below:

(Name)

(Address)

     3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares, all except as in compliance with applicable securities laws.

 
 
(Signature)

(Date)

EXHIBIT A-2

NOTICE OF EXERCISE

To: STRUCTURAL GENOMIX, INC. (the “Company”)

          1. Contingent upon and effective immediately prior to the closing (the “Closing”) of the Company’s public offering contemplated by the Registration Statement on Form S___, filed___, 200_, the undersigned hereby:

          ¨ elects to purchase ______ shares of [Series Preferred Stock] [Common Stock] of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant, or

          ¨ elects to exercise its net issuance rights pursuant to Section 10.2 of the attached Warrant with respect to______ shares of [Series Preferred Stock] [Common Stock].

          2. Please deliver to the custodian for the selling shareholders a stock certificate representing such ______ shares.

          3. The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $______ or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing.

(Signature)

(Date)

EXHIBIT B

CHARTER

EX-5.1

EXHIBIT 5.1

	ATTORNEYS AT LAW	Broomfield, CO
		720 566-4000
	4401 Eastgate Mall	Palo Alto, CA
	San Diego, CA	650 843-5000
	92121-1909	Reston, VA
	Main    858 550-6000	703 456-8000
	Fax       858 550-6420	San Francisco, CA
		415 693-2000
January 4, 2006	www.cooley.com	Washington, DC
		202 842-7800
	FREDERICK T. MUTO
	(858) 550-6010
SGX Pharmaceuticals, Inc.	mutoft@cooley.com
10505 Roselle Street
San Diego, CA 92121

Ladies and Gentlemen:

You have requested our opinion with respect to certain matters in connection with the filing by SGX Pharmaceuticals, Inc. (the “Company”) of a Registration Statement (No. 333-128059) on Form S-1 (the “Registration Statement”) with the Securities and Exchange Commission, including a related prospectus filed with the Registration Statement (the “Prospectus”), covering an underwritten public offering of up to 4,600,000 shares (the “Shares”) of the Company’s common stock, par value $0.001, including 600,000 shares of common stock that may be sold pursuant to the exercise of an over-allotment option.

In connection with this opinion, we have examined and relied upon the Registration Statement and Prospectus, the Company’s Amended and Restated Certificate of Incorporation and Bylaws and its forms of Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws to be effective upon the closing of the offering of the Shares in accordance with the Registration Statement and Prospectus, and the originals or copies certified to our satisfaction of such records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below.

On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Shares, when sold and issued in accordance with the Registration Statement and the Prospectus will be validly issued, fully paid and nonassessable.

We consent to the reference to our firm under the caption “Legal Matters” in the Prospectus and to the filing of this opinion as an exhibit to the Registration Statement.

Very truly yours,

Cooley Godward llp

By:	/s/ Frederick T. Muto
	Frederick T. Muto

EX-10.2

                                                                    EXHIBIT 10.2

                            STRUCTURAL GENOMIX, INC.

                        2000 EQUITY INCENTIVE PLAN
                                (AS AMENDED)

                      INITIALLY ADOPTED FEBRUARY 18, 2000
               INITIALLY APPROVED BY STOCKHOLDERS MARCH 29, 2000


                      TERMINATION DATE: FEBRUARY 17, 2010


1.    PURPOSES.

      (a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock
Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.

      (b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means
by which eligible recipients of Stock Awards may be given an opportunity to
benefit from increases in value of the Common Stock through the granting of the
following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses and (iv) rights to acquire restricted stock.

      (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of the group of persons eligible to receive Stock Awards, to secure
and retain the services of new members of this group and to provide incentives
for such persons to exert maximum efforts for the success of the Company and its
Affiliates.


                                       1

2.    DEFINITIONS.

      (a) "AFFILIATE" means any parent corporation or subsidiary corporation of
the Company, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.

      (b) "BOARD" means the Board of Directors of the Company.

      (c) "CODE" means the Internal Revenue Code of 1986, as amended.

      (d) "COMMITTEE" means a committee of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).

      (e) "COMMON STOCK" means the common stock of the Company.

      (f) "COMPANY" means Structural GenomiX, Inc., a Delaware corporation.

      (g) "CONSULTANT" means any person, including an advisor, (i) engaged by
the Company or an Affiliate to render consulting or advisory services and who is
compensated for such services or (ii) who is a member of the Board of Directors
of an Affiliate. However, the term "Consultant" shall not include either
Directors who are not compensated by the Company for their services as Directors
or Directors who are merely paid a director's fee by the Company for their
services as Directors.

      (h) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director will not
constitute an interruption of Continuous Service. The Board or the chief
executive officer of the Company, in that party's sole discretion, may determine
whether Continuous Service shall be considered interrupted in the case of any
leave of absence approved by that party, including sick leave, military leave or
any other personal leave.

      (i) "COVERED EMPLOYEE" means the chief executive officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to stockholders under the Exchange Act, as determined
for purposes of Section 162(m) of the Code.

      (j) "DIRECTOR" means a member of the Board of Directors of the Company.

      (k) "DISABILITY" means (i) before the Listing Date, the inability of a
person, in the opinion of a qualified physician acceptable to the Company, to
perform the major duties of that


                                        2

person's position with the Company or an Affiliate of the Company because of the
sickness or injury of the person.

      (l) "EMPLOYEE" means any person employed by the Company or an Affiliate.
Mere service as a Director or payment of a director's fee by the Company or an
Affiliate shall not be sufficient to constitute "employment" by the Company or
an Affiliate.

      (m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

      (n) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:

            (i) If the Common Stock is listed on any established stock exchange
or traded on the NASDAQ National Market or the NASDAQ SmallCap Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in the Common Stock) on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable.

            (ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.

            (iii) Prior to the Listing Date, the value of the Common Stock shall
be determined in a manner consistent with Section 260.140.50 of Title 10 of the
California Code of Regulations.

      (o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.

      (p) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the California Corporate
Securities Law of 1968.

      (q) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or a subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or a subsidiary for services rendered as a Consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K and is not engaged in a


                                       3

business relationship as to which disclosure would be required under Item 404(b)
of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for
purposes of Rule 16b-3.

      (r) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.

      (s) "OFFICER" means (i) before the Listing Date, any person designated by
the Company as an officer and (ii) on and after the Listing Date, a person who
is an officer of the Company within the meaning of Section 16 of the Exchange
Act and the rules and regulations promulgated thereunder.

      (t) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.

      (u) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.

      (v) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Option.

      (w) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury Regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.

      (x) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding Stock
Award.

      (y) "PLAN" means this Structural GenomiX, Inc. 2000 Equity Incentive Plan.

      (z) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.

      (aa) "SECURITIES ACT" means the Securities Act of 1933, as amended.

      (bb) "STOCK AWARD" means any right granted under the Plan, including an
Option, a stock bonus and a right to acquire restricted stock.

      (cc) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.


                                       4

      (dd) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to
own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.

3.    ADMINISTRATION.

      (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless
and until the Board delegates administration to a Committee, as provided in
subsection 3(c).

      (b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:

            (i) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; what type or combination of types of Stock Award shall be
granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive Common Stock pursuant to a Stock Award; and the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each such
person.

            (ii) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.

            (iii) To amend the Plan or a Stock Award as provided in Section 12.

            (iv) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.

      (C) DELEGATION TO COMMITTEE.

            (i) GENERAL. The Board may delegate administration of the Plan to a
Committee or Committees of one (1) or more members of the Board, and the term
"Committee" shall apply to any person or persons to whom such authority has been
delegated. If administration is delegated to a Committee, the Committee shall
have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board, including the power to delegate to a subcommittee any of
the administrative powers the Committee is authorized to exercise (and
references in this Plan to the Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.

            (ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At
such time as the Common Stock is publicly traded, in the discretion of the
Board, a Committee


                                       5

may consist solely of two or more Outside Directors, in accordance with Section
162(m) of the Code, and/or solely of two or more Non-Employee Directors, in
accordance with Rule 16b-3. Within the scope of such authority, the Board or the
Committee may (1) delegate to a committee of one or more members of the Board
who are not Outside Directors the authority to grant Stock Awards to eligible
persons who are either (a) not then Covered Employees and are not expected to be
Covered Employees at the time of recognition of income resulting from such Stock
Award or (b) not persons with respect to whom the Company wishes to comply with
Section 162(m) of the Code and/or (2) delegate to a committee of one or more
members of the Board who are not Non-Employee Directors the authority to grant
Stock Awards to eligible persons who are not then subject to Section 16 of the
Exchange Act.

      (d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.

4.    SHARES SUBJECT TO THE PLAN.


      (a) SHARE RESERVE. Subject to the provisions of Section 11 relating to
adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate One Million Seven
Hundred Fifty-Five Thousand (1,755,000) shares of Common Stock.


      (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for any
reason expire or otherwise terminate, in whole or in part, without having been
exercised in full, the shares of Common Stock not acquired under such Option
shall revert to and again become available for issuance under the Plan. In
addition, if any shares of Common Stock issued under the Plan shall for any
reason be repurchased or reacquired by the Company because they have not vested
under the terms of the Stock Award Agreement governing such shares, then any and
all shares of Common Stock so repurchased or reacquired shall revert to and
again become available for issuance under the Plan for Stock Awards other than
Incentive Stock Options.

      (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may
be unissued shares or reacquired shares, bought on the market or otherwise.

      (d) SHARE RESERVE LIMITATION. Prior to the Listing Date and to the extent
then required by Section 260.140.45 of Title 10 of the California Code of
Regulations, the total number of shares of Common Stock issuable upon exercise
of all outstanding Options and the total number of shares of Common Stock
provided for under any stock bonus or similar plan of the Company shall not
exceed the applicable percentage as calculated in accordance with the conditions
and exclusions of Section 260.140.45 of Title 10 of the California Code of
Regulations, based on the shares of Common Stock of the Company that are
outstanding at the time the calculation is made (generally thirty percent (30%)
of the then outstanding shares of the issuer, unless a higher percentage is
approved by at least two-thirds of the outstanding shares entitled to vote).


                                       6

5.    ELIGIBILITY.

      (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be
granted only to Employees. Stock Awards other than Incentive Stock Options may
be granted to Employees, Directors and Consultants.

      (b) TEN PERCENT STOCKHOLDERS.

            (i) A Ten Percent Stockholder shall not be granted an Incentive
Stock Option unless the exercise price of such Option is at least one hundred
ten percent (110%) of the Fair Market Value of the Common Stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.

            (ii) Prior to the Listing Date, a Ten Percent Stockholder shall not
be granted a Nonstatutory Stock Option unless the exercise price of such Option
is at least (i) one hundred ten percent (110%) of the Fair Market Value of the
Common Stock at the date of grant or (ii) such lower percentage of the Fair
Market Value of the Common Stock at the date of grant as is permitted by Section
260.140.41 of Title 10 of the California Code of Regulations at the time of the
grant of the Option.

            (iii) Prior to the Listing Date, a Ten Percent Stockholder shall not
be granted a restricted stock purchase award unless the purchase price of the
restricted stock is at least (i) one hundred percent (100%) of the Fair Market
Value of the Common Stock at the date of grant or (ii) such lower percentage of
the Fair Market Value of the Common Stock at the date of grant as is permitted
by Section 260.140.41 of Title 10 of the California Code of Regulations at the
time of the grant of the restricted stock purchase award.


      (c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 11
relating to adjustments upon changes in the shares of Common Stock, no Employee
shall be eligible to be granted Options covering more than three hundred
thousand (300,000) shares of Common Stock during any calendar year. This
subsection 5(c) shall not apply prior to the Listing Date and, following the
Listing Date, this subsection 5(c) shall not apply until (i) the earliest of:
(1) the first material modification of the Plan (including any increase in the
number of shares of Common Stock reserved for issuance under the Plan in
accordance with Section 4); (2) the issuance of all of the shares of Common
Stock reserved for issuance under the Plan; (3) the expiration of the Plan; or
(4) the first meeting of stockholders at which Directors are to be elected that
occurs after the close of the third calendar year following the calendar year in
which occurred the first registration of an equity security under Section 12 of
the Exchange Act; or (ii) such other date required by Section 162(m) of the Code
and the rules and regulations promulgated thereunder.


      (d) CONSULTANTS.

            (i) Prior to the Listing Date, a Consultant shall not be eligible
for the grant of a Stock Award if, at the time of grant, either the offer or the
sale of the Company's securities to such Consultant is not exempt under Rule 701
of the Securities Act ("Rule 701") because of the


                                       7

nature of the services that the Consultant is providing to the Company, or
because the Consultant is not a natural person, or as otherwise provided by Rule
701, unless the Company determines that such grant need not comply with the
requirements of Rule 701 and will satisfy another exemption under the Securities
Act as well as comply with the securities laws of all other relevant
jurisdictions.

            (ii) From and after the Listing Date, a Consultant shall not be
eligible for the grant of a Stock Award if, at the time of grant, a Form S-8
Registration Statement under the Securities Act ("Form S-8") is not available to
register either the offer or the sale of the Company's securities to such
Consultant because of the nature of the services that the Consultant is
providing to the Company, or because the Consultant is not a natural person, or
as otherwise provided by the rules governing the use of Form S-8, unless the
Company determines both (i) that such grant (A) shall be registered in another
manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or
(B) does not require registration under the Securities Act in order to comply
with the requirements of the Securities Act, if applicable, and (ii) that such
grant complies with the securities laws of all other relevant jurisdictions.

            (iii) Rule 701 and Form S-8 generally are available to consultants
and advisors only if (i) they are natural persons; (ii) they provide bona fide
services to the issuer, its parents, its majority-owned subsidiaries or
majority-owned subsidiaries of the issuer's parent; and (iii) the services are
not in connection with the offer or sale of securities in a capital-raising
transaction, and do not directly or indirectly promote or maintain a market for
the issuer's securities.

6.    OPTION PROVISIONS.

      Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and, if certificates are issued, a separate certificate or certificates
will be issued for shares of Common Stock purchased on exercise of each type of
Option. The provisions of separate Options need not be identical, but each
Option shall include (through incorporation of provisions hereof by reference in
the Option or otherwise) the substance of each of the following provisions:

      (a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Option granted prior to the Listing Date shall be
exercisable after the expiration of ten (10) years from the date it was granted,
and no Incentive Stock Option granted on or after the Listing Date shall be
exercisable after the expiration of ten (10) years from the date it was granted.

      (b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions
of subsection 5(b) regarding Ten Percent Stockholders, the exercise price of
each Incentive Stock Option shall be not less than one hundred percent (100%) of
the Fair Market Value of the Common Stock subject to the Option on the date the
Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may
be granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or


                                       8

substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.

      (c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Nonstatutory Stock Option granted prior to the Listing Date shall
be not less than eighty-five percent (85%) of the Fair Market Value of the
Common Stock subject to the Option on the date the Option is granted. The
exercise price of each Nonstatutory Stock Option granted on or after the Listing
Date shall be determined by the Board. Notwithstanding the foregoing, a
Nonstatutory Stock Option may be granted with an exercise price lower than that
set forth in the preceding sentence if such Option is granted pursuant to an
assumption or substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code.

(d) CONSIDERATION. The purchase price of Common Stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised or (ii) at
the discretion of the Board at the time of the grant of the Option (or
subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the
Company of other Common Stock, (2) according to a deferred payment or other
similar arrangement with the Optionholder, or (3) in any other form of legal
consideration that may be acceptable to the Board. Unless otherwise specifically
provided in the Option, the purchase price of Common Stock acquired pursuant to
an Option that is paid by delivery to the Company of other Common Stock
acquired, directly or indirectly from the Company, shall be paid only by shares
of the Common Stock of the Company that have been held for more than six (6)
months (or such longer or shorter period of time required to avoid a charge to
earnings for financial accounting purposes). At any time that the Company is
incorporated in Delaware, payment of the Common Stock's "par value," as defined
in the Delaware General Corporation Law, shall not be made by deferred payment.

      In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.

      (e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing, the Optionholder may,
by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the
Optionholder, shall thereafter be entitled to exercise the Option.

      (f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock
Option granted prior to the Listing Date shall not be transferable except by
will or by the laws of descent and distribution and, to the extent provided in
the Option Agreement, to such further extent as permitted by Section
260.140.41(d) of Title 10 of the California Code of Regulations at the time of
the grant of the Option, and shall be exercisable during the lifetime of the
Optionholder only by the Optionholder or, if applicable, a permitted transferee.
A Nonstatutory Stock Option


                                       9

granted on or after the Listing Date shall be transferable to the extent
provided in the Option Agreement. If the Nonstatutory Stock Option does not
provide for transferability, then the Nonstatutory Stock Option shall not be
transferable except by will or by the laws of descent and distribution and shall
be exercisable during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing, the Optionholder may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.

      (g) VESTING GENERALLY. The total number of shares of Common Stock subject
to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this subsection 6(g) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option may
be exercised.

      (h) MINIMUM VESTING PRIOR TO THE LISTING DATE. Notwithstanding the
foregoing subsection 6(g), to the extent that the following restrictions on
vesting are required by Section 260.140.41(f) of Title 10 of the California Code
of Regulations at the time of the grant of the Option, then:

            (i) Options granted prior to the Listing Date to an Employee who is
not an Officer, Director or Consultant shall provide for vesting of the total
number of shares of Common Stock at a rate of at least twenty percent (20%) per
year over five (5) years from the date the Option was granted, subject to
reasonable conditions such as continued employment; and

            (ii) Options granted prior to the Listing Date to Officers,
Directors or Consultants may be made exercisable, subject to conditions such as
continued employment or performance criteria, at any time or during any period
established by the Company.

      (i) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise such Option as of the date of
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the Optionholder's
Continuous Service (or such longer or shorter period specified in the Option
Agreement, which period shall not be less than thirty (30) days for Options
granted prior to the Listing Date unless such termination is for "cause," as
defined in the Optionholder's Option Agreement), or (ii) the expiration of the
term of the Option as set forth in the Option Agreement. If, after termination,
the Optionholder does not exercise his or her Option within the time specified
in the Option Agreement, the Option shall terminate.

      (j) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may
also provide that if the exercise of the Option following the termination of the
Optionholder's Continuous Service (other than upon the Optionholder's death or
Disability) would be prohibited


                                       10

at any time solely because the issuance of shares of Common Stock would violate
the registration requirements under the Securities Act or other applicable
securities law, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in subsection 6(a) or (ii) the
expiration of a period of three (3) months after the termination of the
Optionholder's Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.

      (k) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option Agreement, which period shall not be less than six (6) months for
Options granted prior to the Listing Date) or (ii) the expiration of the term of
the Option as set forth in the Option Agreement. If, after termination, the
Optionholder does not exercise his or her Option within the time specified
herein, the Option shall terminate.

      (l) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous
Service terminates as a result of the Optionholder's death or (ii) the
Optionholder dies within the period (if any) specified in the Option Agreement
after the termination of the Optionholder's Continuous Service for a reason
other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
Option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but
only within the period ending on the earlier of (1) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement, which period shall not be less than six (6) months for
Options granted prior to the Listing Date) or (2) the expiration of the term of
such Option as set forth in the Option Agreement. If, after death, the Option is
not exercised within the time specified herein, the Option shall terminate.

      (m) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares of Common Stock subject to the Option prior to the full vesting of
the Option. Subject to the "Repurchase Limitation" in subsection 10(h), any
unvested shares of Common Stock so purchased may be subject to a repurchase
option in favor of the Company or to any other restriction the Board determines
to be appropriate.

      (n) RIGHT OF REPURCHASE. Subject to the "Repurchase Limitation" in
subsection 10(h), the Option may, but need not, include a provision whereby the
Company may elect, prior to the Listing Date, to repurchase all or any part of
the vested shares of Common Stock acquired by the Optionholder pursuant to the
exercise of the Option.

      (o) RIGHT OF FIRST REFUSAL. The Option may, but need not, include a
provision whereby the Company may elect, prior to the Listing Date, to exercise
a right of first refusal


                                       11

following receipt of notice from the Optionholder of the intent to transfer all
or any part of the shares of Common Stock received upon the exercise of the
Option.

      (p) RE-LOAD OPTIONS.

            (i) Without in any way limiting the authority of the Board to make
or not to make grants of Options hereunder, the Board shall have the authority
(but not an obligation) to include as part of any Option Agreement a provision
entitling the Optionholder to a further Option (a "Re-Load Option") in the event
the Optionholder exercises the Option evidenced by the Option Agreement, in
whole or in part, by surrendering other shares of Common Stock in accordance
with this Plan and the terms and conditions of the Option Agreement. Unless
otherwise specifically provided in the Option, the Optionholder shall not
surrender shares of Common Stock acquired, directly or indirectly from the
Company, unless such shares have been held for more than six (6) months (or such
longer or shorter period of time required to avoid a charge to earnings for
financial accounting purposes).

            (ii) Any such Re-Load Option shall (1) provide for a number of
shares of Common Stock equal to the number of shares of Common Stock surrendered
as part or all of the exercise price of such Option; (2) have an expiration date
which is the same as the expiration date of the Option the exercise of which
gave rise to such Re-Load Option; and (3) have an exercise price which is equal
to one hundred percent (100%) of the Fair Market Value of the Common Stock
subject to the Re-Load Option on the date of exercise of the original Option.
Notwithstanding the foregoing, a Re-Load Option shall be subject to the same
exercise price and term provisions heretofore described for Options under the
Plan.

            (iii) Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on the exercisability of Incentive Stock
Options described in subsection 10(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares of Common Stock under
subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options
under subsection 5(c) and shall be subject to such other terms and conditions as
the Board may determine which are not inconsistent with the express provisions
of the Plan regarding the terms of Options.

7.    PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.

      (a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form
and shall contain such terms and conditions as the Board shall deem appropriate.
The terms and conditions of stock bonus agreements may change from time to time,
and the terms and conditions of separate stock bonus agreements need not be
identical, but each stock bonus agreement shall include (through incorporation
of provisions hereof by reference in the agreement or otherwise) the substance
of each of the following provisions:


                                       12

            (i) CONSIDERATION. A stock bonus may be awarded in consideration for
past services actually rendered to the Company or an Affiliate for its benefit.

            (ii) VESTING. Shares of Common Stock awarded under the stock bonus
agreement may, but need not, be subject to an automatic unvested share
reacquisition right in favor of the Company in accordance with a vesting
schedule to be determined by the Board, as described further in Section
7(a)(iii) below. Stock bonus awards granted prior to the Listing Date to an
Employee who is not an Officer, Director or Consultant shall provide for vesting
of the total number of shares of Common Stock at a rate of at least twenty
percent (20%) per year over five (5) years from the date the stock bonus award
was granted, subject to reasonable conditions such as continued employment.
Stock bonus awards granted prior to the Listing Date to Officers, Directors or
Consultants may be made exercisable, subject to conditions such as continued
employment or performance criteria, at any time or during any period established
by the Company.

            (iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event
a Participant's Continuous Service terminates, the Company shall automatically
reacquire all of the shares of Common Stock held by the Participant which have
not vested as of the date of termination under the terms of the stock bonus
agreement.

            (iv) RIGHT OF REPURCHASE. The stock bonus award may, but need not,
include a provision whereby the Company may elect, prior to the Listing Date, to
repurchase all or any part of the vested shares of Common Stock granted to the
Participant pursuant to a stock bonus award.

      (b) RESTRICTED STOCK PURCHASE AWARDS. Each restricted stock purchase
agreement shall be in such form and shall contain such terms and conditions as
the Board shall deem appropriate. The terms and conditions of the restricted
stock purchase agreements may change from time to time, and the terms and
conditions of separate restricted stock purchase agreements need not be
identical, but each restricted stock purchase agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions:

            (i) PURCHASE PRICE. Subject to the provisions of subsection 5(b)
regarding Ten Percent Stockholders, the purchase price under each restricted
stock purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. For restricted stock
awards made prior to the Listing Date, the purchase price shall not be less than
eighty-five percent (85%) of the Common Stock's Fair Market Value on the date
such award is made or at the time the purchase is consummated. For restricted
stock awards made on or after the Listing Date, the purchase price shall be
determined by the Board.

            (ii) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to the restricted stock purchase agreement shall be paid either: (i) in
cash at the time of purchase; (ii) at the discretion of the Board, according to
a deferred payment or other similar arrangement with the Participant; or (iii)
in any other form of legal consideration that may be acceptable to the Board in
its discretion; provided, however, that at any time that the Company is


                                       13

incorporated in Delaware, the payment of the Common Stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by deferred
payment.

            (iii) VESTING. Subject to the "Repurchase Limitation" in subsection
10(h), shares of Common Stock acquired under the restricted stock purchase
agreement may, but need not, be subject to a share repurchase option in favor of
the Company in accordance with a vesting schedule to be determined by the Board,
as described further in Section 7(b)(iv) below. Restricted stock purchase awards
granted prior to the Listing Date to an Employee who is not an Officer, Director
or Consultant shall provide for vesting of the total number of shares of Common
Stock at a rate of at least twenty percent (20%) per year over five (5) years
from the date the restricted stock purchase award was granted, subject to
reasonable conditions such as continued employment. Restricted stock purchase
awards granted prior to the Listing Date to Officers, Directors or Consultants
may be made exercisable, subject to conditions such as continued employment or
performance criteria, at any time or during any period established by the
Company.

            (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Subject to the
"Repurchase Limitation" in subsection 10(h), in the event a Participant's
Continuous Service terminates, the Company may repurchase or otherwise reacquire
any or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the restricted stock
purchase agreement.

            (v) RIGHT OF REPURCHASE. The restricted stock purchase agreement
may, but need not, include a provision whereby the Company may elect, prior to
the Listing Date, to repurchase all or any part of the vested shares of Common
Stock granted to the Participant pursuant a restricted stock purchase award.

            (vi) TRANSFERABILITY. For a restricted stock purchase award made
before the Listing Date, rights to acquire shares of Common Stock under the
restricted stock purchase agreement shall not be transferable except by will or
by the laws of descent and distribution and shall be exercisable during the
lifetime of the Participant only by the Participant. For a restricted stock
award made on or after the Listing Date, rights to acquire shares of Common
Stock under the restricted stock purchase agreement shall be transferable by the
Participant only upon such terms and conditions as are set forth in the
restricted stock purchase agreement, as the Board shall determine in its
discretion, so long as Common Stock awarded under the restricted stock purchase
agreement remains subject to the terms of the restricted stock purchase
agreement.

8.    COVENANTS OF THE COMPANY.

      (a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.

      (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to grant Stock Awards and to issue and sell shares of Common
Stock upon exercise of


                                       14

the Stock Awards; provided, however, that this undertaking shall not require the
Company to register under the Securities Act the Plan, any Stock Award or any
Common Stock issued or issuable pursuant to any such Stock Award. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of Common Stock under the Plan, the Company
shall be relieved from any liability for failure to issue and sell Common Stock
upon exercise of such Stock Awards unless and until such authority is obtained.

9.    USE OF PROCEEDS FROM STOCK.

      Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.

10.   MISCELLANEOUS.

      (a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the
power to accelerate the time at which a Stock Award may first be exercised or
the time during which a Stock Award or any part thereof will vest,
notwithstanding the provisions in the Stock Award stating the time at which it
may first be exercised or the time during which it will vest.

      (b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares of
Common Stock subject to such Stock Award unless and until such Participant has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.

      (c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to continue to serve the Company or an Affiliate in
the capacity in effect at the time the Stock Award was granted or shall affect
the right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, for any reason or no
reason, (ii) the service of a Consultant pursuant to the terms of such
Consultant's agreement with the Company or an Affiliate or (iii) the service of
a Director pursuant to the Bylaws of the Company or an Affiliate, and any
applicable provisions of the corporate law of the state in which the Company or
the Affiliate is incorporated, as the case may be.

      (d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of Common Stock
with respect to which Incentive Stock Options are exercisable for the first time
by any Optionholder during any calendar year (under all plans of the Company and
its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof which exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options.

      (e) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring Common Stock under any Stock Award, (i) to
give written assurances satisfactory to the


                                       15

Company as to the Participant's knowledge and experience in financial and
business matters and/or to employ a purchaser representative reasonably
satisfactory to the Company who is knowledgeable and experienced in financial
and business matters and that he or she is capable of evaluating, alone or
together with the purchaser representative, the merits and risks of exercising
the Stock Award; and (ii) to give written assurances satisfactory to the Company
stating that the Participant is acquiring Common Stock subject to the Stock
Award for the Participant's own account and not with any present intention of
selling or otherwise distributing the Common Stock. The foregoing requirements,
and any assurances given pursuant to such requirements, shall be inoperative if
(1) the issuance of the shares of Common Stock upon the exercise or acquisition
of Common Stock under the Stock Award has been registered under a then currently
effective registration statement under the Securities Act or (2) as to any
particular requirement, a determination is made by counsel for the Company that
such requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities laws,
including, but not limited to, legends restricting the transfer of the Common
Stock.

      (f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of Common
Stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Participant by the
Company) or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the shares of
Common Stock otherwise issuable to the Participant as a result of the exercise
or acquisition of Common Stock under the Stock Award, provided, however, that no
shares of Common Stock are withheld with a value exceeding the minimum amount of
tax required to be withheld by law; or (iii) delivering to the Company owned and
unencumbered shares of Common Stock.

      (g) INFORMATION OBLIGATION. Prior to the Listing Date, to the extent
required by Section 260.140.46 of Title 10 of the California Code of
Regulations, the Company shall deliver financial statements to Participants at
least annually. This subsection 10(g) shall not apply to key Employees whose
duties in connection with the Company assure them access to equivalent
information.

      (h) REPURCHASE LIMITATION. The terms of any repurchase option shall be
specified in the Stock Award and may be either at Fair Market Value at the time
of repurchase or at not less than the original purchase price. To the extent
required by Section 260.140.41 and Section 260.140.42 of Title 10 of the
California Code of Regulations at the time a Stock Award is made, any repurchase
option contained in a Stock Award granted prior to the Listing Date to a person
who is not an Officer, Director or Consultant shall be upon the terms described
below:

            (i) FAIR MARKET VALUE. If the repurchase option gives the Company
the right to repurchase the shares of Common Stock upon termination of
employment at not less than the Fair Market Value of the shares of Common Stock
to be purchased on the date of termination of Continuous Service, then (i) the
right to repurchase shall be exercised for cash or cancellation of purchase
money indebtedness for the shares of Common Stock within ninety (90) days of


                                       16

termination of Continuous Service (or in the case of shares of Common Stock
issued upon exercise of Stock Awards after such date of termination, within
ninety (90) days after the date of the exercise) or such longer period as may be
agreed to by the Company and the Participant (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code regarding
"qualified small business stock") and (ii) the right terminates when the shares
of Common Stock become publicly traded.

            (ii) ORIGINAL PURCHASE PRICE. If the repurchase option gives the
Company the right to repurchase the shares of Common Stock upon termination of
Continuous Service at the original purchase price, then (i) the right to
repurchase at the original purchase price shall lapse at the rate of at least
twenty percent (20%) of the shares of Common Stock per year over five (5) years
from the date the Stock Award is granted (without respect to the date the Stock
Award was exercised or became exercisable) and (ii) the right to repurchase
shall be exercised for cash or cancellation of purchase money indebtedness for
the shares of Common Stock within ninety (90) days of termination of Continuous
Service (or in the case of shares of Common Stock issued upon exercise of
Options after such date of termination, within ninety (90) days after the date
of the exercise) or such longer period as may be agreed to by the Company and
the Participant (for example, for purposes of satisfying the requirements of
Section 1202(c)(3) of the Code regarding "qualified small business stock").

11.   ADJUSTMENTS UPON CHANGES IN STOCK.

      (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common Stock
subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person pursuant to subsection 5(c), and the outstanding Stock
Awards will be appropriately adjusted in the class(es) and number of securities
and price per share of Common Stock subject to such outstanding Stock Awards.
The Board shall make such adjustments, and its determination shall be final,
binding and conclusive. (The conversion of any convertible securities of the
Company shall not be treated as a transaction "without receipt of consideration"
by the Company.)

      (b) CHANGE IN CONTROL--DISSOLUTION OR LIQUIDATION. In the event of a
dissolution or liquidation of the Company, then all outstanding Stock Awards
shall terminate immediately prior to such event.

      (c) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR REVERSE
MERGER. In the event of (i) a sale, lease or other disposition of all or
substantially all of the assets of the Company, (ii) a merger or consolidation
in which the Company is not the surviving corporation or (iii) a reverse merger
in which the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then any


                                       17

surviving corporation or acquiring corporation shall assume or continue any
Stock Awards outstanding under the Plan or shall substitute similar stock awards
(including an award to acquire the same consideration paid to the stockholders
in the transaction described in this subsection 11(c) for those outstanding
under the Plan). In the event any surviving corporation or acquiring corporation
refuses to assume or continue such Stock Awards or to substitute similar stock
awards for those outstanding under the Plan, then with respect to Stock Awards
held by Participants whose Continuous Service has not terminated, the vesting of
such Stock Awards (and, if applicable, the time during which such Stock Awards
may be exercised) shall be accelerated in full, and the Stock Awards shall
terminate if not exercised (if applicable) at or prior to such event. With
respect to any other Stock Awards outstanding under the Plan, such Stock Awards
shall terminate if not exercised (if applicable) prior to such event.

12.   AMENDMENT OF THE PLAN AND STOCK AWARDS.

      (a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may
amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in Common Stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any NASDAQ or securities exchange listing requirements.

      (b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit
any other amendment to the Plan for stockholder approval, including, but not
limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.

      (c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board
may amend the Plan in any respect the Board deems necessary or advisable to
provide eligible Employees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.

      (d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Participant and (ii) the Participant
consents in writing.

      (e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to
time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.

13.   TERMINATION OR SUSPENSION OF THE PLAN.

      (a) PLAN TERM. The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on the day before the tenth
(10th) anniversary of the date the Plan is adopted by the Board or approved by
the stockholders of the Company,


                                       18

whichever is earlier. No Stock Awards may be granted under the Plan while the
Plan is suspended or after it is terminated.

      (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall
not impair rights and obligations under any Stock Award granted while the Plan
is in effect except with the written consent of the Participant.

14.   EFFECTIVE DATE OF PLAN.

      The Plan shall become effective as determined by the Board, but no Stock
Award shall be exercised (or, in the case of a stock bonus, shall be granted)
unless and until the Plan has been approved by the stockholders of the Company,
which approval shall be within twelve (12) months before or after the date the
Plan is adopted by the Board.

15.   CHOICE OF LAW.

      The law of the State of California shall govern all questions concerning
the construction, validity and interpretation of this Plan, without regard to
such state's conflict of laws rules.


                                       19

                            STRUCTURAL GENOMIX, INC.
                           2000 EQUITY INCENTIVE PLAN

                             STOCK OPTION AGREEMENT
                   (INCENTIVE AND NONSTATUTORY STOCK OPTIONS)

      Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock
Option Agreement, Structural GenomiX, Inc. (the "Company") has granted you an
option under its 2000 Equity Incentive Plan (the "Plan") to purchase the number
of shares of the Company's Common Stock indicated in your Grant Notice at the
exercise price indicated in your Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.

      The details of your option are as follows:

      1. VESTING. Subject to the limitations contained herein, your option will
vest as provided in your Grant Notice, provided that vesting will cease upon the
termination of your Continuous Service.

      2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common
Stock subject to your option and your exercise price per share referenced in
your Grant Notice may be adjusted from time to time for Capitalization
Adjustments, as provided in the Plan.

      3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in your
Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of
your option is permitted) and subject to the provisions of your option, you may
elect at any time that is both (i) during the period of your Continuous Service
and (ii) during the term of your option, to exercise all or part of your option,
including the nonvested portion of your option; provided, however, that:

            (a) a partial exercise of your option shall be deemed to cover first
vested shares of Common Stock and then the earliest vesting installment of
unvested shares of Common Stock;

            (b) any shares of Common Stock so purchased from installments that
have not vested as of the date of exercise shall be subject to the purchase
option in favor of the Company as described in the Company's form of Early
Exercise Stock Purchase Agreement;

            (c) you shall enter into the Company's form of Early Exercise Stock
Purchase Agreement with a vesting schedule that will result in the same vesting
as if no early exercise had occurred; and

            (d) if your option is an incentive stock option, then, as provided
in the Plan, to the extent that the aggregate Fair Market Value (determined at
the time of grant) of the shares of Common Stock with respect to which your
option plus all other incentive stock options you hold are exercisable for the
first time by you during any calendar year (under all plans of the


                                        1

Company and its Affiliates) exceeds one hundred thousand dollars ($100,000),
your option(s) or portions thereof that exceed such limit (according to the
order in which they were granted) shall be treated as nonstatutory stock
options.

      4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of the
exercise price in cash or by check or in any other manner PERMITTED BY YOUR
GRANT NOTICE, which may include one or more of the following:

            (a) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in The Wall Street Journal, pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board that,
prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds.

            (b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, by delivery of
already-owned shares of Common Stock either that you have held for the period
required to avoid a charge to the Company's reported earnings (generally six
months) or that you did not acquire, directly or indirectly from the Company,
that are owned free and clear of any liens, claims, encumbrances or security
interests, and that are valued at Fair Market Value on the date of exercise.
"Delivery" for these purposes, in the sole discretion of the Company at the time
you exercise your option, shall include delivery to the Company of your
attestation of ownership of such shares of Common Stock in a form approved by
the Company. Notwithstanding the foregoing, you may not exercise your option by
tender to the Company of Common Stock to the extent such tender would violate
the provisions of any law, regulation or agreement restricting the redemption of
the Company's stock.

            (c) Pursuant to the following deferred payment alternative:

                  (i) Not less than one hundred percent (100%) of the aggregate
exercise price, plus accrued interest, shall be due five (5) years from date of
exercise or, at the Company's election, upon termination of your Continuous
Service.

                  (ii) Interest shall be charged at the minimum rate of interest
necessary to avoid the treatment as interest, under any applicable provisions of
the Code, of any portion of any amounts other than amounts stated to be interest
under the deferred payment arrangement.

                  (iii) At any time that the Company is incorporated in
Delaware, payment of the Common Stock's "par value," as defined in the Delaware
General Corporation Law, shall be made in cash and not by deferred payment.

                  (iv) In order to elect the deferred payment alternative, you
must, as a part of your written notice of exercise, give notice of the election
of this payment alternative and, in order to secure the payment of the deferred
exercise price to the Company hereunder, if the


                                       2

Company so requests, you must tender to the Company a promissory note and a
security agreement covering the purchased shares of Common Stock, both in form
and substance satisfactory to the Company, or such other or additional
documentation as the Company may request.

      5. WHOLE SHARES. You may exercise your option only for whole shares of
Common Stock.

      6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, you may not exercise your option unless the shares of Common
Stock issuable upon such exercise are then registered under the Securities Act
or, if such shares of Common Stock are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the registration
requirements of the Securities Act. The exercise of your option must also comply
with other applicable laws and regulations governing your option, and you may
not exercise your option if the Company determines that such exercise would not
be in material compliance with such laws and regulations.

      7. TERM. You may not exercise your option before the commencement of its
term or after its term expires. The term of your option commences on the Date of
Grant and expires upon the EARLIEST of the following:

            (a) three (3) months after the termination of your Continuous
Service for any reason other than your Disability or death, provided that if
during any part of such three (3) month period your option is not exercisable
solely because of the condition set forth in the preceding paragraph relating to
"Securities Law Compliance," your option shall not expire until the earlier of
the Expiration Date or until it shall have been exercisable for an aggregate
period of three (3) months after the termination of your Continuous Service;

            (b) twelve (12) months after the termination of your Continuous
Service due to your Disability;

            (c) eighteen (18) months after your death if you die either during
your Continuous Service or within three (3) months after your Continuous Service
terminates;

            (d) the Expiration Date indicated in your Grant Notice; or

            (e) the day before the tenth (10th) anniversary of the Date of
Grant.

      If your option is an incentive stock option, note that, to obtain the
federal income tax advantages associated with an "incentive stock option," the
Code requires that at all times beginning on the date of grant of your option
and ending on the day three (3) months before the date of your option's
exercise, you must be an employee of the Company or an Affiliate, except in the
event of your death or Disability. The term Disability as used in this Agreement
and in the Plan exceeds the definition prescribed in Section 22(e)(3) of the
Code. The Company has provided for extended exercisability of your option under
certain circumstances for your benefit but cannot guarantee that your option
will necessarily be treated as an "incentive stock option" if


                                       3

you continue to provide services to the Company or an Affiliate as a Consultant
or Director after your employment terminates or if you otherwise exercise your
option more than three (3) months after the date your employment terminates.

      8.    EXERCISE.

            (a) You may exercise the vested portion of your option (and the
unvested portion of your option if your Grant Notice so permits) during its term
by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.

            (b) By exercising your option you agree that, as a condition to any
exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the
shares of Common Stock are subject at the time of exercise, or (3) the
disposition of shares of Common Stock acquired upon such exercise.

            (c) If your option is an incentive stock option, by exercising your
option you agree that you will notify the Company in writing within fifteen (15)
days after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of your option that occurs within two (2) years after the
date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.

            (d) By exercising your option you agree that the Company (or a
representative of the underwriter(s)) may, in connection with the first
underwritten registration of the offering of any securities of the Company under
the Securities Act, require that you not sell, dispose of, transfer, make any
short sale of, grant any option for the purchase of, or enter into any hedging
or similar transaction with the same economic effect as a sale, any shares of
Common Stock or other securities of the Company held by you, for a period of
time specified by the underwriter(s) (not to exceed one hundred eighty (180)
days) following the effective date of the registration statement of the Company
filed under the Securities Act. You further agree to execute and deliver such
other agreements as may be reasonably requested by the Company and/or the
underwriter(s) that are consistent with the foregoing or that are necessary to
give further effect thereto. In order to enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to your shares of
Common Stock until the end of such period.

      9.    TRANSFERABILITY. Your option is not transferable, except by will or
by the laws of descent and distribution, and is exercisable during your life
only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.

      10.   RIGHT OF FIRST REFUSAL. Shares of Common Stock that you acquire upon
exercise of your option are subject to any right of first refusal that may be
described in the


                                       4

Company's bylaws in effect at such time the Company elects to exercise its
right. The Company's right of first refusal shall expire on the Listing Date.

      11.   RIGHT OF REPURCHASE. To the extent provided in the Early Exercise
Stock Purchase Agreement by which you acquired shares of Common Stock, the
Company shall have the right to repurchase all or any part of the shares of
Common Stock you acquire pursuant to the early exercise of your option.

      12.   OPTION NOT A SERVICE CONTRACT. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.

      13.   WITHHOLDING OBLIGATIONS.

            (a) At the time you exercise your option, in whole or in part, or at
any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "same day sale"
pursuant to a program developed under Regulation T as promulgated by the Federal
Reserve Board to the extent permitted by the Company), any sums required to
satisfy the federal, state, local and foreign tax withholding obligations of the
Company or an Affiliate, if any, which arise in connection with your option.

            (b) Upon your request and subject to approval by the Company, in its
sole discretion, and compliance with any applicable conditions or restrictions
of law, the Company may withhold from fully vested shares of Common Stock
otherwise issuable to you upon the exercise of your option a number of whole
shares of Common Stock having a Fair Market Value, determined by the Company as
of the date of exercise, not in excess of the minimum amount of tax required to
be withheld by law. If the date of determination of any tax withholding
obligation is deferred to a date later than the date of exercise of your option,
share withholding pursuant to the preceding sentence shall not be permitted
unless you make a proper and timely election under Section 83(b) of the Code,
covering the aggregate number of shares of Common Stock acquired upon such
exercise with respect to which such determination is otherwise deferred, to
accelerate the determination of such tax withholding obligation to the date of
exercise of your option. Notwithstanding the filing of such election, shares of
Common Stock shall be withheld solely from fully vested shares of Common Stock
determined as of the date of exercise of your option that are otherwise issuable
to you upon such exercise. Any adverse consequences to you arising in connection
with such share withholding procedure shall be your sole responsibility.

            (c) You may not exercise your option unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise your option when desired even though your option is
vested, and the Company shall have no


                                       5

obligation to issue a certificate for such shares of Common Stock or release
such shares of Common Stock from any escrow provided for herein.

      14. NOTICES. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by mail by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the last
address you provided to the Company.

      15. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions
of the Plan, the provisions of which are hereby made a part of your option, and
is further subject to all interpretations, amendments, rules and regulations
which may from time to time be promulgated and adopted pursuant to the Plan. In
the event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control.


                                       6

                            STRUCTURAL GENOMIX, INC.
                            STOCK OPTION GRANT NOTICE
                          (2000 EQUITY INCENTIVE PLAN)

Structural GenomiX, Inc. (the "Company"), pursuant to its 2000 Equity Incentive
Plan (the "Plan"), hereby grants to Optionholder an option to purchase the
number of shares of the Company's Common Stock set forth below. This option is
subject to all of the terms and conditions as set forth herein and in the Stock
Option Agreement, the Plan and the Notice of Exercise, all of which are attached
hereto and incorporated herein in their entirety.

Optionholder:                         EMPLOYEE
Date of Grant:
Vesting Commencement Date:
Number of Shares Subject to Option:
Exercise Price (Per Share):
Total Exercise Price:
Expiration Date:

TYPE OF GRANT:      [ ]  Incentive Stock Option     [ ]  Nonstatutory Stock
                                                         Option

EXERCISE SCHEDULE:  [ ]  Same as Vesting Schedule   [ ]  Early Exercise
                                                         Permitted

VESTING SCHEDULE:   [                                 ]

PAYMENT:            By one or a combination of the following items
                    (described in the Stock Option Agreement):

                          By cash or check
                          Pursuant to a Regulation T Program if the Shares are
                            publicly traded
                          By delivery of already-owned shares if the Shares are
                            publicly traded
                          By deferred payment

ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock Option
Agreement and the Plan. Optionholder further acknowledges that as of the Date of
Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the
entire understanding between Optionholder and the Company regarding the
acquisition of stock in the Company and supersede all prior oral and written
agreements on that subject with the exception of (i) stock awards previously
granted and delivered to Optionholder under the Plan, and (ii) the following
agreements only:

      OTHER AGREEMENTS:
                                    ------------------------------------------
                                    ------------------------------------------

STRUCTURAL GENOMIX, INC.                  EMPLOYEE:


- --------------------------------------    --------------------------------------
Michael G. Grey
President & Chief Executive Officer

Date:                                     Date:
      --------------------------------           -------------------------------

ATTACHMENTS: Stock Option Agreement, 2000 Equity Incentive Plan and Notice of
Exercise

EX-10.3

                                                                    EXHIBIT 10.3

                            SGX PHARMACEUTICALS, INC.

                           2005 EQUITY INCENTIVE PLAN


                INITIALLY APPROVED BY BOARD ON: AUGUST 30, 2005
              INITIALLY APPROVED BY STOCKHOLDERS: OCTOBER 31, 2005
                        TERMINATION DATE: AUGUST 29, 2015



1.    GENERAL.

      (a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock
Awards are Employees, Directors and Consultants.

      (b) AVAILABLE STOCK AWARDS. The Plan provides for the grant of the
following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) Stock Purchase Awards, (iv) Restricted Stock Awards, (v) Stock
Appreciation Rights, (vi) Restricted Stock Unit Awards, and (vii) Other Stock
Awards.

      (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to secure
and retain the services of the group of persons eligible to receive Awards as
set forth in Section 1(a), to provide incentives for such persons to exert
maximum efforts for the success of the Company and any Affiliate and to provide
a means by which such eligible recipients may be given an opportunity to benefit
from increases in value of the Common Stock through the granting of Stock
Awards.

2.    DEFINITIONS.

      As used in the Plan, the following definitions shall apply to the
capitalized terms indicated below:

      (a) "2000 PLAN" means the Company's 2000 Equity Incentive Plan.

      (b) "AFFILIATE" means, at the time of determination, any "parent" or
"subsidiary" as such terms are defined in Rule 405 of the Securities Act. The
Board shall have the authority to determine the time or times at which "parent"
or "subsidiary" status is determined within the foregoing definition.

      (c) "AWARD" means a Stock Award or a Performance Cash Award.

      (d) "BOARD" means the Board of Directors of the Company.

      (e) "CAPITALIZATION ADJUSTMENT" has the meaning ascribed to that term in
Section 11(a).

      (f) "CAUSE" means with respect to a Participant, the occurrence of any of
the following: (i) such Participant's commission of any felony or any crime
involving fraud, dishonesty or moral turpitude under the laws of the United
States or any state thereof; (ii) such


                                       1.



Participant's attempted commission of, or participation in, a fraud or act of
dishonesty against the Company; (iii) such Participant's intentional, material
violation of any contract or agreement between the Participant and the Company
or of any statutory duty owed to the Company; (iv) such Participant's
unauthorized use or disclosure of the Company's confidential information or
trade secrets; or (v) such Participant's gross misconduct. The determination
that a termination of the Participant's Continuous Service is either for Cause
or without Cause shall be made by the Company in its sole discretion. Any
determination by the Company that the Continuous Service of a Participant was
terminated by reason of dismissal without Cause for the purposes of outstanding
Awards held by such Participant shall have no effect upon any determination of
the rights or obligations of the Company or such Participant for any other
purpose.

      (g) "CHANGE IN CONTROL" means the occurrence, in a single transaction or
in a series of related transactions, of any one or more of the following events:

            (i) any Exchange Act Person becomes the Owner, directly or
indirectly, of securities of the Company representing more than fifty percent
(50%) of the combined voting power of the Company's then outstanding securities
other than by virtue of a merger, consolidation or similar transaction.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
(A) on account of the acquisition of securities of the Company by an investor,
any affiliate thereof or any other Exchange Act Person from the Company in a
transaction or series of related transactions the primary purpose of which is to
obtain financing for the Company through the issuance of equity securities or
(B) solely because the level of Ownership held by any Exchange Act Person (the
"SUBJECT PERSON") exceeds the designated percentage threshold of the outstanding
voting securities as a result of a repurchase or other acquisition of voting
securities by the Company reducing the number of shares outstanding, provided
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of voting securities by the Company, and after
such share acquisition, the Subject Person becomes the Owner of any additional
voting securities that, assuming the repurchase or other acquisition had not
occurred, increases the percentage of the then outstanding voting securities
Owned by the Subject Person over the designated percentage threshold, then a
Change in Control shall be deemed to occur;

            (ii) there is consummated a merger, consolidation or similar
transaction involving (directly or indirectly) the Company and, immediately
after the consummation of such merger, consolidation or similar transaction, the
stockholders of the Company immediately prior thereto do not Own, directly or
indirectly, either (A) outstanding voting securities representing more than
fifty percent (50%) of the combined outstanding voting power of the surviving
Entity in such merger, consolidation or similar transaction or (B) more than
fifty percent (50%) of the combined outstanding voting power of the parent of
the surviving Entity in such merger, consolidation or similar transaction, in
each case in substantially the same proportions as their Ownership of the
outstanding voting securities of the Company immediately prior to such
transaction;

            (iii) the stockholders of the Company approve or the Board approves
a plan of complete dissolution or liquidation of the Company, or a complete
dissolution or liquidation of the Company shall otherwise occur;


                                       2.



            (iv) there is consummated a sale, lease, exclusive license or other
disposition of all or substantially all of the consolidated assets of the
Company and its Subsidiaries, other than a sale, lease, license or other
disposition of all or substantially all of the consolidated assets of the
Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the
combined voting power of the voting securities of which are Owned by
stockholders of the Company in substantially the same proportions as their
Ownership of the outstanding voting securities of the Company immediately prior
to such sale, lease, license or other disposition; or

            (v) individuals who, on the date this Plan is adopted by the Board,
are members of the Board (the "INCUMBENT BOARD") cease for any reason to
constitute at least a majority of the members of the Board; provided, however,
that if the appointment or election (or nomination for election) of any new
Board member was approved or recommended by a majority vote of the members of
the Incumbent Board then still in office, such new member shall, for purposes of
this Plan, be considered as a member of the Incumbent Board.

      The term Change in Control shall not include a sale of assets, merger or
other transaction effected exclusively for the purpose of changing the domicile
of the Company.

      Notwithstanding the foregoing or any other provision of this Plan, the
definition of Change in Control (or any analogous term) in an individual written
agreement between the Company or any Affiliate and the Participant shall
supersede the foregoing definition with respect to Stock Awards subject to such
agreement where such agreement provides for acceleration of vesting of such
Stock Awards in the event of a Change in Control; provided, however, that if no
definition of Change in Control or any analogous term is set forth in such an
individual written agreement, the foregoing definition shall apply.

      (h) "CODE" means the Internal Revenue Code of 1986, as amended.

      (i) "COMMITTEE" means a committee of one (1) or more Directors to whom
authority has been delegated by the Board in accordance with Section 3(c).

      (j) "COMMON STOCK" means the common stock of the Company.

      (k) "COMPANY" means SGX Pharmaceuticals, Inc., a Delaware corporation.

      (l) "CONSULTANT" means any person, including an advisor, who is (i)
engaged by the Company or an Affiliate to render consulting or advisory services
and is compensated for such services, or (ii) serving as a member of the board
of directors of an Affiliate and is compensated for such services. However,
service solely as a Director, or payment of a fee for such service, shall not
cause a Director to be considered a "Consultant" for purposes of the Plan.

      (m) "CONTINUOUS SERVICE" means that the Participant's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. A change in the capacity in which the Participant
renders service to the Company or an Affiliate as an Employee, Consultant or
Director or a change in the entity for which the Participant renders such
service, provided that there is no interruption or termination of the
Participant's service with the Company or an Affiliate, shall not terminate a
Participant's Continuous Service. For example, a change in status from an
employee of the Company to a consultant to an Affiliate or

                                       3.


to a Director shall not constitute an interruption of Continuous Service. To the
extent permitted by law, the Board or the chief executive officer of the
Company, in that party's sole discretion, may determine whether Continuous
Service shall be considered interrupted in the case of any leave of absence
approved by that party, including sick leave, military leave or any other
personal leave. Notwithstanding the foregoing, a leave of absence shall be
treated as Continuous Service for purposes of vesting in a Stock Award only to
such extent as may be provided in the Company's leave of absence policy, in the
written terms of any leave of absence agreement or policy applicable to the
Participant, or as otherwise required by law.

      (n) "CORPORATE TRANSACTION" means the occurrence, in a single transaction
or in a series of related transactions, of any one or more of the following
events:

            (i) a sale or other disposition of all or substantially all, as
determined by the Board in its sole discretion, of the consolidated assets of
the Company and its Subsidiaries;

            (ii) a sale or other disposition of at least ninety percent (90%) of
the outstanding securities of the Company;

            (iii) the consummation of a merger, consolidation or similar
transaction following which the Company is not the surviving corporation; or

            (iv) the consummation of a merger, consolidation or similar
transaction following which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the merger,
consolidation or similar transaction are converted or exchanged by virtue of the
merger, consolidation or similar transaction into other property, whether in the
form of securities, cash or otherwise.

      (o) "COVERED EMPLOYEE" shall have the meaning provided in Section
162(m)(3) of the Code and the regulations promulgated thereunder.

      (p) "DIRECTOR" means a member of the Board.

      (q) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.

      (r) "EMPLOYEE" means any person employed by the Company or an Affiliate.
However, service solely as a Director, or payment of a fee for such services,
shall not cause a Director to be considered an "Employee" for purposes of the
Plan.

      (s) "ENTITY" means a corporation, partnership, limited liability company
or other entity.

      (t) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

      (u) "EXCHANGE ACT PERSON" means any natural person, Entity or "group"
(within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that
"Exchange Act Person" shall not include (i) the Company or any Subsidiary of the
Company, (ii) any employee benefit plan of the Company or any Subsidiary of the
Company or any trustee or other fiduciary holding

                                       4.


securities under an employee benefit plan of the Company or any Subsidiary of
the Company, (iii) an underwriter temporarily holding securities pursuant to an
offering of such securities, (iv) an Entity Owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
Ownership of stock of the Company; or (v) any natural person, Entity or "group"
(within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of
the effective date of the Plan as set forth in Section 13, is the Owner,
directly or indirectly, of securities of the Company representing more than
fifty percent (50%) of the combined voting power of the Company's then
outstanding securities.

      (v) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:

            (i) If the Common Stock is listed on any established stock exchange
or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in the Common Stock) on the last market trading day prior to the date in
question, as reported in The Wall Street Journal or such other source as the
Board deems reliable. Unless otherwise provided by the Board, if there is no
closing sales price (or closing bid if no sales were reported) for the Common
Stock on the date in question, then the Fair Market Value shall be the closing
selling price (or closing bid if no sales were reported) on the last preceding
date for which such quotation exists.

            (ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined by the Board in good faith.

      (w) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
"incentive stock option" within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.

      (x) "IPO DATE" means the date of the underwriting agreement between the
Company and the underwriter(s) managing the initial public offering of the
Common Stock, pursuant to which the Common Stock is priced for the initial
public offering.

      (y) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current employee or officer of the Company or an Affiliate, does not receive
compensation, either directly or indirectly, from the Company or an Affiliate
for services rendered as a consultant or in any capacity other than as a
Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("REGULATION S-K")), does not possess an interest in any other transaction for
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship for which disclosure would be required
pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a
"non-employee director" for purposes of Rule 16b-3.

      (z) "NONSTATUTORY STOCK OPTION" means any Option other than an Incentive
Stock Option.


                                       5.



      (aa) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.

      (bb) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option to purchase shares of Common Stock granted pursuant to the Plan.

      (cc) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an Option grant. Each
Option Agreement shall be subject to the terms and conditions of the Plan.

      (dd) "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if permitted under the terms of this Plan, such other person who
holds an outstanding Option.

      (ee) "OTHER STOCK AWARD" means an award based in whole or in part by
reference to the Common Stock which is granted pursuant to the terms and
conditions of Section 7(e).

      (ff) "OTHER STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of an Other Stock Award evidencing the terms and conditions
of an Other Stock Award grant. Each Other Stock Award Agreement shall be subject
to the terms and conditions of the Plan.

      (gg) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury Regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" who receives
compensation for prior services (other than benefits under a tax-qualified
retirement plan) during the taxable year, has not been an officer of the Company
or an "affiliated corporation," and does not receive remuneration from the
Company or an "affiliated corporation," either directly or indirectly, in any
capacity other than as a Director, or (ii) is otherwise considered an "outside
director" for purposes of Section 162(m) of the Code.

      (hh) "OWN," "OWNED," "OWNER," "OWNERSHIP" A person or Entity shall be
deemed to "Own," to have "Owned," to be the "Owner" of, or to have acquired
"Ownership" of securities if such person or Entity, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise, has
or shares voting power, which includes the power to vote or to direct the
voting, with respect to such securities.

      (ii) "PARTICIPANT" means a person to whom an Award is granted pursuant to
the Plan or, if applicable, such other person who holds an outstanding Stock
Award.

      (jj) "PERFORMANCE CASH AWARD" means an award of cash granted pursuant to
the terms and conditions of Section 7(e)(ii).

      (kk) "PERFORMANCE CRITERIA" means the one or more criteria that the Board
shall select for purposes of establishing the Performance Goals for a
Performance Period. The Performance Criteria that shall be used to establish
such Performance Goals may be based on any one of, or combination of, the
following: (i) earnings per share; (ii) earnings before interest, taxes and
depreciation; (iii) earnings before interest, taxes, depreciation and
amortization; (iv) total

                                       6.


stockholder return; (v) return on equity; (vi) return on assets, investment, or
capital employed; (vii) operating margin; (viii) gross margin; (ix) operating
income; (x) net income (before or after taxes); (xi) net operating income; (xii)
net operating income after tax; (xiii) pre-tax profit; (xiv) operating cash
flow; (xv) sales or revenue targets; (xvi) increases in revenue or product
revenue; (xvii) expenses and cost reduction goals; (xviii) improvement in or
attainment of working capital levels; (xix) economic value added (or an
equivalent metric); (xx) market share; (xxi) cash flow; (xxii) cash flow per
share; (xxiii) share price performance; (xxiv) debt reduction; (xxv)
implementation or completion of projects or processes; (xxvi) customer
satisfaction; (xxvii); stockholders' equity; and (xxviii) other measures of
performance selected by the Board. Partial achievement of the specified criteria
may result in the payment or vesting corresponding to the degree of achievement
as specified in the Stock Award Agreement or the written terms of a Performance
Cash Award. The Board shall, in its sole discretion, define the manner of
calculating the Performance Criteria it selects to use for such Performance
Period.

      (ll) "PERFORMANCE GOALS" means, for a Performance Period, the one or more
goals established by the Board for the Performance Period based upon the
Performance Criteria. Performance Goals may be based on a Company-wide basis,
with respect to one or more business units, divisions, Affiliates, or business
segments, and in either absolute terms or relative to the performance of one or
more comparable companies or a relevant index. At the time of the grant of any
Award, the Board is authorized to determine whether, when calculating the
attainment of Performance Goals for a Performance Period: (i) to exclude
restructuring and/or other nonrecurring charges; (ii) to exclude exchange rate
effects, as applicable, for non-U.S. dollar denominated net sales and operating
earnings; (iii) to exclude the effects of changes to generally accepted
accounting standards required by the Financial Accounting Standards Board; (iv)
to exclude the effects of any statutory adjustments to corporate tax rates; and
(v) to exclude the effects of any "extraordinary items" as determined under
generally accepted accounting principles. In addition, the Board retains the
discretion to reduce or eliminate the compensation or economic benefit due upon
attainment of Performance Goals.

      (mm) "PERFORMANCE PERIOD" means the period of time selected by the Board
over which the attainment of one or more Performance Goals will be measured for
the purpose of determining a Participant's right to and the payment of a Stock
Award or a Performance Cash Award. Performance Periods may be of varying and
overlapping duration, at the sole discretion of the Board.

      (nn) "PERFORMANCE STOCK AWARD" means a Stock Award granted under the terms
and conditions of Section 7(e)(i).

      (oo) "PLAN" means this SGX Pharmaceuticals, Inc. 2005 Equity Incentive
Plan.

      (pp) "RESTRICTED STOCK AWARD" means an award of shares of Common Stock
which is granted pursuant to the terms and conditions of Section 7(b).

      (qq) "RESTRICTED STOCK AWARD AGREEMENT" means a written agreement between
the Company and a holder of a Restricted Stock Award evidencing the terms and
conditions of a Restricted Stock Award grant. Each Restricted Stock Award
Agreement shall be subject to the terms and conditions of the Plan.


                                       7.



      (rr) "RESTRICTED STOCK UNIT AWARD" means a right to receive shares of
Common Stock which is granted pursuant to the terms and conditions of Section
7(c).

      (ss) "RESTRICTED STOCK UNIT AWARD AGREEMENT" means a written agreement
between the Company and a holder of a Restricted Stock Unit Award evidencing the
terms and conditions of a Restricted Stock Unit Award grant. Each Restricted
Stock Unit Award Agreement shall be subject to the terms and conditions of the
Plan.

      (tt) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.

      (uu) "SECURITIES ACT" means the Securities Act of 1933, as amended.

      (vv) "STOCK APPRECIATION RIGHT" means a right to receive the appreciation
on Common Stock that is granted pursuant to the terms and conditions of Section
7(d).

      (ww) "STOCK APPRECIATION RIGHT AGREEMENT" means a written agreement
between the Company and a holder of a Stock Appreciation Right evidencing the
terms and conditions of a Stock Appreciation Right grant. Each Stock
Appreciation Right Agreement shall be subject to the terms and conditions of the
Plan.

      (xx) "STOCK AWARD" means any right granted under the Plan, including an
Incentive Stock Option, a Nonstatutory Stock Option, a Stock Purchase Award, a
Restricted Stock Award, a Stock Appreciation Right, a Restricted Stock Unit
Award, a Performance Stock Award or any Other Stock Award.

      (yy) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a Participant evidencing the terms and conditions of a Stock Award grant.
Each Stock Award Agreement shall be subject to the terms and conditions of the
Plan.

      (zz) "STOCK PURCHASE AWARD" means an award of shares of Common Stock which
is granted pursuant to the terms and conditions of Section 7(a).

      (aaa) "STOCK PURCHASE AWARD AGREEMENT" means a written agreement between
the Company and a holder of a Stock Purchase Award evidencing the terms and
conditions of a Stock Purchase Award grant. Each Stock Purchase Award Agreement
shall be subject to the terms and conditions of the Plan.

      (bbb) "SUBSIDIARY" means, with respect to the Company, (i) any corporation
of which more than fifty percent (50%) of the outstanding capital stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether, at the time, stock of any other class or
classes of such corporation shall have or might have voting power by reason of
the happening of any contingency) is at the time, directly or indirectly, Owned
by the Company, and (ii) any partnership in which the Company has a direct or
indirect interest (whether in the form of voting or participation in profits or
capital contribution) of more than fifty percent (50%).

                                       8.




      (ccc) "TEN PERCENT STOCKHOLDER" means a person who Owns (or is deemed to
Own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or any Affiliate.

3.    ADMINISTRATION.

      (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless
and until the Board delegates administration of the Plan to a Committee or
Committees, as provided in Section 3(c).

      (b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:

            (i) To determine from time to time (A) which of the persons eligible
under the Plan shall be granted Awards; (B) when and how each Award shall be
granted; (C) what type or combination of types of Award shall be granted; (D)
the provisions of each Award granted (which need not be identical), including
the time or times when a person shall be permitted to receive cash or Common
Stock pursuant to a Stock Award; and (E) the number of shares of Common Stock
with respect to which a Stock Award shall be granted to each such person.

            (ii) To construe and interpret the Plan and Awards granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any Stock Award Agreement or in the written
terms of a Performance Cash Award, in a manner and to the extent it shall deem
necessary or expedient to make the Plan or Award fully effective.

            (iii) To settle all controversies regarding the Plan and Awards
granted under it.

            (iv) To accelerate the time at which a Stock Award may first be
exercised or the time during which an Award or any part thereof will vest in
accordance with the Plan, notwithstanding the provisions in the Award stating
the time at which it may first be exercised or the time during which it will
vest.

            (v) To suspend or terminate the Plan at any time. Suspension or
termination of the Plan shall not impair rights and obligations under any Stock
Award granted while the Plan is in effect except with the written consent of the
affected Participant.

            (vi) To amend the Plan, subject to the limitations, if any, of
applicable law. However, except as provided in Section 11(a) relating to
Capitalization Adjustments, no amendment shall be effective unless approved by
the stockholders of the Company to the extent stockholder approval is necessary
to satisfy applicable law or applicable exchange listing requirements. Rights
under any Award granted before amendment of the Plan shall not be impaired by
any amendment of the Plan unless (i) the Company requests the consent of the
affected Participant, and (ii) such Participant consents in writing.

            (vii) To submit any amendment to the Plan for stockholder approval,
including, but not limited to, amendments to the Plan intended to satisfy the
requirements of Section 162(m) of the Code and the regulations thereunder
regarding the exclusion of performance-based

                                       9.


compensation from the limit on corporate deductibility of compensation paid to
Covered Employees.

            (viii) To amend the Plan in any respect the Board deems necessary or
advisable to provide eligible Employees with the maximum benefits provided or to
be provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options or to bring the Plan or Incentive
Stock Options granted under it into compliance therewith.

            (ix) To amend the terms of any one or more Awards, including, but
not limited to, amendments to provide terms more favorable than previously
provided in the Award Agreement, subject to any specified limits in the Plan
that are not subject to Board discretion; provided, however, that the rights
under any Award shall not be impaired by any such amendment unless (i) the
Company requests the consent of the affected Participant, and (ii) such
Participant consents in writing.

            (x) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company and that are not in conflict with the provisions of the Plan or Awards.

            (xi) To adopt such procedures and sub-plans as are necessary or
appropriate to permit participation in the Plan by Employees, Directors or
Consultants who are foreign nationals or employed outside the United States.

            (xii) To effect, at any time and from time to time, with the consent
of any adversely affected Optionholder, (1) the reduction of the exercise price
of any outstanding Option under the Plan, (2) the cancellation of any
outstanding Option under the Plan and the grant in substitution therefor of (a)
a new Option under the Plan or another equity plan of the Company covering the
same or a different number of shares of Common Stock, (b) a Restricted Stock
Award (including a stock bonus), (c) a Stock Appreciation Right, (d) Restricted
Stock Unit, (e) an Other Stock Award, (f) cash and/or (g) other valuable
consideration (as determined by the Board, in its sole discretion), or (3) any
other action that is treated as a repricing under generally accepted accounting
principles.

      (c)   DELEGATION TO COMMITTEE.

            (i) GENERAL. The Board may delegate some or all of the
administration of the Plan to a Committee or Committees. If administration of
the Plan is delegated to a Committee, the Committee shall have, in connection
with the administration of the Plan, the powers theretofore possessed by the
Board that have been delegated to the Committee, including the power to delegate
to a subcommittee of the Committee any of the administrative powers the
Committee is authorized to exercise (and references in this Plan to the Board
shall thereafter be to the Committee or subcommittee), subject, however, to such
resolutions, not inconsistent with the provisions of the Plan, as may be adopted
from time to time by the Board. The Board may retain the authority to
concurrently administer the Plan with the Committee and may, at any time, revest
in the Board some or all of the powers previously delegated.

                                      10.




            (ii) SECTION 162(M) AND RULE 16B-3 COMPLIANCE. In the sole
discretion of the Board, the Committee may consist solely of two or more Outside
Directors, in accordance with Section 162(m) of the Code, or solely of two or
more Non-Employee Directors, in accordance with Rule 16b-3. In addition, the
Board or the Committee, in its sole discretion, may (a) delegate to a Committee
of Directors who need not be Outside Directors the authority to grant Awards to
eligible persons who are either (i) not then Covered Employees and are not
expected to be Covered Employees at the time of recognition of income resulting
from such Stock Award, or (ii) not persons with respect to whom the Company
wishes to comply with Section 162(m) of the Code, or (b) delegate to a Committee
of Directors who need not be Non-Employee Directors the authority to grant Stock
Awards to eligible persons who are not then subject to Section 16 of the
Exchange Act.

      (d) DELEGATION TO AN OFFICER. The Board may delegate to one or more
Officers the authority to do one or both of the following (i) designate
Employees who are not Officers to be recipients of Awards and the terms thereof,
and (ii) determine the number of shares of Common Stock to be subject to such
Stock Awards granted to such Employees; provided, however, that the Board
resolutions regarding such delegation shall specify the total number of shares
of Common Stock that may be subject to the Stock Awards granted by such Officer
and that such Officer may not grant a Stock Award to himself or herself.
Notwithstanding anything to the contrary in this Section 3(d), the Board may not
delegate to an Officer authority to determine the Fair Market Value of the
Common Stock pursuant to Section 2(v)(ii) above.

      (e) EFFECT OF BOARD'S DECISION. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.

      (f) ARBITRATION. Any dispute or claim concerning any Awards granted (or
not granted) pursuant to the Plan or any disputes or claims relating to or
arising out of the Plan shall be fully, finally and exclusively resolved by
binding and confidential arbitration conducted pursuant to the Commercial
Arbitration Rules of the American Arbitration Association in San Diego,
California. The Company shall pay all arbitration fees. In addition to any other
relief, the arbitrator may award to the prevailing party recovery of its
attorneys' fees and costs. By accepting an Award, Participants and the Company
waive their respective rights to have any such disputes or claims tried by a
judge or jury.

4.    SHARES SUBJECT TO THE PLAN.


      (a) Subject to the provisions of Section 11(a) relating to Capitalization
Adjustments, the number of shares of Common Stock that may be issued pursuant to
Stock Awards shall not exceed, in the aggregate, seven hundred fifty thousand
(750,000) shares of Common Stock, plus the number of shares of Common Stock
remaining available for future issuance under the 2000 Plan that are not covered
by outstanding stock options under the 2000 Plan as of the IPO Date; provided,
however, that such share reserve shall be increased from time to time by a
number of shares equal to the number of shares of Common Stock that (i) are or
become issuable pursuant to options outstanding under the Company's 2000 Plan as
of the IPO Date, or were previously or become issued but remain subject to the
Company's repurchase right under the terms of the 2000 Plan, and (ii) but for
the termination of the 2000 Plan as of the effective date of the Plan, would
otherwise have reverted to the share reserve of the 2000 Plan pursuant to the
terms thereof. In addition, the number of shares of Common Stock available for
issuance under the Plan shall automatically increase on


                                      11.


January 1st of each year commencing in 2007 and ending on (and including)
January 1, 2015, in an amount equal to the lesser of (i) three and one half
percent (3 1/2 %) of the total number of shares of Common Stock outstanding on
December 31st of the preceding calendar year (rounded up to the nearest whole
share), or (ii) five hundred thousand (500,000) shares of Common Stock.
Notwithstanding the foregoing, the Board or a Committee may act prior to the
first day of any calendar year, to provide that there shall be no increase in
the share reserve for such calendar year or that the increase in the share
reserve for such calendar year shall be a lesser number of shares of Common
Stock than would otherwise occur pursuant to the preceding sentence. Shares may
be issued in connection with a merger or acquisition as permitted by the
applicable listing exchange rules and such issuance shall not reduce the number
of shares available for issuance under the Plan.


      (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any (i) Stock Award shall
for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full, (ii) shares of Common Stock issued to a
Participant pursuant to a Stock Award are forfeited to or repurchased by the
Company, including any repurchase or forfeiture caused by the failure to meet a
contingency or condition required for the vesting of such shares, (iii) shares
of Common Stock are cancelled in accordance with the cancellation and regrant
provisions of Section 3(b), or (iv) Stock Award is settled in cash, then the
shares of Common Stock not issued under such Stock Award, or forfeited to or
repurchased by the Company, shall revert to and again become available for
issuance under the Plan. If any shares subject to a Stock Award are not
delivered to a Participant because the Stock Award is exercised through a
reduction of shares subject to the Stock Award (i.e., "net exercised") or an
appreciation distribution in respect of a Stock Appreciation Right is paid in
shares of Common Stock, the number of subject to the Stock Award that are not
delivered to the Participant shall remain available for subsequent issuance
under the Plan. If any shares subject to a Stock Award are not delivered to a
Participant because such shares are withheld in satisfaction of the withholding
of taxes incurred in connection with the exercise of an Option, Stock
Appreciation Right, or the issuance of shares under a Stock Purchase Award,
Restricted Stock Award, Restricted Stock Unit Award, or Other Stock Award, the
number of shares that are not delivered to the Participant shall remain
available for subsequent issuance under the Plan. If the exercise price of any
Stock Award is satisfied by tendering shares of Common Stock held by the
Participant (either by actual delivery or attestation), then the number of
shares so tendered shall remain available for subsequent issuance under the
Plan.


      (c) INCENTIVE STOCK OPTION LIMIT. Notwithstanding anything to the contrary
in this Section 4(b), subject to the provisions of Section 11(a) relating to
Capitalization Adjustments the aggregate maximum number of shares of Common
Stock that may be issued pursuant to the exercise of Incentive Stock Options
shall be five million (5,000,000) shares of Common Stock.


      (d) SOURCE OF SHARES. The stock issuable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares repurchased
by the Company.

                                      12.




5.    ELIGIBILITY.

      (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be
granted only to Employees. Stock Awards other than Incentive Stock Options may
be granted to Employees, Directors and Consultants.

      (b) TEN PERCENT STOCKHOLDERS. A Ten Percent Stockholder shall not be
granted an Incentive Stock Option unless the exercise price of such Option is at
least one hundred ten percent (110%) of the Fair Market Value of the Common
Stock on the date of grant and the Option is not exercisable after the
expiration of five (5) years from the date of grant.


     (c) SECTION 162(M) LIMITATION ON ANNUAL GRANTS. Subject to the provisions
of Section 11(a) relating to Capitalization Adjustments, at such time as the
Company may be subject to the applicable provisions of Section 162(m) of the
Code, no Employee shall be eligible to be granted during any calendar year Stock
Awards whose value is determined by reference to an increase over an exercise or
strike price of at least one hundred percent (100%) of the Fair Market Value of
the Common Stock on the date the Stock Award is granted covering more than two
hundred fifty thousand (250,000) shares of Common Stock; provided, however, that
solely in connection with the initiation of employment, an Employee may be
granted such Stock Awards covering an additional three hundred seventy-five
thousand (375,000) shares of Common Stock in that calendar year.


      (d) CONSULTANTS. A Consultant shall not be eligible for the grant of a
Stock Award if, at the time of grant, a Form S-8 Registration Statement under
the Securities Act ("FORM S-8") is not available to register either the offer or
the sale of the Company's securities to such Consultant because of the nature of
the services that the Consultant is providing to the Company, because the
Consultant is not a natural person, or because of any other rule governing the
use of Form S-8.

6.    OPTION PROVISIONS.

      Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and, if certificates are issued, a separate certificate or certificates
shall be issued for shares of Common Stock purchased on exercise of each type of
Option. If an Option is not specifically designated as an Incentive Stock
Option, then the Option shall be a Nonstatutory Stock Option. The provisions of
separate Options need not be identical; provided, however, that each Option
Agreement shall include (through incorporation of provisions hereof by reference
in the Option Agreement or otherwise) the substance of each of the following
provisions:

      (a) TERM. Subject to the provisions of Section 5(b), no Option shall be
exercisable after the expiration of ten (10) years from the date of its grant or
such shorter period specified in the Option Agreement.

      (b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions
of Section 5(b) regarding Ten Percent Stockholders, the exercise price of each
Incentive Stock Option shall be not less than one hundred percent (100%) of the
Fair Market Value of the

                                      13.


Common Stock subject to the Option on the date the Option is granted.
Notwithstanding the foregoing, an Incentive Stock Option may be granted with an
exercise price lower than that set forth in the preceding sentence if such
Option is granted pursuant to an assumption or substitution for another option
in a manner consistent with the provisions of Section 424(a) of the Code.

      (c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The exercise price of
each Nonstatutory Stock Option shall be not less than one hundred percent (100%)
of the Fair Market Value of the Common Stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock
Option may be granted with an exercise price lower than one hundred percent
(100%) of the Fair Market Value of the Common Stock if such Option is granted
pursuant to an assumption or substitution for another option in a manner
consistent with the provisions of Section 424(a) of the Code.

      (d) CONSIDERATION. The purchase price of Common Stock acquired pursuant to
the exercise of an Option shall be paid, to the extent permitted by applicable
law and as determined by the Board in its sole discretion, by any combination of
the methods of payment set forth below. The Board shall have the authority to
grant Options that do not permit all of the following methods of payment (or
otherwise restrict the ability to use certain methods) and to grant Options that
require the consent of the Company to utilize a particular method of payment.
The methods of payment permitted by this Section 6(d) are:

            (i) by cash or check;

            (ii) bank draft or money order payable to the Company;

            (iii) pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board that, prior to the issuance of Common
Stock, results in either the receipt of cash (or check) by the Company or the
receipt of irrevocable instructions to pay the aggregate exercise price to the
Company from the sales proceeds;

            (iv) by delivery to the Company (either by actual delivery or
attestation) of shares of Common Stock;

            (v) by a "net exercise" arrangement pursuant to which the Company
will reduce the number of shares of Common Stock issued upon exercise by the
largest whole number of shares with a Fair Market Value that does not exceed the
aggregate exercise price; provided, however, that the Company shall accept a
cash or other payment from the Participant to the extent of any remaining
balance of the aggregate exercise price not satisfied by such reduction in the
number of whole shares to be issued; provided, further, that shares of Common
Stock will no longer be outstanding under an Option and will not be exercisable
thereafter to the extent that (a) shares are used to pay the exercise price
pursuant to the "net exercise," (b) shares are delivered to the Participant as a
result of such exercise, and (c) shares are withheld to satisfy tax withholding
obligations; or

            (vi) in any other form of legal consideration that may be acceptable
to the Board.

                                      14.




      (e) TRANSFERABILITY OF OPTIONS. The Board may, in its sole discretion,
impose such limitations on the transferability of Options as the Board shall
determine. In the absence of such a determination by the Board to the contrary,
the following restrictions on the transferability of Options shall apply:

            (i) RESTRICTIONS ON TRANSFER. An Option shall not be transferable
except by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the Optionholder only by the Optionholder;
provided, however, that the Board may, in its sole discretion, permit transfer
of the Option in a manner consistent with applicable tax and securities laws
upon the Optionholder's request.

            (ii) DOMESTIC RELATIONS ORDERS. Notwithstanding the foregoing, an
Option may be transferred pursuant to a domestic relations order.

            (iii) BENEFICIARY DESIGNATION. Notwithstanding the foregoing, the
Optionholder may, by delivering written notice to the Company, in a form
provided by or otherwise satisfactory to the Company, designate a third party
who, in the event of the death of the Optionholder, shall thereafter be entitled
to exercise the Option.

      (f) VESTING GENERALLY. The total number of shares of Common Stock subject
to an Option may vest and therefore become exercisable in periodic installments
that may or may not be equal. The Option may be subject to such other terms and
conditions on the time or times when it may or may not be exercised (which may
be based on the satisfaction of Performance Goals or other criteria) as the
Board may deem appropriate. The vesting provisions of individual Options may
vary. The provisions of this Section 6(f) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option may
be exercised.

      (g) TERMINATION OF CONTINUOUS SERVICE. In the event that an Optionholder's
Continuous Service terminates (other than for Cause or upon the Optionholder's
death or Disability), the Optionholder may exercise his or her Option (to the
extent that the Optionholder was entitled to exercise such Option as of the date
of termination of Continuous Service) but only within such period of time ending
on the earlier of (i) the date three (3) months following the termination of the
Optionholder's Continuous Service (or such longer or shorter period specified in
the Option Agreement), or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, after termination of Continuous Service, the
Optionholder does not exercise his or her Option within the time specified
herein or in the Option Agreement (as applicable), the Option shall terminate.

      (h) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may
provide that if the exercise of the Option following the termination of the
Optionholder's Continuous Service (other than for Cause or upon the
Optionholder's death or Disability) would be prohibited at any time solely
because the issuance of shares of Common Stock would violate the registration
requirements under the Securities Act, then the Option shall terminate on the
earlier of (i) the expiration of a period of three (3) months after the
termination of the Optionholder's Continuous Service during which the exercise
of the Option would not be in

                                      15.


violation of such registration requirements, or (ii) the expiration of the term
of the Option as set forth in the Option Agreement.

      (i) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination of Continuous
Service), but only within such period of time ending on the earlier of (i) the
date twelve (12) months following such termination of Continuous Service (or
such longer or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
after termination of Continuous Service, the Optionholder does not exercise his
or her Option within the time specified herein or in the Option Agreement (as
applicable), the Option shall terminate.

      (j) DEATH OF OPTIONHOLDER. In the event that (i) an Optionholder's
Continuous Service terminates as a result of the Optionholder's death, or (ii)
the Optionholder dies within the period (if any) specified in the Option
Agreement after the termination of the Optionholder's Continuous Service for a
reason other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
option upon the Optionholder's death, but only within the period ending on the
earlier of (i) the date eighteen (18) months following the date of death (or
such longer or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of such Option as set forth in the Option Agreement. If,
after the Optionholder's death, the Option is not exercised within the time
specified herein or in the Option Agreement (as applicable), the Option shall
terminate.

      (k) TERMINATION FOR CAUSE. Except as explicitly provided otherwise in an
Optionholder's Option Agreement, in the event that an Optionholder's Continuous
Service is terminated for Cause, the Option shall terminate upon the termination
date of such Optionholder's Continuous Service, and the Optionholder shall be
prohibited from exercising his or her Option from and after the time of such
termination of Continuous Service.

      (l) NON-EXEMPT EMPLOYEES. No Option granted to an Employee that is a
non-exempt employee for purposes of the Fair Labor Standards Act shall be first
exercisable for any shares of Common Stock until at least six months following
the date of grant of the Option. The foregoing provision is intended to operate
so that any income derived by a non-exempt employee in connection with the
exercise or vesting of an Option will be exempt from his or her regular rate of
pay.

7.    PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.

      (a) STOCK PURCHASE AWARDS. Each Stock Purchase Award Agreement shall be in
such form and shall contain such terms and conditions as the Board shall deem
appropriate. To the extent consistent with the Company's Bylaws, at the Board's
election, shares of Common Stock may be (x) held in book entry form subject to
the Company's instructions until any restrictions relating to the Stock Purchase
Award lapse; or (y) evidenced by a certificate, which certificate shall be held
in such form and manner as determined by the Board. The terms and

                                      16.


conditions of Stock Purchase Award Agreements may change from time to time, and
the terms and conditions of separate Stock Purchase Award Agreements need not be
identical, provided, however, that each Stock Purchase Award Agreement shall
include (through incorporation of the provisions hereof by reference in the
Agreement or otherwise) the substance of each of the following provisions:

            (i) PURCHASE PRICE. At the time of the grant of a Stock Purchase
Award, the Board will determine the price to be paid by the Participant for each
share subject to the Stock Purchase Award which amount shall not be less than
50% of the Fair Market Value of the Common Stock subject to such Stock Award on
the date such Stock Award is granted. To the extent required by applicable law,
the price to be paid by the Participant for each share of the Stock Purchase
Award will not be less than the par value of a share of Common Stock.

            (ii) CONSIDERATION. At the time of the grant of a Stock Purchase
Award, the Board will determine the consideration permissible for the payment of
the purchase price of the Stock Purchase Award. The purchase price of Common
Stock acquired pursuant to the Stock Purchase Award shall be paid either: (a) in
cash or by check at the time of purchase, (b) by past services actually
rendered, or future services to be rendered, to the Company or an Affiliate, or
(c) in any other form of legal consideration that may be acceptable to the Board
in its sole discretion and permissible under applicable law.

            (iii) VESTING. Shares of Common Stock acquired under a Stock
Purchase Award may be subject to a share repurchase right or option in favor of
the Company in accordance with a vesting schedule to be determined by the Board.

            (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event
that a Participant's Continuous Service terminates, the Company shall have the
right, but not the obligation, to repurchase or otherwise reacquire, any or all
of the shares of Common Stock held by the Participant that have not vested as of
the date of termination under the terms of the Stock Purchase Award Agreement.
At the Board's election, the price paid for all shares of Common Stock so
repurchased or reacquired by the Company may be at the lesser of: (a) the Fair
Market Value on the relevant date, or (b) the Participant's original cost for
such shares. The Company shall not be required to exercise its repurchase or
reacquisition option until at least six (6) months (or such longer or shorter
period of time necessary to avoid a charge to earnings for financial accounting
purposes) have elapsed following the Participant's purchase of the shares of
Common Stock acquired pursuant to the Stock Purchase Award unless otherwise
determined by the Board or provided in the Stock Purchase Award Agreement.

            (v) TRANSFERABILITY. Rights to purchase or receive shares of Common
Stock granted under a Stock Purchase Award shall be transferable by the
Participant only upon such terms and conditions as are set forth in the Stock
Purchase Award Agreement, as the Board shall determine in its sole discretion,
and so long as Common Stock awarded under the Stock Purchase Award remains
subject to the terms of the Stock Purchase Award Agreement.

      (b) RESTRICTED STOCK AWARDS. Each Restricted Stock Award Agreement shall
be in such form and shall contain such terms and conditions as the Board shall
deem appropriate. To the extent consistent with the Company's Bylaws, at the
Board's election, shares of Common

                                      17.


Stock may be (x) held in book entry form subject to the Company's instructions
until any restrictions relating to the Restricted Stock Award lapse; or (y)
evidenced by a certificate, which certificate shall be held in such form and
manner as determined by the Board. The terms and conditions of Restricted Stock
Award Agreements may change from time to time, and the terms and conditions of
separate Restricted Stock Award Agreements need not be identical, provided,
however, that each Restricted Stock Award Agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions:

            (i) CONSIDERATION. A Restricted Stock Award may be awarded in
consideration for (a) past services actually rendered, or future services to be
rendered, to the Company or an Affiliate, or (b) any other form of legal
consideration that may be acceptable to the Board in its sole discretion and
permissible under applicable law.

            (ii) VESTING. Shares of Common Stock awarded under the Restricted
Stock Award Agreement may be subject to forfeiture to the Company in accordance
with a vesting schedule to be determined by the Board.

            (iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event
a Participant's Continuous Service terminates, the Company may receive via a
forfeiture condition, any or all of the shares of Common Stock held by the
Participant which have not vested as of the date of termination of Continuous
Service under the terms of the Restricted Stock Award Agreement.

            (iv) TRANSFERABILITY. Rights to acquire shares of Common Stock under
the Restricted Stock Award Agreement shall be transferable by the Participant
only upon such terms and conditions as are set forth in the Restricted Stock
Award Agreement, as the Board shall determine in its sole discretion, so long as
Common Stock awarded under the Restricted Stock Award Agreement remains subject
to the terms of the Restricted Stock Award Agreement.

      (c) RESTRICTED STOCK UNIT AWARDS. Each Restricted Stock Unit Award
Agreement shall be in such form and shall contain such terms and conditions as
the Board shall deem appropriate. The terms and conditions of Restricted Stock
Unit Award Agreements may change from time to time, and the terms and conditions
of separate Restricted Stock Unit Award Agreements need not be identical,
provided, however, that each Restricted Stock Unit Award Agreement shall include
(through incorporation of the provisions hereof by reference in the Agreement or
otherwise) the substance of each of the following provisions:

            (i) CONSIDERATION. At the time of grant of a Restricted Stock Unit
Award, the Board will determine the consideration, if any, to be paid by the
Participant upon delivery of each share of Common Stock subject to the
Restricted Stock Unit Award. The consideration to be paid (if any) by the
Participant for each share of Common Stock subject to a Restricted Stock Unit
Award may be paid in any form of legal consideration that may be acceptable to
the Board in its sole discretion and permissible under applicable law.

                                      18.




            (ii) VESTING. At the time of the grant of a Restricted Stock Unit
Award, the Board may impose such restrictions or conditions to the vesting of
the Restricted Stock Unit Award as it, in its sole discretion, deems
appropriate.

            (iii) PAYMENT. A Restricted Stock Unit Award may be settled by the
delivery of shares of Common Stock, their cash equivalent, any combination
thereof or in any other form of consideration, as determined by the Board and
contained in the Restricted Stock Unit Award Agreement.

            (iv) ADDITIONAL RESTRICTIONS. At the time of the grant of a
Restricted Stock Unit Award, the Board, as it deems appropriate, may impose such
restrictions or conditions that delay the delivery of the shares of Common Stock
(or their cash equivalent) subject to a Restricted Stock Unit Award to a time
after the vesting of such Restricted Stock Unit Award.

            (v) DIVIDEND EQUIVALENTS. Dividend equivalents may be credited in
respect of shares of Common Stock covered by a Restricted Stock Unit Award, as
determined by the Board and contained in the Restricted Stock Unit Award
Agreement. At the sole discretion of the Board, such dividend equivalents may be
converted into additional shares of Common Stock covered by the Restricted Stock
Unit Award in such manner as determined by the Board. Any additional shares
covered by the Restricted Stock Unit Award credited by reason of such dividend
equivalents will be subject to all the terms and conditions of the underlying
Restricted Stock Unit Award Agreement to which they relate.

            (vi) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. Except as
otherwise provided in the applicable Restricted Stock Unit Award Agreement, such
portion of the Restricted Stock Unit Award that has not vested will be forfeited
upon the Participant's termination of Continuous Service.

            (vii) COMPLIANCE WITH SECTION 409A OF THE CODE. Notwithstanding
anything to the contrary set forth herein, any Restricted Stock Unit Award
granted under the Plan that is not exempt from the requirements of Section 409A
of the Code shall contain such provisions so that such Restricted Stock Unit
Award will comply with the requirements of Section 409A of the Code. Such
restrictions, if any, shall be determined by the Board and contained in the
Restricted Stock Unit Award Agreement evidencing such Restricted Stock Unit
Award. For example, such restrictions may include, without limitation, a
requirement that any Common Stock that is to be issued in a year following the
year in which the Restricted Stock Unit Award vests must be issued in accordance
with a fixed pre-determined schedule.

      (d) STOCK APPRECIATION RIGHTS. Each Stock Appreciation Right Agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. Stock Appreciation Rights may be granted as stand-alone
Stock Awards or in tandem with other Stock Awards. The terms and conditions of
Stock Appreciation Right Agreements may change from time to time, and the terms
and conditions of separate Stock Appreciation Right Agreements need not be
identical; provided, however, that each Stock Appreciation Right Agreement shall
include (through incorporation of the provisions hereof by reference in the
Agreement or otherwise) the substance of each of the following provisions:

                                      19.




            (i) TERM. No Stock Appreciation Right shall be exercisable after the
expiration of ten (10) years from the date of its grant or such shorter period
specified in the Stock Appreciation Right Agreement.

            (ii) STRIKE PRICE. Each Stock Appreciation Right will be denominated
in shares of Common Stock equivalents. The strike price of each Stock
Appreciation Right granted as a stand-alone or tandem Stock Award shall not be
less than one hundred percent (100%) of the Fair Market Value of the Common
Stock equivalents subject to the Stock Appreciation Right on the date of grant.

            (iii) CALCULATION OF APPRECIATION. The appreciation distribution
payable on the exercise of a Stock Appreciation Right will be not greater than
an amount equal to the excess of (a) the aggregate Fair Market Value (on the
date of the exercise of the Stock Appreciation Right) of a number of shares of
Common Stock equal to the number of share of Common Stock equivalents in which
the Participant is vested under such Stock Appreciation Right, and with respect
to which the Participant is exercising the Stock Appreciation Right on such
date, over (b) the strike price that will be determined by the Board at the time
of grant of the Stock Appreciation Right.

            (iv) VESTING. At the time of the grant of a Stock Appreciation
Right, the Board may impose such restrictions or conditions to the vesting of
such Stock Appreciation Right as it, in its sole discretion, deems appropriate.

            (v) EXERCISE. To exercise any outstanding Stock Appreciation Right,
the Participant must provide written notice of exercise to the Company in
compliance with the provisions of the Stock Appreciation Right Agreement
evidencing such Stock Appreciation Right.

            (vi) PAYMENT. The appreciation distribution in respect to a Stock
Appreciation Right may be paid in Common Stock, in cash, in any combination of
the two or in any other form of consideration, as determined by the Board and
contained in the Stock Appreciation Right Agreement evidencing such Stock
Appreciation Right.

            (vii) TERMINATION OF CONTINUOUS SERVICE. In the event that a
Participant's Continuous Service terminates (other than for Cause), the
Participant may exercise his or her Stock Appreciation Right (to the extent that
the Participant was entitled to exercise such Stock Appreciation Right as of the
date of termination) but only within such period of time ending on the earlier
of (a) the date three (3) months following the termination of the Participant's
Continuous Service (or such longer or shorter period specified in the Stock
Appreciation Right Agreement), or (b) the expiration of the term of the Stock
Appreciation Right as set forth in the Stock Appreciation Right Agreement. If,
after termination, the Participant does not exercise his or her Stock
Appreciation Right within the time specified herein or in the Stock Appreciation
Right Agreement (as applicable), the Stock Appreciation Right shall terminate.

            (viii) TERMINATION FOR CAUSE. Except as explicitly provided
otherwise in an Participant's Stock Appreciation Right Agreement, in the event
that a Participant's Continuous Service is terminated for Cause, the Stock
Appreciation Right shall terminate upon the

                                      20.


termination date of such Participant's Continuous Service, and the Participant
shall be prohibited from exercising his or her Stock Appreciation Right from and
after the time of such termination of Continuous Service.

            (ix) COMPLIANCE WITH SECTION 409A OF THE CODE. Notwithstanding
anything to the contrary set forth herein, any Stock Appreciation Rights granted
under the Plan that are not exempt from the requirements of Section 409A of the
Code shall contain such provisions so that such Stock Appreciation Rights will
comply with the requirements of Section 409A of the Code. Such restrictions, if
any, shall be determined by the Board and contained in the Stock Appreciation
Right Agreement evidencing such Stock Appreciation Right. For example, such
restrictions may include, without limitation, a requirement that a Stock
Appreciation Right that is to be paid wholly or partly in cash must be exercised
and paid in accordance with a fixed pre-determined schedule.

            (x) NON-EXEMPT EMPLOYEES. No Stock Appreciation Right granted to an
Employee that is a non-exempt employee for purposes of the Fair Labor Standards
Act shall be first exercisable until at least six months following the date of
grant of the Stock Appreciation Right. The foregoing provision is intended to
operate so that any income derived by a non-exempt employee in connection with
the exercise of a Stock Appreciation Right will be exempt from his or her
regular rate of pay.

      (e) PERFORMANCE AWARDS.


            (i) PERFORMANCE STOCK AWARDS. A Performance Stock Award is a Stock
Award that may be granted, may vest, or may be exercised based upon the
attainment during a Performance Period of certain Performance Goals. A
Performance Stock Award may, but need not, require the completion of a specified
period of Continuous Service. The length of any Performance Period, the
Performance Goals to be achieved during the Performance Period, and the measure
of whether and to what degree such Performance Goals have been attained shall be
conclusively determined by the Committee in its sole discretion. The maximum
benefit to be received by any Participant in any calendar year attributable to
Stock Awards described in this Section 7(e) shall not exceed the value of five
hundred thousand (500,000) shares of Common Stock.



            (ii) PERFORMANCE CASH AWARDS. A Performance Cash Award is a cash
award that may be granted upon the attainment during a Performance Period of
certain Performance Goals. A Performance Cash Award may also require the
completion of a specified period of Continuous Service. The length of any
Performance Period, the Performance Goals to be achieved during the Performance
Period, and the measure of whether and to what degree such Performance Goals
have been attained shall be conclusively determined by the Committee in its sole
discretion. The maximum benefit to be received by any Participant in any
calendar year attributable to cash awards described in this Section 7(e) shall
not exceed one million dollars ($1,000,000).


      (f) OTHER STOCK AWARDS. Other forms of Stock Awards valued in whole or in
part by reference to, or otherwise based on, Common Stock may be granted either
alone or in addition to Stock Awards provided for under Section 6 and the
preceding provisions of this Section 7. Subject to the provisions of the Plan,
the Board shall have sole and complete authority to

                                      21.


determine the persons to whom and the time or times at which such Other Stock
Awards will be granted, the number of shares of Common Stock (or the cash
equivalent thereof) to be granted pursuant to such Other Stock Awards and all
other terms and conditions of such Other Stock Awards.

8.    COVENANTS OF THE COMPANY.

      (a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.

      (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each
regulatory commission or agency having jurisdiction over the Plan such authority
as may be required to grant Stock Awards and to issue and sell shares of Common
Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable to obtain
from any such regulatory commission or agency the authority that counsel for the
Company deems necessary for the lawful issuance and sale of Common Stock under
the Plan, the Company shall be relieved from any liability for failure to issue
and sell Common Stock upon exercise of such Stock Awards unless and until such
authority is obtained.

9.    USE OF PROCEEDS FROM SALES OF COMMON STOCK.

      Proceeds from the sale of shares of Common Stock pursuant to Stock Awards
shall constitute general funds of the Company.

10.   MISCELLANEOUS.

      (a) CORPORATE ACTION CONSTITUTING GRANT OF STOCK AWARDS. Corporate action
constituting an offer by the Company of Common Stock to any Participant under
the terms of a Stock Award shall be deemed completed as of the date of such
corporate action, unless otherwise determined by the Board, regardless of when
the instrument, certificate, or letter evidencing the Stock Award is actually
received or accepted by the Participant.

      (b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares of
Common Stock subject to such Stock Award unless and until such Participant has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.

      (c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan, any Stock
Award Agreement or other instrument executed thereunder or in connection with
any Award granted pursuant to the Plan shall confer upon any Participant any
right to continue to serve the Company or an Affiliate in the capacity in effect
at the time the Stock Award was granted or shall affect the right of the Company
or an Affiliate to terminate (i) the employment of an Employee with or without
notice and with or without cause, (ii) the service of a Consultant pursuant to
the terms of such Consultant's agreement with the Company or an Affiliate, or
(iii) the service of a Director pursuant to the Bylaws of the Company or an
Affiliate, and any

                                      22.


applicable provisions of the corporate law of the state in which the Company or
the Affiliate is incorporated, as the case may be.

      (d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the
aggregate Fair Market Value (determined at the time of grant) of Common Stock
with respect to which Incentive Stock Options are exercisable for the first time
by any Optionholder during any calendar year (under all plans of the Company and
any Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or
portions thereof that exceed such limit (according to the order in which they
were granted) shall be treated as Nonstatutory Stock Options, notwithstanding
any contrary provision of the applicable Option Agreement(s).

      (e) INVESTMENT ASSURANCES. The Company may require a Participant, as a
condition of exercising or acquiring Common Stock under any Stock Award, (i) to
give written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (x) the issuance of the shares
upon the exercise or acquisition of Common Stock under the Stock Award has been
registered under a then currently effective registration statement under the
Securities Act, or (y) as to any particular requirement, a determination is made
by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may, upon
advice of counsel to the Company, place legends on stock certificates issued
under the Plan as such counsel deems necessary or appropriate in order to comply
with applicable securities laws, including, but not limited to, legends
restricting the transfer of the Common Stock.

      (f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Company may, in its sole discretion, satisfy any
federal, state or local tax withholding obligation relating to a Stock Award by
any of the following means (in addition to the Company's right to withhold from
any compensation paid to the Participant by the Company) or by a combination of
such means: (i) causing the Participant to tender a cash payment; (ii)
withholding shares of Common Stock from the shares of Common Stock issued or
otherwise issuable to the Participant in connection with the Stock Award; or
(iii) by such other method as may be set forth in the Stock Award Agreement.

      (g) ELECTRONIC DELIVERY. Any reference herein to a "written" agreement or
document shall include any agreement or document delivered electronically or
posted on the Company's intranet.

11.   ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.

      (a) CAPITALIZATION ADJUSTMENTS. If any change is made in, or other events
occur with respect to, the Common Stock subject to the Plan or subject to any
Stock Award after the

                                      23.


IPO Date without the receipt of consideration by the Company (through merger,
consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company (each a "CAPITALIZATION ADJUSTMENT")), the Board shall appropriately
adjust: (i) the class(es) and maximum number of securities subject to the Plan
pursuant to Section 4(a), (ii) the class(es) and maximum number of securities by
which the share reserve is to increase automatically each year pursuant to
Section 4(a), (iii) the class(es) and number of securities subject to each stock
award under the 2000 Plan that are added from time to time to the share reserve
under the Plan pursuant to Section 4(a), (iv) the class(es) and maximum number
of securities that may be issued pursuant to the exercise of Incentive Stock
Options pursuant to Section 4(c), (v) the class(es) and maximum number of
securities that may be awarded to any person pursuant to Section 5(c) and
7(e)(i) , and (vi) the class(es) and number of securities and price per share of
stock subject to outstanding Stock Awards. The Board shall make such
adjustments, and its determination shall be final, binding and conclusive.
(Notwithstanding the foregoing, the conversion of any convertible securities of
the Company shall not be treated as a transaction "without receipt of
consideration" by the Company.)

      (b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or
liquidation of the Company, all outstanding Stock Awards (other than Stock
Awards consisting of vested and outstanding shares of Common Stock not subject
to the Company's right of repurchase) shall terminate immediately prior to the
completion of such dissolution or liquidation, and the shares of Common Stock
subject to the Company's repurchase option may be repurchased by the Company
notwithstanding the fact that the holder of such Stock Award is providing
Continuous Service, provided, however, that the Board may, in its sole
discretion, cause some or all Stock Awards to become fully vested, exercisable
and/or no longer subject to repurchase or forfeiture (to the extent such Stock
Awards have not previously expired or terminated) before the dissolution or
liquidation is completed but contingent on its completion.

      (c) CORPORATE TRANSACTION. The following provisions shall apply to Stock
Awards in the event of a Corporate Transaction unless otherwise provided in the
instrument evidencing the Stock Award or any other written agreement between the
Company or any Affiliate and the holder of the Stock Award or unless otherwise
expressly provided by the Board at the time of grant of a Stock Award.

            (i) STOCK AWARDS MAY BE ASSUMED. In the event of a Corporate
Transaction, any surviving corporation or acquiring corporation (or the
surviving or acquiring corporation's parent company) may assume or continue any
or all Stock Awards outstanding under the Plan or may substitute similar stock
awards for Stock Awards outstanding under the Plan (including but not limited
to, awards to acquire the same consideration paid to the stockholders of the
Company pursuant to the Corporate Transaction), and any reacquisition or
repurchase rights held by the Company in respect of Common Stock issued pursuant
to Stock Awards may be assigned by the Company to the successor of the Company
(or the successor's parent company, if any), in connection with such Corporate
Transaction. A surviving corporation or acquiring corporation (or its parent)
may choose to assume or continue only a portion of a Stock Award or substitute a
similar stock award for only a portion of a Stock Award.

                                      24.


the terms of any assumption, continuation or substitution shall be set by the
Board in accordance with the provisions of Section 3.

            (ii) STOCK AWARDS HELD BY CURRENT PARTICIPANTS. In the event of a
Corporate Transaction in which the surviving corporation or acquiring
corporation (or its parent company) does not assume or continue such outstanding
Stock Awards or substitute similar stock awards for such outstanding Stock
Awards, then with respect to Stock Awards that have not been assumed, continued
or substituted and that are held by Participants whose Continuous Service has
not terminated prior to the effective time of the Corporate Transaction
(referred to as the "CURRENT PARTICIPANTS"), the vesting of such Stock Awards
(and, if applicable, the time at which such Stock Awards may be exercised) shall
(contingent upon the effectiveness of the Corporate Transaction) be accelerated
in full to a date prior to the effective time of such Corporate Transaction as
the Board shall determine (or, if the Board shall not determine such a date, to
the date that is five (5) days prior to the effective time of the Corporate
Transaction), and such Stock Awards shall terminate if not exercised (if
applicable) at or prior to the effective time of the Corporate Transaction, and
any reacquisition or repurchase rights held by the Company with respect to such
Stock Awards shall lapse (contingent upon the effectiveness of the Corporate
Transaction).

            (iii) STOCK AWARDS HELD BY PERSONS OTHER THAN CURRENT PARTICIPANTS.
In the event of a Corporate Transaction in which the surviving corporation or
acquiring corporation (or its parent company) does not assume or continue such
outstanding Stock Awards or substitute similar stock awards for such outstanding
Stock Awards, then with respect to Stock Awards that have not been assumed,
continued or substituted and that are held by persons other than Current
Participants, the vesting of such Stock Awards (and, if applicable, the time at
which such Stock Award may be exercised) shall not be accelerated and such Stock
Awards (other than a Stock Award consisting of vested and outstanding shares of
Common Stock not subject to the Company's right of repurchase) shall terminate
if not exercised (if applicable) prior to the effective time of the Corporate
Transaction; provided, however, that any reacquisition or repurchase rights held
by the Company with respect to such Stock Awards shall not terminate and may
continue to be exercised notwithstanding the Corporate Transaction.

            (iv) PAYMENT FOR STOCK AWARDS IN LIEU OF EXERCISE. Notwithstanding
the foregoing, in the event a Stock Award will terminate if not exercised prior
to the effective time of a Corporate Transaction, the Board may provide, in its
sole discretion, that the holder of such Stock Award may not exercise such Stock
Award but will receive a payment, in such form as may be determined by the
Board, equal in value to the excess, if any, of (a) the value of the property
the holder of the Stock Award would have received upon the exercise of the Stock
Award, over (b) any exercise price payable by such holder in connection with
such exercise.

            (v) CHANGE IN CONTROL. A Stock Award may be subject to additional
acceleration of vesting and exercisability upon or after a Change in Control as
may be provided in the Stock Award Agreement for such Stock Award or as may be
provided in any other written agreement between the Company or any Affiliate and
the Participant, but in the absence of such provision, no such acceleration
shall occur.


                                      25.



12.   TERMINATION OR SUSPENSION OF THE PLAN.

      (a) PLAN TERM. Unless sooner terminated by the Board pursuant to Section
3, the Plan shall automatically terminate on the day before the tenth (10th)
anniversary of the date the Plan is adopted by the Board or approved by the
stockholders of the Company, whichever is earlier. No Awards may be granted
under the Plan while the Plan is suspended or after it is terminated.

      (b) NO IMPAIRMENT OF RIGHTS. Termination of the Plan shall not impair
rights and obligations under any Award granted while the Plan is in effect
except with the written consent of the affected Participant.

13.   EFFECTIVE DATE OF PLAN.

      This Plan shall become effective on the IPO Date, but no Stock Award shall
be exercised (or, in the case of a Stock Purchase Award, Restricted Stock Award,
Restricted Stock Unit Award, or Other Stock Award, shall be granted) under this
Plan unless and until this Plan has been approved by the stockholders of the
Company, which approval shall be within twelve (12) months before or after the
date the Plan is adopted by the Board.

14.   CHOICE OF LAW.

      The law of the State of California shall govern all questions concerning
the construction, validity and interpretation of this Plan, without regard to
such state's conflict of laws rules.




                                      26.

                            SGX PHARMACEUTICALS, INC.
                           2005 EQUITY INCENTIVE PLAN

                             STOCK OPTION AGREEMENT
              (INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)


      Pursuant to your Stock Option Grant Notice ("GRANT NOTICE") and this Stock
Option Agreement, SGX Pharmaceuticals, Inc. (the "COMPANY") has granted you an
option under its 2005 Equity Incentive Plan (the "PLAN") to purchase the number
of shares of the Company's Common Stock indicated in your Grant Notice at the
exercise price indicated in your Grant Notice. Capitalized terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.

      The details of your option are as follows:

      1. VESTING. Subject to the limitations contained herein, your option will
vest as provided in your Grant Notice, provided that vesting will cease upon the
termination of your Continuous Service.

      2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common
Stock subject to your option and your exercise price per share referenced in
your Grant Notice may be adjusted from time to time for Capitalization
Adjustments.

      3. METHOD OF PAYMENT. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of the
exercise price in cash or by check or in any other manner PERMITTED BY YOUR
GRANT NOTICE, which may include one or more of the following:

            (a) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in The Wall Street Journal, pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board that,
prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds.

            (b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, by delivery of
already-owned shares of Common Stock either that you have held for the period
required to avoid a charge to the Company's reported earnings (generally six (6)
months) or that you did not acquire, directly or indirectly from the Company,
that are owned free and clear of any liens, claims, encumbrances or security
interests, and that are valued at Fair Market Value on the date of exercise.
"Delivery" for these purposes, in the sole discretion of the Company at the time
you exercise your option, shall include delivery to the Company of your
attestation of ownership of such shares of Common Stock in a form approved by
the Company. Notwithstanding the foregoing, you may not exercise your option by
tender to the Company of Common Stock to the extent such tender



                                       1.



would violate the provisions of any law, regulation or agreement restricting the
redemption of the Company's stock.

            (c) Provided that at the time of exercise the Company has adopted
FAS 123, as revised, by a "net exercise" arrangement pursuant to which the
Company will reduce the number of shares of Common Stock issued upon exercise of
your option by the largest whole number of shares with a Fair Market Value that
does not exceed the aggregate exercise price; provided, however, the Company
shall accept a cash or other payment from you to the extent of any remaining
balance of the aggregate exercise price not satisfied by such holding back of
whole shares; provided, however, shares of Common Stock will no longer be
outstanding under your option and will not be exercisable thereafter to the
extent that (1) shares are used to pay the exercise price pursuant to the "net
exercise," (2) shares are delivered to you as a result of such exercise, and (3)
shares are withheld to satisfy tax withholding obligations.

      4. WHOLE SHARES. You may exercise your option only for whole shares of
Common Stock.

      5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, you may not exercise your option unless the shares of Common
Stock issuable upon such exercise are then registered under the Securities Act
or, if such shares of Common Stock are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the registration
requirements of the Securities Act. The exercise of your option also must comply
with other applicable laws and regulations governing your option, and you may
not exercise your option if the Company determines that such exercise would not
be in material compliance with such laws and regulations.

      6. TERM. You may not exercise your option before the commencement of its
term or after its term expires. The term of your option commences on the Date of
Grant and expires upon the earliest of the following:

            (a) immediately upon the termination of your Continuous Service for
Cause;

            (b) three (3) months after the termination of your Continuous
Service for any reason other than Cause, Disability, or death or as a result of
Termination After Change in Control (defined below), provided that if during any
part of such three- (3-) month period you may not exercise your option solely
because of the condition set forth in the preceding paragraph relating to
"Securities Law Compliance," your option shall not expire until the earlier of
the Expiration Date or until it shall have been exercisable for an aggregate
period of three (3) months after the termination of your Continuous Service;

            (c) twelve (12) months after the termination of your Continuous
Service due to your Disability;

            (d) eighteen (18) months after your death if you die either during
your Continuous Service or within three (3) months after your Continuous Service
terminates for any reason other than Cause;

            (e) the Expiration Date indicated in your Grant Notice; or

                                       2.




            (f) the day before the tenth (10th) anniversary of the Date of
Grant.

      If your option is an Incentive Stock Option, note that to obtain the
federal income tax advantages associated with an Incentive Stock Option, the
Code requires that at all times beginning on the date of grant of your option
and ending on the day three (3) months before the date of your option's
exercise, you must be an employee of the Company or an Affiliate, except in the
event of your death or your permanent and total disability, as defined in
Section 22(e) of the Code. (The definition of disability in Section 22(e) of the
Code is different from the definition of the Disability under the Plan). The
Company has provided for extended exercisability of your option under certain
circumstances for your benefit but cannot guarantee that your option will
necessarily be treated as an Incentive Stock Option if you continue to provide
services to the Company or an Affiliate as a Consultant or Director after your
employment terminates or if you otherwise exercise your option more than three
(3) months after the date your employment with the Company or an Affiliate
terminates.

      7. EXERCISE.

            (a) You may exercise the vested portion of your option during its
term by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.

            (b) By exercising your option you agree that, as a condition to any
exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, or (2) the disposition of shares of Common Stock acquired upon such
exercise.

            (c) If your option is an Incentive Stock Option, by exercising your
option you agree that you will notify the Company in writing within fifteen (15)
days after the date of any disposition of any of the shares of the Common Stock
issued upon exercise of your option that occurs within two (2) years after the
date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.

      8. TRANSFERABILITY.

            (a) If your option is an Incentive Stock Option, your option is not
transferable, except by will or by the laws of descent and distribution, and is
exercisable during your life only by you. Notwithstanding the foregoing, by
delivering written notice to the Company, in a form satisfactory to the Company,
you may designate a third party who, in the event of your death, shall
thereafter be entitled to exercise your option.

            (b) If your option is a Nonstatutory Stock Option, your option is
not transferable, except (i) by will or by the laws of descent and distribution,
(ii) with the prior written approval of the Company, by instrument to an inter
vivos or testamentary trust, in a form accepted by the Company, in which the
option is to be passed to beneficiaries upon the death of

                                       3.


the trustor (settlor) and (iii) with the prior written approval of the Company,
by gift, in a form accepted by the Company, to a permitted transferee under Rule
701 of the Securities Act.

      9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective stockholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.

      10. WITHHOLDING OBLIGATIONS.

            (a) At the time you exercise your option, in whole or in part, or at
any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision as instructed by the Company (including by
means of a "cashless exercise" pursuant to a program developed under Regulation
T as promulgated by the Federal Reserve Board to the extent instructed by the
Company), for any sums required to satisfy the federal, state, local and foreign
tax withholding obligations of the Company or an Affiliate, if any, which arise
in connection with the exercise of your option.

            (b) The Company may, in its sole discretion, and in compliance with
any applicable legal conditions or restrictions, withhold from fully vested
shares of Common Stock otherwise issuable to you upon the exercise of your
option a number of whole shares of Common Stock having a Fair Market Value,
determined by the Company as of the date of exercise, not in excess of the
minimum amount of tax required to be withheld by law (or such lower amount as
may be necessary to avoid variable award accounting). Any adverse consequences
to you arising in connection with such share withholding procedure shall be your
sole responsibility.

            (c) You may not exercise your option unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise your option when desired even though your option is
vested, and the Company shall have no obligation to issue a certificate for such
shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein unless such obligations are satisfied.

      11. NOTICES. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by mail by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the last
address you provided to the Company.

      12. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions
of the Plan, the provisions of which are hereby made a part of your option, and
is further subject to all interpretations, amendments, rules and regulations,
which may from time to time be promulgated and adopted pursuant to the Plan. In
the event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control except as expressly provided
herein.

                                       4.

                            SGX PHARMACEUTICALS, INC.
                            STOCK OPTION GRANT NOTICE
                          (2005 EQUITY INCENTIVE PLAN)


SGX Pharmaceuticals, Inc. (the "COMPANY"), pursuant to its 2005 Equity Incentive
Plan (the "PLAN"), hereby grants to Optionholder an option to purchase the
number of shares of the Company's Common Stock set forth below. This option is
subject to all of the terms and conditions as set forth herein and in the Stock
Option Agreement, the Plan and the Notice of Exercise, all of which are attached
hereto and incorporated herein in their entirety.

      Optionholder:
                                                  --------------------
      Date of Grant:
                                                  --------------------
      Vesting Commencement Date:
                                                  --------------------
      Number of Shares Subject to Option:
                                                  --------------------
      Exercise Price (Per Share):
                                                  --------------------
      Total Exercise Price:
                                                  --------------------
      Expiration Date:
                                                  --------------------


TYPE OF GRANT:      [ ] Incentive Stock Option(1)  [ ] Nonstatutory Stock Option

EXERCISE SCHEDULE:  Same as Vesting Schedule

VESTING SCHEDULE:   [1/4th of the shares vest one year after the Vesting
                    Commencement Date and 1/48th of the shares vest monthly
                    thereafter over the next three years.]

                    [OTHER]

PAYMENT:            By one or a combination of the following items (described in
                    the Stock Option Agreement and/or the Plan):

                    [ ] By cash or check

                    [ ] Pursuant to a Regulation T Program if the Shares are
                        publicly traded

                    [ ] By delivery of already-owned shares if the Shares are
                        publicly traded

                    [ ] Net exercise if the Company has adopted FAS 123, as
                        revised, at the time of such exercise

ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges
receipt of, and understands and agrees to, this Stock Option Grant Notice, the
Stock Option Agreement and the Plan. Optionholder further acknowledges that as
of the Date of Grant, this Stock Option Grant Notice, the Stock Option Agreement
and the Plan set forth the entire understanding between Optionholder and the
Company regarding the acquisition of stock in the Company and supersede all
prior oral and written agreements on that subject with the exception of (i)
options previously granted and delivered to Optionholder under the Plan, and
(ii) the following agreements only:

      OTHER AGREEMENTS:
                                        ----------------------------------------

SGX PHARMACEUTICALS, INC.                    OPTIONHOLDER:

By:
   -------------------------------------     ------------------------------
                 Signature                              Signature

Title:                                       Date:
      ----------------------------------          -------------------------

Date:
     -----------------------------------

ATTACHMENTS: Stock Option Agreement, 2005 Equity Incentive Plan and Notice of
             Exercise


- ----------

(1) If this is an Incentive Stock Option, it (plus other outstanding Incentive
Stock Options) cannot be first exercisable for more than $100,000 in value
(measured by exercise price) in any calendar year. Any excess over $100,000 is a
Nonstatutory Stock Option.







                                  ATTACHMENT I

                             STOCK OPTION AGREEMENT





                                  ATTACHMENT II

                           2005 EQUITY INCENTIVE PLAN





                                 ATTACHMENT III

                               NOTICE OF EXERCISE

EX-10.4

                                                                    EXHIBIT 10.4

                            SGX PHARMACEUTICALS, INC.
                        2005 EMPLOYEE STOCK PURCHASE PLAN


          INITIALLY ADOPTED BY THE BOARD OF DIRECTORS: AUGUST 30, 2005
              INITIALLY APPROVED BY STOCKHOLDERS: OCTOBER 31, 2005


1.    PURPOSE.

      (a) The purpose of the Plan is to provide a means by which Employees of
the Company and certain designated Related Corporations may be given an
opportunity to purchase shares of the Common Stock of the Company.

      (b) The Company, by means of the Plan, seeks to secure and retain the
services of current and new Employees and to provide incentives for such persons
to exert maximum efforts for the success of the Company and its Related
Corporations.

      (c) The Company intends that the Purchase Rights be considered options
issued under an Employee Stock Purchase Plan.

2.    DEFINITIONS.

      As used in the Plan and any Offering, unless otherwise specified, the
following terms have the meanings set forth below:

      (a) "BOARD" means the Board of Directors of the Company.

      (b) "CODE" means the Internal Revenue Code of 1986, as amended.

      (c) "COMMITTEE" means a committee appointed by the Board in accordance
with Section 3(c) of the Plan.

      (d) "COMMON STOCK" means the common stock of the Company.

      (e) "COMPANY" means SGX Pharmaceuticals, Inc., a Delaware corporation.

      (f) "CONTRIBUTIONS" means the payroll deductions and other additional
payments that a Participant contributes to fund the exercise of a Purchase
Right. A Participant may make payments not through payroll deductions only if
specifically provided for in the Offering, and then only if the Participant has
not already had the maximum permitted amount withheld through payroll deductions
during the Offering.

      (g) "CORPORATE TRANSACTION" means the occurrence, in a single transaction
or in a series of related transactions, of any one or more of the following
events:

            (i) a sale, lease, license or other disposition of all or
substantially all of the consolidated assets of the Company;


                                     - 1 -

            (ii) a sale or other disposition of at least ninety percent (90%) of
the outstanding securities of the Company;

            (iii) a merger, consolidation or similar transaction following which
the Company is not the surviving corporation; or

            (iv) a merger, consolidation or similar transaction following which
the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger, consolidation or similar
transaction are converted or exchanged by virtue of the merger, consolidation or
similar transaction into other property, whether in the form of securities, cash
or otherwise.

      (h) "DIRECTOR" means a member of the Board.

      (i) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set
forth in the Offering for eligibility to participate in the Offering, provided
that such Employee also meets the requirements for eligibility to participate
set forth in the Plan.

      (j) "EMPLOYEE" means any person, including Officers and Directors, who is
employed for purposes of Section 423(b)(4) of the Code by the Company or a
Related Corporation. Neither service as a Director nor payment of a director's
fee shall be sufficient to make an individual an Employee of the Company or a
Related Corporation.

      (k) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants Purchase
Rights intended to be options issued under an "employee stock purchase plan," as
that term is defined in Section 423(b) of the Code.

      (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

      (m) "FAIR MARKET VALUE" means the value of a security, as determined in
good faith by the Board. If the security is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of the security, unless otherwise determined by the Board,
shall be the closing sales price (rounded up where necessary to the nearest
whole cent) for such security (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the greatest
volume of trading in the relevant security of the Company) on the Trading Day
that is immediately prior to the relevant determination date, as reported in The
Wall Street Journal or such other source as the Board deems reliable. Unless
otherwise provided by the Board, if there is no closing sales price (or closing
bid if no sales were reported) for the security on the date in question, then
the Fair Market Value shall be the closing selling price (or closing bid if no
sales were reported) on the last preceding date for which such quotation exists.

      (n) "IPO DATE" means the date of the underwriting agreement between the
Company and the underwriter(s) managing the initial public offering of the
Common Stock, pursuant to which the Common Stock is priced for the initial
public offering.

      (o) "OFFERING" means the grant of Purchase Rights to purchase shares of
Common Stock under the Plan to Eligible Employees.


                                       2.

      (p) "OFFERING DATE" means a date selected by the Board for an Offering to
commence.

      (q) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.

      (r) "PARTICIPANT" means an Eligible Employee who holds an outstanding
Purchase Right granted pursuant to the Plan.

      (s) "PLAN" means this SGX Pharmaceuticals, Inc. 2005 Employee Stock
Purchase Plan.

      (t) "PURCHASE DATE" means one or more dates during an Offering established
by the Board on which Purchase Rights shall be exercised and as of which
purchases of shares of Common Stock shall be carried out in accordance with such
Offering.

      (u) "PURCHASE PERIOD" means a period of time specified within an Offering
beginning on the Offering Date or on the next day following a Purchase Date
within an Offering and ending on a Purchase Date. An Offering may consist of one
or more Purchase Periods.

      (v) "PURCHASE RIGHT" means an option to purchase shares of Common Stock
granted pursuant to the Plan.

      (w) "RELATED CORPORATION" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f), respectively, of the Code.

      (x) "SECURITIES ACT" means the Securities Act of 1933, as amended.

      (y) "TRADING DAY" means any day on which the exchange(s) or market(s) on
which shares of Common Stock are listed, whether it be an established stock
exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or otherwise,
is open for trading.

3.    ADMINISTRATION.

      (a) The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in Section 3(c). Whether or
not the Board has delegated administration, the Board shall have the final power
to determine all questions of policy and expediency that may arise in the
administration of the Plan.

      (b) The Board (or the Committee) shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:

            (i) To determine when and how Purchase Rights to purchase shares of
Common Stock shall be granted and the provisions of each Offering of such
Purchase Rights (which need not be identical).


                                       3.

            (ii) To designate from time to time which Related Corporations of
the Company shall be eligible to participate in the Plan.

            (iii) To construe and interpret the Plan and Purchase Rights, and to
establish, amend and revoke rules and regulations for the administration of the
Plan. The Board, in the exercise of this power, may correct any defect, omission
or inconsistency in the Plan, in a manner and to the extent it shall deem
necessary or expedient to make the Plan fully effective.

            (iv) To amend the Plan as provided in Section 15.

            (v) Generally, to exercise such powers and to perform such acts as
it deems necessary or expedient to promote the best interests of the Company and
its Related Corporations and to carry out the intent that the Plan be treated as
an Employee Stock Purchase Plan.

            (vi) To adopt such procedures and sub-plans as are necessary or
appropriate to permit participation in the Plan by Employees who are foreign
nationals or employed outside the United States.

      (c) The Board may delegate administration of the Plan to a Committee of
the Board composed of one (1) or more members of the Board. If administration of
the Plan is delegated to a Committee, the Committee shall have, in connection
with the administration of the Plan, the powers theretofore possessed by the
Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board some or all
of the powers previously delegated. If administration is delegated to a
Committee, references to the Board in this Plan and in the Offering document
shall thereafter be deemed to be to the Board or the Committee, as the case may
be.

      (d) All determinations, interpretations and constructions made by the
Board in good faith shall not be subject to review by any person and shall be
final, binding and conclusive on all persons.

4.    SHARES OF COMMON STOCK SUBJECT TO THE PLAN.


      Subject to the provisions of Section 14(a) relating to adjustments upon
changes in Common Stock, the stock that may be sold pursuant to Purchase Rights
granted under the Plan shall not exceed in the aggregate three hundred
seventy-five thousand (375,000) shares of Common Stock, plus an annual increase
to be added on the first day of each Company fiscal year, beginning in 2007 and
ending in (and including) 2015, equal to the lesser of: (i) one percent (1%) of
the total number of shares of Common Stock outstanding on December 31st of the
preceding year (rounded to the nearest whole share), (ii) one hundred fifty
thousand (150,000) shares of Common Stock, or (iii) an amount determined by the
Board or a Committee.


5.    GRANT OF PURCHASE RIGHTS; OFFERING.

      (a) The Board may from time to time grant or provide for the grant of
Purchase Rights to purchase shares of Common Stock under the Plan to Eligible
Employees in an Offering (consisting of one or more Purchase Periods) on an
Offering Date or Offering Dates selected by


                                       4.

the Board. Each Offering shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate, which shall comply with the
requirement of Section 423(b)(5) of the Code that all Employees granted Purchase
Rights shall have the same rights and privileges. The terms and conditions of an
Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each
Offering shall include (through incorporation of the provisions of this Plan by
reference in the document comprising the Offering or otherwise) the period
during which the Offering shall be effective, which period shall not exceed
twenty-seven (27) months beginning with the Offering Date, and the substance of
the provisions contained in Sections 6 through 9, inclusive.

      (b) If a Participant has more than one Purchase Right outstanding under
the Plan, unless he or she otherwise indicates in agreements or notices
delivered hereunder: (i) each agreement or notice delivered by that Participant
shall be deemed to apply to all of his or her Purchase Rights under the Plan,
and (ii) a Purchase Right with a lower exercise price (or an earlier-granted
Purchase Right, if different Purchase Rights have identical exercise prices)
shall be exercised to the fullest possible extent before a Purchase Right with a
higher exercise price (or a later-granted Purchase Right if different Purchase
Rights have identical exercise prices) shall be exercised.

6.    ELIGIBILITY.

      (a) Purchase Rights may be granted only to Employees of the Company or, as
the Board may designate as provided in Section 3(b), to Employees of a Related
Corporation. Except as provided in Section 6(b), an Employee shall not be
eligible to be granted Purchase Rights under the Plan unless, on the Offering
Date, such Employee has been in the employ of the Company or the Related
Corporation, as the case may be, for such continuous period preceding such
Offering Date as the Board may require, but in no event shall the required
period of continuous employment be greater than two (2) years. In addition, the
Board may provide that no Employee shall be eligible to be granted Purchase
Rights under the Plan unless, on the Offering Date, such Employee's customary
employment with the Company or the Related Corporation is more than twenty (20)
hours per week and/or more than five (5) months per calendar year.

      (b) The Board may provide that each person who, during the course of an
Offering, first becomes an Eligible Employee shall, on a date or dates specified
in the Offering which coincides with the day on which such person becomes an
Eligible Employee or which occurs thereafter, receive a Purchase Right under
that Offering, which Purchase Right shall thereafter be deemed to be a part of
that Offering. Such Purchase Right shall have the same characteristics as any
Purchase Rights originally granted under that Offering, as described herein,
except that:

            (i) the date on which such Purchase Right is granted shall be the
"Offering Date" of such Purchase Right for all purposes, including determination
of the exercise price of such Purchase Right;

            (ii) the period of the Offering with respect to such Purchase Right
shall begin on its Offering Date and end coincident with the end of such
Offering; and


                                       5.

            (iii) the Board may provide that if such person first becomes an
Eligible Employee within a specified period of time before the end of the
Offering, he or she shall not receive any Purchase Right under that Offering.

      (c) No Employee shall be eligible for the grant of any Purchase Rights
under the Plan if, immediately after any such Purchase Rights are granted, such
Employee owns stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of stock of the Company or of any Related
Corporation. For purposes of this Section 6(c), the rules of Section 424(d) of
the Code shall apply in determining the stock ownership of any Employee, and
stock which such Employee may purchase under all outstanding Purchase Rights and
options shall be treated as stock owned by such Employee.

      (d) As specified by Section 423(b)(8) of the Code, an Eligible Employee
may be granted Purchase Rights under the Plan only if such Purchase Rights,
together with any other rights granted under all Employee Stock Purchase Plans
of the Company and any Related Corporations, do not permit such Eligible
Employee's rights to purchase stock of the Company or any Related Corporation to
accrue at a rate which exceeds twenty five thousand dollars ($25,000) of Fair
Market Value of such stock (determined at the time such rights are granted, and
which, with respect to the Plan, shall be determined as of their respective
Offering Dates) for each calendar year in which such rights are outstanding at
any time.

      (e) Officers of the Company and any designated Related Corporation, if
they are otherwise Eligible Employees, shall be eligible to participate in
Offerings under the Plan. Notwithstanding the foregoing, the Board may provide
in an Offering that Employees who are highly compensated Employees within the
meaning of Section 423(b)(4)(D) of the Code shall not be eligible to
participate.

7.    PURCHASE RIGHTS; PURCHASE PRICE.

      (a) On each Offering Date, each Eligible Employee, pursuant to an Offering
made under the Plan, shall be granted a Purchase Right to purchase up to that
number of shares of Common Stock purchasable either with a percentage or with a
maximum dollar amount, as designated by the Board, but in either case not
exceeding fifteen percent (15%), of such Employee's Earnings (as defined by the
Board in each Offering) during the period that begins on the Offering Date (or
such later date as the Board determines for a particular Offering) and ends on
the date stated in the Offering, which date shall be no later than the end of
the Offering.

      (b) The Board shall establish one (1) or more Purchase Dates during an
Offering as of which Purchase Rights granted pursuant to that Offering shall be
exercised and purchases of shares of Common Stock shall be carried out in
accordance with such Offering.

      (c) In connection with each Offering made under the Plan, the Board may
specify a maximum number of shares of Common Stock that may be purchased by any
Participant on any Purchase Date during such Offering. In connection with each
Offering made under the Plan, the Board may specify a maximum


                                       6.

aggregate number of shares of Common Stock that may be purchased by all
Participants pursuant to such Offering. In addition, in connection with each
Offering that contains more than one Purchase Date, the Board may specify a
maximum aggregate number of shares of Common Stock that may be purchased by all
Participants on any Purchase Date under the Offering. If the aggregate purchase
of shares of Common Stock issuable upon exercise of Purchase Rights granted
under the Offering would exceed any such maximum aggregate number, then, in the
absence of any Board action otherwise, a pro rata allocation of the shares of
Common Stock available shall be made in as nearly a uniform manner as shall be
practicable and equitable.

      (d) The purchase price of shares of Common Stock acquired pursuant to
Purchase Rights shall be not less than the lesser of:

            (i) an amount equal to eighty-five percent (85%) of the Fair Market
Value of the shares of Common Stock on the Offering Date; or

            (ii) an amount equal to eighty-five percent (85%) of the Fair Market
Value of the shares of Common Stock on the applicable Purchase Date.

8.    PARTICIPATION; WITHDRAWAL; TERMINATION.

      (a) A Participant may elect to authorize payroll deductions pursuant to an
Offering under the Plan by completing and delivering to the Company, within the
time specified in the Offering, an enrollment form (in such form as the Company
may provide). Each such enrollment form shall authorize an amount of
Contributions expressed as a percentage of the submitting Participant's Earnings
(as defined in each Offering) during the Offering (not to exceed the maximum
percentage specified by the Board). Each Participant's Contributions shall
remain the property of the Participant at all times prior to the purchase of
Common Stock, but such Contributions may be commingled with the assets of the
Company and used for general corporate purposes except where applicable law
requires that Contributions be deposited with an independent third party. To the
extent provided in the Offering, a Participant may begin making Contributions
after the beginning of the Offering. To the extent provided in the Offering, a
Participant may thereafter reduce (including to zero) or increase his or her
Contributions. To the extent specifically provided in the Offering, in addition
to making Contributions by payroll deductions, a Participant may make
Contributions through the payment by cash or check prior to each Purchase Date
of the Offering.

      (b) During an Offering, a Participant may cease making Contributions and
withdraw from the Offering by delivering to the Company a notice of withdrawal
in such form as the Company may provide. Such withdrawal may be elected at any
time prior to the end of the Offering, except as provided otherwise in the
Offering. Upon such withdrawal from the Offering by a Participant, the Company
shall distribute to such Participant all of his or her accumulated Contributions
(reduced to the extent, if any, such Contributions have been used to acquire
shares of Common Stock for the Participant) under the Offering, and such
Participant's Purchase Right in that Offering shall thereupon terminate. A
Participant's withdrawal from an Offering shall have no effect upon such
Participant's eligibility to participate in any other Offerings under the Plan,
but such Participant shall be required to deliver a new enrollment form in order
to participate in subsequent Offerings.


                                       7.

      (c) Purchase Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon a Participant ceasing to be an Employee for any
reason or for no reason (subject to any post-employment participation period
required by law) or other lack of eligibility. The Company shall distribute to
such terminated or otherwise ineligible Employee all of his or her accumulated
Contributions (reduced to the extent, if any, such Contributions have been used
to acquire shares of Common Stock for the terminated or otherwise ineligible
Employee) under the Offering.

      (d) Purchase Rights shall not be transferable by a Participant otherwise
than by will, the laws of descent and distribution, or a beneficiary designation
as provided in Section 13. During a Participant's lifetime, Purchase Rights
shall be exercisable only by such Participant.

      (e) Unless otherwise specified in an Offering, the Company shall have no
obligation to pay interest on Contributions.

9.    EXERCISE.

      (a) On each Purchase Date during an Offering, each Participant's
accumulated Contributions shall be applied to the purchase of shares of Common
Stock up to the maximum number of shares of Common Stock permitted pursuant to
the terms of the Plan and the applicable Offering, at the purchase price
specified in the Offering. No fractional shares shall be issued upon the
exercise of Purchase Rights unless specifically provided for in the Offering.

      (b) If any amount of accumulated Contributions remains in a Participant's
account after the purchase of shares of Common Stock and such remaining amount
is less than the amount required to purchase one share of Common Stock on the
final Purchase Date of an Offering, then such remaining amount shall be held in
such Participant's account for the purchase of shares of Common Stock under the
next Offering under the Plan, unless such Participant withdraws from such next
Offering, as provided in Section 8(b), or is not eligible to participate in such
Offering, as provided in Section 6, in which case such amount shall be
distributed to such Participant after the final Purchase Date, without interest.
If the amount of Contributions remaining in a Participant's account after the
purchase of shares of Common Stock is at least equal to the amount required to
purchase one (1) whole share of Common Stock on the final Purchase Date of the
Offering, then such remaining amount shall be distributed in full to such
Participant at the end of the Offering.

      (c) No Purchase Rights may be exercised to any extent unless the shares of
Common Stock to be issued upon such exercise under the Plan are covered by an
effective registration statement pursuant to the Securities Act and the Plan is
in material compliance with all laws applicable to the Plan. If on a Purchase
Date during any Offering hereunder the shares of Common Stock are not so
registered or the Plan is not in such compliance, no Purchase Rights or any
Offering shall be exercised on such Purchase Date, and the Purchase Date shall
be delayed until the shares of Common Stock are subject to such an effective
registration statement and the Plan is in such compliance, except that the
Purchase Date shall not be delayed more than twelve (12) months and the Purchase
Date shall in no event be more than twenty-seven (27) months from the Offering
Date. If, on the Purchase Date under any Offering hereunder, as delayed to the
maximum extent permissible, the shares of Common Stock are not registered and
the Plan is not


                                       8.

in such compliance, no Purchase Rights or any Offering shall be exercised and
all Contributions accumulated during the Offering (reduced to the extent, if
any, such Contributions have been used to acquire shares of Common Stock) shall
be distributed to the Participants.

10.   COVENANTS OF THE COMPANY.

      The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of Common Stock upon
exercise of the Purchase Rights. If, after commercially reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority that counsel for the Company deems necessary for the lawful issuance
and sale of shares of Common Stock under the Plan, the Company shall be relieved
from any liability for failure to issue and sell shares of Common Stock upon
exercise of such Purchase Rights unless and until such authority is obtained.

11.   USE OF PROCEEDS FROM SHARES OF COMMON STOCK.

      Proceeds from the sale of shares of Common Stock pursuant to Purchase
Rights shall constitute general funds of the Company.

12.   RIGHTS AS A STOCKHOLDER.

      A Participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, shares of Common Stock subject to
Purchase Rights unless and until the Participant's shares of Common Stock
acquired upon exercise of Purchase Rights are recorded in the books of the
Company (or its transfer agent).

13.   DESIGNATION OF BENEFICIARY.

      (a) A Participant may file a written designation of a beneficiary who is
to receive any shares of Common Stock and/or cash, if any, from the
Participant's account under the Plan in the event of such Participant's death
subsequent to the end of an Offering but prior to delivery to the Participant of
such shares of Common Stock or cash. In addition, a Participant may file a
written designation of a beneficiary who is to receive any cash from the
Participant's account under the Plan in the event of such Participant's death
during an Offering. Any such designation shall be on a form provided by or
otherwise acceptable to the Company.

      (b) The Participant may change such designation of beneficiary at any time
by written notice to the Company. In the event of the death of a Participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such Participant's death, the Company shall deliver such shares
of Common Stock and/or cash to the executor or administrator of the estate of
the Participant, or if no such executor or administrator has been appointed (to
the knowledge of the Company), the Company, in its sole discretion, may deliver
such shares of Common Stock and/or cash to the spouse or to any one or more
dependents or relatives of the Participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company may
designate.


                                       9.

14.   ADJUSTMENTS UPON CHANGES IN SECURITIES; CORPORATE TRANSACTIONS.

      (a) If any change is made in the shares of Common Stock, subject to the
Plan, or subject to any Purchase Right, without the receipt of consideration by
the Company (through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan shall be appropriately adjusted in the
type(s), class(es) and maximum number of shares of Common Stock subject to the
Plan pursuant to Section 4, and the outstanding Purchase Rights shall be
appropriately adjusted in the type(s), class(es), number of shares and purchase
limits of such outstanding Purchase Rights. The Board shall make such
adjustments, and its determination shall be final, binding and conclusive.
(Notwithstanding the foregoing, the conversion of any convertible securities of
the Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company.")

      (b) In the event of a Corporate Transaction, then: (i) any surviving or
acquiring corporation may continue or assume Purchase Rights outstanding under
the Plan or may substitute similar rights (including a right to acquire the same
consideration paid to stockholders in the Corporate Transaction) for those
outstanding under the Plan, or (ii) if any surviving or acquiring corporation
does not continue or assume such Purchase Rights or does not substitute similar
rights for Purchase Rights outstanding under the Plan, then, the Participants'
accumulated Contributions shall be used to purchase shares of Common Stock
within ten (10) business days prior to the Corporate Transaction under the
ongoing Offering, and the Participants' Purchase Rights under the ongoing
Offering shall terminate immediately after such purchase.

15.   AMENDMENT OF THE PLAN.

      (a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 14 relating to adjustments upon changes
in securities and except as to amendments solely to benefit the administration
of the Plan, to take account of a change in legislation or to obtain or maintain
favorable tax, exchange control or regulatory treatment for Participants or the
Company or any Related Corporation, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary for the Plan to satisfy the requirements of Section 423 of the Code
or other applicable laws or regulations.

      (b) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide Employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Employee Stock Purchase Plans
or to bring the Plan and/or Purchase Rights into compliance therewith.

      (c) The rights and obligations under any Purchase Rights granted before
amendment of the Plan shall not be impaired by any amendment of the Plan except:
(i) with the consent of the person to whom such Purchase Rights were granted, or
(ii) as necessary to comply with any laws or governmental regulations
(including, without limitation, the provisions of the Code and the regulations
promulgated thereunder relating to Employee Stock Purchase Plans).


                                      10.

16.   TERMINATION OR SUSPENSION OF THE PLAN.

      (a) The Board in its discretion may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate at the time that all of
the shares of Common Stock reserved for issuance under the Plan, as increased
and/or adjusted from time to time, have been issued under the terms of the Plan.
No Purchase Rights may be granted under the Plan while the Plan is suspended or
after it is terminated.

      (b) Any benefits, privileges, entitlements and obligations under any
Purchase Rights while the Plan is in effect shall not be impaired by suspension
or termination of the Plan except (i) as expressly provided in the Plan or with
the consent of the person to whom such Purchase Rights were granted, (ii) as
necessary to comply with any laws, regulations, or listing requirements, or
(iii) as necessary to ensure that the Plan and/or Purchase Rights comply with
the requirements of Section 423 of the Code.

17.   EFFECTIVE DATE OF PLAN.

      The Plan shall become effective on the IPO Date, but no Purchase Rights
shall be exercised unless and until the Plan has been approved by the
stockholders of the Company within twelve (12) months before or after the date
the Plan is adopted by the Board.

18.   MISCELLANEOUS PROVISIONS.

      (a) The Plan and Offering do not constitute an employment contract.
Nothing in the Plan or in the Offering shall in any way alter the at will nature
of a Participant's employment or be deemed to create in any way whatsoever any
obligation on the part of any Participant to continue in the employ of the
Company or a Related Corporation, or on the part of the Company or a Related
Corporation to continue the employment of a Participant.

      (b) The provisions of the Plan shall be governed by the law of the State
of California without resort to that state's conflicts of laws rules.


                                      11.

                            SGX PHARMACEUTICALS, INC.

                        2005 EMPLOYEE STOCK PURCHASE PLAN
                                    OFFERING

              ADOPTED BY THE BOARD OF DIRECTORS: AUGUST 30, 2005


      In this document, capitalized terms not otherwise defined shall have
the same definitions of such terms as in the SGX Pharmaceuticals, Inc. 2005
Employee Stock Purchase Plan.

1.    GRANT; OFFERING DATE.

      (a) The Board hereby authorizes a series of Offerings pursuant to the
terms of this Offering document.

      (b) The first Offering hereunder (the "Initial Offering") shall begin on
the closing date of the initial public offering of the Company's Common Stock
under a registration statement declared effective under the Securities Act (the
"IPO Date") and shall end approximately 24 months following IPO Date, unless
terminated earlier as provided below. After the Initial Offering, an additional
new Offering shall begin on the day after the first Purchase Date of the
immediately preceding Offering. The first day of an Offering is that Offering's
"Offering Date." Except as provided below, each Offering shall be approximately
twenty-four (24) months in duration, with four (4) Purchase Periods which shall
be six (6) months in length, except for the first and second Purchase Periods of
the Initial Offering which may be longer or shorter and shall be approximately
six (6) months in length. Except as provided below, a Purchase Date is the last
day of a Purchase Period or of an Offering, as the case may be. The Initial
Offering shall consist of four (4) Purchase Periods with the first Purchase
Period of the Initial Offering ending approximately 6 months following IPO date
and the second Purchase Period of the Initial Offering ending approximately 12
months following the IPO date.

      (c) Notwithstanding the foregoing: (i) if any Offering Date falls on a day
that is not a Trading Day, then such Offering Date shall instead fall on the
next subsequent Trading Day, and (ii) if any Purchase Date falls on a day that
is not a Trading Day, then such Purchase Date shall instead fall on the
immediately preceding Trading Day.

      (d) Prior to the commencement of any Offering, the Board may change any or
all terms of such Offering and any subsequent Offerings. The granting of
Purchase Rights pursuant to each Offering hereunder shall occur on each
respective Offering Date unless prior to such date (i) the Board determines that
such Offering shall not occur, or (ii) no shares of Common Stock remain
available for issuance under the Plan in connection with the Offering.

      (e) Notwithstanding anything in this Section 1 to the contrary, if on the
first day of a Purchase Period during an Offering the Fair Market Value of the
shares of Common Stock is less


                                       1.

than it was on the Offering Date for that Offering, that day shall become the
next Offering Date, the Offering that would otherwise have continued in effect
shall immediately terminate and the Employees who were enrolled in the
terminated Offering shall automatically be enrolled in the new Offering that
starts such day.

      (f) If the Company's accountants advise the Company that the accounting
treatment of purchases under the Plan will change or has changed in a manner
that the Company determines is detrimental to its best interests, then the
Company may, in its discretion, take any or all of the following actions: (i)
terminate each ongoing Offering as of the next Purchase Date (after the purchase
of stock on such Purchase Date) under such Offering; (ii) set a new Purchase
Date for each ongoing Offering and terminate each such Offering after the
purchase of stock on such Purchase Date; (iii) amend the Plan and each ongoing
Offering to reduce or eliminate an accounting treatment that is detrimental to
the Company's best interests and (iv) terminate each ongoing Offering and refund
any money contributed to the Participants.

2.    ELIGIBLE EMPLOYEES.

      (a) Each Eligible Employee who, on the date that is fourteen (14) days
prior to the Offering Date of an Offering hereunder, is (i) an employee of the
Company; (ii) an employee of a Subsidiary incorporated in the United States; or
(iii) an employee of a Subsidiary that is not incorporated in the United States,
provided that the Board or Committee has designated the employees of such
Subsidiary as eligible to participate in the Offering, shall be granted a
Purchase Right on the Offering Date of such Offering.

      (b) Notwithstanding the foregoing, the following Employees shall not be
Eligible Employees or be granted Purchase Rights under an Offering:

            (i) part-time or seasonal Employees whose customary employment is
twenty (20) hours per week or less;

            (ii) part-time or seasonal Employees whose customary employment is
five (5) months per calendar year or less;

            (iii) five percent (5%) stockholders (including ownership through
unexercised and/or unvested stock options) as described in Section 6(c) of the
Plan; or

            (iv) Employees in jurisdictions outside of the United States if, as
of the Offering Date of the Offering, the grant of such Purchase Rights would
not be in compliance with the applicable laws of any jurisdiction in which the
Employee resides or is employed.

      (c) Notwithstanding the foregoing, each person who first becomes an
Eligible Employee during an ongoing Offering shall not be able to participate in
such Offering.

3.    PURCHASE RIGHTS.

      (a) Subject to the limitations set forth herein and in the Plan, a
Participant's Purchase Right shall permit the purchase of the number of shares
of Common Stock purchasable with up to fifteen percent (15%) of such
Participant's Earnings paid during the period of such Offering


                                       2.

beginning immediately after such Participant first commences participation;
provided, however, that no Participant may have more than fifteen percent (15%)
of such Participant's Earnings applied to purchase shares of Common Stock under
all ongoing Offerings under the Plan and all other plans of the Company and
Related Corporations that are intended to qualify as Employee Stock Purchase
Plans.

      (b) For Offerings hereunder, "Earnings" means the base compensation paid
to a Participant, including all salary, wages and overtime pay (including
amounts elected to be deferred by the Participant, that would otherwise have
been paid, under any cash or deferred arrangement or other deferred compensation
program established by the Company or a Related Corporation), but excluding all
of the following: (i) all commissions, bonuses, and other remuneration paid
directly to such Participant, (ii) profit sharing, (iii) the cost of employee
benefits paid for by the Company or a Related Corporation, (iv) education or
tuition reimbursements, (v) imputed income arising under any Company or a
Related Corporation group insurance or benefit program, (vi) traveling expenses,
(vii) business and moving expense reimbursements, (viii) income received in
connection with stock options, (ix) contributions made by the Company or a
Related Corporation under any employee benefit plan, and (x) other similar items
of compensation.

      (c) Notwithstanding the foregoing, the maximum number of shares of Common
Stock that a Participant may purchase on any Purchase Date in an Offering shall
be such number of shares as has a Fair Market Value (determined as of the
Offering Date for such Offering) equal to (x) $25,000 multiplied by the number
of calendar years in which the Purchase Right under such Offering has been
outstanding at any time, minus (y) the Fair Market Value of any other shares of
Common Stock (determined as of the relevant Offering Date with respect to such
shares) that, for purposes of the limitation of Section 423(b)(8) of the Code,
are attributed to any of such calendar years in which the Purchase Right is
outstanding. The amount in clause (y) of the previous sentence shall be
determined in accordance with regulations applicable under Section 423(b)(8) of
the Code based on (i) the number of shares previously purchased with respect to
such calendar years pursuant to such Offering or any other Offering under the
Plan, or pursuant to any other Company or Related Corporation plans intended to
qualify as Employee Stock Purchase Plans, and (ii) the number of shares subject
to other Purchase Rights outstanding on the Offering Date for such Offering
pursuant to the Plan or any other such Company or Related Corporation Employee
Stock Purchase Plan.

      (d) The maximum aggregate number of shares of Common Stock available to be
purchased by all Participants under an Offering shall be the number of shares of
Common Stock remaining available under the Plan on the Offering Date. If the
aggregate purchase of shares of Common Stock upon exercise of Purchase Rights
granted under the Offering would exceed the maximum aggregate number of shares
available, the Board shall make a pro rata allocation of the shares available in
a uniform and equitable manner.


      (e) Notwithstanding the foregoing, the maximum number of shares of Common
Stock that an Eligible Employee may purchase on any Purchase Date shall not
exceed seven thousand five hundred (7,500) shares.



                                       3.

4.    PURCHASE PRICE.

      The purchase price of shares of Common Stock under an Offering shall be
the lesser of: (i) eighty-five percent (85%) of the Fair Market Value of such
shares of Common Stock on the applicable Offering Date, or (ii) eighty-five
percent (85%) of the Fair Market Value of such shares of Common Stock on the
applicable Purchase Date, in each case rounded up to the nearest whole cent per
share. For the Initial Offering, the Fair Market Value of the shares of Common
Stock at the time when the Offering commences shall be the price per share at
which shares are first sold to the public in the Company's initial public
offering as specified in the final prospectus for that initial public offering.

5.    PARTICIPATION.

      (a) An Eligible Employee may elect to participate in an Offering on the
Offering Date. An Eligible Employee shall elect his or her payroll deduction
percentage on such enrollment form as the Company provides. The completed
enrollment form must be delivered to the Company prior to the date participation
is to be effective, unless a later time for filing the enrollment form is set by
the Company for all Eligible Employees with respect to a given Offering. Payroll
deduction percentages must be expressed in whole percentages of Earnings, with a
minimum percentage of one percent (1%) and a maximum percentage of fifteen
percent (15%). Except as provided in paragraph (f) below with respect to the
Initial Offering, Contributions may be made only by way of payroll deductions.

      (b) A Participant may increase or decrease his or her participation level
at any time during an Offering with such change to be effective commencing as of
the next Purchase Period. Any such increase or decrease in participation level
shall be made by delivering a notice to the Company or a designated Subsidiary
in such form as the Company provides prior to the ten (10) day period (or such
shorter period of time as determined by the Company and communicated to
Participants) immediately preceding the next Purchase Period for which it is to
commence.

      (c) A Participant may decrease (including a decrease to zero percent (0%))
his or her participation level no more than twice during a Purchase Period (and
the second decrease in participation level must be to zero percent (0%)). Any
such change in participation level shall be made by delivering a notice to the
Company or a designated Related Corporation in such form as the Company provides
prior to the ten (10) day period (or such shorter period of time as determined
by the Company and communicated to Participants) immediately preceding the next
Purchase Date of the Purchase Period for which it is to be effective. Such
change will become effective as soon as administratively practicable following
the Company's receipt of the notice.

      (d) A Participant may withdraw from an Offering and receive a refund of
his or her Contributions (reduced to the extent, if any, such Contributions have
been used to acquire shares of Common Stock for the Participant on any prior
Purchase Date) without interest, at any time prior to the end of the Offering,
excluding only each ten (10) day period immediately preceding a Purchase Date
(or such shorter period of time determined by the Company and communicated to
Participants), by delivering a withdrawal notice to the Company or a designated
Subsidiary in such form as the Company provides. A Participant who has withdrawn
from an Offering shall


                                       4.

not again participate in such Offering, but may participate in subsequent
Offerings under the Plan in accordance with the terms of the Plan and the terms
of such subsequent Offerings.

      (e) Notwithstanding the foregoing or any other provision of this Offering
document or of the Plan to the contrary, neither the enrollment of any Eligible
Employee in the Plan nor any forms relating to participation in the Plan shall
be given effect until such time as a registration statement covering the
registration of the shares under the Plan that are subject to the Offering has
been filed by the Company and has become effective.

      (f) Notwithstanding the foregoing or any other provision of this Offering
document or of the Plan to the contrary, with respect to the Initial Offering
only, each Eligible Employee who is employed on the IPO Date automatically shall
be enrolled in the Initial Offering, with a Purchase Right to purchase up to the
number of shares of Common Stock that are purchasable with fifteen percent (15%)
of the Eligible Employee's Earnings, subject to the limitations set forth in
Section 3(c) - 3(e) above. Following the filing of an effective registration
statement pursuant to a Form S-8, such Eligible Employee shall be provided a
certain period of time, as determined by the Company in its sole discretion,
within which to elect to authorize payroll deductions for the purchase of shares
during the Initial Offering (which may be for a percentage that is less than
fifteen percent (15%) of the Eligible Employee's Earnings). If such Eligible
Employee elects not to authorize such payroll deductions, the Eligible Employee
instead may purchase shares of Common Stock under the Plan by delivering a
single cash payment for the purchase of such shares to the Company or a
designated Subsidiary prior to the ten (10) day period (or such shorter period
of time as determined by the Company and communicated to Participants)
immediately preceding the Purchase Date under the Initial Offering. If an
Eligible Employee neither elects to authorize payroll deductions nor chooses to
make a cash payment in accordance with the foregoing sentence, then the Eligible
Employee shall not purchase any shares of Common Stock during the Initial
Offering. After the end of the Initial Offering, in order to participate in any
subsequent Offerings, an Eligible Employee must enroll and authorize payroll
deductions prior to the commencement of the Offering, in accordance with
paragraph (a) above; provided, however, that once an Eligible Employee enrolls
in an Offering and authorizes payroll deductions (including in connection with
the Initial Offering), the Eligible Employee automatically shall be enrolled for
all subsequent Offerings until he or she elects to withdraw from an Offering
pursuant to paragraph (c) above or terminates his or her participation in the
Plan.

6.    PURCHASES.

      Subject to the limitations contained herein, on each Purchase Date, each
Participant's Contributions (without any increase for interest) shall be applied
to the purchase of whole shares, up to the maximum number of shares permitted
under the Plan and the Offering.

7.    NOTICES AND AGREEMENTS.

      Any notices or agreements provided for in an Offering or the Plan shall be
given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering, shall be deemed effectively given
upon receipt or, in the case of notices and


                                       5.

agreements delivered by the Company, five (5) days after deposit in the United
States mail, postage prepaid.

8.    EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.

      The Purchase Rights granted under an Offering are subject to the approval
of the Plan by the stockholders of the Company as required for the Plan to
obtain treatment as an Employee Stock Purchase Plan.

9.    OFFERING SUBJECT TO PLAN.

      Each Offering is subject to all the provisions of the Plan, and the
provisions of the Plan are hereby made a part of the Offering. The Offering is
further subject to all interpretations, amendments, rules and regulations which
may from time to time be promulgated and adopted pursuant to the Plan. In the
event of any conflict between the provisions of an Offering and those of the
Plan (including interpretations, amendments, rules and regulations which may
from time to time be promulgated and adopted pursuant to the Plan), the
provisions of the Plan shall control.


                                       6.

EX-10.5

                                                                    EXHIBIT 10.5

                            SGX PHARMACEUTICALS, INC.

                 2005 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN


            INITIALLY ADOPTED BY BOARD OF DIRECTORS AUGUST 30, 2005
              INITIALLY APPROVED BY STOCKHOLDERS OCTOBER 31, 2005
                        EFFECTIVE DATE: JANUARY _, 2006


1. PURPOSES.

      (a) ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive Options
are the Non-Employee Directors of the Company.

      (b) AVAILABLE OPTIONS. The purpose of the Plan is to provide a means by
which Non-Employee Directors may be given an opportunity to benefit from
increases in value of the Common Stock through the granting of Nonstatutory
Stock Options.

      (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain
the services of its current Non-Employee Directors, to secure and retain the
services of new Non-Employee Directors and to provide incentives for such
persons to exert maximum efforts for the success of the Company and its
Affiliates.

2. DEFINITIONS.

      (a) "AFFILIATE" means, at the time of determination, any "parent" or
"subsidiary" as such terms are defined in Rule 405 of the Securities Act. The
Board shall have the authority to determine the time or times at which "parent"
or "subsidiary" status is determined within the foregoing definition.

      (b) "ANNUAL GRANT" means an Option granted annually to all Non-Employee
Directors who meet the specified criteria pursuant to Section 6(b).

      (c) "ANNUAL MEETING" means the annual meeting of the stockholders of the
Company.

      (d) "BOARD" means the Board of Directors of the Company.

      (e) "CAPITALIZATION ADJUSTMENT" has the meaning ascribed to that term in
Section 11(a).

      (f) "CHANGE IN CONTROL" means the occurrence, in a single transaction or
in a series of related transactions, of any one or more of the following events:

            (i) any Exchange Act Person becomes the Owner, directly or
indirectly, of securities of the Company representing more than fifty percent
(50%) of the combined voting power of the Company's then outstanding securities
other than by virtue of a merger,


                                       1.


consolidation or similar transaction. Notwithstanding the foregoing, a Change in
Control shall not be deemed to occur (A) on account of the acquisition of
securities of the Company by an investor, any affiliate thereof or any other
Exchange Act Person from the Company in a transaction or series of related
transactions the primary purpose of which is to obtain financing for the Company
through the issuance of equity securities or (B) solely because the level of
Ownership held by any Exchange Act Person (the "SUBJECT PERSON") exceeds the
designated percentage threshold of the outstanding voting securities as a result
of a repurchase or other acquisition of voting securities by the Company
reducing the number of shares outstanding, provided that if a Change in Control
would occur (but for the operation of this sentence) as a result of the
acquisition of voting securities by the Company, and after such share
acquisition, the Subject Person becomes the Owner of any additional voting
securities that, assuming the repurchase or other acquisition had not occurred,
increases the percentage of the then outstanding voting securities Owned by the
Subject Person over the designated percentage threshold, then a Change in
Control shall be deemed to occur;

            (ii) there is consummated a merger, consolidation or similar
transaction involving (directly or indirectly) the Company and, immediately
after the consummation of such merger, consolidation or similar transaction, the
stockholders of the Company immediately prior thereto do not Own, directly or
indirectly, either (A) outstanding voting securities representing more than
fifty percent (50%) of the combined outstanding voting power of the surviving
Entity in such merger, consolidation or similar transaction or (B) more than
fifty percent (50%) of the combined outstanding voting power of the parent of
the surviving Entity in such merger, consolidation or similar transaction, in
each case in substantially the same proportions as their Ownership of the
outstanding voting securities of the Company immediately prior to such
transaction;

            (iii) the stockholders of the Company approve or the Board approves
a plan of complete dissolution or liquidation of the Company, or a complete
dissolution or liquidation of the Company shall otherwise occur;

            (iv) there is consummated a sale, lease, exclusive license or other
disposition of all or substantially all of the consolidated assets of the
Company and its Subsidiaries, other than a sale, lease, license or other
disposition of all or substantially all of the consolidated assets of the
Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the
combined voting power of the voting securities of which are Owned by
stockholders of the Company in substantially the same proportions as their
Ownership of the outstanding voting securities of the Company immediately prior
to such sale, lease, license or other disposition; or

            (v) individuals who, on the date this Plan is adopted by the Board,
are members of the Board (the "INCUMBENT BOARD") cease for any reason to
constitute at least a majority of the members of the Board; provided, however,
that if the appointment or election (or nomination for election) of any new
Board member was approved or recommended by a majority vote of the members of
the Incumbent Board then still in office, such new member shall, for purposes of
this Plan, be considered as a member of the Incumbent Board.

      The term Change in Control shall not include a sale of assets, merger or
other transaction effected exclusively for the purpose of changing the domicile
of the Company.


                                       2.


      Notwithstanding the foregoing or any other provision of this Plan, the
definition of Change in Control (or any analogous term) in an individual written
agreement between the Company or any Affiliate and the Participant shall
supersede the foregoing definition with respect to Stock Awards subject to such
agreement where such agreement provides for acceleration of vesting of such
Stock Awards in the event of a Change in Control; provided, however, that if no
definition of Change in Control or any analogous term is set forth in such an
individual written agreement, the foregoing definition shall apply.

      (g) "CODE" means the Internal Revenue Code of 1986, as amended.

      (h) "COMMITTEE" means a committee of one (1) or more members of the Board
appointed by the Board in accordance with Section 3(c).

      (i) "COMMON STOCK" means the common stock of the Company.

      (j) "COMPANY" means SGX Pharmaceuticals, Inc., a Delaware corporation.

      (k) "CONSULTANT" means any person, including an advisor, who (i) is
engaged by the Company or an Affiliate to render consulting or advisory services
and is compensated for such services or (ii) is serving as a member of the Board
of Directors of an Affiliate and is compensated for such services. However,
service solely as a Director, or payment of a fee for such services, shall not
cause a Director to be considered a "Consultant" for purposes of the Plan.

      (l) "CONTINUOUS SERVICE" means that the Optionholder's service with the
Company or an Affiliate, whether as an Employee, Director or Consultant, is not
interrupted or terminated. A change in the capacity in which the Optionholder
renders service to the Company or an Affiliate as an Employee, Consultant or
Director or a change in the entity for which the Optionholder renders such
service, provided that there is no interruption or termination of the
Optionholder's service with the Company or an Affiliate, shall not terminate a
Optionholder's Continuous Service. For example, a change in status from a
Non-Employee Director of the Company to a consultant to an Affiliate or an
Employee of the Company shall not constitute an interruption of Continuous
Service. To the extent permitted by law, the Board or the chief executive
officer of the Company, in that party's sole discretion, may determine whether
Continuous Service shall be considered interrupted in the case of any leave of
absence approved by that party, including sick leave, military leave or any
other personal leave. Notwithstanding the foregoing, a leave of absence shall be
treated as Continuous Service for purposes of vesting in an Option only to such
extent as may be provided in the Company's leave of absence policy, in the
written terms of any leave of absence agreement or policy applicable to the
Optionholder, or as otherwise required by law.

      (m) "CORPORATE TRANSACTION" means the occurrence, in a single transaction
or in a series of related transactions, of any one or more of the following
events:

            (i) a sale or other disposition of all or substantially all, as
determined by the Board in its sole discretion, of the consolidated assets of
the Company and its Subsidiaries;

            (ii) a sale or other disposition of at least ninety percent (90%) of
the outstanding securities of the Company;


                                       3.


            (iii) the consummation of a merger, consolidation or similar
transaction following which the Company is not the surviving corporation; or

            (iv) the consummation of a merger, consolidation or similar
transaction following which the Company is the surviving corporation but the
shares of Common Stock outstanding immediately preceding the merger,
consolidation or similar transaction are converted or exchanged by virtue of the
merger, consolidation or similar transaction into other property, whether in the
form of securities, cash or otherwise.

      (n) "DIRECTOR" means a member of the Board.

      (o) "DISABILITY" means the inability of a person, in the opinion of a
qualified physician acceptable to the Company, to perform the major duties of
that person's position with the Company or an Affiliate of the Company because
of the sickness or injury of the person.

      (p) "EMPLOYEE" means any person employed by the Company or an Affiliate.
However, service solely as a Director, or payment of a fee for such services,
shall not cause a Director to be considered an "Employee" for purposes of the
Plan.

      (q) "ENTITY" means a corporation, partnership or other entity.

      (r) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

      (s) "EXCHANGE ACT PERSON" means any natural person, Entity or "group"
(within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that
"Exchange Act Person" shall not include (i) the Company or any Subsidiary of the
Company, (ii) any employee benefit plan of the Company or any Subsidiary of the
Company or any trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any Subsidiary of the Company, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of
the Company in substantially the same proportions as their Ownership of stock of
the Company; or (v) any natural person, Entity or "group" (within the meaning of
Section 13(d) or 14(d) of the Exchange Act) that, as of the effective date of
the Plan as set forth in Section 14, is the Owner, directly or indirectly, of
securities of the Company representing more than fifty percent (50%) of the
combined voting power of the Company's then outstanding securities.

      (t) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock determined as follows:

            (i) If the Common Stock is listed on any established stock exchange
or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in the Common Stock) on the last market trading day prior to the date in
question, as reported in The Wall Street Journal or such other source as the
Board deems reliable. Unless otherwise provided by the Board, if there is no
closing sales price (or closing bid if no sales were reported) for the Common
Stock on the date in question, then the Fair


                                       4.


Market Value shall be the closing selling price (or closing bid if no sales were
reported) on the last preceding date for which such quotation exists.

            (ii) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined by the Board in good faith.

      (u) "INITIAL GRANT" means an Option granted to a Non-Employee Director who
meets the specified criteria pursuant to Section 6(a).

      (v) "IPO DATE" means the date of the underwriting agreement between the
Company and the underwriter(s) managing the initial public offering of the
Common Stock, pursuant to which the Common Stock is priced for the initial
public offering.

      (w) "NON-EMPLOYEE DIRECTOR" means a Director who is not an Employee.

      (x) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.

      (y) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.

      (z) "OPTION" means a Nonstatutory Stock Option granted pursuant to the
Plan.

      (aa) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.

      (bb) "OPTIONHOLDER" means a person to whom an Option is granted pursuant
to the Plan or, if applicable, such other person who holds an outstanding
Option.

      (cc) "OWN," "OWNED," "OWNER," "OWNERSHIP" A person or Entity shall be
deemed to "Own," to have "Owned," to be the "Owner" of, or to have acquired
"Ownership" of securities if such person or Entity, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise, has
or shares voting power, which includes the power to vote or to direct the
voting, with respect to such securities.

      (dd) "PLAN" means this SGX Pharmaceuticals, Inc. 2005 Non-Employee
Directors' Stock Option Plan.

      (ee) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or
any successor to Rule 16b-3, as in effect from time to time.

      (ff) "SECURITIES ACT" means the Securities Act of 1933, as amended.

      (gg) "SUBSIDIARY" means, with respect to the Company, (i) any corporation
of which more than fifty percent (50%) of the outstanding capital stock having
ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether, at the time,


                                       5.


stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time,
directly or indirectly, Owned by the Company, and (ii) any partnership in which
the Company has a direct or indirect interest (whether in the form of voting or
participation in profits or capital contribution) of more than fifty percent
(50%).

3. ADMINISTRATION.

      (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless
and until the Board delegates administration of the Plan to a Committee, as
provided in Section 3(c).

      (b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:

            (i) To determine the provisions of each Option to the extent not
specified in the Plan.

            (ii) To construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.

            (iii) To effect, at any time and from time to time, with the consent
of any adversely affected Optionholder, (1) the reduction of the exercise price
of any outstanding Option under the Plan, (2) the cancellation of any
outstanding Option under the Plan and the grant in substitution therefor of (A)
a new Option under the Plan or another equity plan of the Company covering the
same or a different number of shares of Common Stock, (B) cash and/or (C) other
valuable consideration (as determined by the Board, in its sole discretion), or
(3) any other action that is treated as a repricing under generally accepted
accounting principles.

            (iv) To amend the Plan or an Option as provided in Section 12.

            (v) To terminate or suspend the Plan as provided in Section 13.

            (vi) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company and that are not in conflict with the provisions of the Plan.

      (c) DELEGATION TO COMMITTEE. The Board may delegate some or all of the
administration of the Plan to a Committee or Committees of one (1) or more
members of the Board, and the term "COMMITTEE" shall apply to any person or
persons to whom such authority has been delegated. If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board that
have been delegated to the Committee, including the power to delegate to a
subcommittee any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the
Committee or subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to


                                       6.


time by the Board. The Board may retain the authority to concurrently administer
the Plan with the Committee and may, at any time, revest in the Board some or
all of the powers previously delegated.

      (d) EFFECT OF BOARD'S DECISION. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.

4. SHARES SUBJECT TO THE PLAN.


      (a) SHARE RESERVE. Subject to the provisions of Section 11(a) relating to
Capitalization Adjustments, the shares of Common Stock that may be issued
pursuant to Options shall not exceed in the aggregate seventy-five thousand
(75,000) shares of Common Stock plus an annual increase to be added on January
1st of each year commencing in 2007 and ending on (and including) January 1,
2015, equal to the lesser of: (i) the aggregate number of shares of Common Stock
subject to options granted under the Plan as Initial Grants and Annual Grants
during the immediately preceding fiscal year, or (ii) an amount determined by
the Board or a Committee.


      (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall for any
reason expire or otherwise terminate, in whole or in part, without having been
exercised in full, the shares of Common Stock not acquired under such Option
shall revert to and again become available for issuance under the Plan. If any
shares subject to an Option are not delivered to an Optionholder because such
shares are withheld for the payment of taxes or the Option is exercised through
a reduction of shares subject to the Option (i.e., "net exercised"), the number
of shares that are not delivered to the Optionholder as a result thereof shall
remain available for issuance under the Plan. If the exercise price of an Option
is satisfied by tendering shares of Common Stock held by the Optionholder
(either by actual delivery or attestation), then the number of shares so
tendered shall remain available for issuance under the Plan.

      (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may
be unissued shares or reacquired shares, bought on the market or otherwise.

5. ELIGIBILITY.

      The Options, as set forth in Section 6, automatically shall be granted
under the Plan to all Non-Employee Directors who meet the criteria specified in
Section 6.

6. NON-DISCRETIONARY GRANTS.


      (a) INITIAL GRANTS. Without any further action of the Board, each person
who after the IPO Date is elected or appointed for the first time to be a
Non-Employee Director automatically shall, upon the date of his or her initial
election or appointment to be a Non-Employee Director, be granted an Initial
Grant to purchase twelve thousand five hundred (12,500) shares of Common Stock
on the terms and conditions set forth herein.


      (b) ANNUAL GRANTS. Without any further action of the Board, on the date of
each Annual Meeting, commencing with the Annual Meeting in 2007, each person who
is then a Non-


                                       7.



Employee Director automatically shall be granted an Annual Grant to purchase
five thousand (5,000) shares of Common Stock on the terms and conditions set
forth herein; provided, however, that if a person who is first elected as a
Non-Employee Director after the IPO Date has not been serving as a Non-Employee
Director for the entire period since the preceding Annual Meeting, then the
number of shares subject to such Annual Grant shall be reduced pro rata for each
full quarter prior to the date of grant during such period for which such person
did not serve as a Non- Employee Director.


7. OPTION PROVISIONS.

      Each Option shall be in such form and shall contain such terms and
conditions as required by the Plan. Each Option shall contain such additional
terms and conditions, not inconsistent with the Plan, as the Board shall deem
appropriate. Each Option shall include (through incorporation of provisions
hereof by reference in the Option or otherwise) the substance of each of the
following provisions:

      (a) TERM. No Option shall be exercisable after the expiration of ten (10)
years from the date on which it was granted.

      (b) EXERCISE PRICE. The exercise price of each Option shall be one hundred
percent (100%) of the Fair Market Value of the Common Stock subject to the
Option on the date the Option is granted.

      (c) CONSIDERATION. The purchase price of Common Stock acquired pursuant to
an Option shall be paid, to the extent permitted by applicable law, either (i)
in cash at the time the Option is exercised or (ii) at the discretion of the
Board either at the time of the grant of the Option or subsequent thereto (1) by
delivery to the Company of other Common Stock at the time the Option is
exercised, (2) by a "net exercise" of the Option (as further described below),
(3) pursuant to a program developed under Regulation T as promulgated by the
Federal Reserve Board that, prior to the issuance of Common Stock, results in
either the receipt of cash (or check) by the Company or the receipt of
irrevocable instructions to pay the aggregate exercise price to the Company from
the sales proceeds or (4) in any other form of legal consideration that may be
acceptable to the Board. Unless otherwise specifically provided in the Option,
the purchase price of Common Stock acquired pursuant to an Option that is paid
by delivery to the Company of other Common Stock acquired, directly or
indirectly from the Company, shall be paid only by shares of the Common Stock of
the Company that have been held for more than six (6) months (or such longer or
shorter period of time required to avoid a charge to earnings for financial
accounting purposes).

      In the case of a "net exercise" of an Option, the Company will not require
a payment of the exercise price of the Option from the Optionholder but will
reduce the number of shares of Common Stock issued upon the exercise by the
largest number of whole shares that has a Fair Market Value that does not exceed
the aggregate exercise price. With respect to any remaining balance of the
aggregate exercise price, the Company shall accept a cash payment from the
Optionholder. Shares of Common Stock will no longer be outstanding under an
Option (and will therefore not thereafter be exercisable) following the exercise
of such Option to the extent of (i) shares used to pay the exercise price of an
Option under a "net exercise", (ii) shares actually


                                       8.


delivered to the Optionholder as a result of such exercise and (iii) shares
withheld for purposes of tax withholding.

      (d) TRANSFERABILITY. An Option is transferable by will or by the laws of
descent and distribution. An Option also may be transferable upon written
consent of the Company if, at the time of transfer, a Form S-8 registration
statement under the Securities Act is available for the exercise of the Option
and the subsequent resale of the underlying securities. In addition, an
Optionholder may, by delivering written notice to the Company, in a form
provided by or otherwise satisfactory to the Company, designate a third party
who, in the event of the death of the Optionholder, shall thereafter be entitled
to exercise the Option.

      (e) VESTING. Options shall vest as follows:

            (i) Initial Grants: 1/36th of the shares of Common Stock subject to
an Initial Grant shall vest monthly over three (3) years.

            (ii) Annual Grants: 1/12th of the shares of Common Stock subject to
an Annual Grant shall vest monthly over one (1) year.

      (f) TERMINATION OF CONTINUOUS SERVICE. In the event that an Optionholder's
Continuous Service terminates for any reason, the Optionholder may exercise his
or her Option (to the extent that the Optionholder was entitled to exercise such
Option as of the date of termination of Continuous Service) but only within such
period of time ending on the expiration of the term of the Option as set forth
in the Option Agreement. If, after termination of Continuous Service, the
Optionholder does not exercise his or her Option within the time specified in
the Option Agreement, the Option shall terminate.

8. SECURITIES LAW COMPLIANCE.

      The Company shall seek to obtain from each regulatory commission or agency
having jurisdiction over the Plan such authority as may be required to grant
Options and to issue and sell shares of Common Stock upon exercise of the
Options; provided, however, that this undertaking shall not require the Company
to register under the Securities Act the Plan, any Option or any Common Stock
issued or issuable pursuant to any such Option. If, after reasonable efforts,
the Company is unable to obtain from any such regulatory commission or agency
the authority which counsel for the Company deems necessary for the lawful
issuance and sale of Common Stock under the Plan, the Company shall be relieved
from any liability for failure to issue and sell Common Stock upon exercise of
such Options unless and until such authority is obtained.

9. USE OF PROCEEDS FROM STOCK.

      Proceeds from the sale of Common Stock pursuant to Options shall
constitute general funds of the Company.

10. MISCELLANEOUS.

      (a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the
power to accelerate the time at which an Option may first be exercised or the
time during which an Option


                                       9.


or any part thereof will vest in accordance with the Plan, notwithstanding the
provisions in the Plan or the Option stating the time at which it may first be
exercised or the time during which it will vest.

      (b) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the holder
of, or to have any of the rights of a holder with respect to, any shares of
Common Stock subject to such Option unless and until such Optionholder has
satisfied all requirements for exercise of the Option pursuant to its terms.

      (c) NO SERVICE RIGHTS. Nothing in the Plan, any Option Agreement or other
instrument executed thereunder or any Option granted pursuant thereto shall
confer upon any Optionholder any right to continue to serve the Company as a
Non-Employee Director or shall affect the right of the Company or an Affiliate
to terminate (i) the employment of an Employee with or without notice and with
or without cause, (ii) the service of a Consultant pursuant to the terms of such
Consultant's agreement with the Company or an Affiliate or (iii) the service of
a Director pursuant to the Bylaws of the Company or an Affiliate, and any
applicable provisions of the corporate law of the state in which the Company or
the Affiliate is incorporated, as the case may be.

      (d) INVESTMENT ASSURANCES. The Company may require an Optionholder, as a
condition of exercising or acquiring Common Stock under any Option, (i) to give
written assurances satisfactory to the Company as to the Optionholder's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Option; and (ii) to give
written assurances satisfactory to the Company stating that the Optionholder is
acquiring the Common Stock subject to the Option for the Optionholder's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (1) the issuance of the shares of
Common Stock upon the exercise or acquisition of Common Stock under the Option
has been registered under a then currently effective registration statement
under the Securities Act or (2) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the Common Stock.

      (e) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of an
Option Agreement, the Company may in its sole discretion, satisfy any federal,
state or local tax withholding obligation relating to an Option by any of the
following means (in addition to the Company's right to withhold from any
compensation paid to the Optionholder by the Company) or by a combination of
such means: (i) causing the Optionholder to tender a cash payment; (ii)
withholding shares of Common Stock from the shares of Common Stock issued or
otherwise issuable to the Optionholder in connection with the Option; or (iii)
via such other method as may be set forth in the Option Agreement.


                                      10.


11. ADJUSTMENTS UPON CHANGES IN COMMON STOCK.

      (a) CAPITALIZATION ADJUSTMENTS. If any change is made in, or other event
occurs with respect to, the Common Stock subject to the Plan, or subject to any
Option, without the receipt of consideration by the Company (through merger,
consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company (each a "CAPITALIZATION ADJUSTMENT")), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject both to the
Plan pursuant to Section 4 and to the nondiscretionary Options specified in
Section 6, and the outstanding Options will be appropriately adjusted in the
class(es) and number of securities and price per share of Common Stock subject
to such outstanding Options. The Board shall make such adjustments, and its
determination shall be final, binding and conclusive. (Notwithstanding the
foregoing, the conversion of any convertible securities of the Company shall not
be treated as a transaction "without receipt of consideration" by the Company.)

      (b) DISSOLUTION OR LIQUIDATION. In the event of a dissolution or
liquidation of the Company, then all outstanding Options shall terminate
immediately prior to the completion of such dissolution or liquidation.

      (c) CORPORATE TRANSACTION. The following provisions shall apply to Options
in the event of a Corporate Transaction unless otherwise provided in the
instrument evidencing the Option or any other written agreement between the
Company or any Affiliate and the holder of the Option or unless otherwise
expressly provided by the Board at the time of grant of a Option. In the event
of a Corporate Transaction, any surviving corporation or acquiring corporation
may assume or continue any or all Options outstanding under the Plan or may
substitute similar stock options for Options outstanding under the Plan
(including options to acquire the same consideration paid to the stockholders of
the Company, as the case may be, pursuant to the Corporate Transaction). In the
event that any surviving corporation or acquiring corporation does not assume or
continue all such outstanding Options or substitute similar stock options for
all such outstanding Options, then with respect to Options that have been not
assumed, continued or substituted and that are held by Optionholders whose
Continuous Service has not terminated prior to the effective time of the
Corporate Transaction, the vesting of such Options (and, if applicable, the time
at which such Options may be exercised) shall (contingent upon the effectiveness
of the Corporate Transaction) be accelerated in full to a date prior to the
effective time of such Corporate Transaction as the Board shall determine (or,
if the Board shall not determine such a date, to the date that is five (5) days
prior to the effective time of the Corporate Transaction), and such Options
shall terminate on the effective time of the Corporate Transaction if not
exercised (if applicable) at or prior to such effective time. With respect to
any other Options outstanding under the Plan that have not been assumed,
continued or substituted, the vesting of such Options (and, if applicable, the
time at which such Options may be exercised) shall not be accelerated, unless
otherwise provided in a written agreement between the Company or any Affiliate
and the Optionholder, and such Options shall terminate if not exercised (if
applicable) prior to the effective time of the Corporate Transaction.


                                      11.


      (d) CHANGE IN CONTROL. An Option may be subject to additional acceleration
of vesting and exercisability upon or after a Change in Control as may be
provided in the Option Agreement for such Option or as may be provided in any
other written agreement between the Company or any Affiliate and the
Optionholder, but in the absence of such provision, no such acceleration shall
occur.

12. AMENDMENT OF THE PLAN AND OPTIONS.

      (a) AMENDMENT OF PLAN. Subject to the limitations, if any, of applicable
law, the Board, at any time and from time to time, may amend the Plan. However,
except as provided in Section 11(a) relating to Capitalization Adjustments, no
amendment shall be effective unless approved by the stockholders of the Company
to the extent stockholder approval is necessary to satisfy applicable law.

      (b) STOCKHOLDER APPROVAL. The Board, in its sole discretion, may submit
any other amendment to the Plan for stockholder approval.

      (c) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the Optionholder and (ii) the
Optionholder consents in writing.

      (d) AMENDMENT OF OPTIONS. The Board, at any time, and from time to time,
may amend the terms of any one or more Options, including, but not limited to,
amendments to provide terms more favorable than previously provided in the
agreement evidencing an Option, subject to any specified limits in the Plan that
are not subject to Board discretion; provided, however, that the rights under
any Option shall not be impaired by any such amendment unless (i) the Company
requests the consent of the Optionholder and (ii) the Optionholder consents in
writing.

13. TERMINATION OR SUSPENSION OF THE PLAN.

      (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. No
Options may be granted under the Plan while the Plan is suspended or after it is
terminated.

      (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall
not impair rights and obligations under any Option granted while the Plan is in
effect except with the written consent of the Optionholder.

14. EFFECTIVE DATE OF PLAN.

      The Plan shall become effective on the IPO Date, but no Option shall be
exercised unless and until the Plan has been approved by the stockholders of the
Company, which approval shall be within twelve (12) months before or after the
date the Plan is adopted by the Board.

15. CHOICE OF LAW.

      The law of the state of California shall govern all questions concerning
the construction, validity and interpretation of this Plan, without regard to
such state's conflict of laws rules.


                                      12.



                            SGX PHARMACEUTICALS, INC.
                 2005 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

                             STOCK OPTION AGREEMENT
                           (NONSTATUTORY STOCK OPTION)

      Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock
Option Agreement, SGX Pharmaceuticals, Inc. (the "Company") has granted you an
option under its 2005 Non-Employee Directors' Stock Option Plan (the "Plan") to
purchase the number of shares of the Company's Common Stock indicated in your
Grant Notice at the exercise price indicated in your Grant Notice. Defined terms
not explicitly defined in this Stock Option Agreement but defined in the Plan
shall have the same definitions as in the Plan.

      The details of your option are as follows:

      1. VESTING. Subject to the limitations contained herein, your option will
vest as provided in your Grant Notice, provided that vesting will cease upon the
termination of your Continuous Service. In addition, if the Company is subject
to a Change in Control before your Continuous Service terminates, then all of
the unvested shares subject to this option shall become fully vested and
exercisable immediately prior to the effective date of such Change in Control.

      2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common
Stock subject to your option and your exercise price per share referenced in
your Grant Notice may be adjusted from time to time for Capitalization
Adjustments, as provided in the Plan.

      3. METHOD OF PAYMENT. Payment of the exercise price is due in full upon
exercise of all or any part of your option. You may elect to make payment of the
exercise price in cash or by check or in any other manner PERMITTED BY YOUR
GRANT NOTICE, which may include one or more of the following:

            (a) In the Company's sole discretion at the time your option is
exercised and provided that at the time of exercise the Common Stock is publicly
traded and quoted regularly in The Wall Street Journal, pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board that,
prior to the issuance of Common Stock, results in either the receipt of cash (or
check) by the Company or the receipt of irrevocable instructions to pay the
aggregate exercise price to the Company from the sales proceeds.

            (b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, by delivery of
already-owned shares of Common Stock either that you have held for the period
required to avoid a charge to the Company's reported earnings (generally six
months) or that you did not acquire, directly or indirectly from the Company,
that are owned free and clear of any liens, claims, encumbrances or security
interests, and that are valued at Fair Market Value on the date of exercise.
"Delivery" for these purposes, in the sole discretion of the Company at the time
you exercise your option, shall include delivery to the Company of your
attestation of ownership of such shares of Common Stock in a form approved by
the Company. Notwithstanding the foregoing, you may


                                       1.


not exercise your option by tender to the Company of Common Stock to the extent
such tender would violate the provisions of any law, regulation or agreement
restricting the redemption of the Company's stock.

      4. WHOLE SHARES. You may exercise your option only for whole shares of
Common Stock.

      5. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, you may not exercise your option unless the shares of Common
Stock issuable upon such exercise are then registered under the Securities Act
or, if such shares of Common Stock are not then so registered, the Company has
determined that such exercise and issuance would be exempt from the registration
requirements of the Securities Act. The exercise of your option must also comply
with other applicable laws and regulations governing your option, and you may
not exercise your option if the Company determines that such exercise would not
be in material compliance with such laws and regulations.

      6. TERM. You may not exercise your option before the commencement of its
term or after its term expires. The term of your option commences on the Date of
Grant and expires upon the earliest of the following:

            (a) three (3) months after the termination of your Continuous
Service for any reason other than your Disability or death (or in connection
with a Change in Control as provided in subsection (b) below), provided that if
during any part of such three- (3-) month period your option is not exercisable
solely because of the condition set forth in the preceding paragraph relating to
"Securities Law Compliance," your option shall not expire until the earlier of
the Expiration Date or until it shall have been exercisable for an aggregate
period of three (3) months after the termination of your Continuous Service;

            (b) twelve (12) months after the termination of your Continuous
Service in connection with a Change in Control where all of the unvested shares
subject to your option become fully vested and exercisable immediately prior to
the effective date of such Change in Control in accordance with the provisions
of Section 1 above;

            (c) twelve (12) months after the termination of your Continuous
Service due to your Disability;

            (d) eighteen (18) months after your death if you die either during
your Continuous Service or within three (3) months after your Continuous Service
terminates;

            (e) the Expiration Date indicated in your Grant Notice; or

            (f) the day before the tenth (10th) anniversary of the Date of
Grant.

      Notwithstanding the foregoing, if your sale of the shares acquired upon
exercise of your option would subject you to suit under Section 16(b) of the
Exchange Act, your option shall remain exercisable until the earlier of (i) the
expiration of a period of ten (10) days after the date on which a sale of the
shares by you would no longer be subject to such suit, (ii) the expiration of


                                       2.


the one hundred and ninetieth (190th) day after your termination of Continuous
Service, or (iii) the Expiration Date indicated in your Grant Notice.

      7. EXERCISE.

            (a) You may exercise the vested portion of your option (and the
unvested portion of your option if your Grant Notice so permits) during its term
by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.

            (b) By exercising your option you agree that, as a condition to any
exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the
shares of Common Stock are subject at the time of exercise, or (3) the
disposition of shares of Common Stock acquired upon such exercise.

      8. TRANSFERABILITY. Your option is not transferable, except (i) by will or
by the laws of descent and distribution, (ii) with the prior written approval of
the Company, by instrument to an inter vivos or testamentary trust, in a form
accepted by the Company, in which the option is to be passed to beneficiaries
upon the death of the trustor (settlor) and (iii) with the prior written
approval of the Company, by gift, in a form accepted by the Company, to a
permitted transferee under Rule 701 of the Securities Act.

      9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or
service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.

      10. WITHHOLDING OBLIGATIONS.

            (a) At the time you exercise your option, in whole or in part, or at
any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision as directed by the Company (including by means
of a "cashless exercise" pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board to the extent directed by the Company),
for any sums required to satisfy the federal, state, local and foreign tax
withholding obligations of the Company or an Affiliate, if any, which arise in
connection with your option.

            (b) The Company may, in its sole discretion, and in compliance with
any applicable conditions or restrictions of law, withhold from fully vested
shares of Common Stock otherwise issuable to you upon the exercise of your
option a number of whole shares of Common Stock having a Fair Market Value,
determined by the Company as of the date of exercise, not in


                                       3.


excess of the minimum amount of tax required to be withheld by law. Any adverse
consequences to you arising in connection with such share withholding procedure
shall be your sole responsibility.

            (c) You may not exercise your option unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise your option when desired even though your option is
vested, and the Company shall have no obligation to issue a certificate for such
shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein.

      11. PARACHUTE PAYMENTS.

            (a) If any payment or benefit you would receive pursuant to a Change
in Control from the Company or otherwise ("Payment") would (i) constitute a
"parachute payment" within the meaning of Section 280G of the Code, and (ii) but
for this sentence, be subject to the excise tax imposed by Section 4999 of the
Code (the "Excise Tax"), then such Payment shall be equal to the Reduced Amount.
The "Reduced Amount" shall be either (x) the largest portion of the Payment that
would result in no portion of the Payment being subject to the Excise Tax or (y)
the largest portion, up to and including the total, of the Payment, whichever
amount, after taking into account all applicable federal, state and local
employment taxes, income taxes, and the Excise Tax (all computed at the highest
applicable marginal rate), results in your receipt, on an after-tax basis, of
the greater amount of the Payment notwithstanding that all or some portion of
the Payment may be subject to the Excise Tax. If a reduction in payments or
benefits constituting "parachute payments" is necessary so that the Payment
equals the Reduced Amount, reduction shall occur in the following order unless
you elect in writing a different order (provided, however, that such election
shall be subject to Company approval if made on or after the effective date of
the event that triggers the Payment): reduction of cash payments; cancellation
of accelerated vesting of Stock Awards; reduction of employee benefits. In the
event that acceleration of vesting of Stock Award compensation is to be reduced,
such acceleration of vesting shall be cancelled in the reverse order of the date
of grant of your Stock Awards (i.e., earliest granted Stock Award cancelled
last) unless you elect in writing a different order for cancellation.

            (b) The accounting firm engaged by the Company for general audit
purposes as of the day prior to the effective date of the Change in Control
shall perform the foregoing calculations. If the accounting firm so engaged by
the Company is serving as accountant or auditor for the individual, entity or
group effecting the Change in Control, the Company shall appoint a nationally
recognized accounting firm to make the determinations required hereunder. The
Company shall bear all expenses with respect to the determinations by such
accounting firm required to be made hereunder.

            (c) The accounting firm engaged to make the determinations hereunder
shall provide its calculations, together with detailed supporting documentation,
to you and the Company within fifteen (15) calendar days after the date on which
your right to a Payment is triggered (if requested at that time by you or the
Company) or such other time as requested by you or the Company. If the
accounting firm determines that no Excise Tax is payable with respect to a
Payment, either before or after the application of the Reduced Amount, it shall


                                       4.


furnish you and the Company with an opinion reasonably acceptable to you that no
Excise Tax will be imposed with respect to such Payment. Any good faith
determinations of the accounting firm made hereunder shall be final, binding and
conclusive upon you and the Company, except as specified below.

            (d) If, notwithstanding any reduction described in this Section 10,
the IRS determines that you are liable for the Excise Tax as a result of the
receipt of the payment of benefits as described above, then you shall be
obligated to pay back to the Company, within thirty (30) days after a final IRS
determination or in the event that you challenge the final IRS determination, a
final judicial determination, a portion of the payment equal to the "Repayment
Amount." The Repayment Amount with respect to the payment of benefits shall be
the smallest such amount, if any, as shall be required to be paid to the Company
so that your net after-tax proceeds with respect to any payment of benefits
(after taking into account the payment of the Excise Tax and all other
applicable taxes imposed on such payment) shall be maximized. The Repayment
Amount with respect to the payment of benefits shall be zero if a Repayment
Amount of more than zero would not result in your net after-tax proceeds with
respect to the payment of such benefits being maximized. If the Excise Tax is
not eliminated pursuant to this paragraph, you shall pay the Excise Tax.

            (e) Notwithstanding any other provision of this Section 10, if (i)
there is a reduction in the payment of benefits as described in this Section 10,
(ii) the IRS later determines that you are liable for the Excise Tax, the
payment of which would result in the maximization of your net after-tax proceeds
(calculated as if your benefits had not previously been reduced), and (iii) you
pay the Excise Tax, then the Company shall pay to you those benefits which were
reduced pursuant to this section contemporaneously or as soon as
administratively possible after you pay the Excise Tax so that your net
after-tax proceeds with respect to the payment of benefits is maximized.

      12. NOTICES. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by mail by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the last
address you provided to the Company.

      13. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions
of the Plan, the provisions of which are hereby made a part of your option, and
is further subject to all interpretations, amendments, rules and regulations
which may from time to time be promulgated and adopted pursuant to the Plan. In
the event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control.


                                       5.



                            SGX PHARMACEUTICALS, INC.
                            STOCK OPTION GRANT NOTICE

                                  INITIAL GRANT
                (2005 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN)

SGX Pharmaceuticals, Inc. (the "Company"), pursuant to its 2005 Non-Employee
Directors' Stock Option Plan (the "Plan"), hereby grants to Optionholder an
option to purchase the number of shares of the Company's Common Stock set forth
below. This option is subject to all of the terms and conditions as set forth
herein and in the Stock Option Agreement, the Plan and the Notice of Exercise,
all of which are attached hereto and incorporated herein in their entirety.

Optionholder:___________________________________________________________________
Date of Grant:__________________________________________________________________
Number of Shares Subject to Option:_____________________________________________
Exercise Price (Per Share):_____________________________________________________
Total Exercise Price:___________________________________________________________
Expiration Date:       The day before the 10th anniversary of the Date of Grant

TYPE OF GRANT:         Nonstatutory Stock Option

EXERCISE SCHEDULE:     Same as Vesting Schedule

VESTING SCHEDULE:      1/36th of the shares vest each month following the Date
                       of Grant.

PAYMENT:               By one or a combination of the following items (described
                       in the Plan and/or Stock Option Agreement):

                       [ ]  By cash or check
                       [ ]  Pursuant to a Regulation T Program if the Shares are
                            publicly traded
                       [ ]  By delivery of already-owned shares if the Shares
                            are publicly traded
                       [ ]  Net exercise if the Company has adopted FAS 123, as
                            revised, at the time of such exercise

ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock Option
Agreement and the Plan. Optionholder further acknowledges that as of the Date of
Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the
entire understanding between Optionholder and the Company regarding the
acquisition of stock in the Company and supersede all prior oral and written
agreements on that subject with the exception of (i) options previously granted
and delivered to Optionholder under the Plan, and (ii) the following agreements
only:

      OTHER AGREEMENTS:                  _______________________________________
                                         _______________________________________

SGX PHARMACEUTICALS, INC.                OPTIONHOLDER:


By:___________________________________   _______________________________________
            Signature                                   Signature

Title:________________________________   Date:__________________________________

Date:_________________________________

ATTACHMENTS:     Stock Option Agreement, 2005 Non-Employee Directors' Stock
                 Option Plan and Notice of Exercise

EX-10.16

                                                                   EXHIBIT 10.16

                                           *** TEXT OMITTED AND FILED SEPARATELY
                                    PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST
                                            UNDER 17 C.F.R. SECTION 200.80(b)(4)
                                               AND RULE 406 UNDER THE SECURITIES
                                                         ACT OF 1933, AS AMENDED


                                  23 JULY 2004



                           PATENT AND KNOW HOW LICENSE


                                     BETWEEN


                               SHIRE BIOCHEM INC.

                               TANAUD IRELAND INC.

                            TANAUD INTERNATIONAL B.V.


                                       AND


                            STRUCTURAL GENOMIX, INC.






                    ----------------------------------------

                           PATENT AND KNOW HOW LICENSE
        Relating to the development, registration and sale of TROXATYL(R)

                    ----------------------------------------





PATENT AND KNOW HOW LICENSE

DATE:    23 JULY 2004

PARTIES:

(1)  SHIRE BIOCHEM INC., a company incorporated in Canada, whose address is 275
     boul. Armand-Frappier, Laval, QC, Canada H7V 4A7 ("SHIRE BIOCHEM");

(2)  TANAUD IRELAND INC., a company incorporated in Ireland, whose address is
     Shannon Airport House, Shannon, County Clare, Ireland ("TANAUD IRELAND");

(3)  TANAUD INTERNATIONAL B.V., a company incorporated in the Netherlands, whose
     address is Fred Roeskestraat 123, First Floor, 1076 EE Amsterdam, The
     Netherlands ("TANAUD BV"); and

(4)  STRUCTURAL GENOMIX, INC., a company incorporated in Delaware, whose address
     is 10505 Roselle Street, San Diego, CA 92121, U.S.A. ("LICENSEE").

BACKGROUND

(A)  Shire BioChem (formerly BioChem Pharma Inc.) is a pharmaceutical company
     engaged in, among other things, the research and development of certain
     pharmaceutical products including the Licensed Product (as defined below).

(B)  During the course of its research and development of the Licensed Product,
     Shire BioChem generated the Compound Patents, the Background Patents and
     the Shire Know-How (each defined below) in connection with the Licensed
     Product.

(C)  On 3 January 1996, Shire BioChem entered into the License Agreement (as
     defined below) which, among other things, granted Shire BioChem the
     exclusive right to use the University Patents (as defined below).

(D)  The Licensee is engaged in, among other things, the research and
     development of certain pharmaceutical products.

(E)  The Licensee has requested, and Shire agrees to grant, an exclusive license
     to make, have made, use, supply and sell the Licensed Product in the
     Territory (as defined below) on the terms and conditions set out in this
     Agreement.

OPERATIVE PROVISIONS

1.   INTERPRETATION

1.1  In this Agreement:



                                       2





         "ACCELERATED APPROVAL" means approval for Marketing Authorisation of
         the Licensed Product in the United States of America on the basis of an
         application made to the FDA pursuant to the Code of Federal
         Regulations, Title 21, Part 314 (subpart H - accelerated approval of
         new drugs for serious or life threatening illnesses) or its equivalent
         in any jurisdiction;

         "AFFILIATE" means any firm, person or company which controls, is
         controlled by or is under common control with a Party to this Agreement
         and for the purpose of this definition the term "control" means the
         possession, directly or indirectly, of the power to direct or cause the
         direction of the management and policies of such firm, person or
         company, whether through the ownership of voting securities, by
         contract or otherwise or the ownership either directly or indirectly of
         more than 50% of the voting securities of such firm, person or company;

         "BACKGROUND PATENTS" means the patents and patent applications owned by
         or licensed to Shire Biochem, Tanaud Ireland or Tanaud BV as set out in
         Part I of Schedule 2;

         "BUSINESS DAY" means any day other than Saturday or Sunday on which the
         banks in New York are open for business;

         "CANADIAN TERRITORY" means Canada;

         "CHANGE OF CONTROL" means a transaction or series of related
         transactions (other than an equity financing the principal purpose of
         which is to raise new capital for the Licensee or an IPO or follow-on
         public offering), that result directly or indirectly in the change of:

         (a)      control of more than half of the voting power of the issued
                  share capital of the Licensee; or

         (b)      control of more than half of the issued share capital
                  (excluding any part thereof which carries no right to
                  participate beyond a specified amount in the distribution of
                  either profit or capital) of the Licensee; or

         (c)      control of the power to direct or cause the direction of the
                  management and policies of the Licensee, by virtue of any
                  power conferred under the articles of association or other
                  documents relating to the Licensee;

         "CLAIMS" shall have the meaning given in clause 14.1;

         "CLINICAL PROOF OF CONCEPT" means either (a) completion of the
         [...***...] patient phase II study of the Compound [...***...] Acute
         Myelogenous Leukemia (AML) patients with a complete response rate (CR
         and CRp in aggregate) [...***...] AML patients of at least [...***...]%
         with a CR rate of at least [...***...]%; or (b) continuation of such
         phase II study with additional patients or Initiation of a phase III
         study. For the purposes of this Agreement, "CR" shall have the meaning
         given to it in Journal of Clinical Oncology, Vol. 21, 2003: 4642-4649:
         "Morphologic complete remission: A CR designation requires that the
         patient achieve the morphologic leukemia-free state and have an
         absolute neutrophil count of more than 1,000/uL and platelets of
         100,000/uL. Hemoglobin concentration or hematocrit has no bearing on
         remission status, although the patient must be red cell and platelet
         transfusion



                                       3     ***CONFIDENTIAL TREATMENT REQUESTED


         independent (no red cell transfusion for 2 weeks and no platelet
         transfusion for 1 week). The bone marrow would have less than 5% blasts
         and no Auer rods. There is no requirement for bone marrow cellularity.
         There should be no residual evidence of extramedullary leukemia," and
         "CRp" means CR but with platelets of >25,000/uL and
         <100,000uL;

         "COMMERCIAL SALE" means any sale of the Licensed Product to a third
         party in any country in the Territory after the receipt of the
         Marketing Authorization for that country;

         "COMMITTEE MEMBERS" shall have the meaning given in clause 4.1;

         "COMPETING PRODUCT" means any pharmaceutical product (other than the
         Licensed Product) indicated for the treatment of acute myeloid leukemia
         that is marketed or near to market (phase II clinical development or
         later) which in Shire's reasonable opinion is likely to compete with
         the Licensed Product to the detriment of the Licensed Product, but
         excluding:

         (a)      any pharmaceutical product which is a kinase inhibitor owned
                  or licensed by the Licensee; and

         (b)      pharmaceutical products with scientifically documented
                  evidence, demonstrating the potential for use in combination
                  with the Licensed Product.

         "COMPOUND" means the compound troxacitabine;

         "COMPOUND PATENTS" means the patents and patent applications set out in
         Part II of Schedule 2;

         "CONFIDENTIAL INFORMATION" means any scientific, technical,
         formulation, process, manufacturing, clinical, non-clinical,
         regulatory, marketing, financial or commercial information or data
         relating to the business, projects or products of either Party and
         provided by one Party to the other by written, oral, electronic or
         other means in connection with this Agreement;

         "CONSULTANCY AGREEMENT" means the consultancy agreement dated 20
         February 1996 between BioChem Therapeutic Inc. and [...***...];

         "DEVELOPMENT COMMITTEE" means the committee set up by the Parties in
         accordance with clause 4.1;

         "DEVELOPMENT DATA" means any data, charts, studies, summaries,
         analyses, reports, know-how and other information created, generated or
         discovered in connection with the Development Plan or any other
         pre-clinical or clinical trials or studies of the Licensed Product
         conducted by or on behalf of the Licensee;

         "DEVELOPMENT PLAN" means the plan for the development of the Licensed
         Product by the Licensee as set out in Schedule 1 including the
         anticipated Timelines and development budget for the phase II study of
         the Licensed Product;

                                        4    ***CONFIDENTIAL TREATMENT REQUESTED





         "EFFECTIVE DATE" means the date of this Agreement;

         "EXCLUDED PATENTS" means the patents and patent applications identified
         in Schedule 9 which are excluded from the license granted to the
         Licensee under this Agreement;

         "FDA" means the United States Food and Drug Administration and any
         successor thereto;

         "FIELD" means all pharmaceutical uses of the Licensed Product except
         that in relation to the University Patents and University Technology,
         "Field" means the treatment of cancer only;

         "FORCE MAJEURE" means in relation to either Party any circumstances
         beyond the reasonable control of that Party;

         "GENERIC PRODUCT" means any pharmaceutical product that is recognized
         by a Regulatory Authority in a particular country in the Territory as
         "AA or AB" rated (or the equivalent rating in any jurisdiction) against
         the Licensed Product or is substitutable at the pharmacy by a
         pharmacist for a prescription written for the Licensed Product;

         "IMPROVEMENT" means any and all discoveries, developments, inventions,
         enhancements or modifications, patentable or otherwise, specifically
         relating to the Licensed Product and for use in the Field created,
         generated or discovered by or on behalf of either Party or its
         Affiliates during the term of this Agreement, but excluding the
         Development Data and any regulatory material generated in connection
         with an application for Marketing Authorization;

         "INTELLECTUAL PROPERTY RIGHTS" means patents, trade marks, service
         marks, logos, trade names, rights in designs, copyright, utility
         models, rights in know-how and other intellectual property rights, in
         each case whether registered or unregistered and including applications
         for registration, and all rights or forms of protection having
         equivalent or similar effect anywhere in the world;

         "INITIATION" means the date of first dosing of the first patient in the
         relevant clinical study;

         "IPO" means an initial public offering of the Licensee's equity
         securities for admission to listing or trading on a recognized
         securities exchange or listing or trading on a recognized securities
         market;

         "LAUNCH" means the commencement of Commercial Sale of the Licensed
         Product in any country of the Territory;

         "LICENSE AGREEMENT" means the license agreement dated 3 January 1996
         between the University of Georgia Research Foundation Inc., Yale
         University, Shire BioChem Inc. (formerly BioChem Pharma Inc.), Tanaud
         Holdings (Barbados) Limited and Tanaud LLC, as amended from time to
         time;



                                       5


         "LICENSED PRODUCT" means any pharmaceutical formulations that contain
         the Compound alone as a therapeutically active ingredient, or in
         combination with any other pharmaceutically active ingredient;

         "MARKETING AUTHORIZATION" means the grant of all necessary permits,
         authorizations, licenses, approvals (including pricing and
         reimbursement approvals, if applicable) or waivers from any relevant
         Regulatory Authority required for the research, development,
         manufacture, marketing, storage, import, export, transport, use or sale
         of the Licensed Product in any country of the Territory;

         "MARKETING PLAN" means the marketing plan for the Launch, marketing and
         commercialization of the Licensed Product in each country of the
         Territory prepared in accordance with clause 6.2;

         "MEMORANDUM OF UNDERSTANDING" means a memorandum of understanding
         between the University and the Licensee substantially in the form of
         Schedule 7;

         "MINIMUM SALES FORECASTS" means [...***...]% of the [...***...];
         [...***...]% of the [...***...]; [...***...]% of the [...***...]; and
         [...***...]% of the [...***...];

         "MILESTONE EVENT" means the event identified in Schedule 3 which
         triggers a payment under clause 7.2;

         "MILESTONE PAYMENT" means the payment by the Licensee to Shire of the
         sums identified in Schedule 3 on the occurrence of a Milestone Event;

         "MILESTONE PAYMENT TERMS" means the payment of any Milestone Payment or
         other applicable payment under clause 7, to Shire as follows:
         [...***...]% of such payment to Tanaud Ireland; [...***...]% of such
         payment to Tanaud BV; and [...***...]% of such payment to Shire
         BioChem;

         "NDA" means a new drug application and all supplements filed with the
         FDA, including all documents, data and other information concerning the
         Licensed Product which are necessary for, or included in, a Marketing
         Authorization to use, sell, supply or market the Licensed Product in
         the United States of America;

         "NET SALES" means the gross amount invoiced by the Licensee, its
         Affiliates or Sub-Licensees to third parties in respect of sales of the
         Licensed Product, less:

         (a)      trade, quantity and cash discounts or rebates actually allowed
                  and taken, provided that such discounts or rebates are not
                  applied disproportionately to the Licensed Product as compared
                  with similar products of the selling entity, including those
                  granted for rejected, damaged and recalled goods;

         (b)      freight, shipping and related insurance charges, provided that
                  such charges are no more than 1% of Net Sales;


                                       6     ***CONFIDENTIAL TREATMENT REQUESTED



         (c)      tax, tariff or customs duties or other government duties
                  (other than income tax) levied on the sale, transportation or
                  delivery of the Licensed Product; and

         (d)      credits, rebates, charge backs or similar payments granted or
                  given to wholesalers or other third party distributors, health
                  care insurance carriers, pharmacy benefit management companies
                  or health care organizations.

                  For the avoidance of doubt, sales or other transfers between
         the Licensee and its Affiliates or its Sub-Licensees are not sales to
         third parties, but Net Sales shall include any subsequent sales of the
         Licensed Product by such Affiliates or Sub-Licensees to any third
         parties. Where the Licensed Product is sold otherwise than on an arms
         length basis, the amount that would have been charged in an arms length
         sale shall be deemed to be the invoice price for such Licensed Product
         and where the Licensed Product is disposed of for consideration other
         than cash, such consideration shall be valued at the fair market value.

         "OTHER TERRITORIES" means throughout the world, except for the Canadian
         Territory and the US Territory;

         "PARTY" AND "PARTIES" means respectively Shire or the Licensee, or as
         the case may be, both such parties;

         "PREMIUM ON EQUITY" means in relation to the acquisition by any third
         party of any equity (or any form of security convertible into equity)
         in the Licensee or its Affiliates in connection with any Sub-License
         Agreement, the excess of actual purchase price paid for such equity
         over the fair market value of such equity. For clarity, if the fair
         market value of the equity is $8.00 and the amount paid by the third
         party is $10.00, the Premium on Equity is $2.00. Any dispute over the
         fair market value of the Licensee's stock shall be resolved through the
         dispute resolution procedure set out in clause 24.2;

         "PRINCIPAL MARKETS" means the United States of America, Canada, Japan,
         the United Kingdom, Germany, France, Italy and Spain;

         "QUARTER" means a three month period ending on the last day of March,
         June, September or December in any calendar year;

         "REASONABLE COMMERCIAL EFFORTS" means commercial efforts consistent
         with normal business practices and effort used by the Licensee in
         connection with other products of similar market size or importance
         which the Licensee intends to launch or has launched and sold in the
         Territory, or in the absence of any such similar products then such
         effort shall be assessed by reference to good business practice in the
         light of all the circumstances;

         "REGULATORY AUTHORITY" means any competent government agency,
         regulatory authority or other administrative body responsible for
         granting Marketing Authorization in a particular country or
         multinational group of countries in the Territory, including the FDA;

         "REMEDIES" shall have the meaning given in clause 12.2;


                                       7



         "SALES FORECASTS" means the sales of the Licensed Product anticipated
         by the Licensee for a 4 year period from Launch of the Licensed Product
         in the US Territory as set out in Schedule 4;

         "SEC" means the Securities Exchange Commission in the United States of
         America and any successor thereto;

         "SHIRE" means Shire BioChem, Tanaud Ireland or Tanaud BV or
         collectively Shire BioChem, Tanaud Ireland and Tanaud BV as the case
         may be;

         "SHIRE INTELLECTUAL PROPERTY" means the Shire Patents, the University
         Patents, University Technology and the Shire Know-How;

         "SHIRE KNOW-HOW" means all information, procedures, instructions,
         techniques, 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 owned by Shire or its
         Affiliates (other than Shire Laboratories Inc.) and reasonably
         necessary for the development, or in the case of pricing and market
         evaluation materials, for commercialization, of the Licensed Product in
         the Territory;

         "SHIRE MATERIALS" means the Compound and other materials identified in
         Schedule 5;

         "SHIRE PATENTS" means the Compound Patents and Background Patents and
         including, in each case, any divisionals, extensions, reissues,
         substitutions, renewals, continuations, continuations-in-part,
         provisionals, re-examinations and foreign counterparts thereof
         (including European supplementary protection certificates) and patents
         issuing thereon;

         "SUB-LICENSEE" means any non-Affiliate third party sub-licensee of the
         rights (or any part of the rights) granted to the Licensee under this
         Agreement;

         "SUB-LICENSE AGREEMENT" means any agreement between the Licensee and
         the Sub-Licensee granting the right or license under the Shire
         Intellectual Property (or any part of it) to develop, manufacture, have
         manufactured, use, sell, offer for sale, import or supply the Licensed
         Product;

         "SUB-LICENSE INCOME" means any consideration in any form received by
         the Licensee or its Affiliates in connection with a Sub-License
         Agreement, but excluding royalties on Net Sales and amounts received
         under arms length non-convertible debt instruments negotiated on
         standard commercial terms, including (a) upfront fees, milestone
         payments, license maintenance fees, distribution or joint marketing
         fees, development funding (in excess of the Licensee's cost of
         performing such development), and any investment in the Licensee, and
         (b) exchange products, cross-licensed products, options, marketing
         rights and such other forms of non-cash consideration that may be
         deemed to have value;

         "SUB-LICENSEE MOU" means a memorandum of understanding between Shire
         and a Sub-Licensee substantially in the form of Schedule 7;



                                       8


       "TERRITORY" means the Canadian Territory, the US Territory and the Other
       Territories;

       "THIRD PARTY ACTION" shall have the meaning given in clause 13.1;

       "TIMELINES" means the timelines for the research, development,
       registration and Launch of the Licensed Product as set out in the
       Development Plan;

       "TRADE MARKS" means the trade marks and applications for trade marks set
       out in Schedule 6;

       "UNIVERSITY" means each of the University of Georgia Research Foundation
       Inc. and Yale University;

       "UNIVERSITY PATENTS" means the patents and patent applications set out in
       Part III of Schedule 2 and including, any divisionals, extensions,
       reissues, re-examinations, continuations, and foreign counterparts
       thereof and patents issuing thereon;

       "UNIVERSITY TECHNOLOGY" means the "Licensed Technology" as defined in the
       License Agreement; and

       "US TERRITORY" means the United States of America and its territories and
       possessions.

1.2    In this Agreement, unless the context requires otherwise:

       (a)    the headings are included for convenience only and shall not
              affect its construction;

       (b)    references to "persons" includes individuals, bodies corporate
              (wherever incorporated), unincorporated associations and
              partnerships;

       (c)    words denoting the singular shall include the plural and vice
              versa;

       (d)    references to the word "including" are to be construed without
              limitation;

       (e)    words denoting one gender shall include each gender and all
              genders; and

       (f)    any reference to an enactment or statutory provision is a
              reference to it as it may have been, or may from time to time be
              amended, modified, consolidated or re-enacted.

1.3    The Schedules comprise part of and shall be construed in accordance with
       the terms of this Agreement. In the event of any inconsistency between
       the Schedules and the terms of this Agreement, the terms of this
       Agreement shall prevail.

2.     GRANT OF LICENSE

2.1    Subject to the terms of this Agreement, Shire hereby grants the Licensee:

                                       9


       (a)    an exclusive license under the Shire Patents and Shire Know-How to
              develop, manufacture, have manufactured, use, sell, offer for
              sale, import and supply the Licensed Product in the Territory and
              in the Field; and

       (b)    an exclusive sub-license under the University Patents and
              University Technology to develop, manufacture, have manufactured,
              use, sell, offer for sale, import and supply the Licensed Product
              in the Territory and in the Field.

2.2    Except to the extent necessary to enable Shire to perform its obligations
       under this Agreement and subject to the terms of the License Agreement
       (and in particular the University's rights under Articles 2.2 and 2.4 of
       the License Agreement) the term "exclusive" for the purposes of clause
       2.1, means to the exclusion of all others, including Shire and its
       Affiliates.

2.3    This Agreement and the grant of any license pursuant to clauses 2.1 and
       10.1 shall in all respects be conditional upon the Licensee receiving
       US$12 million in cash from its investors and providing documentary
       evidence, to Shire's reasonable satisfaction, of receipt of such sum by
       no later than September 30, 2004. If such condition subsequent is not
       fulfilled (or waived) on or before September 30, 2004, this Agreement
       shall automatically terminate, Shire shall be entitled to retain any
       upfront payment received and neither party shall have a claim of any
       nature whatsoever against the other party under this Agreement (except in
       respect of any rights or liabilities of the parties which have accrued
       prior to termination).

2.4    The Licensee undertakes to:

       (a)    use all reasonable efforts to ensure that the condition subsequent
              in clause 2.3 is fulfilled as soon as reasonably practicable and
              in any event by September 30, 2004; and

       (b)    keep Shire informed of the progress towards satisfaction of such
              condition precedent and in particular promptly disclose in writing
              to Shire anything which will or may prevent the condition
              subsequent from being satisfied.

3.     SUB-LICENSING

3.1    The Licensee shall have the right to sub-license the rights granted under
       this Agreement to its Affiliates or any third party, provided that:

       (a)    the Licensee provides Shire the opportunity to review the
              Sub-License Agreement (which, subject to the disclosure to the
              University to the extent required under the License Agreement and
              subject to the Universities' confidentiality obligations
              thereunder, Shire shall treat as Confidential Information of the
              Licensee) prior to its execution and considers in good faith any
              reasonable amendments to the Sub-License Agreement requested by
              Shire and subject to clause 3.1A, shall obtain the University's
              prior consent (such consent not be unreasonably withheld or
              delayed);


                                       10

       (b)    any Sub-License Agreement shall be in writing and, with the
              exception of the financial terms, be consistent with the terms of
              this Agreement (except that the Sub-Licensee shall not have the
              right to sub-license, unless Shire and the University have
              consented to such right, which consent, if requested by the
              Licensee, shall not be unreasonably withheld or delayed); and

       (c)    the Licensee shall remain responsible to Shire with respect to all
              the operations of its Sub-Licensee relevant to the use Licensed
              Product under this Agreement as if such operations were carried
              out by the Licensee, including the provision of Reasonable
              Commercial Efforts in the development, manufacture, registration
              and Launch of the Licensed Product, the making of any payments
              under this Agreement, the provision of indemnities, the provision
              of insurance and compliance with applicable law.

3.1A   The Licensee may enter into a Sublicense Agreement without the prior
       consent of the University if:

       (a)    the relevant territory of the Sub-License Agreement is outside the
              Principal Markets; or

       (b)    the relevant territory of the Sub-License Agreement is within the
              Principal Markets, provided that, the Sub-Licensee, at the time of
              grant:

              (i)    is listed on a recognized securities exchange and has
                     market capitalization of not less than U.S.$ [...***...]
                     million, or is a private company with cash of not less than
                     U.S.$ [...***...] million; and

              (ii)   has a current marketing authorization for at least one
                     other regulatory-approved pharmaceutical oncology product
                     in any country in the Principal Markets prior to the date
                     of the Sub-License Agreement.

3.2    Shire shall use reasonable endeavours to procure that the University
       signs a Memorandum of Understanding, and shall provide the same to the
       Licensee on the Effective Date for countersignature by the Licensee. Upon
       request by the Licensee, Shire shall consent (which consent shall not be
       unreasonably withheld or delayed) to signing a Sub-Licensee MOU, provided
       that, the reason for the termination of this Agreement does not relate in
       any way to any act or omission of the Sub-Licensee, its Affiliates,
       representatives or sub-licensees.

3.3    In the event that the Licensee enters a Sub-License Agreement pursuant to
       clause 3.1, the Licensee shall promptly after execution of such
       Sub-License Agreement, provide Shire with a copy of the final form of the
       Sub-License Agreement, which Shire shall treat as Confidential
       Information of Licensee.

3.4    The Licensee shall not, and shall procure that its Affiliates and
       Sub-Licensees shall not:

       (a)    utilize any part of the Shire Intellectual Property in the making
              of any patent application, except as otherwise agreed in writing
              by the Parties pursuant to the terms of this Agreement; or

                                       11    ***CONFIDENTIAL TREATMENT REQUESTED



         (b)      manufacture, supply, market or sell, or knowingly assist any
                  third party to manufacture, supply, market or sell any
                  Competing Product anywhere in the Territory; unless in the
                  event of a Change of Control of Licensee, the new controlling
                  party has a Competing Product and Shire does not terminate the
                  Agreement pursuant to clause 19.2(c), in which event, this
                  sub-clause 3.3(b) shall not apply.

3.5    Shire agrees not to terminate the License Agreement without the prior
       written consent of the Licensee (which consent shall not be unreasonably
       withheld or delayed). Shire further agrees that within 5 Business Days
       after a request from Licensee, Shire shall provide the University with
       the written notice under clause 2.2(a) of the Memorandum of
       Understanding, provided that the reason for the termination of the
       License Agreement by the University does not relate in any way to any act
       or omission of the Licensee, its Affiliates, representatives or
       Sub-Licensees.

4.     THE DEVELOPMENT COMMITTEE

4.1    The Parties shall establish a Development Committee consisting of 4
       individuals ("COMMITTEE MEMBERS"); 2 of whom shall be nominated by Shire;
       and 2 of whom shall be nominated by the Licensee. Either Party may
       replace its Committee Members by notice to the other Party. The Committee
       Members shall be appropriately qualified and experienced in order to make
       a meaningful contribution to Development Committee meetings.

4.2    The purpose of the Development Committee is to provide a forum for the
       Parties to share information and knowledge on the on-going research,
       development and commercialisation of the Licensed Product including
       monitoring the progress of non-clinical and clinical studies, reviewing
       clinical trial programmes, considering proposed regulatory filings,
       Launch plans, marketing and promotional plans, reviewing competitor
       activity and discussing any regulatory, technical, quality assurance or
       safety issues in relation to the Licensed Product. The Development
       Committee shall conduct its discussions in good faith with a view to
       operating to the mutual benefit of the Parties and in furtherance of the
       successful development and commercialisation of the Licensed Product.

4.3    The Development Committee shall meet as often as the Committee Members
       may determine, but in any event not less than once per calendar year. The
       Committee Members may invite individuals with special skills to attend
       such meetings where it is considered to be relevant and appropriate. The
       quorum for Development Committee meetings shall be 2 Committee Members,
       comprising 1 Committee Member from each Party.

5.     DEVELOPMENT AND MARKETING AUTHORIZATIONS

5.1    Shire shall use reasonable efforts within 90 days from the Effective
       Date:

       (a)    to deliver to the Licensee (or its nominee) the Shire Know-How to
              the extent that it is reasonably necessary for the research and
              development of the Licensed Product by the Licensee in accordance
              with the Development Plan, the University Technology under Shire's
              possession or control;

       (b)    to deliver to the Licensee (or its nominee) the Shire Materials;



                                       12



       (c)    transfer the investigational new drug application (filed with the
              FDA) relating to the development and use of Licensed Product to
              the Licensee; and

       (d)    transfer its rights and obligations to the Licensee under the
              clinical research services agreements relating to the phase I
              clinical studies ([...***...] and [...***...]) of the Licensed
              Product between Shire Pharmaceutical Development Inc. and
              Quintiles Inc. From the Effective Date, the Licensee shall bear
              the cost of and risk in such phase I studies.

5.2    For a period of 3 months following the Effective Date, Shire shall
       provide the Licensee with a reasonable amount of access during normal
       business hours to [...***...], and [...***...], as is reasonably
       necessary to teach the Shire Know-How to the Licensee, provided that, the
       personnel remain employed or engaged by Shire and such access is limited
       to no more than an aggregate of 25 person working days and no more than 2
       working days in any working week. Shire shall not terminate the
       employment or engagement of any of the above personnel for 3 months
       following the Effective Date. Shire shall promptly inform the Licensee
       if, during such period, any of the relevant personnel cease to work for
       Shire. In the event that the Licensee requires additional access to Shire
       personnel, the Parties shall in good faith negotiate the cost to the
       Licensee of such access.

5.3    The Licensee shall:

       (a)    at [...***...], use its Reasonable Commercial Efforts to perform,
              or procure the performance of, the activities and services in the
              Development Plan;

       (b)    perform, or procure the performance of, any such activities and
              services with reasonable care and skill and ensure that personnel
              employed or engaged by it in the provision of any such activities
              and services are competent and have appropriate professional
              qualifications, training and experience;

       (c)    complete the Development Plan as expeditiously as reasonably
              possible using its Reasonable Commercial Efforts to meet and
              comply with the Timelines; and

       (d)    update Shire at regular intervals, to be agreed between the
              Parties, on the progress of the Development Plan and submit a
              written report to Shire and the University every [...***...] as
              soon as reasonably practicable after [...***...] of each year and
              in any event by [...***...] respectively, detailing its progress
              of the research, development, registration and commercialisation
              of the Licensed Product and the amount of direct expenditures
              associated with the development of the Licensed Product for the
              previous [...***...] months.

5.4    Upon completion of the Development Plan, the Licensee shall, at
       [...***...], use, or cause its Affiliates and Sub-Licensees to use,
       Reasonable Commercial Efforts to prepare, file, prosecute and maintain
       all applications for Marketing Authorization and any other necessary
       licenses, permits, authorizations and approvals (or waivers) required by
       any Regulatory Authority for the Launch, use, promotion, import, sale,
       distribution or commercialisation of the Licensed Product in the
       Principal Markets. The Licensee shall file its application for


                                         13  ***CONFIDENTIAL TREATMENT REQUESTED





       NDA in the United States of America no later than [...***...] following
       completion of the Development Plan with respect to that country.

6.     LAUNCH AND MARKETING EFFORTS

6.1    The Licensee shall, at [...***...] use its Reasonable Commercial Efforts,
       or procure that its Affiliates or Sub-Licensees use their Reasonable
       Commercial Efforts, to:

       (a)    Launch the Licensed Product in the Principal Markets as soon as
              reasonably practicable following receipt of Marketing
              Authorization in the relevant country and in any event Launch the
              Licensed Product no later than [...***...] following receipt of
              Marketing Authorization in such country; and

       (b)    research, develop, manufacture, distribute and sell, or cause its
              Affiliates or Sub-Licensees (except for third party contract
              research organisations or pharmaceutical manufacturers) to
              research, develop, manufacture, distribute and sell the Licensed
              Product in the Principal Markets.

6.2    The Licensee shall, within [...***...] from filing the NDA for the
       Licensed Product, provide the Development Committee with its Marketing
       Plan setting out its strategy for the Launch of the Licensed Product
       including revised Sales Forecasts (if applicable), anticipated pricing
       levels and reimbursement levels, if appropriate, and marketing and
       promotion plans and spend, in relation to the Licensed Product for the
       calendar year following approval of the NDA. Thereafter, and on or before
       31 October of each calendar year, the Licensee shall provide the
       Development Committee with its Marketing Plan for the next calendar year.
       Each Marketing Plan shall include net sales targets, projections with
       respect to sales force staffing levels, marketing research strategies,
       marketing and promotion plans, physician education plans and general
       advertising and related budgets for sales of the Licensed Product in the
       relevant calendar year.

6.3    Licensee shall:

       (a)    perform, or procure the performance of, the activities set out in
              the Marketing Plan;

       (b)    use Reasonable Commercial Efforts to meet the Sales Forecasts; and

       (c)    on reasonable request from Shire, provide it with copies of the
              packaging, packaging inserts and any advertising or promotional
              materials (including translations, if necessary) used in
              connection with the sale of the Licensed Product in the Territory.

6.4    The Licensee acknowledges that the Sales Forecasts are its good faith
       estimates of sales of the Licensed Product in the Territory based on
       information available to the Licensee at the Effective Date.

6.5    The Licensee may, on submitting the first Marketing Plan and subject to
       the terms of this Agreement, revise the Sales Forecasts. Any reduction in
       the Sales Forecasts must be based on the following:


                                         14  ***CONFIDENTIAL TREATMENT REQUESTED





       (a)    an unexpected and materially adverse change in the market for the
              Licensed Product in the Territory;

       (b)    unexpected clinical data generated from the Development Plan or an
              unexpected pricing decision from a Regulatory Authority which, in
              each case, has an adverse effect on the anticipated sales of the
              Licensed Product; or

       (c)    advice from a Regulatory Authority which specifies restrictions to
              the use of the Licensed Product that reduces the anticipated
              market for the Licensed Product in the Territory.

6.6    Notwithstanding anything contained in clause 6.5, any such reduction in
       the Sales Forecast in the first Marketing Plan must:

       (a)    be supported by a written report explaining, to Shire's reasonable
              satisfaction, the reasons for such reduction;

       (b)    not be due to reasons which could have reasonably been foreseen by
              the Licensee at the Effective Date and shall not, in any event, be
              less than the [...***...] identified at the Effective Date; and

       (c)    be more than [...***...]% of the initial Sales Forecast before the
              Licensee shall be entitled to seek such a reduction.

6.7    In the event that the Licensee fails to meet a Minimum Sales Forecasts in
       any calendar year, the Licensee shall pay Shire, within 30 days from the
       end of the relevant calendar year, an additional payment representing
       [...***...] that [...***...] on the [...***...] the [...***...] for the
       [...***...] and the [...***...].

7.     ROYALTY AND MILESTONE PAYMENTS

7.1    In consideration of the rights granted under this Agreement, the Licensee
       shall pay Shire (or its nominee) the non-creditable and non-refundable
       sum of US$3 million within 3 Business Days from the Effective Date and
       the non-creditable and non-refundable sum of US$1 million within 5
       Business Days of the first anniversary of the Effective Date, in
       accordance with the Milestone Payment Terms.

7.2    Upon the occurrence of each Milestone Event, the corresponding
       non-refundable Milestone Payment shall be made by the Licensee to Shire
       in accordance with the Milestone Payment Terms. For the avoidance of
       doubt, each Milestone Payment shall be made no more than once with
       respect to the achievement of a Milestone Event, but shall be payable the
       first time the Milestone Event is achieved. [...***...]% of any
       development Milestone Payments (but not sales Milestone Payments) shall
       be creditable against royalties due to Shire under sub-clauses 7.3(a),
       7.3(b), 7.3(c), 7.3(d) (but not royalties under sub-clause 7.3(e)), and
       if applicable, sub-clauses 7.4(a), 7.4(b), 7.4(c), 7.4(d) (but not
       royalties under sub-clause 7.4(e)), provided that, in no event will the
       credit for such development Milestone Payments reduce the royalties
       payable to Shire in any Quarter by more than [...***...]%. Any amount
       that has not been so credited


                                       15    ***CONFIDENTIAL TREATMENT REQUESTED




       may be credited against royalties due in subsequent Quarters, subject to
       the limitation described in the previous sentence. For the avoidance of
       doubt, upon expiry or termination of this Agreement, Shire shall not be
       liable to the Licensee for any credit amount accrued and not credited.

7.3    Subject to clauses 7.4, 7.7(b) and 8.2, during the term of this
       Agreement, the Licensee shall pay Shire:

       (a)    a royalty of [...***...]% of the first US$[...***...] of Net Sales
              of the Licensed Product in the Territory in any calendar year;

       (b)    a royalty of [...***...]% of any Net Sales in excess of
              US$[...***...] and up to US$[...***...] in the Territory in any
              calendar year;

       (c)    a royalty of [...***...]% of any Net Sales in excess of
              US$[...***...] and up to US$[...***...] in the Territory in any
              calendar year;

       (d)    a royalty of [...***...]% of any Net Sales in excess of
              US$[...***...] in the Territory in any calendar year; and

       (e)    any royalties or other payments to be made by Shire or its
              Affiliates under the License Agreement or the Consultancy
              Agreement, incurred after the Effective Date, other than payments
              under Articles 4.5 and 4.6 of the License Agreement. [...***...]%
              of any payments made by the Licensee for milestone payments
              properly paid by the Licensee under Article 4.2(c) of the License
              Agreement shall be creditable against royalties in accordance with
              clause 7.2 above.

7.4    At any time during calendar year [...***...], Licensee shall have the
       right to pay to Shire the non-creditable and non-refundable sum of
       US$[...***...] in accordance with the Milestone Payment Terms and in such
       event, Licensee shall have no obligation to make any payments to Shire
       under clause 7.3, but instead shall pay Shire the following:

       (a)    a royalty of [...***...]% of the first US$[...***...] of Net Sales
              of the Licensed Product in the Territory in any calendar year;

       (b)    a royalty of [...***...]% of any Net Sales in excess of
              US$[...***...] and up to US$[...***...] in the Territory in any
              calendar year;

       (c)    a royalty of [...***...]% of any Net Sales in excess of
              US$[...***...] and up to US$[...***...] in the Territory in any
              calendar year;

       (d)    a royalty of [...***...]% of any Net Sales in excess of
              US$[...***...] in the Territory in any calendar year; and

       (e)    any royalties or other payments to be made by Shire or its
              Affiliates under the License Agreement or the Consultancy
              Agreement, incurred after the Effective Date, other than payments
              under Articles 4.5 and 4.6 of the License Agreement.

                                       16    ***CONFIDENTIAL TREATMENT REQUESTED




7.5    In the event that the Licensee supplies a Licensed Product to any
       customer as part of a package or combination of products, then the Net
       Sales of the Licensed Product shall be whichever is the higher of:


       (a)    the fair market value of such Licensed Product when sold by
              itself; or



       (b)    the proportion of the selling price of such package of products
              which is reasonably attributable to the Licensed Product.



7.6    For the purposes of clause 7.5, fair market value means the value of
       Licensed Product sold to similar customers in the Territory with similar
       pricing and reimbursement structures and for similar quantities. Any
       dispute as to the determination of fair market value or proportion of the
       selling price of a package of products attributable to the Licensed
       Product shall be resolved through the dispute resolution procedure set
       out in clause 24.2.


7.7    Subject to clauses 7.9 and 8.2, in the event that Licensee or its
       Affiliates enters into a Sub-License Agreement in any Territory, then
       Licensee shall pay to Shire in addition to the Milestone Payments:

       (a)    subject to clause 7.10, [...***...]% of any Sub-License Income;
              and

       (b)    in lieu of royalties under clauses 7.3 or 7.4 applicable to Net
              Sales by such Sub-Licensee in its particular territory, the
              greater of:

              (i)    [...***...]% of any royalty payments received by Licensee
                     or its Affiliates from the Sub-Licensee or its Affiliates
                     for sales of Licensed Products by or on behalf of the
                     Sub-Licensee; or

              (ii)   [...***...]% of Net Sales by the Sub-Licensee and its
                     Affiliates.

7.8    In the event that Sub-License Income corresponds to a Milestone Payment
       under this Agreement which has not already been paid by the Licensee and
       such Sub-License Income is greater than the respective Milestone Payment,
       the Licensee shall pay Shire on the occurrence of the Milestone Event the
       full Milestone Payment plus [...***...]% of the difference between the
       Sub-License Income and the relevant Milestone Payment.

7.9    In addition to any payments made by the Licensee under clause 7.7, the
       Licensee shall pay any royalties or other payments to be made by Shire or
       its Affiliates under the License Agreement and the Consultancy Agreement,
       incurred after the Effective Date, other than payments under Articles 4.5
       and 4.6 of the License Agreement.

7.10   In the event that the Licensee or its Affiliates receives any Sub-License
       Income by way of cash consideration in relation to the acquisition of
       equity (or any form of security convertible into equity) in the Licensee
       or its Affiliates or non-cash consideration upon which payment would be
       due to Shire under clause 7.7, the Licensee shall pay Shire:

       (a)    in relation to the acquisition of equity (or any form of security
              convertible into equity) in the Licensee or its Affiliates the
              greater of:


                                       17    ***CONFIDENTIAL TREATMENT REQUESTED




              (i)    [...***...]% of the Premium on Equity; or

              (ii)   [...***...]% of the total amount received or to be received
                     by the Licensee or its Affiliates; or

       (b)    in relation to the payment of non-cash consideration, [...***...]%
              of the fair market cash value of such non-cash consideration at
              the date of receipt of the non-cash consideration by the Licensee
              or its Affiliate.

8.     PAYMENT TERMS

8.1    Unless otherwise expressly stated, payments due under this Agreement
       shall be made by the Licensee to Shire (or its nominee) as follows:

       (a)    in respect of any development Milestone Payments, within
              [...***...] days from identification of the occurrence of the
              development Milestone Event by the Licensee;

       (b)    in respect of any sales Milestone Payments, within [...***...]
              days from the end of the Quarter in which the relevant Milestone
              Event occurred;

       (c)    in respect of Net Sales royalty payments during any Quarter,
              within [...***...] days from the end of that Quarter;

       (d)    in respect of any payments under clause 7.7, within [...***...]
              days from receipt of the Sub-Licensing Income by the Licensee or
              its Affiliates from the Sub-Licensee, or in relation to royalties
              on Net Sales within [...***...] days from the end of the relevant
              Quarter; and

       (e)    in respect of any payments to be made under the License Agreement
              during any Quarter, within [...***...] days from the end of the
              Quarter.

8.2    The payment of all Net Sales royalty revenue from the Licensee, its
       Affiliates or its Sub-Licensees, to Shire shall:

       (a)    in respect of sales of the Licensed Product in the US Territory,
              be paid to Tanaud Ireland;

       (b)    in respect of sales of the Licensed Product in the Canadian
              Territory, be paid to Shire BioChem; and

       (c)    in respect of sales of the Licensed Product in the Other
              Territories, be paid to Tanaud BV.

8.3      All payment sums due under this Agreement to Shire shall be paid in US
         dollars. Net Sales shall be determined in the currency in which the
         Licensed Product was sold and shall be converted into US dollars using
         the spot rate on the last day of the relevant Quarter as

                                       18    ***CONFIDENTIAL TREATMENT REQUESTED



       published by the Wall Street Journal for the relevant Quarter for which
       such payment is being determined.

8.4    At the same time as payment of any Net Sales royalty falls due, the
       Licensee shall submit to Shire a statement in writing recording the
       calculation of the amounts payable and including:

       (a)    the number of Licensed Products which have been supplied in each
              country of the Territory during the previous Quarter;

       (b)    the Net Sales generated in each country of the Territory during
              the previous Quarter; and

       (c)    the amount of royalties due and payable to Shire in relation to
              sales of the Licensed Product in the US Territory, the Canadian
              Territory, the Other Territories, and the Territory as a whole
              (including where appropriate the exchange rate used).

8.5    Interest shall be payable by the Licensee on any amounts payable to Shire
       under this Agreement which are not paid by the due date for payment. All
       interest shall accrue and be calculated on a daily basis (both before and
       after any judgment) at the rate of [...***...]% per annum above the base
       rate of Barclays Bank plc from time to time, for the period from the due
       date for payment until the date of actual payment.

8.6    Notwithstanding any other provision of this Agreement, if at any time
       legal restrictions prevent the prompt remittance of part or all of the
       payments required hereunder in any country, payment shall be made through
       such lawful means as Shire may determine.

8.7    Any tax that the Licensee, its Affiliates or Sub-Licensees are required
       to withhold to comply with relevant laws with respect to the royalties
       and other payments due under this Agreement, shall be deducted from said
       payments prior to remittance; provided, however, that in regard to any
       tax so deducted, the Licensee shall give or cause to be given to Shire
       such assistance, including documentary evidence, as may reasonably be
       necessary to enable Shire to claim exemption therefrom or credit
       therefor, and in each case, the Licensee shall furnish to Shire proper
       evidence of the taxes paid on its behalf. Unless otherwise expressly
       stated, all sums due under this Agreement shall be paid without
       deduction, set-off or counterclaim.

8.8    The obligation of the Licensee to pay royalties and any other payments
       due under this Agreement, shall continue on a country-by-country basis
       for the term of this Agreement. Subject to clause 8.9, in the event that
       there are no issued Shire Patents or University Patents covering the use
       of the Licensed Product in a country in the Territory, the royalty
       payments due to Shire (but not those due to the University under the
       License Agreement) for Net Sales in such country shall be reduced by
       [...***...]%, provided that:

       (a)    one or more Generic Products have been granted marketing
              authorization and are being sold in such country; and


                                       18    ***CONFIDENTIAL TREATMENT REQUESTED




       (b)    IMS data demonstrates that the market share for the Licensed
              Product in such country has been reduced by [...***...]% or more
              in any two consecutive Quarters following the launch of the
              Generic Product in such country.

8.9    In the event that after the grant of marketing authorization of the
       Generic Product any Shire Patent or University Patent application is
       issued, and such patent is able to prevent the sale of the Generic
       Product in the relevant country the royalty payments due to Shire for Net
       Sales in such country shall return to the royalty rates set out in clause
       7.3 or 7.4 as applicable.

9.     RECORDS AND REPORTS

9.1    During the term of this Agreement, and for a period of [...***...] years
       after its expiry or termination, the Licensee shall, and shall procure
       that its Affiliates and Sub-Licensees shall, keep at its or their normal
       place of business detailed, accurate and up to date records and books of
       account showing the sales of the Licensed Product in each country in the
       Territory sufficient to ascertain:

       (c)    any Net Sales generated in connection with the sale of the
              Licensed Product and royalties payable to Shire under this
              Agreement; and

       (d)    the achievement or progress towards achievement of any Milestone
              Event, provided that, in the event that the Milestone Event
              relates to the development of the Licensed Product, the Licensee
              has failed to meet the Timelines and, in Shire's reasonable
              opinion, the Licensee has failed to adequately explain the reasons
              for the delay.

9.2    On no less than [...***...] Business Days notice from Shire, the Licensee
       shall make, or procure that its Affiliates or Sub-Licensees make, such
       records and books of account available for inspection by Shire (or its
       nominee) for the purpose of audit to confirm payments due under this
       Agreement, but not more than [...***...] in any calendar year in relation
       to royalties payable to Shire under this Agreement and not more than
       [...***...] in any calendar year in relation to the achievement of any
       Milestone Event. Shire (or its nominee) shall be entitled to take copies
       or extracts from such records or books of account during any such review
       or audit.

9.3    Shire shall be solely responsible for its costs and expenses in making
       any such review or audit, unless Shire identifies a discrepancy in the
       sums paid in any calendar year from those payable under this Agreement
       for that calendar year of greater than [...***...]%, in which event the
       Licensee shall pay Shire's costs and expenses incurred in connection with
       the review or audit, and make good the deficit in the payments (including
       any interest amount calculated in accordance with clause 8.5).

9.4    All information disclosed by the Licensee, its Affiliates or its
       Sub-Licensees pursuant to this clause 9 shall be deemed Confidential
       Information of Licensee, its Affiliates or its Sub-Licensees, as
       applicable.


                                       20    ***CONFIDENTIAL TREATMENT REQUESTED



10.      TRADE MARKS

10.1     Shire hereby grants the Licensee an exclusive license, with the right
         to sublicense, to use the Trade Marks in relation to the sale,
         promotion and marketing of the Licensed Product in the Territory for
         the term of this Agreement. The Licensee shall:

         (a)      use the Trade Marks only in a manner which conforms to the
                  reasonable directions and standards notified to it by Shire
                  from time to time;

         (b)      market the Licensed Product throughout the Territory under the
                  Trade Marks and ensure that all marketing materials for the
                  Product shall display the Trade Marks;

         (c)      not use, register or attempt to register any trade marks,
                  company, business or trading names or domain names which are
                  identical or similar to (or which incorporate) any of the
                  Trade Marks, any aspect of them, or any other trade marks or
                  trade names used by Shire, without Shire's prior written
                  consent; and

         (d)      not do anything which could, in Shire's reasonable opinion,
                  bring the Trade Marks or Shire into disrepute or which could
                  otherwise damage the goodwill attaching to the Trade Marks or
                  any other trade marks or trade names of Shire.

10.2     Shire shall, [...***...], maintain the registrations for the Trade
         Marks, and shall use reasonable efforts to prosecute any applications
         for registration of the Trade Marks through to grant in the Territory.

10.3     The Licensee acknowledges that:

         (a)      it shall not acquire, nor claim, any right, title or interest
                  in or to any of the Trade Marks or the goodwill attaching to
                  them by virtue of this Agreement or its use of the Trade
                  Marks, other than the rights specifically granted to it under
                  clause 10.1; and

         (b)      all goodwill arising from use of the Trade Marks by the
                  Licensee before, during or after the term of this Agreement
                  shall accrue and belong to Shire, and the Licensee shall, at
                  Shire's request and cost, promptly execute all documents
                  required by Shire to confirm this.

11.      INTELLECTUAL PROPERTY, IMPROVEMENTS AND PATENTS

11.1     Except as set out in this Agreement and the License Agreement, all
         right, title and interest in the Shire Intellectual Property and the
         Trade Marks shall belong to Shire, and the Licensee shall not have any
         right, title or interest in the Shire Intellectual Property or the
         Trade Marks.


11.2     All Intellectual Property Rights in the Development Data shall belong
         to the Licensee. The Licensee shall disclose reasonably detailed
         summaries of the Development Data to Shire through the Development
         Committee.


11.3     Shire shall, at its sole option, file, prosecute, maintain or extend
         the Shire Patents. Subject to the terms of the License Agreement, Shire
         shall:



                                       21    ***CONFIDENTIAL TREATMENT REQUESTED




         (a)      keep the Licensee reasonably informed of any material
                  developments or notices in connection with the prosecution of
                  any Shire Patents or University Patent applications, but only
                  to the extent that the material developments or notices relate
                  to the Licensed Product;

         (b)      give the Licensee a reasonable opportunity to comment on any
                  Shire response to such developments or notices that are
                  intended to be filed in any patent office in relation to the
                  Compound Patents and consider in good faith any such comments;
                  and

         (c)      give the Licensee a reasonable opportunity to liaise and
                  cooperate with the University in the prosecution and
                  maintenance of the University Patents.

11.4     Any expenses incurred after the Effective Date in the filing,
         prosecution or maintenance of:


         (a)      the University Patents, shall borne by the Licensee;



         (b)      the Compound Patents shall be borne by the Licensee and shall
                  be creditable (but non-refundable) against royalty payments
                  due from Licensee to Shire under clause 7 (including for the
                  avoidance of doubt, payments under clause 7.7(b)), provided
                  that, in no event will any credit amount under this Agreement
                  reduce the royalties payable to Shire in any Quarter by more
                  than [...***...]% (and any amount that has not been so
                  credited may be credited against royalties due in subsequent
                  Quarters, subject to the limitation described in the previous
                  sentence); and



         (c)      the Background Patents, shall be borne by Shire.


11.5     In the event that Shire elects not to continue to file, prosecute or
         maintain patent protection for any of the Compound Patents, the
         Licensee shall have the right, at its option, to maintain such Compound
         Patents on behalf of Shire. Without limiting the generality of the
         foregoing, in no event shall Shire provide the Licensee with notice of
         abandonment of any Compound Patents less than 30 days prior to its date
         of lapse.

11.6     Shire shall maintain patent protection for all Background Patents
         identified as [...***...] and [...***...] in the Principal Markets.

11.7     Shire reserves all of its rights not expressly granted to the Licensee
         under this Agreement. The Licensee shall not, and shall not attempt or
         purport to file or prosecute in any country any patent application
         which claims, or purports to claim, any Shire Intellectual Property,
         except as permitted under clause 11.5. Additionally, the Licensee shall
         not, directly or indirectly prevent or attempt to prevent Shire from
         filing or prosecuting in any country any patent application which
         claims, discloses or uses or purports to claim, disclose or use any
         Shire Intellectual Property.

12.      INFRINGEMENT OF SHIRE INTELLECTUAL PROPERTY RIGHTS

12.1     Each Party shall promptly notify the other, with such details as it has
         in its possession, on becoming aware of any third party infringement,
         or suspected infringement, of any part of the Shire Intellectual
         Property or the Trade Marks in the Territory.


                                       22    ***CONFIDENTIAL TREATMENT REQUESTED




12.2     Subject to the terms of the License Agreement, Shire shall have the
         first right, but not the obligation, to take action in respect of any
         infringements of the Shire Intellectual Property or the Trade Marks,
         including any injunctive, compensatory or other remedies or relief
         (collectively "REMEDIES") as may be necessary or desirable to prevent
         such infringement and preserve the Shire Intellectual Property. The
         Licensee shall permit any such Remedies to be brought in its name if
         permitted or required by law. Shire may compromise or settle any of the
         Remedies at its sole discretion, provided that, Shire shall not make
         any settlement or compromise that adversely affects the interests of
         the Licensee in respect of the Licensed Products in the Territory
         without the prior written consent of the Licensee, such consent not to
         be unreasonably withheld or delayed.

12.3     In the event that Shire does not pursue any Remedies with respect to
         the Shire Intellectual Property or the Trade Marks within 60 days
         following notice of alleged infringement or 10 days before the time
         limit, if any, for the filing of any infringement action, whichever is
         sooner, then the Licensee shall, subject to the terms of the License
         Agreement, have the right but, not the obligation, to pursue the
         Remedies against such third party infringer at its sole cost, provided
         that, the Licensee does not make any settlement or compromise that
         adversely affects the interests of Shire without the prior written
         consent of Shire, such consent not to be unreasonably withheld or
         delayed. For the avoidance of doubt, the Licensee's right to pursue any
         Remedies with respect to the infringement, or suspected infringement,
         of any part of the Shire Intellectual Property is limited to the extent
         that such infringement, or suspected infringement relates to the
         Compound.

12.4     In the event that either Party pursues the Remedies under clauses 12.2
         or 12.3:

         (a)      the other Party shall provide reasonable assistance to and
                  cooperate with the Party pursuing such Remedies, including
                  providing access to relevant documents and personnel and
                  furnishing a power of attorney if required by law;

         (b)      the Party that pursues the Remedy shall keep the other Party
                  fully informed of the progress of, and developments in, any
                  proceedings including any settlement discussions with the
                  defendants or potential defendants of such proceedings;

         (c)      each Party shall bear its own costs and expenses relating to
                  its pursuit of the Remedies or in providing assistance and
                  cooperation; and

         (d)      any damages or other amounts awarded or obtained by either
                  Party shall, subject to the terms of the License Agreement, be
                  distributed as follows:

                  (i)      firstly to cover any legal costs and expenses
                           incurred by the Party that pursued the Remedies; and
                           then

                  (ii)     to cover those legal costs and expenses, if any,
                           incurred by the other Party relating to the pursuit
                           of such Remedies; and then

                  (iii)    any remaining amount identified as damages for lost
                           sales of the Licensed Product, after the deductions
                           set out above, shall be paid to Licensee except that



                                       23

                           Shire shall receive a portion equivalent to the
                           royalties it would have received under this Agreement
                           if such amount were deemed Net Sales; and then

                  (iv)     any remaining amount of damages awarded, other than
                           for damages for lost sales, shall be divided
                           [...***...], with Licensee receiving [...***...]% and
                           Shire receiving [...***...]%.

12.5     Notwithstanding anything contained in this Agreement, Shire reserves
         the right to control, at its sole expense, any opposition, protest,
         claim, proceedings, challenge or litigation relating to the validity of
         the Background Patents. The Licensee shall, and shall procure that its
         Affiliates and Sub-Licensees shall, provide such reasonable assistance
         and co-operation to Shire, at Shire's reasonable expense, as is
         necessary for the conduct of any such opposition, protest, claim,
         proceedings, challenge or litigation. The Licensee may participate in
         the defence or settlement of any opposition, protest, claim,
         proceedings, challenge or litigation relating to the validity of the
         Background Patents at its own cost with counsel of its choice, provided
         that:

         (a)      Shire has control of the conduct of such opposition, protest,
                  claim, proceedings, challenge or litigation relating to the
                  validity of the Background Patents; and

         (b)      the Licensee shall not, and shall procure that its Affiliates
                  and Sub-Licensees shall not, during the course of such
                  proceedings make any statement or admission that compromises
                  the validity of the Background Patents.

13.      INFRINGEMENT OF THIRD PARTY RIGHTS

13.1     In the event that any third party commences or threatens to commence
         patent, trade secret or other patent infringement action against the
         Licensee during the term of this Agreement, alleging that its use of
         the Licensed Product in the Territory infringes the third party's
         Intellectual Property Rights ("THIRD PARTY ACTION"), the Licensee shall
         by written notice promptly inform Shire of the Third Party Action,
         providing all such details of the Third Party Action as are in its
         possession. Upon receipt of the notice, the Parties shall promptly
         discuss the best way to respond to the Third Party Action.


13.2     The Licensee shall, at its sole cost and in its sole discretion, defend
         and control the defence of any such Third Party Action using counsel of
         its own choice, provided that:


         (a)      Shire may participate in the defence or settlement of the
                  Third Party Action at its own cost with counsel of its
                  choice; and

         (b)      the Licensee shall not settle the Third Party Action in a
                  manner adverse to Shire, except as agreed in writing by Shire,
                  such agreement not to be unreasonably withheld or delayed.

13.3     In any Third Party Action under this clause 13, the Parties shall
         cooperate with each other in connection with any such claim, suit or
         proceeding and shall keep each other reasonably informed of any
         material development in connection with the Third Party Action,
         including providing access to relevant documents, personnel or other
         evidence.


                                       24    ***CONFIDENTIAL TREATMENT REQUESTED




14.      INDEMNIFICATION AND INSURANCE

14.1     The Licensee shall defend, indemnify and hold harmless Shire, its
         Affiliates and its and their directors, officers, employees and
         contractors ("SHIRE PARTIES") from and against any and all claims,
         actions, demands, losses, damages, costs and reasonable expenses
         (including reasonable legal, counsel and expert fees) made or brought
         by any third parties ("CLAIMS") arising from or in connection with the
         research, development, testing, manufacture, marketing, distribution,
         sale or use of the Licensed Product by Licensee or its Affiliates or
         its or their Sub-Licensees, except to the extent that such Claims
         result from the negligence or willful default of the Shire Parties.

14.2     Shire shall promptly:

         (a)      inform the Licensee by written notice of any Claims or the
                  discovery of a fact upon which Shire intends to base a request
                  for indemnification;

         (b)      provide the Licensee with copies of all papers and official
                  documents received in respect of any Claims; and

         (c)      cooperate as reasonably requested by the Licensee in the
                  defence against any Claims.

14.3     The Licensee shall have the sole control over the defence of any
         Claims, provided that, the Licensee shall obtain the written consent of
         Shire, prior to settling or otherwise disposing of such Claims if as a
         result of the settlement or Claim disposal Shire's interests are in any
         way adversely affected. Any costs and expenses, incurred by Shire in
         connection with any Claims shall be reimbursed by the Licensee on a
         Quarterly basis, subject to an obligation of reimbursement if it is
         determined by a court of competent jurisdiction that such Claims are
         not subject to indemnification under clause 14.1.

14.4     Shire shall defend, indemnify and hold harmless Licensee, its
         Affiliates and its and their directors, officers, employees and
         contractors ("LICENSEE PARTIES") from and against any and all Claims
         resulting from a breach of clause 16.2.

14.5     Notwithstanding anything contained in this Agreement, in no event shall
         either Party or their respective Affiliates be liable for special,
         indirect, incidental or consequential loss or damage based on contract,
         tort or any other legal theory arising out of this Agreement. Nothing
         in this Agreement shall limit either Party's liability to any person
         for death or personal injury caused by negligence.


14.6     The Licensee shall, at its own cost, during the term of this Agreement
         and for a period of 10 years thereafter, maintain insurance which is
         reasonable and customary in the United States of America pharmaceutical
         industry for companies of comparable size and activities, and in any
         event:


         (a)      listing Shire and the Indemnitees (as defined in the License
                  Agreement) as additional insureds on the policy by no later
                  than October 1, 2004;

                                       25




         (b)      covering product liability in relation to the studies
                  undertaken in connection with the development of the Licensed
                  Product in amounts no less than US$1 million per incident and
                  US$3 million annual aggregate; and



         (c)      covering comprehensive product liability insurance and general
                  commercial liability insurance with respect to the
                  manufacture, use or sale Licensed Product from receipt of
                  Marketing Authorization in amounts not less than
                  US$5 million per incident and US$10 million annual
                  aggregate.


14.7     Upon reasonable request from Shire, the Licensee shall provide, or
         procure that its Sub-Licensees provide documents from its insurer
         confirming the existence and renewal of the relevant insurance policies
         conforming with the requirements of clause 14.6.


15.      CONFIDENTIALITY AND PUBLICATIONS

15.1     The Parties, their Affiliates and their respective directors, officers,
         employees, officers and consultants shall keep and maintain any
         Confidential Information supplied by the other Party during the term of
         this Agreement strictly confidential. The confidentiality obligations
         contained in this Agreement shall not apply to the extent that such
         Confidential Information is:

         (a)      at the time of disclosure by one Party to the other in the
                  public domain or otherwise publicly known;

         (b)      after disclosure by one Party to the other becomes part of the
                  public domain, other than by breach of any obligation of
                  confidentiality;

         (c)      information which the receiving Party can establish by
                  documentary evidence was already in its possession at the time
                  of receipt or was independently developed by the receiving
                  Party without use of the Confidential Information of the
                  disclosing Party; or

         (d)      received from a third party who was lawfully entitled to
                  disclose such information without an obligation of
                  confidentiality.

15.2     Notwithstanding clause 15.1, the Party receiving Confidential
         Information may disclose such Confidential Information:

         (a)      to Regulatory Authorities or other government agencies to gain
                  approval to conduct clinical trials in relation to the
                  Licensed Product or to file, prosecute and maintain the
                  Marketing Authorizations and any other required filings for
                  the Licensed Product, provided that, the disclosure is limited
                  to the extent reasonably necessary to obtain such
                  authorizations or approvals;

         (b)      to the extent that such disclosure is required by any
                  applicable law, regulation, court of competent jurisdiction or
                  governmental authority (including the FDA and the SEC),
                  provided that, the Confidential Information may be disclosed
                  only to the extent


                                       26



                  required and wherever practicable, the disclosing Party has
                  been given sufficient written notice in advance to enable it
                  to seek protection or confidential treatment of such
                  Confidential Information;

         (c)      to Affiliates, actual or potential Sub-Licensees,
                  sub-contractors, employees, consultants and agents who have a
                  need to know the information for the purposes of this
                  Agreement, and are bound by obligations of confidentiality no
                  less protective than those contained in this Agreement; or

         (d)      to Third Parties in connection with due diligence
                  investigations in relation to the Licensee (for example,
                  potential investors), provided that, such Third Parties are
                  bound by confidentiality obligations no less protective than
                  those contained in this Agreement; or

         (e)      representatives of the University, provided that, such
                  representatives are bound by confidentiality obligations no
                  less protective than those contained in this Agreement.

15.3     The Parties shall consult with each other, in advance, with regard to
         the terms of all proposed press releases, public announcements and
         other public statements relating to any Confidential Information or the
         transactions contemplated under this Agreement. Shire acknowledges that
         in connection with any public offering of the stock of Licensee,
         Licensee may be required to file this Agreement with the SEC, subject
         to confidential treatment requests.

16.      WARRANTIES

16.1     Shire and the Licensee each warrant that:

         (a)      it has obtained all corporate authorisations required to enter
                  into and perform its obligations under this Agreement; and

         (b)      this Agreement is valid and binding obligation enforceable
                  against it in accordance with its terms and conditions.

16.2     At the Effective Date, Shire warrants that:

         (a)      the Shire Patents are owned by Shire and the University
                  Patents are exclusively licensed to Shire under the terms of
                  the License Agreement;

         (b)      all renewal and maintenance fees in relation to the Shire
                  Patents and University Patents have been paid on or before the
                  due date for payment;

         (c)      so far as it is aware, there are no current oppositions or
                  interferences relating to the Shire Patents or University
                  Patents;


         (d)      it has not received any notice from any third party in the
                  last 6 years alleging that the Compound infringes any third
                  party Intellectual Property Rights;



                                       27






         (e)      it has not sent any notice to any third party in the last
                  6 years alleging that the third party is infringing the Shire
                  Intellectual Property with respect to the Compound;


         (f)      so far as it is aware, Shire has no royalty or other license
                  payment obligations to third parties with respect to the
                  research, use, manufacture or sale of the Compound other than
                  under the License Agreement and Consultancy Agreement; and

         (g)      except for the Excluded Patents, the list of Licensed Patents
                  in Schedule 2 of this Agreement is a complete list of the
                  patents and patent applications owned by or licensed to Shire
                  containing claims relating to the Compound.

16.3     Notwithstanding anything contained in this Agreement, Shire gives no
         warranty and makes no representation that any patent application
         identified in Schedule 2 shall proceed to grant or will be valid and
         enforceable.

16.4     Except for the warranties set out in clause 16, no warranty, condition,
         term, undertaking or representation (express or implied, statutory or
         otherwise) is given by Shire to the Licensee in respect of the Shire
         Intellectual Property, the Licensed Product or any other products
         developed, manufactured, sold or supplied by the Licensee using the
         Shire Intellectual Property and all such warranties, conditions, terms,
         undertakings and representations are to the extent permitted by law
         expressly excluded.

17       COMPLIANCE WITH LAW

17.1     In exercising its rights and obligations under this Agreement, the
         Licensee shall comply with, or shall procure compliance by its
         Affiliates and Sub-Licensees with, all applicable national and local
         laws, rules and regulations including but not limited to the
         requirements of any Marketing Authorization s or any relevant laws,
         rules or regulations concerning the research, development, manufacture,
         delivery, transport, import, advertising, packaging, labelling,
         storage, sale or use of the Licensed Product in the Territory or any
         part of it.

17.2     The Licensee shall use reasonable efforts to promptly inform Shire of
         any new laws, rules or regulations in the Territory (or any part of it)
         or any amendments, or proposed amendments to the current laws, rules or
         regulations that may have material impact on the use, distribution or
         sale of the Licensed Product.

17.3     In performing any of their respective rights and obligations under this
         Agreement, each Party shall comply with all applicable data protection
         laws and regulations.

18       TERM

18.1     This Agreement commences on the Effective Date and, subject to earlier
         termination in accordance with clause 19, shall with respect to each of
         the countries in the Territory expire on the last to occur of:

         (a)      expiry of the last to expire of the issued Shire Patents or
                  the University Patents in the applicable country, including
                  patents issued on patent applications within Shire Patents or
                  University Patents as the case may be; or


                                       28





         (b)      10 years from the date of first commercial sale in that
                  country.


19       TERMINATION

19.1     Either Party shall be entitled to terminate this Agreement by written
         notice to the other if:

         (a)      the other Party commits a material breach of this Agreement,
                  and in the case of a breach which is capable of remedy fails
                  to remedy it within 60 days of receipt of notice from the
                  first Party of such breach and of its intention to exercise
                  its rights under this clause; or

         (b)      an order is made or a resolution is passed for the winding up
                  of the other Party (other than voluntarily for the purposes of
                  solvent amalgamation or reconstruction) or an order is made
                  for the appointment of an administrator to manage the other
                  Party's affairs, business and property or if a receiver (which
                  expression shall include an administrative receiver) is
                  appointed over any of the other Party's assets or undertaking
                  or if circumstances arise which entitle the court or a
                  creditor to appoint a receiver or manager or which entitle the
                  court to make a winding-up order or if a voluntary arrangement
                  is proposed in respect of the other Party or if the other
                  Party takes or suffers any similar or analogous action in
                  consequence of debt, and such order, appointment or similar
                  action is not removed within 90 days.

19.2     This Agreement may be terminated by Shire by notice in writing to the
         Licensee at any time (except as provided in clause 19.2(a)) if:

         (a)      the Licensee fails to make the upfront payment of
                  US$3 million to Shire within 3 Business Days from the
                  Effective Date pursuant to clause 7.1, with immediate effect
                  from receipt of the notice from Shire; which right of
                  termination will terminate on the earlier of (i) payment by
                  Licensee of the upfront payment of US$3 million to Shire or
                  (ii) 28 days from the expiration of the 3 Business Days from
                  the Effective Date;

         (b)      the Licensee, its Affiliates or its Sub-Licensees fail to make
                  any Milestone Payments or other payments of any sums due under
                  this Agreement (other than the upfront payment pursuant to
                  clause 7.1) within 30 days of receiving notice from Shire
                  requiring such payment;

         (c)      the Licensee, its Affiliates or its Sub-Licensees, directly or
                  indirectly, challenge the validity of the Shire Intellectual
                  Property or the Trade Marks or the right of Shire to use or
                  license the use of any of such Shire Intellectual Property or
                  the Trade Marks, or the Licensee assists any third party to
                  challenge the validity of such Shire Intellectual Property or
                  the Trade Marks;

         (d)      subject to clause 19.3, in the event of a Change of Control
                  where the new controlling party of the Licensee owns or
                  licenses a Competing Product;

         (e)      the Licensee ceases or threatens by written notice to cease to
                  carry on its business relating to oncology products;


                                       29





         (f)      in the event that the Licensee or its Affiliates or
                  Sub-Licensees has not commenced a phase II study of the
                  Licensed Product in the United States of America within
                  12 months from the Effective Date;



         (g)      subject to clause 19.4, in the event that the Licensee or its
                  Affiliates or Sub-Licensees has not filed for Accelerated
                  Approval or commenced a phase III study of the Licensed
                  Product in the United States of America by 31 December 2007;



         (h)      in the event that the Licensee or its Affiliates or
                  Sub-Licensees has not filed an NDA by 31 December 2009,
                  provided that, Shire may not terminate this Agreement under
                  this sub-clause if the Licensee can reasonably demonstrate
                  that such delay or failure to file an NDA by 31 December 2009
                  is due to circumstances directly relating to Development Plan
                  and beyond its reasonable control, in which event the Licensee
                  shall have a further period of 12 months to achieve such
                  event;



         (i)      in the event that for a reason attributable to the Licensee,
                  its Affiliates or its Sub-Licensees any NDA or Marketing
                  Authorization in the Principal Markets lapses or is revoked by
                  any competent Regulatory Authority in the Territory; or



         (j)      in the event that the Licensee fails to provide Shire with any
                  semi-annual reports under clause 5.3(d).


19.3     In the event of Change of Control, where the new controlling party of
         the Licensee owns or licenses a Competing Product, the Licensee shall
         by written notice inform Shire of the Change of Control and Shire shall
         have 90 days from receipt of such notice to exercise its right of
         termination under clause 19.2(c). Notwithstanding anything contained in
         this clause, the Parties agree that Shire may not terminate this
         Agreement pursuant to clause 19.2(c) if the new controlling party
         agrees to divest such Competing Product and in fact so divests such
         Competing Product within 6 months from the date of completion of the
         Change of Control (subject to extension for an additional 3 months if
         the new controlling party has entered into a binding agreement with
         respect to such divestiture within such 6 month period). If the new
         controlling party is unable or unwilling to divest the Competing
         Product within such period, Shire shall be entitled to terminate this
         Agreement by 30 days written notice to the Licensee.


19.4     In the event that the Licensee's application for Accelerated Approval
         is unsuccessful, the Licensee shall have 6 months from date of receipt
         of the Accelerated Approval rejection notice to commence a phase III
         study of the Licensed Product in the United States of America, failing
         which, Shire may terminate this Agreement by written notice with
         immediate effect.


19.5     This Agreement may be terminated by Licensee by 90 days written notice
         to Shire, at any time after the second anniversary of the Effective
         Date, if:

         (a)      after making a reasonable evaluation of the safety, efficacy
                  or other data generated during the Development Plan, the
                  Licensee determines that the Licensed Product is not a
                  scientifically or commercially viable for further development
                  or commercialisation; or



                                       30



         (b)      the Licensee reasonably believes it will be unable to obtain
                  Marketing Authorization in the United States of America
                  after diligent pursuit of such Marketing Authorization.



19.6     If the Licensee, its Affiliates or any Sub-Licensee, after having
         Launched the Licensed Product in any country in the Territory,
         discontinues the sale of the Licensed Product in such country for a
         period of 6 months or more for reasons unrelated to Force Majeure or
         regulatory or safety issues in relation to the use of the Licensed
         Product, and subsequently fails to resume sales of any Licensed Product
         in such country within 90 days of having been notified in writing
         of the failure to supply by Shire, then Shire may terminate the rights
         granted to the Licensee under this Agreement and the Trade Mark license
         solely with respect to such country by written notice to the Licensee.
         For the purpose of this clause, sales of minimal or commercially
         insignificant quantities of Licensed Product in a country shall be
         deemed to constitute a discontinuation of sales in such country.


20       CONSEQUENCES OF TERMINATION

20.1     On termination of this Agreement by either Party the license and
         sub-license (subject to the terms of the Memorandum of Understanding
         and Sub-Licensee MOU) granted under this Agreement shall immediately
         cease and the Licensee shall, and shall procure that its Affiliates and
         Sub-Licensees shall:

         (a)      subject to clause 20.4, immediately cease to carry out any of
                  the activities permitted by this Agreement (or any relevant
                  Sub-License Agreement) and cease to use or exploit in any way
                  the Licensed Product, the Trade Marks or the Shire
                  Intellectual Property;

         (b)      within 60 days of the date of the termination notice make all
                  outstanding payments including any royalty payments due to
                  Shire at the date of termination; and

         (c)      promptly return, or at Shire's option, destroy any Shire
                  Know-How and any materials containing the Shire Know-How in
                  its possession, custody or power except for such records as
                  may be required to be retained by the Licensee by any national
                  or local laws, rules or regulations.

20.2     On termination of this Agreement by either Party for any reason, other
         than by the Licensee under clause 19.1, the Licensee shall, and shall
         procure that its Affiliates and, Sub-Licensees subject to the terms of
         the Sub-Licensee MOU, shall:

         (a)      promptly deliver up to Shire any Development Data,
                  Improvements or other materials generated by the Licensee, its
                  Affiliates or Sub-Licensees in the development, registration
                  or commercialization of the Licensed Product;

         (b)      within 90 days from the date of termination, assign to Shire
                  (or its nominated Affiliate) all right, title and interest in
                  any Marketing Authorization in the Territory; and



                                       31



         (c)      grant Shire an exclusive, royalty free, worldwide, irrevocable
                  and perpetual license to use (with the right to sub-license)
                  the Development Data and any registration materials developed
                  or acquired by or on behalf of the Licensee its Affiliates or
                  Sub-Licensees during the term of this Agreement.

20.3     On expiry of this Agreement, Shire shall grant, the Licensee an
         exclusive, royalty-free, worldwide, irrevocable and perpetual license
         to use and exploit (with the right to sub-license) the Shire Know-How,
         including the right use the Shire Know-How to make, have made, use,
         offer for sale, sell and import the Licensed Products.

20.4     The Licensee, its Affiliates and Sub-Licensees shall be entitled to
         continue to sell existing stocks of the Licensed Products in the
         Territory for a period of not longer than 6 months following the date
         of termination, provided that, the Licensee pays Shire any royalties
         due in respect of such sales in accordance with the provisions of this
         Agreement.

20.5     Subject to clause 20.6, on termination of this Agreement by Shire under
         Sections 19.1 or 19.2, the Licensee hereby grants Shire an option to
         exclusively license any Intellectual Property Rights owned or licensed
         (with the right to sublicense) by the Licensee that claim or cover any
         Improvements generated by the Licensee during the term of this
         Agreement ("OPTION"). The Option shall be exercisable by Shire at any
         time within [...***...] from the date of notice of termination. Within
         15 days from receipt by the Licensee, of notice from Shire confirming
         the exercise of the Option, Shire and the Licensee shall negotiate in
         good faith for a period not to exceed [...***...] the grant to Shire of
         a exclusive, royalty bearing, worldwide, license to use (with the right
         to sub-license) the Improvement developed or acquired by or on behalf
         of the Licensee during the term of this Agreement, on commercially
         reasonable terms.

20.6     In the event that this Agreement is terminated as a result of the
         termination of the License Agreement by the University, and no license
         for the University Patents is granted to the Licensee pursuant to the
         Memorandum of Understanding, the Licensee shall grant the University
         the Option rights set out in clause 20.5 instead of to Shire under
         clause 20.6.

20.7     Subject to any separate agreement with the Sub-Licensee pursuant to
         clause 3.2, upon the termination or expiry of this Agreement, the
         Licensee shall, and shall procure that its Affiliates and Sub-Licensees
         shall execute such documents as Shire may reasonably require to record
         at all appropriate patent offices throughout the Territory that the
         Licensee or the relevant Sub-Licensee has ceased to be entitled to use
         and exploit the Licensed Patents.

20.8     In the event that the Licensee wishes to continue the use of the Trade
         Mark for the sale of the Licensed Product after the expiration of this
         Agreement, Shire shall grant to the Licensee an exclusive
         non-transferable license for the Trade Mark in the Territory on terms
         to be agreed between the Parties, provided that the Licensee notifies
         Shire within [...***...] of the date of such expiry that it wishes to
         take such a license and the Licensee shall pay Shire a perpetual Trade
         Mark royalty of [...***...]% of the Net Sales of the Licensed Product
         in accordance with clause 8.2.



                                       32    ***CONFIDENTIAL TREATMENT REQUESTED





20.9     The termination or expiry of this Agreement shall not release either of
         the Parties from any liability which at the time of termination or
         expiry has already accrued to the other Party, nor affect in any way
         the survival of any other right, duty or obligation of the Parties
         which is expressly stated elsewhere in this Agreement to survive such
         termination or expiry.

20.10    Clauses 1, 9, 14, 15.1, 15.2, 16.3, 16.4, 20, 22, 23, and 24 shall
         survive the termination or expiry of this Agreement.

21       FORCE MAJEURE

21.1     Neither Party shall be entitled to terminate this Agreement or shall be
         liable to the other under this Agreement for loss or damages
         attributable to any Force Majeure, provided that, the Party affected
         shall give prompt notice thereof to the other Party. Subject to clause
         21.2, the Party giving such notice shall be excused from such of its
         obligations hereunder for so long as it continues to be affected by
         Force Majeure.

21.2     If such Force Majeure continues unabated for a period of at least 90
         days, the Parties will meet to discuss in good faith what actions to
         take or what modifications should be made to this Agreement as a
         consequence of such Force Majeure in order to alleviate its
         consequences on the affected Party.

22       NOTICES

22.1     Any notice or other document given under this Agreement shall be in
         writing in the English language and shall be given by hand or sent by
         prepaid airmail or by fax transmission to the address of the receiving
         Party as set out in clauses 22.3 below unless a different address or
         fax number has been notified to the other in writing for this purpose.

22.2     Each such notice or document shall:

         (a)      if sent by hand, be deemed to have been given when delivered
                  at the relevant address;

         (b)      if sent by prepaid airmail, be deemed to have been given 7
                  days after posting; or

         (c)      if sent by fax transmission be deemed to have been given when
                  transmitted provided that a confirmatory copy of such
                  facsimile transmission shall have been sent by prepaid airmail
                  within 24 hours of such transmission.

22.3     The address for services of notices and other documents on the Parties
         shall be:

           TO SHIRE BIOCHEM                      TO THE LICENSEE
           275 boul. Armand-Frappier,            ADDRESS:   10505 Roselle Street
           Laval, QC,                                       San Diego, CA 92121
           Canada H7V 4A7                                   U.S.A.


           FAX:      +1 450 978 7767             FAX:       +1 858 558 3402



                                       33




           ATTENTION: Claude Perron              ATTENTION:  Michael Grey

           COPY TO:   Shire Legal Department     COPY TO:    Legal Department
                      +44 (0)1256 894 710                    +1 858 558 3402

           TO TANAUD IRELAND                     TO TANAUD BV

           Shannon Airport House,                Fred Roeskestraat 123,
           Shannon, Co Clare,                    First Floor, 1076 EE Amsterdam,
           Ireland                               The Netherlands

           FAX:       +353 61 472 060            FAX:         +31 20 577 1188

           ATTENTION: Alan Kane                  ATTENTION:   Dirk Stolp


23       ASSIGNMENT

23.1     Subject to clause 23.2, the Licensee shall not assign or transfer any
         of its rights or obligations under this Agreement without the prior
         written consent of Shire, such consent not to be unreasonably withheld
         or delayed; provided that the Licensee may assign or transfer this
         Agreement and its rights and obligations hereunder without Shire's
         consent in connection with the sale or transfer of all or substantially
         all of the Licensee's business to which this Agreement relates to a
         third party, whether by merger, sale of stock, sale of assets or
         otherwise. In the event of any such transaction however, Intellectual
         Property Rights of the acquiring party under such transaction shall not
         be included in the Intellectual Property Rights subject to this
         Agreement.

23.2     The Licensee may sub-license all or any of its rights under this
         Agreement provided that the Licensee complies with its obligations set
         out in clause 3.

23.3     Shire shall be entitled to assign all or any of its rights or
         obligations under this Agreement to an Affiliate.

24       GENERAL PROVISIONS

24.1     Nothing in this Agreement is deemed to constitute a partnership between
         the Parties nor constitute either Party the agent of the other Party
         for any purpose.

24.2     Any disagreement between Shire and the Licensee on the interpretation
         of this Agreement or any aspect of the performance by either Party of
         its obligations under this Agreement shall be resolved in accordance
         with the dispute resolution procedure set out in Schedule 8 provided
         that either Party shall have the right to seek urgent injunctive or
         other equitable relief in any court of competent jurisdiction.

24.3     Each of the Parties shall do execute and perform and shall procure to
         be done executed and performed all such further acts deeds documents
         and things as the other Party may reasonably require from time to time
         to give full effect to the terms of this Agreement.



                                       34


24.4     Each Party shall pay its own costs, charges and expenses incurred in
         connection with the negotiation, preparation and completion of this
         Agreement.

24.5     This Agreement sets out the entire agreement and understanding between
         the Parties in respect of the subject matter of this Agreement and
         supersedes any heads of agreement which shall cease to have any further
         force or effect. It is agreed that:

         (a)      no Party has entered into this Agreement in reliance upon any
                  representation, warranty or undertaking of the other Party
                  which is not expressly set out in this Agreement;

         (b)      no Party shall have any remedy in respect of misrepresentation
                  or untrue statement made by the other Party or for any breach
                  of warranty which is not contained in this Agreement; and

         (c)      this clause shall not exclude any liability for, or remedy in
                  respect of, fraudulent misrepresentation.

24.6     Nothing in this Agreement shall operate to:

         (a)      exclude any provision implied into this Agreement by law and
                  which may not be excluded by law; or

         (b)      limit or exclude any liability, right or remedy to a greater
                  extent than is permissible under law.

24.7     No variation of this Agreement shall be valid unless it is in writing
         and signed by or on behalf of both Parties.

24.8     Unless expressly agreed, no variation shall constitute a general waiver
         of any provisions of this Agreement, nor shall it affect any rights,
         obligations or liabilities under or pursuant to this Agreement which
         have already accrued up to the date of variation, and the rights and
         obligations of the Parties under or pursuant to this Agreement shall
         remain in full force and effect, except and only to the extent that
         they are so varied.

24.9     If and to the extent that any provision of this Agreement is held to be
         illegal, void or unenforceable, such provision shall be given no effect
         and shall be deemed not to be included in this Agreement but without
         invalidating any of the remaining provisions of this Agreement.

24.10    No failure or delay by either Party in exercising any right or remedy
         provided by law under or pursuant to this Agreement shall impair such
         right or remedy or operate or be construed as a waiver or variation of
         it or preclude its exercise at any subsequent time and no single or
         partial exercise of any such right or remedy shall preclude any other
         or further exercise of it or the exercise of any other right or remedy.



                                       35


24.11    The rights and remedies of each of the Parties under or pursuant to
         this Agreement are cumulative, may be exercised as often as such Party
         considers appropriate and are in addition to its rights and remedies
         under general law.

24.12    If in any jurisdiction the effect of any provision of this Agreement or
         the absence from this Agreement of any provision would be to prejudice
         the Licensed Patents or any remedy under the Licensed Patents, the
         Parties will make such amendments to this Agreement and execute such
         further agreements and documents limited to that part of the Territory
         which falls under such jurisdiction as may be necessary to remove such
         prejudicial effects.

24.13    This Agreement may be executed in any number of counterparts and by the
         Parties on separate counterparts, each of which is an original but all
         of which together constitute one and the same instrument.

24.14    The Licensee, or any Sub-Licensee or assignee, shall not create, assume
         or permit to exist any lien, pledge, security interest or other
         encumbrance on this Agreement or any Sub-License Agreement, provided
         that, Licensee or any Sub-Licensee shall be permitted to create, assume
         or permit to exist any lien, pledge, security interest or other
         encumbrance on this Agreement or any Sub-License Agreement:

         (a)      pursuant to obligations to its creditors outstanding as of the
                  Effective Date; and

         (b)      pursuant to the Loan and Security Agreement dated as of July
                  23, 2004 between the Licensee and its creditors thereto.

24.15    This Agreement and the obligations of the Parties shall be governed by
         and construed in accordance with the laws of the state of New York and
         subject to the jurisdiction of the New York courts.

         The rest of this page has been left intentionally blank.




                                       36





AS WITNESS this Agreement has been signed by the duly authorised representatives
of the Parties on the day and year first before written.


SIGNED for and on behalf of     )            /s/ Angus Russell
SHIRE BIOCHEM INC.              )            -----------------------------------
                                )
                                             Angus Russell, Director
                                             -----------------------------------
                                             PRINT NAME AND TITLE



SIGNED for and on behalf of     )            /s/ Joseph Rus
TANAUD IRELAND INC.             )            -----------------------------------
                                )
                                             Joseph Rus, Director
                                             -----------------------------------
                                             PRINT NAME AND TITLE



SIGNED for and on behalf of     )            /s/ Joseph Rus
TANAUD INTERNATIONAL B.V.       )            -----------------------------------
                                )
                                             Joseph Rus, Director
                                             -----------------------------------
                                             PRINT NAME AND TITLE




SIGNED for and on behalf of     )            /s/ M.G. Grey
STRUCTURAL GENOMIX, INC.        )            -----------------------------------
                                )
                                             M.G. Grey, President
                                             -----------------------------------
                                             PRINT NAME AND TITLE





                                       37



                                   SCHEDULE 1

                          DEVELOPMENT PLAN AND TIMELINE

ACTIVITY                                                      ANTICIPATED TIMING

Initiate Transition Plan                                           July 2004

AML

Complete Open Phase 1 Trial                                       [...***...]

Last cohort of patients dosed at [...***...] days
   [...***...] was [...***...] with [...***...]
   [...***...] had [...***...] the [...***...] of [...***...]
   An increase in [...***...]
   [...***...] to be [...***...] days)
   [...***...]
   [...***...]

Commence [...***...] Trial                                        [...***...]

Patient Population
   [...***...]
   [...***...]

Trial Size
   [...***...]
   [...***...]

Study Endpoints
   [...***...]
   [...***...]

Treatment Centers
   [...***...]

Complete [...***...] Trial                                        [...***...]

[...***...]                                                       [...***...]
   [...***...] for [...***...]
   [...***...] if [...***...] in the [...***...] is [...***...]
   [...***...] to [...***...]
   [...***...]



                                       38    ***CONFIDENTIAL TREATMENT REQUESTED





Complete [...***...] Trial                                        [...***...]

Commence [...***...] Trial ([...***...])                          [...***...]

Patient Population
   [...***...] over [...***...] of age
   [...***...]

Treatment and Trial Size
   [...***...] at [...***...]
   [...***...] at [...***...]

Treatment Centers
   [...***...]

Study Endpoints
   [...***...] is [...***...] of [...***...]
   [...***...] is [...***...] of [...***...]

Complete [...***...] Trial                                        [...***...]

BLAST PHASE CML

Based on review of clinical opportunities with CML experts:

Commence [...***...] Trial                                        [...***...]

Patient population
   [...***...] CML-BP [...***...] or [...***...]

   Treatment and trial size
        [...***...] at [...***...]
        ~[...***...]

   Study Endpoints
        [...***...] to [...***...] CML [...***...]
        [...***...] of [...***...]

Complete [...***...] Trial                                        [...***...]

Evaluate next steps                                               [...***...]

MDS

Based on review of clinical opportunities with MDS experts:


                                       39    ***CONFIDENTIAL TREATMENT REQUESTED





Commence [...***...] MDS Trial                                    [...***...]

SOLID TUMOR

Evaluate Open Phase 1 solid tumor
Continuous infusion study                                         [...***...]

Complete Phase 1 if existing data are supportive                  [...***...]

Initiate Phase 2                                                  [...***...]



                                       40    ***CONFIDENTIAL TREATMENT REQUESTED




                                   SCHEDULE 2

                                LICENSED PATENTS

PART I - BACKGROUND PATENTS

[...***...], SYNTHESIS AND USE THEREOF




SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



                                       41    ***CONFIDENTIAL TREATMENT REQUESTED





[...***...] AND USE THEREOF



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



PROCESS FOR [...***...] SYNTHESIS OF NUCLEOSIDES



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]


                                       42    ***CONFIDENTIAL TREATMENT REQUESTED








SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       43    ***CONFIDENTIAL TREATMENT REQUESTED








SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



PROCESS FOR DIASTEREOSELECTIVE SYNTHESIS OF NUCLEOSIDES



DOCKET NUMBER       APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       44    ***CONFIDENTIAL TREATMENT REQUESTED






DOCKET NUMBER       APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



STEREOSELECTIVE SYNTHESIS OF [...***...] USING [...***...] INTERMEDIATE



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       45    ***CONFIDENTIAL TREATMENT REQUESTED






SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



METHOD AND COMPOSITIONS FOR THE SYNTHESIS OF [...***...] WITH [...***...]



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       46    ***CONFIDENTIAL TREATMENT REQUESTED






SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       47    ***CONFIDENTIAL TREATMENT REQUESTED







SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



STEREOSELECTIVE SYNTHESIS OF [...***...]



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



PROCESS FOR PRODUCING [...***...]



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       48    ***CONFIDENTIAL TREATMENT REQUESTED





[...***...]


STEREOSELECTIVE PROCESS FOR THE PRODUCTION OF [...***...]



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




PART II - COMPOUND PATENTS

METHOD OF TREATING [...***...]



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       49    ***CONFIDENTIAL TREATMENT REQUESTED






SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



METHODS OF TREATING CANCER USING A [...***...]



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



PHARMACEUTICAL [...***...] FOR THE TREATMENT OF CANCER



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       50    ***CONFIDENTIAL TREATMENT REQUESTED






[...***...]


[...***...] FOR IMPROVED [...***...] DELIVERY



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



METHODS OF TREATING [...***...]



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       51    ***CONFIDENTIAL TREATMENT REQUESTED





PHARMACEUTICAL [...***...] AND METHODS FOR THE TREATMENT OF [...***...]



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



METHODS OF [...***...] OF TROXACITABINE



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



METHOD FOR THE TREATMENT OF [...***...]



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




PART III - UNIVERSITY PATENTS

COMPOUNDS AND METHODS FOR THE TREATMENT OF CANCER




SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       52    ***CONFIDENTIAL TREATMENT REQUESTED






SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       53    ***CONFIDENTIAL TREATMENT REQUESTED






SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



COMPOUNDS AND METHODS FOR THE TREATMENT OF CANCER



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       54    ***CONFIDENTIAL TREATMENT REQUESTED




                                   SCHEDULE 3

                     MILESTONE EVENTS AND MILESTONE PAYMENTS






NO.           MILESTONE EVENT                                                       MILESTONE PAYMENT (US$)
- ----------    -------------------------------------------------------------------   ------------------------
                                                                              

              DEVELOPMENT MILESTONES

1.            On the Licensee obtaining [...***...]                                       $[...***...]


2.                                                                                        $[...***...]
              The earlier of:

              o      the [...***...] of the [...***...] of the [...***...]; or

              o      the [...***...] of the [...***...] after [...***...] for
                     the [...***...]; or

              o      [...***...] of [...***...] that the [...***...].


3.            The earlier of:

              o      the [...***...] the [...***...] of the [...***...] for
                     [...***...]; or

              o      the [...***...] the [...***...] of the [...***...] for the           $[...***...]
                     [...***...]; or

              o      [...***...] of [...***...] that the [...***...].


4.            File for Marketing Authorization for first indication
              ([...***...]) of the Licensed Product in any of the [...***...].            $[...***...]


5.            File for Marketing Authorization for [...***...] of the Licensed
              Product in any of the [...***...].                                          $[...***...]


6.            Receipt of Marketing Authorization from any Regulatory Authority
              for the first indication ([...***...]) of the Licensed Product in
              any of the                                                                  $[...***...]




                                       55    ***CONFIDENTIAL TREATMENT REQUESTED




                                                                              
              [...***...].


7.            Receipt of Marketing Authorization from any Regulatory Authority      $[...***...]
              for the [...***...] of the Licensed Product in any of the
              [...***...]


8.            Receipt of Marketing Authorization from any Regulatory Authority
              for the second indication ([...***...]) of the Licensed Product in    $[...***...]
              any of the [...***...]

8.            Receipt of Marketing Authorization from any Regulatory Authority
              for the [...***...] of the Licensed Product in any of the             $[...***...]
              [...***...]


              SALES MILESTONES


9.            The first time that Net Sales of the Licensed Product in the          $[...***...]
              Territory surpass US$[...***...] in any calendar year


10            The first time that Net Sales of the Licensed Product in the          $[...***...]
              Territory surpass US$[...***...] in any calendar year


11.           The first time that Net Sales of the Licensed Product in the          $[...***...]
              Territory surpass US$[...***...] in any calendar year


12.           The first time that Net Sales of the Licensed Product in the          $[...***...]
              Territory surpass US$[...***...] in any calendar year





                                       56    ***CONFIDENTIAL TREATMENT REQUESTED





                                   SCHEDULE 4

                        SALES FORECASTS AND MINIMUM SALES




   No.     YEAR                                     SALES FORECAST          MINIMUM SALES FORECAST
- -------    ------------------------------------     -------------------     ----------------------
                                                                   
    1.     First year following Launch              US$[...***...]               US$[...***...]

    2.     Second year following Launch             US$[...***...]               US$[...***...]

    3.     Third year following Launch              US$[...***...]               US$[...***...]

    4.     Fourth year following Launch             US$[...***...]               US$[...***...]





                                       57    ***CONFIDENTIAL TREATMENT REQUESTED





                                   SCHEDULE 5

                                 SHIRE MATERIALS




                                                                          EXPIRY
                                                                       DATE/RETEST
MATERIAL DESCRIPTION                 LOT NUMBER          QUANTITY          DATE          WAREHOUSE SITE
- -----------------------------        -----------       -----------      -----------     ----------------
                                              

Troxatyl 2 mg IMP                    [...***...]       [...***...]      [...***...]       [...***...]
Troxatyl 10 mg IMP                   [...***...]       [...***...]      [...***...]       [...***...]
Troxatyl 2 mg IMP                    [...***...]       [...***...]      [...***...]       [...***...]
Troxatyl 10 mg IMP                   [...***...]       [...***...]      [...***...]       [...***...]
Troxatyl API                         [...***...]       [...***...]      [...***...]       [...***...]
Troxatyl API                         [...***...]       [...***...]      [...***...]       [...***...]
Troxatyl API                         [...***...]       [...***...]      [...***...]       [...***...]
API Reference Standard               [...***...]       [...***...]      [...***...]       [...***...]
Ongoing Compound stability samples
including available impurities
standards (samples to remain at
stability testing site)





                                       58    ***CONFIDENTIAL TREATMENT REQUESTED





                                   SCHEDULE 6

                                   TRADE MARKS




NO.        TRADE MARK      OWNER                 COUNTRY          CLASS        NUMBER         APP/REG DATE    STATUS
- ---------- ------------    -----------------     -----------      ----------   -----------    ------------    ------------
                                                                                         

1.         TROXATYL        Shire BioChem         [...***...]      [...***...]                 [...***...]     [...***...]
2.         TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
3.         TROXATYL        Shire BioChem         [...***...]      [...***...]                 [...***...]     [...***...]
4.         TROXATYL        Shire BioChem         [...***...]      [...***...]                 [...***...]     [...***...]
5.         TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
6.         TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
7.         TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
8.         TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
9.         TROXATYL        Shire BioChem         [...***...]      [...***...]                 [...***...]     [...***...]
10.        TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
11.        TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
12.        TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
13.        TROXATYL        Shire BioChem         [...***...]                                  [...***...]     [...***...]
14.        TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
15.        TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
16.        TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
17.        TROXATYL        Shire BioChem         [...***...]      [...***...]  [...***...]    [...***...]     [...***...]
18.        TROXATYL        Shire BioChem         [...***...]      [...***...]                 [...***...]     [...***...]




                                       59    ***CONFIDENTIAL TREATMENT REQUESTED


                                   SCHEDULE 7

                           MEMORANDUM OF UNDERSTANDING

MEMORANDUM OF UNDERSTANDING

DATED:   23 JULY 2004

BETWEEN:

(1)      UNIVERSITY OF GEORGIA RESEARCH FOUNDATION, INC., a nonprofit Georgia
         corporation with offices located in Boyd Graduate Studies Research
         Center, The University of Georgia, Athens, Georgia 30602 ("UGARF");

(2)      YALE UNIVERSITY located in New Haven, Connecticut ("YALE"); and

(3)      STRUCTURAL GENOMIX, INC., a company incorporated in Delaware, whose
         address is 10505 Roselle Street, San Diego, CA 92121, U.S.A.
         ("SUB-LICENSEE").

BACKGROUND:

(A)      On 3 January 1996, UGARF and Yale entered into a license agreement with
         Shire BioChem Inc. (formerly BioChem Pharma Inc.), Tanaud Holdings
         (Barbados) Limited and Tanaud LLC (collectively "SHIRE") under which
         the University Patents and Licensed Technology (as defined below) were
         exclusively licensed to Shire ("HEAD LICENCE").

(B)      On 23 July 2004, Shire entered into a licence agreement with the
         Sub-Licensee under which certain patents and know how were exclusively
         licensed to the Sub-Licensee and the University Patents and Licensed
         Technology were sub-licensed to the Sub-Licensee ("SHIRE LICENCE").

(C)      Yale and UGARF have agreed to grant a licence under the University
         Patents and Licensed Technology to the Sub-Licensee on the same
         financial terms to the Head Licence in the event that the Head Licence
         is terminated as more specifically set out in this Memorandum of
         Understanding ("MEMORANDUM").

OPERATIVE PROVISIONS

1        DEFINITIONS


1.1      In this Memorandum:

         "AFFILIATE" means any firm, person or company which controls, is
         controlled by or is under common control with a Party to this Agreement
         and for the purpose of this definition the term "control" means the
         ownership either directly or indirectly of more than 50% of the voting
         securities of such firm, person or company;

                                       60


         "COMPOUND" means the compound troxacitabine;

         "FIELD" means use of the Licensed Product in the treatment of cancer;

         "LICENSED PRODUCT" means any pharmaceutical formulations that contain
         the Compound alone as a therapeutically active ingredient, or in
         combination with any other pharmaceutically active ingredient;

         "LICENSED TECHNOLOGY" shall mean all designs, technical information,
         know-how, knowledge, data, specifications, test results and other
         information, whether or not patented, which are licensed by UGARF and
         Yale under the Head Licence and are useful for the development,
         commercialization, manufacture, use or sale of any Licensed Product;

         "UNIVERSITY" means UGARF or Yale or collectively UGARF and Yale as the
         case may be; and

         "UNIVERSITY PATENTS" means the patents and patent applications set out
         in Part III of Schedule 2 and including, any divisionals, extensions,
         reissues, re-examinations, continuations, and foreign counterparts
         thereof and patents issuing thereon;

1.2      In this Memorandum, unless the context requires otherwise:

         (a)      the headings are included for convenience only and shall not
                  affect its construction;

         (b)      references to "persons" includes individuals, bodies corporate
                  (wherever incorporated), unincorporated associations and
                  partnerships;

         (c)      words denoting the singular shall include the plural and vice
                  versa;

         (d)      words denoting one gender shall include each gender and all
                  genders; and

         (e)      any reference to an enactment or statutory provision is a
                  reference to it as it may have been, or may from time to time
                  be amended, modified, consolidated or re-enacted.

2        AGREEMENT TO GRANT LICENCE

2.1      Subject to clause 2.2, the parties agree that, in the event the
         University terminates the Head Licence, and provided that the reason
         for such termination does not relate in any way to any act or omission
         of the Sub-Licensee, its Affiliates, representatives or sub-licensees,
         the University shall grant the Sub-Licensee (or its nominated
         Affiliate), from the date of such termination, an exclusive worldwide
         licence under the University Patents and Licensed Technology to
         develop, manufacture, have manufactured, use, sell, offer for sale,
         import and supply the Licensed Product in the Field on the same
         financial terms as the Head Licence and substantially similar due
         diligence and other terms as those contained in the Shire Licence ("NEW
         LICENCE").



                                       61






2.2      This Agreement and the grant of any licence under the University Patent
         and Licensed Technology pursuant to clauses 2.1, shall in all respects
         be conditional upon the University receiving the following:

         (a)      written notice from Shire, confirming that the Sub-Licensee is
                  in compliance with its obligations under the Shire Licence;

         (b)      copies of any arrangements, agreements or related transactions
                  (and any amendments thereto) between the Sub-Licensee and
                  Shire relating to the Licensed Product or any rights licensed
                  to the Sub-Licensee under the Shire Licence;

         (c)      written representation from Sub-Licensee, confirming that the
                  Sub-Licensee is in compliance with its obligations under the
                  Shire Licence;

         (d)      a detailed written update on the development and
                  commercialization of the Licensed Product that shall include,
                  without limitation, a summarized budget for development plan
                  expenses;

         (e)      documentary evidence confirming, to the University's
                  reasonable satisfaction, that the Sub-Licensee has sufficient
                  funds to carry on the development or commercialization of the
                  Licensed Product for not less than [...***...] months; and

         (f)      copies of agreements between the Sub-Licensee and any third
                  party relating to the sublicense of the rights granted to the
                  Sub-Licensee (or any part of such rights) under the Shire
                  Licence.

2.3      If each of the conditions precedent identified in clause 2.2 are not
         fulfilled (unless waived by the University) within 60 days of the
         termination of the Head Licence, the University shall have no
         obligation to the Sub-Licensee to grant the licence under clause 2.1,
         and neither party shall have a claim of any nature whatsoever against
         the other party under this Agreement.

2.4      The Sub-Licensee undertakes to use all reasonable efforts to ensure
         that the conditions precedent in clause 2.2 are fulfilled as soon as
         reasonably practicable following termination of the Head Licence, and
         in any event within 60 days from the date of termination of the Head
         Licence.

2.5      Yale and UGARF shall notify Sub-Licensee if a notice of termination of
         the Head Licence has been provided to Shire and the parties shall
         promptly meet to discuss in good faith to arrange for the finalisation
         and execution of the New Licence.

2.6      Yale and UGARF each agree that activities of the Sub-Licensee, its
         Affiliates and sublicensees shall constitute activities of Shire for
         the purposes of Article 3 of the Head License.



                                       62    ***CONFIDENTIAL TREATMENT REQUESTED




3        FURTHER ASSURANCES

3.1      Each party shall do all acts and execute all documents as may be
         reasonably necessary to give effect to the grant of the New Licence and
         the exercise of the rights granted therein.

4        LAW AND JURISDICTION

4.1      This Memorandum and the obligations of the Parties shall be governed by
         and construed in accordance with the laws of the state of New York and
         subject to the jurisdiction of the New York courts.

AGREED by the parties through their duly authorised representations on the date
written above:

SIGNED for and on behalf of      )       /s/ Gordhan L. Patel
UNIVERSITY OF GEORGIA            )       ---------------------------------------
RESEARCH FOUNDATION, INC.        )
                                         Gordhan L. Patel, Executive Vice
                                         President
                                         ---------------------------------------
                                         PRINT NAME AND TITLE


SIGNED for and on behalf of      )       /s/ Jon Soderstrom
YALE UNIVERSITY                  )       ---------------------------------------
                                 )
                                         Jon Soderstrom, Managing Director, OCR
                                         ---------------------------------------
                                         PRINT NAME AND TITLE



SIGNED for and on behalf of      )       /s/ Tim Harris
STRUCTURAL GENOMIX, INC.         )       ---------------------------------------
                                 )
                                         CEO
                                         ---------------------------------------
                                         PRINT NAME AND TITLE




                                       63


                                   SCHEDULE 1
                             THE UNIVERSITY PATENTS


COMPOUNDS AND METHODS FOR THE TREATMENT OF CANCER




SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]





                                       64    ***CONFIDENTIAL TREATMENT REQUESTED






SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]



COMPOUNDS AND METHODS FOR THE TREATMENT OF CANCER



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]




                                       65    ***CONFIDENTIAL TREATMENT REQUESTED



                                   SCHEDULE 8

                          DISPUTE RESOLUTION PROCEDURE

1.       NEGOTIATION

1.1      Representatives of the Parties shall, within 10 Business Days of
         receipt of a written request from either Party, convene a meeting of
         the Development Committee (with additional members from each Party as
         appropriate for the particular dispute) to discuss and in good faith
         try to resolve any claim, dispute, controversy, or disagreement between
         the Parties arising out of or in connection with the terms (or
         interpretation of the terms) of this Agreement (DISPUTE) without
         recourse to legal proceedings.

1.2      If resolution of the Dispute does not occur within 20 Business Days
         from the Development Committee meeting, the matter shall be escalated
         for determination by the respective Group Legal Counsel or heads of
         applicable business units of the Parties (OFFICERS) who may resolve the
         matter themselves or jointly appoint a mediator. The Officers shall
         negotiate in good faith to achieve a resolution of the Dispute referred
         to them within 20 Business Days after such notice is received.

1.3      If the Officers are unable to settle the Dispute between themselves
         within 20 Business Days from referral, the Officers shall report to the
         Parties on the progress of the negotiations in writing and the Dispute
         shall then be referred to mediation in accordance with sections 2.1 -
         2.4.

2.       MEDIATION

2.1      If the Parties have failed to resolve the Dispute by negotiation
         pursuant to sections 1.1 - 1.3, the Dispute shall be referred to
         mediation to be resolved in accordance with the rules of the American
         Arbitration Association ("AAA"). The place of the mediation shall be
         New York, United States and the language of the mediation shall be
         English.

2.2      To initiate a mediation, either Party shall give notice in writing
         (NOTICE) to the other Party in accordance with the provisions of clause
         22, requesting.

2.3      If the Dispute is not resolved within 60 days (or such longer period as
         the parties may agree) from the giving of the Notice, or if one of the
         Parties refuses to participate in mediation, the dispute shall be
         referred to arbitration in accordance with the provisions of section 3.

2.4      If Notice is not given prior to the commencement of arbitration, the
         Party commencing the arbitration must serve Notice on the other party
         to the arbitration within 21 days.

3.       ARBITRATION



                                       66




3.1      If after the procedures set forth in sections 1 and 2, the Dispute has
         not been resolved, either Party may decide to institute arbitration
         proceedings by written notice to that effect to the other Party. Any
         unresolved Dispute shall be referred to and finally resolved by
         arbitration under the Rules of Arbitration of the International Chamber
         of Commerce (ICC) , which rules are deemed to be incorporated by
         reference into this clause.

3.2      The Tribunal shall consist of three arbitrators to be appointed having
         experience in the pharmaceutical industry: Shire and the Licensee shall
         each appoint one arbitrator and the third arbitrator, who shall be the
         Chairman of the tribunal, shall be appointed by the two-Party appointed
         arbitrators.

3.3      The place of arbitration shall be New York and the language of the
         arbitration shall be English.

3.4      Each Party shall bear its own costs and expenses incurred in connection
         with any arbitration proceeding and the Parties shall equally share the
         cost of the mediation and arbitration levied by the AAA or the ICC.




                                       67


                                   SCHEDULE 9

                                EXCLUDED PATENTS



STEREOSELECTIVE SYNTHESIS OF [...***...]



SHIRE REFERENCE     APPL'N DATE       COUNTRY        APPL'N NO.              GRANT DATE   PATENT NUMBER    STATUS       EXP. DATE
- ------------------- ----------------- -------------- ----------------------- ------------ ---------------  -----------  -----------
                                                                                                   
[...***...]
Any patents or patent applications owned or licensed by [...***...]





                                       68   ***CONFIDENTIAL TREATMENT REQUESTED




SHIRE BIOCHEM INC.
2250 Alfred-Nobel Blvd., Suite 500
Ville Saint-Laurent, Quebec  H4S 2C9 Canada
Tel. 514 787-2300  Fax 514 787-2427
www.shire.com

                                                                    (SHIRE LOGO)

                                                                   Claude Perron
                                              Vice President and General Manager
                                            Tel.: 514-787-2345 Fax: 514-787-2428
                                                    e-mail: cperron@ca.shire.com


March 8, 2005                                                         By Courier
                                                                      ----------

Structural GenomiX, Inc
Attention:  Mr. Michael Grey, President
10505 Roselle Street
San Diego, CA 92121
USA

Re: Amendment to the License Agreement
- --------------------------------------------------------------------------------

Dear Sir:

We refer to the patent and know how license between Shire BioChem Inc., Shire
Pharmaceutical Development Limited, Tanaud International BV (together SHIRE) and
Structural GenomiX, Inc. (SGX) dated 23 July 2004 as amended (LICENSE
AGREEMENT).

Shire and SGX desire to amend the License Agreement and this letter sets out the
agreed amendment to the License Agreement. All capitalised terms in this letter
shall, unless the context requires otherwise, have the meaning given to them in
the License Agreement.

Shire and SGX agree and acknowledge that from the date of this letter the
License Agreement shall be amended by deleting the definition of "Compound"
under clause 1.1 and replacing it with the following new definition:

         "COMPOUND" means the compound troxacitabine and its prodrugs;

Except as expressly amended by the terms of this letter, the terms and
conditions of the License Agreement shall remain in full force and effect,
unamended.

Please confirm your acceptance of the above amendment to the License Agreement
by signing, dating and returning to Shire a copy of this letter.

Yours faithfully,



/s/ Claude Perron
Claude Perron
Vice President and General Manager






Amendment to the License Agreement                                       Page 2
- --------------------------------------------------------------------------------




Agreed to:                              Agreed to:

/s/ Claude Perron                       /s/ Matthew Emmens
- ---------------------------------       ----------------------------------------
Claude Perron, Vice President and       Matthew Emmens
General Manager                         Director
For and on behalf of                    For and on behalf of
SHIRE BIOCHEM INC.                      SHIRE PHARMACEUTICAL DEVELOPMENT LIMITED


Agreed to:                              Agreed to:



/s/ Joseph Rus                          /s/ Stephen K. Burley
- ---------------------------------       ----------------------------------------
Joseph Rus                              Stephen K. Burley
Director                                CSO
For and on behalf of                    For and on behalf of
TANAUD INTERNATIONAL BV                 STRUCTURAL GENOMIX, INC.





THIS NOVATION AGREEMENT is made the 19th day of January, 2005

BETWEEN:

1.       Shire BioChem Inc. (formerly known as BioChem Pharma Inc.) of 2250
         Alfred-Nobel Blvd., Suite 500, Ville Saint-Laurent, Quebec, H4S 2C9,
         Canada ("SBI");

2.       Tanaud International B.V. of Fred Roekestraat 123, First Floor, 1076 EE
         Amsterdam, The Netherlands ("TANAUD BV");

3.       Structural Genomix, Inc. of 10505 Roselle Street, San Diego, CA 92121,
         U.S.A. ("GENOMIX"); and

4.       Tanaud Ireland Inc. of 2250 Alfred-Nobel Blvd., Suite 500, Ville
         Saint-Laurent, Quebec, H4S 2C9, Canada ("TII").

WHEREAS:

(A)      Pursuant to the Licence (as defined below) SBI, Tanaud BV and TII
         licensed certain patents, technology and know-how to Genomix.

(B)      TII wishes to be released and discharged from the Licence and the
         parties have agreed to release and discharge TII from the Licence upon
         the terms of SBI's undertaking to perform the Licence and be bound by
         its terms and conditions in place of TII.

NOW IT IS AGREED as follows.

1.       DEFINITIONS

         In this agreement:

         "COUNTERPARTIES"           means, together, Genomix and Tanaud BV;

         "EFFECTIVE DATE"           means 1 January 2005; and

         "LICENCE"                  means a patent and know-how licence between
                                    SBI, TII, Tanaud BV and Genomix, dated 23
                                    July 2004 a copy of which is annexed hereto
                                    and initialled by the parties for the
                                    purposes of identification only.

2.       SBI'S UNDERTAKING

         With effect from the Effective Date and in consideration of the
         undertakings given by the Counterparties in clause 3, SBI hereby
         undertakes to observe, perform, discharge, assume liabilities under and
         be bound by the Licence as if SBI had taken the place of TII under the
         Licence. Notwithstanding this undertaking, nothing in this agreement
         shall:

         (A)      require SBI to perform any obligation created by or arising
                  under the Licence falling due for performance, or which should
                  have been performed by TII, before the Effective Date or to
                  make any payments due or as otherwise would be incurred and
                  payable by Tll prior to the Effective Date; or

         (B)      make SBI liable for any act, neglect, default, omission or
                  liability in respect of the Licence committed or incurred by
                  TII or occurring before the Effective Date.




                                       2



3.       COUNTERPARTIES' UNDERTAKINGS AND RELEASE OF TII

3.1      With effect from the Effective Date and in consideration of and subject
         to the undertakings given by SBI in clause 2 and TII in clause 4, the
         Counterparties hereby:

         (A)      release and discharge TII from all liabilities under the
                  Licence and all obligations to observe, perform, discharge and
                  be bound by the Licence;

         (B)      accept SBI's undertaking to observe, perform, discharge,
                  assume liabilities under and be bound by the Licence (such
                  undertaking being set out in clause 2); and

         (C)      agree to observe, perform, discharge, assume liabilities under
                  and be bound by the Licence as if SBI had taken the place of
                  TII under the Licence.

3.2      Notwithstanding the provisions of sub-clause 3.1(A), nothing in this
         agreement shall affect or prejudice any claim or demand whatsoever
         which the Counterparties may have against TII in relation to the
         Licence and arising out of matters prior to the Effective Date.

4.       TII'S UNDERTAKING AND RELEASE OF COUNTERPARTIES

         With effect from the Effective Date and in consideration of the
         undertakings given by the Counterparties in clause 3, TII hereby
         releases and discharges the Counterparties from all liabilities under
         the Licence and all obligations to observe, perform, discharge and be
         bound by the Licence. Notwithstanding this undertaking and release,
         nothing in this agreement shall affect or prejudice any claim or demand
         whatsoever which TII may have against the Counterparties in relation to
         the Licence and arising out of matters prior to the Effective Date.

5.       COUNTERPARTS

5.1      This agreement may be executed in any number of counterparts, and by
         the parties on separate counterparts, but shall not be effective until
         each party has executed at least one counterpart.

5.2      Each counterpart shall constitute an original of this agreement, but
         all the counterparts shall together constitute but one and the same
         instrument.







                                       3



6.       GOVERNING LAW

         This agreement shall be governed by and construed in accordance with
         the laws of the state of New York and subject to the jurisdiction of
         the New York courts.

IN WITNESS WHEREOF the parties have entered into this agreement on the date
first written above.



/s/ [Illegible]
- -------------------------------------------------
For and on behalf of SHIRE BIOCHEM INC.



/s/ [Illegible]
- -------------------------------------------------
For and on behalf of TANAUD INTERNATIONAL B.V.



/s/ M. Grey
- -------------------------------------------------
For and on behalf of STRUCTURAL GENOMIX, INC.



/s/ [Illegible]
- -------------------------------------------------
For and on behalf of TANAUD IRELAND INC.





THIS NOVATION AGREEMENT is made the 19th day of January, 2005

BETWEEN:

1.       Shire BioChem Inc. (formerly known as BioChem Pharma Inc.) of 2250
         Alfred-Nobel Blvd., Suite 500, Ville Saint-Laurent, Quebec, H4S 2C9,
         Canada ("SBI");

2.       Tanaud International B.V. of Fred Roekestraat 123, First Floor, 1076 EE
         Amsterdam, The Netherlands ("TANAUD BV");

3.       Structural Genomix, Inc. of 10505 Roselle Street, San Diego, CA 92121,
         U.S.A. ("GENOMIX"); and

4.       Shire Intellectual Property SrI of Chancery House, High Street,
         Bridgetown, Barbados, West Indies ("SIP").

WHEREAS:

(A)      Pursuant to the Licence (as defined below) SBI, Tanaud BV and Tanaud
         Ireland Inc. ("TII") licensed certain patents, technology and know-how
         to Genomix.

(B)      By a prior novation effective as at 1 January 2005, the rights and
         obligations of TII under the Licence (the "TII INTERESTS") were novated
         to SBI, TII being released and discharged from the Licence upon the
         terms of SBI's undertaking to perform the Licence and be bound by its
         terms and conditions in place of TII.

(C)      SBI now wishes to be released and discharged from the Licence to the
         extent of its rights and obligations representing the TII Interests and
         the parties have agreed to so release and discharge SBI from the
         Licence upon the terms of SIP's undertaking to perform the Licence and
         be bound by its terms and conditions in place of SBI in respect of the
         TII Interests.

NOW IT IS AGREED as follows.

1.       DEFINITIONS

         In this agreement:

         "COUNTERPARTIES"           means, together, Genomix and Tanaud BV;

         "EFFECTIVE DATE"           means 4 January 2005; and

         "LICENCE"                  means a patent and know-how between SBI,
                                    TII, Tanaud BV and Genomix, dated 23 July
                                    2004 a copy of which is annexed hereto and
                                    initialled by the parties for the purposes
                                    of identification only.

2.       SIP'S UNDERTAKING

         With effect from the Effective Date and in consideration of the
         undertakings given by the Counterparties in clause 3, SIP hereby
         undertakes to observe, perform, discharge, assume liabilities under and
         be bound by the Licence as if SIP were a party to the Licence in place
         of SBI in respect of the TII Interests only. Notwithstanding this
         undertaking, nothing in this agreement shall:

         (A)      require SIP to perform any obligation created by or arising
                  under the Licence falling due for performance, or which should
                  have been performed, before the Effective Date or to




                                       2


                  make any payments due or as otherwise would be incurred and
                  payable prior to the Effective Date; or

         (B)      make SIP liable for any act, neglect, default, omission or
                  liability in respect of the Licence committed or incurred by
                  SBI or occurring before the Effective Date.

3.       COUNTERPARTIES' UNDERTAKINGS AND RELEASE OF SBI

3.1      With effect from the Effective Date and in consideration of and subject
         to the undertakings given by SIP in clause 2 and SBI in clause 4, the
         Counterparties hereby:

         (A)      release and discharge SBI, in respect of the TII Interests
                  only, from all liabilities under the Licence and all
                  obligations to observe, perform, discharge and be bound by the
                  Licence;

         (B)      accept SIP's undertaking to observe, perform, discharge,
                  assume liabilities under and be bound by the Licence (such
                  undertaking being set out in clause 2); and

         (C)      agree to observe, perform, discharge, assume liabilities under
                  and be bound by the Licence as if SIP were a party to the
                  Licence in the place of SBI in respect of the TII Interests.

3.2      Notwithstanding the provisions of sub-clause 3.1(A), nothing in this
         agreement shall affect or prejudice any claim or demand whatsoever
         which the Counterparties may have against SBI, in respect of the TII
         Interests, in relation to the Licence and arising out of matters prior
         to the Effective Date.

4.       SBI'S UNDERTAKING AND RELEASE OF COUNTERPARTIES

         With effect from the Effective Date and in consideration of the
         undertakings given by the Counterparties in clause 3, SBI hereby
         releases and discharges the Counterparties from all liabilities under
         the Licence and all obligations to observe, perform, discharge and be
         bound by the Licence. Notwithstanding this undertaking and release,
         nothing in this agreement shall affect or prejudice any claim or demand
         whatsoever which SBI may have against the Counterparties in relation to
         the Licence and arising out of matters prior to the Effective Date.

5.       NOTICES

         For the purposes of all provisions in the Licence concerning the
         service of notices, the address of SIP is its principal place of
         business set out above.

6.       COUNTERPARTS

6.1      This agreement may be executed in any number of counterparts, and by
         the parties on separate counterparts, but shall not be effective until
         each party has executed at least one counterpart.

6.2      Each counterpart shall constitute an original of this agreement, but
         all the counterparts shall together constitute but one and the same
         instrument.




                                       3


7.       GOVERNING LAW

         This agreement shall be governed by and construed in accordance with
         the laws of the state of New York and subject to the jurisdiction of
         the New York courts.

IN WITNESS WHEREOF the parties have entered into this agreement on the date
first written above.



/s/ [Illegible]
- -----------------------------------------------------
For and on behalf of SHIRE BIOCHEM INC.



/s/ [Illegible]
- -----------------------------------------------------
For and on behalf of TANAUD INTERNATIONAL B.V.



/s/ M. Grey
- -----------------------------------------------------
For and on behalf of STRUCTURAL GENOMIX, INC.



/s/ [Illegible]
- -----------------------------------------------------
For and on behalf of SHIRE INTELLECTUAL PROPERTY SRI





THIS NOVATION AGREEMENT is made the 19th day of January, 2005

BETWEEN:

1.       Shire BioChem Inc. (formerly known as BioChem Pharma Inc.) of 2250
         Alfred-Nobel Blvd., Suite 500, Ville Saint-Laurent, Quebec, H4S 2C9,
         Canada ("SBI");

2.       Tanaud International B.V. of Fred Roekestraat 123, First Floor, 1076 EE
         Amsterdam, The Netherlands ("TANAUD BV");

3.       Structural Genomix, Inc. of 10505 Roselle Street, San Diego, CA 92121,
         U.S.A. ("GENOMIX");

4.       Shire Intellectual Property SrI of Chancery House, High Street,
         Bridgetown, Barbados, West Indies ("SIP"); and

5.       Shire Pharmaceutical Development Limited to Hampshire International
         Business Park, Chineham, Basingstoke, Hampshire, RG24 8EP, U.K.
         ("SPD").

WHEREAS:

(A)      Pursuant to the Licence (as defined below) SBI, Tanaud BV and Tanaud
         Ireland Inc. ("TII") licensed certain patents, technology and know-how
         to Genomix.

(B)      By a prior novation effective as at 1 January 2005, the rights and
         obligations of TII under the Licence (the "TII INTERESTS") were novated
         to SBI, TII being released and discharged from the Licence upon the
         terms of SBI's undertaking to perform the Licence and be bound by its
         terms and conditions in place of TII.

(C)      By a prior novation effective as at 4 January 2005, SBI was released
         and discharged from the Licence to the extent of its rights and
         obligations representing the TII Interests and the parties agreed to
         release and discharge SBI from the Licence upon the terms of SIP's
         undertaking to perform the Licence and be bound by its terms and
         conditions in place of SBI in respect of the TII Interests.

(D)      SIP now wishes to be released and discharged from the Licence to the
         extent of its rights and obligations representing the TII Interests and
         the parties have agreed to release and discharge SIP from the Licence
         upon the terms of SPD's undertaking to perform the Licence and be bound
         by its terms and conditions in place of SIP in respect of the TII
         Interests.

NOW IT IS AGREED as follows.

1.       DEFINITIONS

         In this agreement:

         "COUNTERPARTIES"           means, together, Genomix and Tanaud BV;

         "EFFECTIVE DATE"           means 4 January 2005; and

         "LICENCE"                  means a patent and know-how licence between
                                    SBI, TII, Tanaud BV and Genomix, dated 23
                                    July 2004 a copy of which is annexed hereto
                                    and initialled by the parties for the
                                    purposes of identification only.






                                       2

2.       SPD'S UNDERTAKING

         With effect from the Effective Date and in consideration of the
         undertakings given by the Counterparties in clause 3, SPD hereby
         undertakes to observe, perform, discharge, assume liabilities under and
         be bound by the Licence as if SPD were a party to the Licence in place
         of SIP in respect of the TII Interests only. Notwithstanding this
         undertaking, nothing in this agreement shall:

         (A)      require SPD to perform any obligation created by or arising
                  under the Licence falling due for performance, or which should
                  have been performed, before the Effective Date or to make any
                  payments due or as otherwise would be incurred and payable
                  prior to the Effective Date; or

         (B)      make SPD liable for any act, neglect, default, omission or
                  liability in respect of the Licence committed or incurred by
                  SBI or occurring before the Effective Date.

3.       COUNTERPARTIES' UNDERTAKINGS AND RELEASE OF SIP

3.1      With effect from the Effective Date and in consideration of and subject
         to the undertakings given by SPD in clause 2 and SIP in clause 4, the
         Counterparties hereby:

         (A)      release and discharge SIP from all liabilities under the
                  Licence and all obligations to observe, perform, discharge and
                  be bound by the Licence;

         (B)      accept SPD's undertaking to observe, perform, discharge,
                  assume liabilities under and be bound by the Licence (such
                  undertaking being set out in clause 2); and

         (C)      agree to observe, perform, discharge and be bound by the
                  Licence as if SPD were a party to the Licence in the place of
                  SIP in respect of the TII Interests.

3.2      Notwithstanding the provisions of sub-clause 3.1(A), nothing in this
         agreement shall affect or prejudice any claim or demand whatsoever
         which the Counterparties may have against SIP in respect of the TII
         Interests, in relation to the Licence and arising out of matters prior
         to the Effective Date.

4.       SIP'S UNDERTAKING AND RELEASE OF COUNTERPARTIES

         With effect from the Effective Date and in consideration of the
         undertakings given by the Counterparties in clause 3, SIP hereby
         releases and discharges the Counterparties from all liabilities under
         the Licence and all obligations to observe, perform, discharge and be
         bound by the Licence. Notwithstanding this undertaking and release,
         nothing in this agreement shall affect or prejudice any claim or demand
         whatsoever which SIP may have against the Counterparties in relation to
         the Licence and arising out of matters prior to the Effective Date.

5.       FURTHER ASSURANCE

         The parties (including any successors in business or assignees under
         the Licence) agree, at their own cost, to enter into and execute a
         novation agreement in a form substantially similar to this agreement to
         effect the transfer of the TII Interests to SIP (or its nominee which
         shall be a subsidiary of Shire Pharmaceuticals Group plc), thereby
         discharging and releasing SPD from the effective date of such novation
         from its obligations and liabilities under the Licence and substituting
         SIP (or its nominee) as the primary obligor in respect of the TII
         Interests, such agreement to be executed on or to take effect from 1
         January 2010.







                                       3


5.2      In the event the TII Interests are novated to a nominee of SIP ("SIP
         Nominee") pursuant to clause 5.1 the parties (including any successors
         in business or assignees under the Licence) further agree, when
         requested to do so by SIP and at their own cost, to enter into and
         execute a further novation agreement in a form substantially similar to
         this agreement to effect the transfer of the TII Interests to SIP,
         thereby discharging and releasing the SIP Nominee from the effective
         date of such novation from its obligations and liabilities under the
         Licence and substituting SIP as the primary obligor in respect of the
         TII interests.

6.       NOTICES

         For the purposes of all provisions in the Licence concerning the
         service of notices, the address of SPD is its principal place of
         business set out above.

7.       COUNTERPARTS

7.1      This agreement may be executed in any number of counterparts, and by
         the parties on separate counterparts, but shall not be effective until
         each party has executed at least one counterpart.

7.2      Each counterpart shall constitute an original of this agreement, but
         all the counterparts shall together constitute but one and the same
         instrument.

8.       GOVERNING LAW

         This agreement shall be governed by and construed in accordance with
         the laws of the state of New York and subject to the jurisdiction of
         the New York courts.

IN WITNESS WHEREOF the parties have entered into this agreement on the date
first written above.



 /s/ [Illegible]
- ---------------------------------------------------------------
For and on behalf of SHIRE BIOCHEM INC.



/s/ [Illegible]
- ---------------------------------------------------------------
For and on behalf of TANAUD INTERNATIONAL B.V.



/s/ M. Grey
- ---------------------------------------------------------------
For and on behalf of STRUCTURAL GENOMIX, INC.



/s/ [Illegible]
- ---------------------------------------------------------------
For and on behalf of SHIRE INTELLECTUAL PROPERTY SRI



/s/ [Illegible]
- ---------------------------------------------------------------
For and on behalf of SHIRE PHARMACEUTICAL DEVELOPMENT LIMITED

EX-10.29

                                                                   EXHIBIT 10.29

                                           *** TEXT OMITTED AND FILED SEPARATELY
                                    PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST
                                            UNDER 17 C.F.R. SECTION 200.80(b)(4)
                                               AND RULE 406 UNDER THE SECURITIES
                                                         ACT OF 1933, AS AMENDED

                            DRUG DISCOVERY AGREEMENT


         This Drug Discovery Agreement (the "Agreement") effective as of July 1,
2005 (the "Effective Date"), is entered into by and between Structural GenomiX,
Inc., a Delaware Corporation with principal offices at 10505 Roselle Street, San
Diego, California 92121 ("SGX"), and the Cystic Fibrosis Foundation
Therapeutics, Inc. ("CFFT"), (an Affiliate of the Cystic Fibrosis Foundation
("CFF")), with principal offices at 6931 Arlington Road, Bethesda, MD 20814.

                                    RECITALS

         WHEREAS, CFFT and SGX are currently engaged in collaborative research
pursuant to the Sponsored Research Agreement of December 31, 2000 (the "SRA");
and

         WHEREAS, the Parties wish to continue the research in the manner
specified and pursuant to the terms and conditions of this Agreement; and

         WHEREAS, upon the execution of this Agreement, except as provided in
Article 1, the SRA shall be null and void;

         NOW THEREFORE, the parties agree as follows:

                                 ARTICLE 1 - SRA

         CFFT will continue to pay SGX the SRA milestones indicated in Appendix
A that are successfully completed prior to January 1, 2006 or as otherwise
agreed by the JRC.





Except for any provisions relating to such milestone payments, the SRA shall be
null and void on the Effective Date.

                            ARTICLE 2 - DEFINITIONS

         2.1 "Affiliate" means an entity controlling, controlled by, or under
common control with the parties to this Agreement; and for purposes of SGX,
control shall mean ownership of at least fifty percent (50%) of the voting
stock; and for purposes of CFFT, control shall either mean such stock ownership
or the power to elect a majority of the members of the Board of Directors.

         2.2 "CFFT Intellectual Property" means: (i) Inventions existing as of
the Effective Date, necessary or useful for the performance of the Research,
which CFFT owns, controls or has a license to; and (ii) Inventions made,
created, developed, conceived or reduced to practice solely by CFFT after the
Effective Date.

         2.3 "CFTR" means cystic fibrosis transmembrane conductance regulator
protein in whole or part.

         2.4 "Collaboration Products" means a Lead Series, Early Lead Series or
Structure Data if any of them are sold or licensed as such and any products that
are derived from any or all of a Lead Series, Early Lead Series or the Structure
Data. Collaboration Products shall not include SGX Background Intellectual
Property except to the extent it is integrated into a Lead Series, Early Lead
Series or the Structure Data.

         2.5 "Completion Date" shall have the meaning set forth in Section 3.1.


                                       2



         2.6 Confidential Information" shall have the meaning set forth in
Section 6.1.

         2.7 "Donee" shall have the meaning set forth in Section 3.9(a).

         2.8 "Donor" shall have the meaning set forth in Section 3.9(a).

         2.9 "Early Lead Series" shall mean compounds that either (a) meet the
requirements of Section B.1 of Appendix B or (b) which the JRC designates as an
Early Lead Series.

         2.10 "Effective Date" shall mean July 1, 2005.

         2.11 "Field" shall mean the treatment of cystic fibrosis in humans.

         2.12 "FTE" shall have the meaning set forth in Section 3.2.

         2.13 "Grantees" shall mean Grantees of CFF who own Intellectual
Property and/or other rights that may be useful to the Research.

         2.14 "Hit" shall mean a compound used in the SGX FAST screen which is
shown in the course of the Research, to bind to CFTR or any of its domains as
demonstrated by a crystal structure of ligand bound to protein or by measurable
affinity in a solution phase method such as, but not limited to, isothermal
titrating calorimetry.

         2.15 "Inventions" means all tangible and intangible inventions (whether
or not patentable), discoveries, information, improvements, technology, data,
materials, samples, processes, methods, know-how, trade secrets, or
copyrightable material resulting from the Research.



                                       3




         2.16 "JRC" shall have the meaning set forth in Section 3.8.

         2.17 "Key Milestone Event" shall mean each of Appendix D milestones 7,
8, 9 and 10.

         2.18 "Lead Series" means the collection of compounds within a single
chemical series identified in the course of the Research either (a) which
contains compounds which satisfy the criteria B.2 in Appendix B; or (b) which
the JRC designates as a Lead Series.

         2.19 "Milestone Events" shall have the meaning set forth in Section
3.5(a).

         2.20 "Net Sales" with respect to any Collaboration Product shall mean
the gross amount invoiced by CFFT and any CFFT Affiliate, licensee or
sublicensee for that Collaboration Product sold in bona fide, arms-length
transactions to Third Parties, less (i) quantity and/or cash discounts from the
gross invoice price which are actually allowed or taken; (ii) freight, postage
and insurance included in the invoice price; (iii) amounts repaid or credited by
reasons of rejections or return of goods or because of retroactive price
reductions specifically identifiable to the Collaboration Product; (iv) amounts
payable resulting from government (or agency thereof) mandated rebate programs;
(v) third-party rebates to the extent actually allowed; (vi) invoiced customs
duties and sales taxes (excluding income, value-added and similar taxes), if
any, actually paid and directly related to the sale that are not reimbursed by
the buyer; and (vii) any other specifically identifiable amounts included in the
Collaboration Product's gross invoice price that should be credited for reasons
substantially equivalent to those listed above; all as determined in accordance
with generally accepted accounting principles.



                                       4




                  2.20.1 In the case of any sale or other disposal of a
Collaboration Product between or among CFFT and its Affiliates, licensees and
sublicensees, for resale, Net Sales shall be calculated as above only on the
value charged or invoiced on the first arm's-length sale thereafter to a Third
Party.

                  2.20.2 In the case of any sale which is not invoiced or is
delivered before invoice, Net Sales shall be calculated at the time of shipment
or when the Collaboration Product is paid for, if paid for before shipment or
invoice.

                  2.20.3 In the case of any sale or other disposal for value,
such as barter or counter-trade, of any Collaboration Product, or part thereof,
other than in an arm's length transaction exclusively for money, Net Sales shall
be calculated as above on the value of the consideration received or the fair
market price (if higher) of the Collaboration Product in the country of sale or
disposal.

                  2.20.4 In the event the Collaboration Product is sold in a
finished dosage form containing the Collaboration Product in combination with
one or more other active ingredients (a "Combination Product"), the Net Sales of
the Collaboration Product, for the purposes of determining royalty payments,
shall be determined by multiplying the Net Sales (as defined above in this
Section) of the Combination Product by the fraction, A/(A+B) where A is the
weighted (by sales volume) average sale price of the Collaboration Product when
sold separately in finished form and B is the weighted average sale price of the
other product(s) sold separately in finished form, provided that the above
formula in this Section 2.19.4 shall not apply if the Collaboration Product is
virtually always sold in combination form and if each of the active ingredients
in a



                                       5




Combination Product results from the Research Program and in each such event the
following sentence shall apply. In the event that such average sale price cannot
be determined for both the Collaboration Product and the other product(s) in
combination, Net Sales for purposes of determining royalty payments shall be
mutually agreed by the parties based on relative value contributed by each
component, and such agreement shall not be unreasonably withheld.

                  2.21 "Progress Report" shall have the meaning set forth in
Section 3.8(a).

                  2.22 "Research" shall have the meaning set forth in Section
3.1.

                  2.23 "Research Plan" shall mean the Research Plan attached to
this Agreement as Appendix C as it may be revised from time to time in
accordance with this Agreement.

                  2.24 "SGX Background Intellectual Property" means Inventions
made, created, developed, conceived or reduced to practice by SGX prior to or in
connection with the Research, relating to: (i) methodologies and practices for
protein over-expression, purification, crystallization, X-ray structure
determination, co-crystal structure determination, and compound screening,
including but not limited to, protocols and methodologies and/or instrumentation
relating to production of soluble membrane-bound proteins or their domains,
other than Inventions relating to CFTR or interactions of CFTR with small
molecules or other interactions of CFTR with interacting proteins; and (ii)
compounds within SGX's libraries, including without limitation Hits and linear
libraries, but excluding compounds developed in the course of the Research,
within combinatorial libraries, Structure Data, Early Lead Series and Lead
Series.



                                       6




                  2.25 "Structure Data" means any Inventions made, created,
developed, conceived or reduced to practice by SGX in the course of the Research
relating to the structure of CFTR or interactions of CFTR with other interacting
proteins or CFTR interactions with small molecules and compounds within
combinatorial libraries, developed in the course of the Research, but excluding,
Hits and compounds within linear libraries. For clarity, Structure Data does not
include SGX Background Technology.


                              ARTICLE 3 - RESEARCH

         3.1 Research. There is attached to this Agreement as Appendix C, the
applicable Research Plan describing the Research (the "Research") to be
conducted by SGX in accordance with this Agreement. The Research Plan may be
revised from time to time by the determination of the JRC. Any such revised
Research Plan shall be attached hereto as Appendix C. The term of the Research
will commence on the Effective Date and terminate on the third (3rd) anniversary
of the Effective Date (the "Completion Date") unless terminated earlier as
provided in this Agreement. SGX will exercise its good faith commercial efforts
to conduct the Research in a professional and diligent manner; provided however,
that SGX does not warrant that the Research will achieve any of the research
objectives contemplated by it. For the purposes of Sections 2.15, 2.23, 2.24,
4.1 and 6.5, the Research shall also include the "Research" (as defined in the
SRA) performed pursuant to the SRA. The Research is dependent upon the
availability of both biophysical and cell-based assays to be provided by CFFT.
It is envisioned that the biophysical assay will be based either on Isothermal
Titrating Calorimetry or Biacore(TM) analysis, both of which are capable of
measuring binding of low molecular weight




                                       7




compounds with affinities as low as 100uM. SGX will be responsible for providing
samples of both proteins and compounds for this assay. The cell-based assay
should be capable of detecting compounds with activities of less than 100uM. The
read-out from the assay should reflect activity of functional CFTR. CFFT will
bear the costs of all assays.

         3.2 Research Staffing. SGX will dedicate a minimum of [...***...] full
time equivalent researchers ("FTE's") to the Research per year during the term
of the Research, the exact number to be determined by the JRC on a quarterly
basis in advance of each calendar quarter during the term of the Research based
on the demands of the Research during the upcoming quarter. One FTE is
equivalent to [...***...] hours of work per year. It is anticipated that the
following researchers will be involved in the Research: [...***...], [...***...]
and [...***...] (collectively, the "Key Personnel"). [...***...] shall serve as
SGX's Research manager and shall be responsible for the overall management of
the Research and shall be the first point of contact with CFFT. SGX shall
endeavor to continue to assign the Key Personnel to the Research until the
Completion Date; provided however, that if SGX believes internal transfers are
necessary, SGX shall discuss with CFFT the reasons for such transfers, the
identity and qualification of the proposed substitute personnel, and the means
by which SGX proposes to prevent any such transfer resulting in a learning curve
loss detrimental to the progress of the Research. SGX shall secure CFFT's
written approval prior to implementing any transfer of the Key Personnel;
provided however, that such approval shall not be unreasonably withheld or
delayed.




                                       8     ***CONFIDENTIAL TREATMENT REQUESTED




         3.3 Research Funding. CFFT will pay SGX research funding during the
term of the Research based on the number of SGX FTEs involved in the Research as
provided in Section 3.2 above. For each such FTE, CFFT will pay SGX the rate of
[...***...] dollars ($[...***...]) per FTE per year, except that CFFT will pay
SGX for [...***...] of the FTE's for the Research from the Effective Date
through December 30, 2005 at the rate of [...***...] dollars ($[...***...]) per
FTE. Payments will be made by CFFT [...***...] beginning on the Effective Date,
based on the number of FTE's SGX estimates will be devoted to the Research
during the following fiscal quarter. With its invoice, SGX will provide CFFT
with evidence that the number and appropriate qualifications of FTE's covered by
the [...***...] were actually devoted to the Research and will respond promptly
to any CFFT questions regarding same. Within sixty (60) days following each
anniversary date during the term of the Research, SGX shall provide CFFT with an
annual accounting of the FTE's actually devoted to the Research during the
preceding year and accord CFFT a credit (or in the case of the last annual
accounting), a refund, for any deficiency in FTE's assigned to the Research from
the number of FTE's specified in Section 3.2 for such preceding annual period.
In no event shall CFFT be responsible during any annual period for FTE's
payments in excess of the number of FTE's specified in Section 3.2 for such
period.

         3.4 Technology Payments



                  (a) CFFT shall pay SGX a Technology Access Fee of
one million dollars ($1 million) after receipt of an invoice for same, which may
be submitted by SGX immediately after the Effective Date.





                                       9     ***CONFIDENTIAL TREATMENT REQUESTED




                  (b) CFFT shall pay SGX quarterly Technology Maintenance Fees
of [...***...] dollars ($[...***...]) each, billable by SGX on the first
anniversary date of the Effective Date and at the outset of each three (3) month
period thereafter during the term of the Research after receipt of invoices for
same.

         3.5 Milestone Payments.

                  (a) In addition to the FTE payments provided for in Section
3.3, CFFT shall pay to SGX the nonrefundable milestone payments for the
achievement of the Milestone Events set forth in Appendix D.


         (b) Appendix D is provided to direct the flow of the Research and to
offer incentives to SGX. The order and timing of these Milestone Events is
suggested by CFFT and its advisors on the JRC. However, these steps may be
performed out of order and in any year if such performance is determined by the
JRC to help to achieve the overall objectives of the Research at the time they
are performed. Failure to achieve any of the Milestone Events described in
Appendix A or D will not constitute a breach of this Agreement. However, the
failure to achieve a Key Milestone Event on or before its Anticipated Completion
Date (as defined in Appendix D) shall constitute grounds for a "No Cost
Termination" by CFFT in accordance with Section 7.2 of this Agreement.

         (c) Milestone payments shall be paid after the JRC confirms the
completion of each Milestone Event and the receipt of the SGX invoice
corresponding to the Milestone Event.



                                       10    ***CONFIDENTIAL TREATMENT REQUESTED



         3.6 Outsource Budget. In addition to the payments to SGX specified
hereinabove, CFFT will reimburse SGX for amounts SGX incurs for third party
services or materials specified in the Outsource Budget attached hereto as
Appendix E. The Outsource Budget may be amended from time to time with CFFT's
approval. Payments due to SGX under the Outsource Budget shall be invoiced to
CFFT with respect to the preceding quarter.

         3.7 Early Termination Bonus. In addition to the payments provided for
in Sections 3.3 through 3.6. CFFT shall pay to SGX, within sixty (60) days after
the termination of this Agreement, an additional bonus if, but only if,
Milestone Event numbered 10 has been successfully completed by SGX prior to the
termination, such bonus to be calculated as follows: (i) multiplying [...***...]
dollars ($[...***...]) by the number of FTE's specified in Section 3.2 for the
period from the date of such successful completion through the Completion Date,
provided that, if no final number of FTE's have been approved for any portion of
the period after successful completion and prior to the Completion Date, the
number of FTE's for such period for purposes of calculating the Early
Termination Bonus shall be [...***...]. Such bonus shall be in lieu of FTE
payments that otherwise might have been devoted to the Research after successful
completion had the Agreement not been terminated.

         3.8 Research Management.

                  (a) During the term of the Agreement, three or more
representatives of each party will be named to serve on the Joint Research
Committee (the "JRC"). The JRC shall meet regularly (at least two times per year
in person and more frequently at the call of a



                                       11    ***CONFIDENTIAL TREATMENT REQUESTED




representative from either party face to face, by telephone or video
conferencing) to oversee the progress of the Research. The timing and location
of such meetings will be agreed upon by the parties. SGX will provide a written
report (the "Progress Report") detailing the progress of the Research quarterly,
with the Progress Report scheduled for quarters immediately preceding meetings
of the JRC to be distributed to CFFT at least three (3) business days prior to
such meetings. Without limitation, SGX will include in the Progress Reports in
reasonable detail SGX's interpretation of the data.

                  (b) The JRC will be responsible for: approving the detailed
research plans for the first and subsequent years of the Research and any
revision thereto; coordinating and monitoring research progress; determining the
numbers of FTE's required to accomplish the tasks specified in the Research
Plan, determining the successful completion of Appendix A milestones and
Milestone Events; ensuring open and frequent exchanges between the parties with
respect to Research activities; and approving priorities of the Research and
allocations of tasks and resources required to carry out the goals of the
Research. All such decisions will be made by consensus of the JRC; provided
however, that CFFT will have the final decision as to the setting of priorities
for the Research and with respect to all decisions relating directly or
indirectly to payments (including the completion of Appendix A milestones and
Milestone Events) under this Agreement. Decisions of the JRC are [...***...].

         3.9 Proprietary Materials.

                  (a) In the course of the Research, a party ("Donor") may
transfer its proprietary materials to the other party ("Donee"). Substances made
by a Donee from proprietary materials of a Donor shall remain the property of
the Donor. Neither party shall



                                       12    ***CONFIDENTIAL TREATMENT REQUESTED





transfer the other party's proprietary materials to any third party without the
prior written consent of the Donor.

                  (b) CFFT shall exercise its good faith commercial efforts to
obtain from Grantees information and materials; provided however, that all
decisions regarding whether or not, and on what terms, to obtain such
information and materials from Grantees, will be CFFT's responsibility and at
its sole discretion.

                  (c) Upon termination of this Agreement, any remaining
proprietary materials supplied by a Donor will be returned to the Donor or
destroyed, as requested by the Donor.

                  (d) BOTH PARTIES ACKNOWLEDGE THAT THE PROPRIETARY MATERIALS
PROVIDED BY EITHER PARTY TO THE OTHER PARTY ARE EXPERIMENTAL IN NATURE AND THAT
THE DONOR MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, AS TO THE MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. In no
event shall either party be liable to the other party for any indirect or
consequential damages resulting from any use of the proprietary materials or any
derivatives thereof, by the other party.

         3.10 Exclusivity. During the term of the Research, SGX will not enter
into any agreement or conduct any research, with any commercial third party or
for any commercial purpose, in connection with the structure solution of CFTR
proteins or the development of modulators of CFTR.



                                       13




             ARTICLE 4 - - INTELLECTUAL PROPERTY RIGHTS AND PAYMENTS

         4.1 Ownership. SGX Background Intellectual Property is owned by SGX.
CFFT Intellectual Property is owned by CFFT. SGX will own any Lead Series, Early
Lead Series and Structure Data resulting from the Research; provided however,
that SGX hereby grants to CFFT (a) an exclusive (even as to SGX) worldwide,
sublicensable, perpetual license under all of its rights and interests in any
Lead Series and Early Lead Series to use, sell, license or otherwise transfer
any Lead Series and Early Lead Series to a third party; and (b) an exclusive
(even as to SGX) worldwide, sublicensable, perpetual license in the Structure
Data (other than an Early Lead Series and Lead Series) in the Field under all of
its rights and interests. At CFFT's request, SGX shall promptly furnish the
Structure Data, Early Lead Series and Lead Series to CFFT in such form as will
allow CFFT to exercise its rights hereunder. If CFFT determines that SGX's
retention of title hereunder in any way hinders commercialization, it may
request that SGX transfer title to CFFT. SGX shall not unreasonably withhold its
consent to such request. Without limitation of the foregoing in this Section
4.1, SGX's retention of title to any Lead Series, Early Lead Series and the
Structure Data shall not allow SGX to use the Structure Data in the Field or use
the Lead Series or Early Lead Series for any purposes other than the Research,
and shall not allow SGX to transfer the Structure Data to any third party for
use in the Field or transfer the Early Lead Series or Lead Series to any third
person, except in each case in conjunction with an assignment allowable under
Section 9.5 and then only if SGX's successor in interest in any such assignment
agrees to be bound by the terms of this Section 4.1. SGX shall execute such
agreements and/or documents as



                                       14





requested by CFFT as are necessary to implement CFFT's rights pursuant to this
Section 4.1. Inventorship of Inventions will be determined in accordance with
the laws of the United States and other applicable law.

         4.2 License to SGX of CFFT Intellectual Property. Subject to the terms
of this Agreement, CFFT grants to SGX and SGX accepts a non-exclusive, paid-up,
license of CFFT Intellectual Property to use and practice CFFT Intellectual
Property solely to conduct the Research to the extent that CFFT has the right to
grant such license.

         4.3 SGX Background Intellectual Property. CFFT will have no rights to
use or practice SGX Background Intellectual Property except to the extent it is
integrated into the Structure Data, Early Lead Series or a Lead Series.

         4.4 Commercial Efforts. CFFT will exercise its good faith commercial
efforts to (i) develop and bring on its own account or through sublicensees,
Collaboration Products to the market as soon as reasonably practicable, (ii)
obtain regulatory approvals to market Collaboration Products, and (iii) after
obtaining regulatory approvals for any Collaboration Products, launch
Collaboration Products and promote and meet the market demand therefor.

         4.5 Lack of Diligence. In the event that CFFT fails to exercise its
good faith efforts to develop and commercialize a Collaboration Product within
[...***...] years after the Completion Date, the rights to the Structure Data,
Early Lead Series and Lead Series granted to CFFT pursuant to Section 4.1 shall
revert to SGX and SGX thereafter shall have the right to develop, manufacture,
make, have made, import, use, distribute, offer for sale and sell Collaboration
Products. In the event of such reversion, SGX shall pay to



                                       15    ***CONFIDENTIAL TREATMENT REQUESTED




CFFT [...***...] percent ([...***...]%) of any amount SGX receives from the sale
of any Collaboration Product.

         4.6 Lump Sum Payments. It is anticipated that CFFT will seek a
sublicensee to aid in the further development and commercialization of a Lead
Series generated by SGX. SGX further acknowledges that CFFT may elect to invest
additional funds in the continued development of the Structure Data or a Lead
Series or Early Lead Series prior to seeking a sublicensee and that CFFT will
seek a sublicensee either directly or indirectly after delivery by SGX of a Lead
Series, Early Lead Series or Structure Data or at any point thereafter. Upon
entering into a sublicensing arrangement, CFFT will pay to SGX the cumulative
amounts indicated in the table below of the greater of the indicated percentage
of sublicensing proceeds or the indicated milestone and royalty payments for the
stages completed prior to sublicensing. Thereafter, CFFT shall pay to SGX the
greater of the indicated percentage of sublicensing proceeds or the milestone or
royalty amount corresponding to a stage when it is completed.

SUBLICENSING PROCEEDS, MILESTONES AND ROYALTIES:




                                  Lead Stage (no
                                  additional              From Lead Stage
       Stage of                   investment              up to IND filing        From IND approval
       Sublicensing               by CFFT)                Stage                   Stage on
       -------------------------- ----------------------- ----------------------- ---------------------------
                                                                         
       Percentage of              [...***...]% of the     [...***...]% of the     [...***...]% of the
       sublicensing proceeds      amounts received        amounts received        amounts received
       (including royalties)
       payable to SGX

       Development Candidate      $[...***...]            $[...***...]            $[...***...]

       IND Filing                 $[...***...]            $[...***...]            $[...***...]

       Completion Phase I         $[...***...]            $[...***...]            $[...***...]

       Completion Phase II (POC)  $[...***...]            $[...***...]            $[...***...]

       Initiation Phase III       $[...***...]            $[...***...]            $[...***...]





                                       16    ***CONFIDENTIAL TREATMENT REQUESTED

                                                                         
       1st Registration, US       $[...***...]            $[...***...]            $[...***...]

       1st Registration,          $[...***...]            $[...***...]            $[...***...]
       ex-US

       Royalties                  [...***...]% of Net     [...***...]% of Net     [...***...]% of Net Sales
                                  Sales                   Sales



         4.7 Royalty Accounting and Payments. The royalty payments due under
Section 4.6 will be paid quarterly within sixty (60) days after the close of
each calendar quarter beginning with the calendar quarter following the quarter
in which the first commercial sale of a Collaboration Product occurs. With each
such quarterly payment CFFT will furnish to SGX a written accounting in a format
agreed upon by the parties detailing the total number of units of each
Collaboration Product sold for the quarterly period for which payments under
Section 4.6 are due. Any payments due hereunder which are not paid by the date
due will bear interest at a rate equal to the prime rate as reported by Citibank
(or its successor) in New York, New York applicable to such period, plus
[...***...] percent ([...***...]%).

         4.8 Records; Inspection. CFFT will keep complete, true and accurate
books of account and records for the purpose of determining the amounts payable
under Section 4.6. Such books will be kept reasonably accessible for at least
three (3) years following the end of the calendar quarter to which they pertain.
Such records will be open for inspection during such three (3) year period with
reasonable notice by a representative or agent of SGX for the purpose of
verifying the written accounting. SGX shall bear the costs and expenses of any
such inspections conducted under this Section 4.8 unless a variation or error
producing an underpayment of [...***...] percent ([...***...]%) or more of the
amount payable for any inspection period is established, whereupon all costs and
expenses


                                       17    ***CONFIDENTIAL TREATMENT REQUESTED




relating to such inspection and any unpaid amounts discovered will be paid by
CFFT together with interest on such amounts at the rate specified in Section
4.7.

         4.9 Payments to CFFT. In the event section 4.5 is applicable, Sections
4.7 and 4.8 shall be applicable to SGX and CFFT by reversing the rights and
obligations of the parties specified therein.

                         ARTICLE 5 - PATENT PROSECUTION

         5.1 Prosecution by each party.


                  (a) SGX shall promptly notify CFFT of any Invention. During
the term of Research, SGX shall, at CFFT's expense, (i) direct the preparation,
filing, prosecution and maintenance of patent applications and patents relating
to the Research in such countries as CFFT deems appropriate and (ii) conduct any
interferences, re-examinations, reissues, oppositions or requests for patent
term extensions with respect to patents and patent applications; and (iii) keep
CFFT informed as to the status of patent matters relating to Inventions,
including, without limitation, by providing CFFT and its patent counsel the
opportunity, at CFFT's expense, to review and comment on any documents relating
to the Research which will be filed in any patent office at least thirty (30)
days before such filing, and promptly providing CFFT with copies of any
documents relating to the Inventions which SGX receives from such patent
offices, including notices of all interferences, reissues, reexaminations,
oppositions or requests for patent term extensions. After the term of the
Research, CFFT shall assume the aforementioned obligations with respect to
patents. CFFT



                                       18




shall reimburse SGX for the costs SGX incurs in undertaking the above patent
responsibilities on a monthly basis.

                  (b) SGX shall have the right at its sole expense to direct the
preparation, filing, prosecution and maintenance of patent applications and
patents relating to SGX Background Intellectual Property worldwide in such
countries as SGX deems appropriate, and conduct any interferences,
re-examinations, reissues, oppositions or requests for patent term extensions
with respect thereto.

         5.2 Prosecution by CFFT. In the event SGX declines to file or, having
filed, declines to further prosecute and maintain any patents or patent
applications on Inventions for which it is responsible under Section 5.1(a)
after a reasonable opportunity to do so, CFFT will have the right to conduct
such activities, at its own expense, in the name of the owner in any country, in
which event SGX shall provide all reasonable assistance requested by CFFT at
CFFT's expense.

         5.3 Cooperation. Each party will make available to the other such of
its employees, agents or consultants as are reasonably necessary or appropriate
to enable such party to file, prosecute and maintain patents and patent
applications as permitted under Section 5.1(a), including without limitation, by
providing the other with an opportunity to fully review and comment on any
documents as far in advance of filing dates as feasible, which documents will be
filed in any patent office, and providing the other with copies of any documents
that such party received from such patent offices promptly after receipt,
including notice of all interferences, reissues, reexaminations, oppositions or
requests for patent term extensions.



                                       19




                           ARTICLE 6 - CONFIDENTIALITY

         6.1 Confidential Information. Pursuant to the SRA and to this
Agreement, SGX and CFFT have and may supply each other with certain proprietary,
technical or business information or materials ("Confidential Information").
Confidential Information will mean all Confidential Information disclosed by the
parties to each other under the SRA and all information disclosed by a party to
the other party under this Agreement and designated as "Confidential" by the
disclosing party at the time of disclosure as follows: (i) Confidential
Information embodied in any tangible form or thing must be marked or labeled
clearly as "CONFIDENTIAL" or with a similar legend sufficient to notify the
receiving party that the Confidential Information is subject to the terms of
this Agreement; (ii) Confidential Information disclosed orally must be
identified as "CONFIDENTIAL" at the time of oral disclosure; (iii) Confidential
Information licensed to CFFT pursuant to Section 4.1 of this Agreement which
shall be the Confidential Information of CFFT pursuant to such license
notwithstanding the fact the information was initially disclosed to CFFT by SGX.

         6.2 Use of Confidential Information. SGX and CFFT agree that they will
not use any Confidential Information received from the other party except for
the purposes of this Agreement or to exercise the rights granted or retained by
such party under this Agreement. Each party agrees not to disclose any
Confidential Information received from the other party to any third parties,
except as provided in Sections 6.3 or 6.4, to the extent required for patent
filings, or otherwise to exercise its rights duties and obligations




                                       20




pursuant to this Agreement. SGX and CFFT agree to maintain and follow reasonable
procedures to prevent unauthorized disclosure or use of the Confidential
Information and to prevent it from falling into the public domain or the
possession of unauthorized persons. SGX and CFFT agree that subject to the first
two sentences of this Section 6.2, and to Sections 6.3 and 6.4, the recipient of
Confidential Information hereunder will not disclose such information other than
to those of its officers, employees, or consultants who require access to
Confidential Information to accomplish the purposes of this Agreement and that
all such disclosures will be subject to written contractual obligations of
confidentiality at least as restrictive as those in this Agreement. Each party
will immediately advise the other party of any disclosure, loss or use of
Confidential Information in violation of this Agreement. The obligations of the
parties with respect to Confidential Information under this Article 6 will
terminate [...***...] ([...***...]) years from the Completion Date except in the
case of Confidential Information exclusively licensed to CFFT pursuant to this
Agreement which confidentiality restrictions shall remain in force for SGX for
[...***...].

         6.3 Disclosure to Commercial Partner. In the event that either party
enters into an agreement with a third party in accordance with the terms of this
Agreement with respect to the further development or commercialization of any
Inventions, such party will have the right to disclose to that third party and
such third party will have the right to use such Confidential Information of the
other party as is necessary to accomplish the purposes of the agreement between
the contracting party and the third party.

         6.4 Exceptions. For purposes of Sections 6.1 through 6.3, Confidential
Information will not include information that the receiving party shows is:




                                       21    ***CONFIDENTIAL TREATMENT REQUESTED




                  (a) lawfully known or available to the receiving party from a
source other than the disclosing party without breach of this Agreement;


                  (b) already known to the receiving party, as shown by written
records, before its disclosure by the disclosing party;


                  (c) developed independently by the receiving party without the
use or consideration of or reference to the Confidential Information of the
disclosing party;


                  (d) within, or later falls within, the public domain without
breach of this Agreement by the receiving party;


                  (e) publicly disclosed with the written approval of the
disclosing party; or


                  (f) disclosed pursuant to the requirement or demand of a
lawful governmental or judicial authority, but only to the extent required by
operation of law, regulation or court order; provided however, prior to such
disclosure the party otherwise required to disclose shall notify the other party
as far in advance as is practicable to allow such other party to seek a
protective order; and


                  (g) the transfer of coordinate files that underlie milestones
4 and 5 of Appendix A and Milestone 5 of Appendix D, each of which files shall
be furnished to CFFT by SGX promptly upon the completion of each such milestone.

         6.5 Publication. In the event any of the parties hereto wish to publish
any papers relating to the Research, representatives of the other parties hereto
may be co-authors of such papers, subject to customary scientific practices;
provided, however, each



                                       22




party's contribution to the Research described in such papers will be
acknowledged in all such papers, regardless of authorship. To afford each party
an opportunity to determine that no Confidential Information of such party is
disclosed in any proposed publications, whether written or oral (including
without limitation, presentations to a journal or editor or other written
materials, abstracts, presentations to a seminar, meeting or other third party
or any other oral disclosure or abstract) and that patent filings will not be
jeopardized, and to keep each party informed of upcoming disclosures, each party
will provide the other with an advance copy of any proposed publication or
abstract relating to the Research at least thirty (30) days prior to submission
of such manuscript or thirty (30) days prior to presentation if such publication
is to be made orally. At the non-publishing party's request, the publishing
party will delay submitting such manuscripts for an additional ninety (90) days
to allow the non-publishing party to take such steps it deems necessary to file
patent applications or otherwise protect its Confidential Information.

         6.6 Publicity. Neither party may make any public announcement relating
to this Agreement including disclosure of the terms or status of Milestone
Events under this Agreement without the prior written consent of the other
party, which consent will not be unreasonably withheld. Upon execution of this
Agreement, the parties will issue a press release in the form mutually agreed
upon or a reasonable variant thereof. Any additional press releases or public
announcements with respect to this Agreement or the transactions and activities
contemplated herein will be published at such time and in such manner as the
parties will mutually agree upon.



                                       23




                             ARTICLE 7 - TERMINATION


         7.1 Without Cause Termination by CFFT. CFFT shall have the right to
terminate this Agreement without cause upon the first (1st) or second (2nd)
anniversaries of the Effective Date by providing SGX at least thirty (30) days
notice of such termination. In such event, CFFT shall pay to SGX a termination
payment of [...***...] dollars ($[...***...]), and except for such termination
payment and any outstanding accrued liabilities existing as of the effective
date of termination, no further amount shall be payable by CFFT pursuant to this
Agreement.


         7.2 No Cost Termination. CFFT may terminate this Agreement without cost
("No Cost Termination") on written notice, given at any time during the sixty
(60) day period immediately following a Key Milestone Event Anticipated
Completion Date only if SGX has failed to successfully complete such Key
Milestone Event by the Anticipated Completion Date, and only to the extent that
such failure is not due to a delay in the availability of the assays described
in Section 3.1. In the event of such termination, no further amount shall be
payable by CFFT to SGX except for any outstanding accrued liabilities existing
as of the effective date of termination.


         7.3 Automatic Termination. This Agreement shall terminate on the
Completion Date, or if earlier, on the date Milestone numbered 10 specified in
Appendix D has been successfully completed.


         7.4 Termination for Material Breach. Without limitation to other rights
available to a party, either party may terminate this Agreement in the event of
a material breach by the other party upon sixty (60) days written notice to the
other party setting

                                             ***CONFIDENTIAL TREATMENT REQUESTED


                                       24




forth in reasonable detail the specifics of the material breach, provided
however, that within such sixty (60) day period, the party in material breach
may cure the deficiency or the parties may agree on a settlement in which case
the termination by SGX or CFFT shall not occur.


         7.5 Effect of Termination. In the event of termination of this
Agreement (other than by reason of CFFT's breach), the licenses granted by CFFT
to SGX pursuant to this Agreement will terminate. In the event of termination of
this Agreement by CFFT under Sections 7.2 or 7.4, or in the event of termination
under Section 7.3, SGX agrees that for a period of [...***...] ([...***...])
years from the date of termination, it will not work with any third party in the
field of CFTR structure determination. In the event of termination (other than
as a result of CFFT's breach), SGX shall transfer to CFFT in a format requested
by CFFT all processes and materials relevant to the Research other than SGX
Background Intellectual Property. , In addition to other licenses granted to
CFFT by SGX pursuant to this Agreement, (i) in the event of termination of this
Agreement by CFFT under Section 7.4 SGX will grant to CFFT an exclusive
license in the Field, to any Hits and compounds within linear libraries,
identified in the course of the Research, and (ii) in the event of termination
of this Agreement under Sections 7.2 or 7.3, SGX will grant to CFFT a
non-exclusive license in the Field to any Hits and compounds within linear
libraries, identified in the course of the Research.


         7.6 Survival. Articles 1, 2, 4, 5, 6, 7, 8 and 9 and Section 3.9 shall
survive expiration or termination of this Agreement for any reason, except that:
(a) in the event of termination by CFFT under Section 7.4, Sections 4.6 and 4.7
shall not survive; and (b) in the event of a termination by SGX under Section
7.4, sections 4.1(a) and (b) shall not



                                       25    ***CONFIDENTIAL TREATMENT REQUESTED




survive; and (c) in the event of termination by CFFT under Section 7.2, Sections
4.6 and 4.7 shall not survive, but in lieu of payments to SGX pursuant to those
sections, CFFT shall pay to SGX [...***...] percent ([...***...]%) of any amount
CFFT receives from the sale of any Collaboration Product.

                           ARTICLE 8 - INDEMNIFICATION

         8.1 CFFT Indemnification. CFFT agrees to defend, indemnify and hold
SGX, its directors, officers, employees, agents and Affiliates, harmless from
and against any losses, costs, claims, liabilities or expenses (including
reasonable attorney's fees and expenses of litigation) claimed by persons not
covered by this indemnification arising out of or in connection with (i) the use
or practice of an Early Lead Series, Lead Series or Structure Data by or on
behalf of CFFT, its Affiliates, licensees or sublicensees or (ii) the research
and development, manufacture, use, promotion, marketing, sale or other
distribution of any Collaboration Product by CFFT or its Affiliates, licensees
or sublicensees, except to the extent that such claims result from the
negligence or willful misconduct of SGX.

         8.2 SGX Indemnification. SGX agrees to defend, indemnify and hold CFFT
and its Affiliates and their officers, employees and agents, harmless from and
against any losses, costs, claims, liabilities or expenses (including reasonable
attorney's fees and expenses of litigation) claimed by persons not covered by
this indemnification arising out of or in connection with (i) the negligent
performance or willful misconduct of this Agreement by or on behalf of SGX; or
(ii) resulting from the use or practice of CFFT Intellectual Property by or on
behalf of SGX; or (iii) resulting from the use or practice of




                                       26    ***CONFIDENTIAL TREATMENT REQUESTED




SGX Background Intellectual Property by SGX; except to the extent that such
claims result from the negligence or willful misconduct of CFFT.

         8.3 Procedure. The parties agree to promptly notify each other of any
claim or liability subject to this Article 8. The indemnifying party will have
the right to control the defense thereof with counsel of its choice; provided
however, that the indemnified party will have the right to retain its own
counsel at its own expense for any reason. The indemnified party will cooperate
with the indemnifying party and its legal representatives in the investigation
of any action, claim or liability covered by this Article 8. The indemnified
party will not, except at its own cost, voluntarily make any payment or incur
any expense with respect to any claim or suit without the prior written consent
of the indemnifying party.


                            ARTICLE 9 - MISCELLANEOUS

         9.1 Representations and Warranties. Each party represents and warrants:


                  (a) each SGX scientist and employee involved in the Research
has entered into a contract which provides for assignment to the party of all
Inventions and discoveries made by the scientist or employee during the course
of his or her employment with the party;


                  (b) it has not previously granted and during the term of this
Agreement will not grant any option, license or interest in or to the
Intellectual Property subject to this Agreement or any portion thereof in
conflict with the rights granted to the other party herein;



                                       27




                  (c) it has the right to grant the rights granted herein and it
has the full power, right and authority to execute and deliver this Agreement
and perform its obligations hereunder; and


                  (d) it owns or has a license (with the right to grant
sublicenses) to the proprietary materials provided to the other party under this
Agreement

         9.2 Arbitration. The parties recognize the disputes as to certain
matters may from time to time arise during the term of this Agreement which
relate to either party's rights and/or obligations hereunder. It is the
objective of the parties to establish procedures to facilitate the resolution of
disputes arising under this Agreement in an expedient manner by mutual
cooperation and without resorting to arbitration. The parties agree that prior
to any arbitration concerning this Agreement, CFFT's President and SGX's
President will meet in person or by video conferencing in a good faith effort to
resolve any disputes concerning this Agreement. Within thirty (30) days of a
formal request by either party to the other, any party may, by written notice to
the other, have such dispute referred to their respective officers designated
for attempted resolution by good faith negotiations, such good faith
negotiations to begin within thirty (30) days after such notice is received. Any
dispute arising out of or relating to this Agreement which is not resolved
between the parties or the designated officers of the parties pursuant to this
Section 9 will be resolved by final and binding arbitration conducted in
Chicago, Illinois under the then current Commercial Arbitration Rules of the
American Arbitration Association ("AAA"). The arbitration will be conducted by
three (3) arbitrators who are knowledgeable in the subject matter which is at
issue in the dispute. One arbitrator will be selected by CFFT and one arbitrator
will be selected by SGX and the third arbitrator



                                       28




will be appointed by the AAA. In conducting the arbitration, the arbitrator will
determine what discovery will be permitted, consistent with the goal of limiting
the cost and time which the parties must expend for discovery (and provided that
the arbitrators will permit such discovery they deem necessary to permit an
equitable resolution of the dispute) and will be able to decree any and all
relief of an equitable nature, including but not limited to such relief as a
temporary restraining order, a preliminary injunction, a permanent injunction,
specific performance or replevin of property. The arbitrators will also be able
to award actual or general damages, but will not award any other form of damage
(e.g., consequential, punitive or exemplary damages). The parties will share
equally the arbitrator's fees and expenses pending the resolution of the
arbitration unless the arbitrators require the non-prevailing party to bear all
or any portion of the costs of the prevailing party. The decision of the
arbitrators will be final and binding and may be enforced by the party in whose
favor it runs in any court of competent jurisdiction at the option of such
party. Notwithstanding anything to the contrary in this Section 9.2, either
party may seek immediate injunctive or other interim relief from any court of
competent jurisdiction with respect to any breach of Section 6 hereof, or
otherwise to enforce and protect the patent rights, copyrights, trademarks, or
other intellectual property rights owned or controlled by such party. In no
event will a demand for arbitration be made after the date when the institution
of a legal or equitable proceeding based on such claim, dispute or other matter
in question would be barred by the applicable statute of limitations.

         9.3 Invoices. All invoices sent under this Agreement are payable within
thirty (30) days after the date of an invoice finally submitted. Each invoice
shall be submitted




                                       29



with sufficient backup information to allow CFFT to verify the invoice amounts.
SGX shall promptly respond to requests by CFFT for further information and SGX
shall cooperate with CFFT if CFFT determines that an audit of any invoice is
appropriate. In case of non- or late payments of any amounts owing by CFFT to
SGX, such amounts shall bear interest at the rate of [...***...]% per
[...***...] from the date on which such amounts shall become due and payable.

         9.4 Governing Law. This Agreement will be governed by the laws of the
State of Maryland, without reference to conflicts of laws principles.

         9.5 Assignment. This Agreement will not be assignable by either party
to any third party without the prior written consent of the other party; except
either party may assign this Agreement without such consent, to (i) an Affiliate
of such party; or (ii) an entity that acquires all or substantially all of the
business or assets of such party to which this Agreement relates, whether by
merger, acquisition, reorganization, sale or otherwise.

         9.6 No Implied License. No right or license under any patent
application, issued patent, know-how or other proprietary information is granted
or shall be granted by implication. All such rights or licenses are or shall be
granted only as expressly provided in the terms of this Agreement.

         9.7 Force Majeure. Neither party will be liable to the other for
failure or delay in the performance of any of its obligations under this
Agreement for the time and to the extent such failure or delay is caused by
earthquake, riot, civil commotion, war, hostilities between nations,
governmental law, order or regulation, embargo, action by the government or any
agency thereof, act of God, storm, fire, accident, labor dispute or



                                       30    ***CONFIDENTIAL TREATMENT REQUESTED




strike, sabotage, explosion, or other similar or different contingencies, in
each case, beyond the reasonable control of the respective party.

         9.8 Independent Contractors. The relationship between the parties will
be that of independent contracting parties and nothing in this Agreement will be
construed to create any other relationship between CFFT and SGX. No party will
have the right, power or authority to assume, create or incur any expense,
liability or obligation, express or implied, on behalf of any of the other
parties.

         9.9 Severability. If any provision(s) of this Agreement will be held
invalid, illegal or unenforceable by a court of competent jurisdiction, this
Agreement will continue in full force and effect without said provision.

         9.10 Notices. Any notices made pursuant to this Agreement will be in
writing and will be deemed effective when sent by nationally recognized
overnight express delivery service, registered or certified mail, return receipt
requested, postage prepaid, to the respective addresses specified below, or to
such other address as each party may specify by written notice:

         To SGX:           Structural GenomiX, Inc.
                           10505 Roselle Street
                           San Diego, CA 92121
                           Attention:  President and CEO
                           Copy to:    Legal Department

         To CFFT:          Cystic Fibrosis Foundation Therapeutics, Inc.
                           6931 Arlington Road
                           Bethesda, MD 20814
                           Attention: Dr. Robert Beall, President



                                       31




                           Copy to:  Kenneth I. Schaner, Esq.
                           Swidler Berlin LLP
                           3000 K Street, N.W., Suite 300
                           Washington, D.C. 20007



         9.11 Entire Agreement. This Agreement and its Appendices constitute the
entire Agreement between SGX and CFFT and except as provided in Article I
supersedes all prior communications, understandings and agreements with respect
to all subject matters covered by the Agreement.

         9.12 Modification; Waiver. This Agreement may not be altered, amended
or modified in any way except by a writing signed by both parties. The failure
of a party to enforce any provision of the Agreement will not be construed to be
a waiver of the right of such party to thereafter enforce that provision or any
other provision or right.

         9.13 Headings. The captions to the several sections hereof are not a
part of this Agreement, but are included merely for convenience of reference
only and shall not affect its meaning or interpretation.

         9.14 Counterparts. This Agreement may be executed in two counterparts,
each of which will be deemed an original and both of which together will
constitute one instrument.



                                       32




         IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.


STRUCTURAL GENOMIX, INC.                    CYSTIC FIBROSIS FOUNDATION
                                            THERAPEUTICS, INC.


By: /s/ M.G. Grey                           By:  /s/ Robert J. Beall
    -------------------------------              -------------------------------





Title: President & CEO                      Title: President & CEO
       ----------------------------                -----------------------------


Date: June 23, 2005                         Date: 7/05/05
      -----------------------------               ------------------------------



                                       33




                                   APPENDIX A


                          SURVIVING MILESTONES FROM SRA




                                       Milestones                       Amount
- ----------------- ------------------------------------------ --------------------
                                                       
1                 [...***...]                                        $[...***...]

2                 [...***...]                                        $[...***...]

3                 [...***...]                                        $[...***...]

4                 [...***...]                                        $[...***...]

5                 [...***...]                                        $[...***...]

Total                                                                $[...***...]
                                                                      -----------





                                       34    ***CONFIDENTIAL TREATMENT REQUESTED





                                   APPENDIX B


                              LEAD SERIES CRITERIA


A Lead Series will comprise a set of structures that possess the properties
detailed below and can form the basis of a formal medicinal chemistry
optimization effort.


B.1      EARLY LEAD SERIES CRITERIA

(i)      [...***...].

(ii)     Total number of [...***...] and [...***...], number of [...***...]

(iii)    No [...***...] groups or [...***...] commonly associated with
         [...***...], as judged by an independent [...***...] agreed upon by
         [...***...]. No [...***...] of [...***...] to the [...***...] that
         would be [...***...] in [...***...].

(iv)     [...***...].

(v)      Proof of [...***...] in [...***...]; [...***...] an increase in the
         [...***...].

(vi)     [...***...] activity on [...***...] by a known [...***...]

(vii)    [...***...].

(viii)   [...***...] in [...***...] used for [...***...].

(ix)     One or more [...***...] meets criterion numbers [...***...],
         [...***...], [...***...], [...***...], [...***...], [...***...], and at
         least one member of the series meets criteria [...***...] without
         necessarily also meeting criteria [...***...], [...***...],
         [...***...], [...***...], [...***...], [...***...].(1)

B.2.     LEAD SERIES CRITERIA

         [...***...]:

(i)      [...***...].

(ii)     [...***...].

(iii)    [...***...].

(iv)     [...***...] in presence of [...***...]% [...***...].


- ----------
(1) While satisfaction of the specified criterion requires that [...***...],
[...***...], [...***...], [...***...], [...***...], the parties specifically
intend that [...***...]



                                       35    ***CONFIDENTIAL TREATMENT REQUESTED





(v)      [...***...].

(vi)     [...***...]:

                  a.       [...***...]

                           [...***...]

                  b.       [...***...]

(vii)    [...***...]

(viii)   [...***...], [...***...], [...***...].

(ix)     [...***...]

(x)      [...***...] should be met for a [...***...] within the [...***...];

(xi)     At least [...***...] is required to meet all the specified criteria.

(xii)    [...***...]:

                  o        [...***...]

                  o        [...***...]

                  o        [...***...]

                  o        [...***...]




                                       36    ***CONFIDENTIAL TREATMENT REQUESTED





                                   APPENDIX C

                                  Research Plan



3.8 1. OVERALL GOAL

The goal of the SGX-CFFT collaboration is to generate Lead Series that function
as "[...***...]" of (DELTA)F508 CFTR and have the potential to be optimized and
developed into therapeutics. The Plan involves applying SGX FAST( technology to
find novel small molecule structures that bind to []F508 NBD1 and that, when
optimized and tested in cells, reverse the effect of the F508 mutation.

This project will be initiated with parallel screens of the SGX FAST(TM)
Fragment Library (using compound mixtures) using [...***...] and [...***...]
with []F508 human NBD1 as the target. Fragments identified from the [...***...]
screen will be re-screened by [...***...]. All [...***...] hits will be
prioritized for elaboration into compounds with increased binding affinity to
[]F508 NBD1.


2. Overview of the FAST( Process

FAST(TM) begins with the establishment of robust methods for co-crystallization
and soaking to enable screening of the FAST(TM) fragment library against the
target.

Once the crystal soaking methods are developed at SGX, the FAST(TM) fragment
library is screened. This includes a crystallographic screen of fragment
mixtures ([...***...] fragments soaked with [...***...] crystal). Fragments
identified as binding to the target protein are reviewed and selected for
elaboration, using criteria such as [...***...], [...***...], [...***...] and
[...***...], and [...***...] in terms of chemical elaboration.

The FAST(TM) Fragment library is a collection of ~1000 diverse low molecular
weight compounds that represent ring systems typically found in drugs and
drug-like molecules. These fragments have been selected using specific
"lead-like" criteria, including:

         o [...***...]

         o [...***...]

         o [...***...]

         o [...***...], [...***...], [...***...], [...***...],
           [...***...].[...***...]

Each member of the FAST(TM) fragment library is amenable to rapid chemical
elaboration at two or three sites to provide access to enormous potential
chemical diversity using parallel organic synthesis. Initial fragment
elaboration involves using knowledge of the structure of the target-fragment
complex and advanced computational chemistry tools (MM/PBSA: Kollman et al, Acc.
Chem. Res. 2000, 33, 889-897) to guide synthesis of small, focused linear
(one-dimensional) libraries. Usually, these linearly elaborated




                                       37    ***CONFIDENTIAL TREATMENT REQUESTED




fragments are evaluated with in vitro biochemical assays and co-crystal
structure analyses to provide a set of compounds with enhanced activity and SAR.
In the case of (DELTA)F508 NBD1, however, [...***...]. Instead, we will use a
[...***...], and [...***...]) to assess [...***...]. Thereafter, optimal
variations at each point of chemical diversity are combined to synthesize
focused combinatorial (two- or three-dimensional) libraries that are again
evaluated with assays and X-ray crystallography. These focused combinatorial
libraries typically contain multiple novel compounds of low molecular weight
(<500Da) that bind the target protein with micromolar IC(50) values and
considerable selectivity. The deliverables from this process are compounds with
defined "lead-like" properties, target activity, SAR, and co-crystal structures.
The identified compounds can be further elaborated via parallel synthesis or
medicinal chemistry optimization to provide more optimized lead series. The
leads or lead series can be profiled and advanced based on cellular or
functional assays, animal efficacy models, in vitro and in vivo ADME and in
vitro toxicology studies in concert with structural information.

3. FAST(TM) APPLIED TO (DELTA)F508 NBD1

SGX and CFFT will collaborate on the discovery of Lead Series against
(DELTA)F508 NBD1 using the SGX FAST(TM) process. The crystal structure of
(DELTA)F508 human NBD1 has already been determined at SGX. A prime initial goal
of the collaboration will be to determine the [...***...] and [...***...] of
[...***...] on the [...***...] of the [...***...]. Information gained from this
early series of experiments will guide the selection of fragments for further
elaboration. Prioritization of the fragment selection and elaboration for the
various sites will occur through discussions with the Joint Research Committee
(JRC) throughout the course of the collaboration.

SGX will then apply its experience and expertise in high-throughput
crystallographic studies of protein-ligand complexes and integrated small
molecule design and discovery to rapidly identify one or more Early Lead Series
against (DELTA)F508 NBD1 which will subsequently be optimized to Lead Series as
defined in Appendix B.


3.1 TIMELINE

The projected timeline for the FAST(TM) project directed against (DELTA)F508
NBD1 is illustrated in the accompanying Project Timeline, with the goal of
identifying one or more Lead Series as defined in Appendix B.


3.2 FAST(TM) TARGET SELECTION AND FAST(TM) READINESS

3.2.1 Protein Production

SGX currently has established methods for producing a number of [...***...] and
[...***...] proteins in multi-milligram quantities. These quantities are
sufficient for all the crystallization trials and binding studies using mass
spectrometer analysis that are envisaged during the collaboration.

3.2.2 Screening for compounds that bind to (DELTA)F508 NBD1 using [...***...]

As there is no biochemical assay for compounds that bind to [...***...], we will
use an assay based on [...***...], in parallel with the crystallographic screen,
to detect FAST(TM) fragments that bind to (DELTA)F508 NBD1. For this, we will
[...***...] into [...***...] that are based on [...***...] and [...***...] by
[...***...]



                                       38    ***CONFIDENTIAL TREATMENT REQUESTED




[...***...] rather than on [...***...]. We will screen both wild type and
(DELTA)F508 NBD1 proteins in parallel in this assay as this will allow us to
determine, for the first time, whether there are differences in binding
properties between these proteins due to the loss of F508.

A brief description of the [...***...] process follows:

         o The [...***...]) is [...***...] from the FAST(TM) library, where each
           [...***...] of [...***...] (the number of [...***...] can be
           [...***...] if needed).

         o Appropriate [...***...] are [...***...].

         o [...***...] are [...***...] as the [...***...] of [...***...].

         o [...***...] to [...***...] are [...***...] by [...***...] and
           identified by [...***...].

         o [...***...] that [...***...] can be [...***...] in [...***...].

         o [...***...] will be followed up by [...***...].

We intend to use the [...***...] screen in parallel with the [...***...] screen.
Each approach will use [...***...]. However, the [...***...] will be different:
those for the [...***...] screen will be [...***...] based on the [...***...] of
the [...***...] while those used for [...***...] are [...***...] based on the
[...***...]. Following the [...***...] analysis on compound mixtures, we will
follow up hits with individual experiments on single compounds to confirm the
identity of the hits.

The JRC will review results and select [...***...] hits for follow-up in
crystallization trials to determine the precise location of the binding sites
and binding mode of the fragments.

3.2.3 Crystallization and Crystallography

SGX will develop appropriate crystallization, co-crystallization, soaking and
mixture soaking methods in-house to enable [...***...]. Activities will include:

         o Definition of [...***...] and [...***...] and [...***...]

         o Verification of [...***...], [...***...]

         o Development and optimization of [...***...]

The main goal is to be able to [...***...]. In the early stages of the work,
[...***...] will be attempted [...***...]. Our goal is to [...***...] from the
[...***...] (DELTA)F508 NBD1 protein, where [...***...]% of the [...***...] to
[...***...]. However, at a certain point the JRC may agree to move forward even
[...***...]%.


3.3 IDENTIFICATION OF INITIAL FRAGMENT HITS

>>       [...***...] of the SGX FAST(TM) Fragment library will be performed to
         provide initial Fragments for elaboration.

>>       Fragments may be identified as binding to multiple different sites on
         (DELTA)F508 NBD1. SGX will select [...***...] Initial Fragment Hits,
         distributed across the different binding sites, using criteria
         including [...***...]. SGX will generate plans to elaborate these
         fragments.

>>       Fragment hits identified by [...***...] will be tested by [...***...]
         and/or [...***...] to measure their binding affinity.



                                       39    ***CONFIDENTIAL TREATMENT REQUESTED





3.4  IDENTIFICATION OF ELABORATED FRAGMENTS

>>   The selected Initial Fragment Hits are computationally elaborated into
     virtual libraries with each segment/handle combination being elaborated
     independently to provide "linear libraries". The enumerated libraries are
     subjected to the SGX proprietary docking and scoring process (AGILE). The
     AGILE process involves:

     1.  Enumerating all possible [...***...] from [...***...] at each "handle".

     2.  Generating all [...***...] of each [...***...] in the context of the
         [...***...] and [...***...], based on the observed [...***...] of the
         [...***...].

     3.  [...***...] each [...***...] in the context of the [...***...].

     4.  Eliminating [...***...] with [...***...].

     5.  [...***...].

>>       The target library for the first round of synthesis is typically
         [...***...] compounds for each fragment / handle that is elaborated.

>>       SGX will synthesize these small parallel libraries of Linear Elaborated
         Fragments, [...***...] per "handle", using the computationally selected
         fragments (i.e., for a fragment with [...***...] "handles", [...***...]
         individual small libraries will be synthesized, one at each position -
         approximately [...***...] compounds per library).

>>       All linear library members will be tested by [...***...] and/or
         [...***...] to determine their binding affinity. Selected compounds
         with measurable affinity will be selected for cocrystal structure
         determination.

>>       SGX will perform co-crystal structure determinations for selected
         Linear Elaborated Fragments.

The fact that both [...***...] have [...***...] may be an issue. All [...***...]
will already have been [...***...] by their [...***...] in the [...***...] for
synthesis. We will need to obtain [...***...] for [...***...] and [...***...].
[...***...] will need to be compatible with the [...***...]; [...***...] will be
completed at a maximum rate of [...***...]. If [...***...] or [...***...]
threaten to become [...***...], one of the following alternative approaches will
be used:

i) If we have a [...***...] system, we will use [...***...] (we may need to
[...***...], just as with the FAST screening library; so [...***...] elaborated
compounds would be combined [...***...]) to identify [...***...] for follow-up
by [...***...] by [...***...] and/or [...***...]. The advantage of this approach
is that we will not [...***...] without [...***...]. We will also consider using
[...***...] as a [...***...] at the outset until we gain confidence in
[...***...] results. Or,

ii) Once the [...***...] of the [...***...] has been established, it will be
possible to [...***...] with [...***...] in a rapid fashion with a [...***...]
in a [...***...], and then select those compounds of interest for a [...***...].

3.5 COMBINATORIAL ELABORATED FRAGMENTS

                                       40    ***CONFIDENTIAL TREATMENT REQUESTED




>>       Based on the results from the characterization of Linear Elaborated
         Fragments, SGX will generate plans for the second stage of fragment
         elaboration (Combinatorial Elaborated Fragments). The effort will focus
         on elaboration of compounds targeting a single binding site (unless the
         JRC elects to the contrary) and will involve multiple elaborations of
         up to [...***...] Fragments subject to the outcome of the screening and
         linear library design experiments outlined above.

>>       SGX will computationally select (using the AGILE process described
         above) combinations of active Linear Elaborated Fragments for all
         points of diversity (handles) to design small, focused combinatorial
         libraries, for which two or more positions are varied simultaneously
         (approximately [...***...] compounds per library).

>>       SGX will synthesize small combinatorial libraries using parallel
         synthesis.

>>       All combinatorial library members will be tested by [...***...] and/or
         [...***...] to determine their binding affinity.

>>       [...***...] will perform [...***...] determinations for selected
         Combinatorial Elaborated Fragments.

>>       Depending on the results from these first Combinatorial Elaborated
         Libraries, we anticipate that [...***...].

The number of structure determinations, whether by [...***...] or by
[...***...], will depend on the answer to questions such as 3.4. We will submit
up to [...***...]% of [...***...]-active compounds per linear library for
soaking to obtain a representative sampling of the most active compounds.


3.6  OPTIMIZATION TO EARLY LEAD SERIES

>>       As necessary, additional optimization will be undertaken in order to
         obtain one or more Early Lead Series meeting the target criteria in
         Appendix B.

>>       Plans will be generated using a combination of structure-based design
         and parallel synthesis, with additional consideration of properties and
         medicinal chemistry design to address any identified liabilities of the
         Early Lead Series. This effort may include synthesis of smaller sets of
         compounds with specific functional group changes and/or replacements.
         Design efforts will continue to draw on data from co-crystal structures
         of Elaborated Fragments.

>>       SGX will prepare the representative members of the Early Lead Series
         and provide powder samples (up to 15mg) to CFFT for evaluation in
         cell-based assays.

>>       SGX will conduct a STN International search around Early Lead series.

>>       The JSC will review profiling data and compounds/series will be
         nominated as Early Lead Series meeting the defined criteria described
         in Appendix B.


3.7 [...***...] MEASUREMENT OF BINDING AFFINITIES AND CELL-BASED EVALUATION OF
COMPOUND ACTIVITY

The Research is dependent upon the availability of both [...***...] and
[...***...] assays to be provided by CFFT.

The [...***...] assay will be based either on [...***...] analysis, both of
which are capable of [...***...]. SGX will be responsible for providing samples
of both proteins and compounds for this assay.

The cell-based assay should be capable of detecting compounds with activities of
less than 10uM. Currently, the following types of assay, designed either to
demonstrate activity of compounds in cell lines expressing mutant CFTR or to
show specificity of action, are envisaged:



                                       41    ***CONFIDENTIAL TREATMENT REQUESTED




         o        [...***...] or [...***...] to [...***...] and and [...***...]

         o        [...***...] by [...***...] in [...***...]

         o        [...***...] assays [...***...]

         o        [...***...] in the [...***...] assay to [...***...] in
                  [...***...] in the [...***...]

Responsibilities for establishing these assays are set out in Appendix E.

Once active compounds have been identified, the JRC will discuss potential
mechanism of action studies for evaluation of these series. These studies may
include protein folding studies. It is anticipated that these studies will be
outsourced and provision for the funding of the studies will be made in the
budgets for Years 2 and 3 as applicable.


3.8  OPTIMIZATION OF EARLY LEAD SERIES TO LEAD SERIES

Several parameters will be optimized to convert the early leads into late stage
leads suitable for consideration as potential development candidates. Thus, in
addition to continuing optimization of potency in the biochemical and cellular
assays, we will be optimizing for selectivity against criteria agreed to by the
JSC.

From the perspective of in vitro ADME, we will be designing and selecting lead
structures with acceptable plasma protein binding and metabolic profiles to
attain acceptable human in vivo bioavailability, and lack of CYP interactions to
obviate any potential drug/drug interactions. There will be a clearly defined IP
position with supportive patent filings, and a proven synthetic route for
obtaining pure grade material on a multi-gram scale.

3.9  POTENTIAL ADDITIONAL TARGETS

Although work on this project will start with (DELTA)F508 NBD1 as the target, it
may be replaced, at some stage, by another target(s). Replacement targets are:

         o [...***...]

         o [...***...]

Both of these targets are currently in the Research stage at SGX. The decision
to replace (DELTA)F508 NBD1 with one of the other targets will be made by the
JRC.



                                       42    ***CONFIDENTIAL TREATMENT REQUESTED





                                   APPENDIX D

                               MILESTONE SCHEDULE

YEAR 1

1.       [...***...] screen on Target 1: Identification of [...***...] to
         [...***...].

                  $[...***...]

2.       [...***...] of [...***...] for [...***...] of [...***...] the
         appropriate [...***...] whose [...***...] is [...***...]. In this
         instance, "[...***...]" means that [...***...]% of [...***...] than or
         [...***...] shall be final arbiter in cases where [...***...].

[                 $[...***...]



3        FAST(TM) screen on Target 1: [...***...] of a [...***...].

                  $[...***...]



4.       [...***...]: Identification of a [...***...] with [...***...] than
         [...***...]. [...***...] to be measured using [...***...].

                  $[...***...]



5.       [...***...]:[...***...] is [...***...] per criteria defined in
         [...***...].

                  $[...***...]



YEAR 2

6.       [...***...]: Identification of an [...***...] with [...***...] than
         [...***...] from [...***...].

                  $[...***...]



7.       [...***...] - Anticipated Completion Date:- [...***...] days from
         Effective Date. Measurable efficacy for [...***...] in at least one of
         the [...***...] described in [...***...], as judged by [...***...]

                  $[...***...]



                                       43    ***CONFIDENTIAL TREATMENT REQUESTED





8.       [...***...] - Anticipated Completion Date: [...***...] days from
         Effective Date. Identification of an [...***...] in [...***...]

                  $[...***...]



9.       [...***...] -Anticipated Completion Date: [...***...] days from
         Effective Date.

         At least one compound meets [...***...] defined in [...***...].

                  $[...***...]



YEAR 3

10.      [...***...] - Due [...***...] days from Effective Date:

         Identification of a [...***...] meeting criteria defined in
         [...***...].

                  $[...***...]



         Wild-type and (DELTA)F508-NBD1 are assumed to be Target 1. Should
         Targets change, the new Target will assume the same milestones, as
         appropriate.



                                       44    ***CONFIDENTIAL TREATMENT REQUESTED




                                   APPENDIX E

                                OUTSOURCE BUDGET

YEAR 1

>>       ACCESS TO [...***...]

         o        Initial discussions indicated that CFFT will arrange these
                  assays through [...***...] on a fee for service basis. SGX to
                  supply compounds and to have access to all information for
                  analysis. Assume a cost of $[...***...] in Year 1.

>>       ACQUISITION OF [...***...] TECHNOLOGY - SGX

         o        Establish collaboration with [...***...]. Compounds from
                  elaborated hits will be assayed by [...***...] and by
                  [...***...]. Assume a cost of $[...***...] in Year 1.

YEAR 2*

>>       [...***...] method for [...***...] - [...***...]

         o        SGX to provide compounds for these assays

>>       [...***...] for [...***...] - [...***...] to provide [...***...] and an
         appropriate [...***...]

         o        SGX will conduct Western blot analysis

>>       using [...***...] - [...***...]

         o        SGX to provide compounds for these assays

>>       [...***...] - [...***...]

         o        SGX to provide compounds for these assays

>>       [...***...] - [...***...]

         o        SGX will carry out these assays

YEAR 3*

>>       [...***...] - [...***...]

         o        SGX will carry out these assays

>>       [...***...] - [...***...]

         o        SGX will carry out these assays

>>       [...***...] (TBD)

>>       [...***...] - [...***...]

         o        [...***...]

>>       [...***...] - [...***...]

         o        SGX will carry out these assays


* Proposed budget amounts shall be submitted by SGX to CFFT on or before
[...***...] in each of [...***...], and when budget amounts are approved by
CFFT, they shall be inserted in a replacement Appendix E.





                                       45    ***CONFIDENTIAL TREATMENT REQUESTED

EX-10.37

                                                                   EXHIBIT 10.37

[SGX PHARMACEUTICALS LOGO]

November 16, 2005

                                                                    CONFIDENTIAL

Mr. Todd Myers
P.O. Box 1238
Poway, CA 92074

Dear Todd:

I am pleased to offer you the position of Chief Financial Officer with SGX
Pharmaceuticals, Inc. reporting to Mike Grey, President & Chief Executive
Officer. This position is categorized as full-time regular exempt. Following are
the details of our offer.

      -     The salary in this position is $225,000 on an annualized basis, or
            approximately $8,653.84 bi-weekly, subject to standard deductions
            and withholdings.

      -     Subject to approval by the Board of Directors (the "Board"), you
            will receive an option to purchase 150,000 shares of the Company's
            common stock at a price per share equal to its fair market value as
            determined by the Board. This option will have a vesting
            commencement date of your first day of employment with the Company.
            Twenty five percent (25%) of the granted shares will vest on the
            first anniversary of the vesting commencement date. The remaining
            options vest ratably on a monthly basis thereafter until the fourth
            anniversary of the vesting commencement date. The offer of these
            shares is conditioned upon your acceptance of our offer of
            employment and subject to the terms and requirements of the
            Company's 2000 Equity Incentive Plan (the "Incentive Plan") and the
            Company's form of stock option agreement.

      -     You are also eligible to participate in the Company's cash bonus
            program. In your position, you are eligible to earn a cash bonus up
            to 30% of your base salary. Employees hired in the fourth quarter of
            a calendar year are typically not eligible for bonus payments for
            that calendar year. However, in your circumstances, it is agreed
            that you will be eligible to receive a bonus payment for 2005 if the
            company goes public by the end of the first quarter of 2006 and the
            Board approves the payment of 2005 bonuses.

      -     Included in the compensation package is a benefits plan that offers
            medical, dental, vision, life insurance, Accidental Death and
            Dismemberment (AD&D) insurance, long-term disability, short-term
            disability insurance; and a 401(k) plan. For full-time employees,
            vacation accrues on a pay period basis at the annual rate of 120
            hours (three weeks). The vacation accrual increases by one day after
            each anniversary with the Company, up to a maximum of 20 days per
            year. The Company also provides employees with five days of sick
            time per year.



As a condition of your employment, you will be required to sign a copy of our
Employment, Confidential Information and Invention Assignment Agreement, which
is attached for your information. In addition, to conform with the Immigration
Reform and Control Act of 1986, please bring with you on your start date the
original of one of the documents noted in List A on the I-9 form attached or one
document from List B and one document from List C. If you do not have the
originals of any of these documents, please call me immediately. Please do not
complete or sign the I-9 until you begin employment. This offer is contingent
upon your providing sufficient documentation to show proof of eligibility for
employment in the United States.

It is the Company's policy to fully respect the proprietary and confidential
information rights of your previous employers. You are not expected to disclose,
nor are you allowed to use for the Company's purposes, any confidential or
proprietary information you may have acquired as a result of previous
employment.

Your employment with the company is not for a specified term, but may be
terminated by you or the company at any time, with or without cause. The nature
of your employment as set forth in this paragraph cannot be modified in any way
except by written agreement signed by you and an officer of SGX Pharmaceuticals.

In the event of a Change of Control (as that term is defined below) the vesting
of any outstanding stock options described above will be accelerated by 12
months. In the event your employment is terminated by the Company without cause
within one year after a Change of Control, the vesting of your outstanding stock
options described above will be accelerated by a further 12 months, provided
that you comply with all surviving provisions of this letter and the Employment,
Confidential Information and Invention Assignment Agreements and execute a full
general release, releasing all claims, known or unknown, that you may have
against the Company arising out of or any way related to you employment or
termination of employment with the Company. In the event of such termination all
other obligations of the Company to you pursuant to this letter will become
automatically terminated and completely extinguished.

A Change of Control means any one of the following occurrences:

      (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), other than a trustee or
other fiduciary holding securities of SGX under an employee benefit plan of SGX,
becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the
Exchange Act), directly or indirectly, of the securities of SGX representing
more than 50% of (a) the outstanding shares of common stock of SGX or (b) the
combined voting power of SGX' then-outstanding securities; or

      (ii) The sale or disposition of all or substantially all of SGX' assets
(or any transaction having similar effect is consummated) other than to an
entity of which SGX owns at least 50% of the Voting Stock so long as the sale or
disposition is not under duress of SGX' financial hardship; or

      (iii) SGX is party to a merger or consolidation that results in the
holders of voting securities of SGX outstanding immediately prior thereto
failing to continue to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity)

                                       2



less than 50% of the combined voting power of the voting securities of SGX or
such surviving entity outstanding immediately after such merger or
consolidation.

I am pleased to extend this offer to you and look forward to your acceptance.
Please sign and return the attached copy of this offer letter as soon as
possible, but within at least five days of receipt, to indicate your agreement
with the terms of this offer. Once signed by you, this letter and the
Employment, Confidential Information and Invention Assignment Agreement will
constitute the complete agreement between you and SGX Pharmaceuticals, Inc.
regarding employment matters and will supersede all prior written or oral
agreements or understandings on these matters. This letter may only be modified
by a written agreement signed by you and an officer of SGX Pharmaceuticals, Inc.
We hope you will join us December 5th or sooner. Please contact me if you have
any questions.

I feel you will be able to make an immediate contribution to our efforts, and I
think you will enjoy the rewards of working for an innovative, fast-paced
organization.

Sincerely,

/s/ Mike Grey
- -----------------------
Mike Grey
President and Chief Executive Officer

Attachments:

      -     Copy of Offer Letter

      -     I-9

      -     Employment, Confidential Information and Invention Assignment
            Agreement

I accept the terms of employment as described in this offer letter and will
start my employment on 12/5/05.

Signature:  /s/ William Todd Myers          Date:  11/16/05
           ---------------------------

                                       3

EX-10.38

                                                                   EXHIBIT 10.38

[SGX PHARMACEUTICALS LOGO]

December 13, 2005

                                                                    CONFIDENTIAL

Siegfried Reich, Ph.D.
311 Glenmont Drive
Solana Beach, CA  92075

Dear Siegfried:

I am pleased to offer you the position of Vice President, Drug Discovery with
SGX Pharmaceuticals, Inc. reporting to Mike Grey, President & Chief Executive
Officer. This position is categorized as full-time regular exempt. Following are
the details of our offer.

      -     The salary in this position is $275,000 on an annualized basis, or
            approximately $10,576.92 bi-weekly, subject to standard deductions
            and withholdings.

      -     Subject to approval by the Board of Directors (the "Board"), you
            will receive an option to purchase 150,000 shares of the Company's
            common stock at a price per share equal to its fair market value as
            determined by the Board. The option will have a vesting commencement
            date of your first day of employment with the Company. Twenty five
            percent (25%) of the granted shares will vest on the first
            anniversary of the vesting commencement date. The remaining options
            vest ratably on a monthly basis thereafter until the fourth
            anniversary of the vesting commencement date. The offer of these
            shares is conditioned upon your acceptance of our offer of
            employment and subject to the terms and requirements of the
            Company's 2000 Equity Incentive Plan (the "Incentive Plan") and the
            Company's form of stock option agreement.

      -     Subject to approval by the Board of Directors (the "Board"), on or
            about August 1, 2006, provided you are still an employee of the
            Company at such time, you will receive an option to purchase an
            additional 60,000 shares of the Company's common stock at a price
            per share equal to its fair market value as determined by the Board.
            The option will have a vesting commencement date of August 1, 2006.
            Twenty five percent (25%) of the granted shares will vest on the
            first anniversary of the vesting commencement date. The remaining
            options vest ratably on a monthly basis thereafter until the fourth
            anniversary of the vesting commencement date. The offer of these
            shares is conditioned upon your acceptance of our offer of
            employment and subject to the terms and requirements of the
            Company's Equity Incentive Plan then in effect (the "Effective
            Incentive Plan") and the Company's form of stock option agreement.

      -     You are also eligible to participate in the Company's cash bonus
            program. In your position, you are eligible to earn a cash bonus in
            the range of 15% to 30% of your base salary based upon corporate and
            individual goal achievement. Employees hired in the fourth quarter
            of a calendar year are typically not eligible for bonus payments for
            that calendar year.

      -     Included in the compensation package is a benefits plan that offers
            medical, dental, vision, life insurance, Accidental Death and
            Dismemberment (AD&D) insurance, long-term disability, short-term
            disability insurance; and a 401(k) plan. For full-time employees,
            vacation accrues on a pay period basis at the annual rate of 120
            hours (three weeks). The vacation accrual increases by one day after
            each anniversary with the Company, up to a maximum of 20 days per
            year. The Company also provides employees with five days of sick
            time per year.

As a condition of your employment, you will be required to sign a copy of our
Employment, Confidential Information and Invention Assignment Agreement, which
is attached for your information. In addition, to conform with the



[SGX PHARMACEUTICALS LOGO]

Immigration Reform and Control Act of 1986, please bring with you on your start
date the original of one of the documents noted in List A on the I-9 form
attached or one document from List B and one document from List C. If you do not
have the originals of any of these documents, please call me immediately. Please
do not complete or sign the I-9 until you begin employment. This offer is
contingent upon your providing sufficient documentation to show proof of
eligibility for employment in the United States.

It is the Company's policy to fully respect the proprietary and confidential
information rights of your previous employers. You are not expected to disclose,
nor are you allowed to use for the Company's purposes, any confidential or
proprietary information you may have acquired as a result of previous
employment.

Your employment with the company is not for a specified term, but may be
terminated by you or the company at any time, with or without cause. If you are
terminated without cause, you will be entitled to receive a severance payment
equivalent to six (6) months of your base salary then in effect on the date of
termination ("Severance Payment"), provided that you comply with all surviving
provisions of this letter and the Employment, Confidential Information and
Invention Assignment Agreement and execute a full general release, releasing all
claims, known or unknown, that you may have against the Company arising out of
or any way related to you employment or termination of employment with the
Company. The Severance Payment will be payable in accordance with SGX's regular
payroll cycle, including continuation of your benefits in accordance with SGX's
regular payroll deductions. The nature of your employment as set forth in this
paragraph cannot be modified in any way except by written agreement signed by
you and an officer of SGX Pharmaceuticals.

In the event of a Change of Control (as that term is defined below) the vesting
of any outstanding stock options described above will be accelerated by 12
months. In the event your employment is terminated by the Company without cause
within one year after a Change of Control, the vesting of your outstanding stock
options described above will be accelerated by a further 12 months, provided
that you comply with all surviving provisions of this letter and the Employment,
Confidential Information and Invention Assignment Agreement and execute a full
general release, releasing all claims, known or unknown, that you may have
against the Company arising out of or any way related to you employment or
termination of employment with the Company. In the event of such termination all
other obligations of the Company to you pursuant to this letter will become
automatically terminated and completely extinguished.

A Change of Control means any one of the following occurrences:

      (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"), other than a trustee or
other fiduciary holding securities of SGX under an employee benefit plan of SGX,
becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the
Exchange Act), directly or indirectly, of the securities of SGX representing
more than 50% of (a) the outstanding shares of common stock of SGX or (b) the
combined voting power of SGX' then-outstanding securities; or

      (ii) The sale or disposition of all or substantially all of SGX' assets
(or any transaction having similar effect is consummated) other than to an
entity of which SGX owns at least 50% of the Voting Stock so long as the sale or
disposition is not under duress of SGX' financial hardship; or

      (iii) SGX is party to a merger or consolidation that results in the
holders of voting securities of SGX outstanding immediately prior thereto
failing to continue to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) less than 50% of the
combined voting power of the voting securities of SGX or such surviving entity
outstanding immediately after such merger or consolidation.

I am pleased to extend this offer to you and look forward to your acceptance.
Please sign and return the attached copy of this offer letter as soon as
possible, but within at least five days of receipt, to indicate your agreement
with the terms of this offer. Once signed by you, this letter and the
Employment, Confidential Information and Invention Assignment Agreement will
constitute the complete agreement between you and SGX Pharmaceuticals, Inc.
regarding employment matters and will supersede all prior written or oral
agreements or understandings on these matters. This letter may only be modified
by a written agreement signed by you and an officer of SGX Pharmaceuticals, Inc.
We hope you will join us February 1, 2006 or sooner. Please contact me if you
have any questions.



[SGX PHARMACEUTICALS LOGO]

I feel you will be able to make an immediate contribution to our efforts, and I
think you will enjoy the rewards of working for an innovative, fast-paced
organization.

Sincerely,

/s/ Mike Grey
- -------------------
Mike Grey
President and Chief Executive Officer

Attachments:

      -     Copy of Offer Letter

      -     I-9

      -     Employment, Confidential Information And Invention Assignment
            Agreement


I accept the terms of employment as described in this offer letter and will
start my employment on 2/1/06.



Signature: /s/ Siegfried Reich                       Date: 12/19/05
           ---------------------------------------         ---------------------

EX-10.39

                                                                   EXHIBIT 10.39

                              SEPARATION AGREEMENT

November 18, 2005

James Rotherham
9710 Wren Bluff Drive
San Diego, CA  92127

Dear Jim:

This letter sets forth the substance of the separation agreement (the
"Agreement") that SGX PHARMACEUTICALS, INC., (the "Company") is offering to you
to aid in your employment transition.

      1. SEPARATION. Your last day of work with the Company and your employment
termination date will be November 18, 2005 (the "Separation Date").

      2. ACCRUED SALARY AND VACATION. On the Separation Date, the Company will
pay you all accrued salary, and all accrued and unused vacation earned through
the Separation Date, subject to standard payroll deductions and withholdings.
You are entitled to these payments by law.

      3. SEVERANCE PAYMENT. Commencing on the first regularly scheduled payday
after the Separation Date, Employer shall pay Employee severance in the form of
continuation of Employee's base salary in effect on the Separation Date
("Severance Payments") for a period of six (6) weeks, less appropriate
deductions and withholdings, payable in accordance with Employer's normal
payroll cycles ("Severance Period.").

      4. HEALTH INSURANCE. To the extent provided by the federal COBRA law or,
if applicable, state insurance laws, and by the Company's current group health
insurance policies, you will be eligible to continue your group health insurance
benefits at your own expense following the Separation Date. Later, you may be
able to convert to an individual policy through the provider of the Company's
health insurance, if you wish. You will be provided with a separate notice
describing your rights and obligations under COBRA. If you elect continued
coverage under COBRA, the Company, as part of this Agreement, will pay your
COBRA premiums through December 31, 2005.

      5. STOCK OPTIONS. Under the terms of your stock option agreement and the
applicable plan documents, vesting of your stock options will cease as of the
Separation Date. Your right to exercise any vested shares, and all other rights
and obligations with respect to your stock options(s), will be as set forth in
your stock option agreement, grant notice and applicable plan documents.



      6. OTHER COMPENSATION OR BENEFITS. You acknowledge that, except as
expressly provided in this Agreement, you will not receive any additional
compensation, severance, or benefits after the Separation Date.

      7. EXPENSE REIMBURSEMENTS. You agree that, within ten (10) days of the
Separation Date, you will submit your final documented expense reimbursement
statement reflecting all business expenses you incurred through the Separation
Date, if any, for which you seek reimbursement. The Company will reimburse you
for these expenses pursuant to its regular business practice.

      8. RETURN OF COMPANY PROPERTY. By the Separation Date, you agree to return
to the Company all Company documents (and all copies thereof) and other Company
property that you have had in your possession at any time, including, but not
limited to, Company files, notes, drawings, records, business plans and
forecasts, financial information, specifications, computer-recorded information,
tangible property (including, but not limited to, computers), credit cards,
entry cards, identification badges, and keys; and, any materials of any kind
that contain or embody any proprietary or confidential information of the
Company (and all reproductions thereof). Your timely return of all such Company
documents and other property is a condition precedent to your receipt of the
severance benefits provided under this Agreement.

      9. PROPRIETARY INFORMATION OBLIGATIONS. You acknowledge your continuing
obligations under your Employment, Confidential Information and Invention
Assignment Agreement, a copy of which is attached hereto as Exhibit A.

      10. CONFIDENTIALITY. The provisions of this Agreement will be held in
strictest confidence by you and the Company and will not be publicized or
disclosed in any manner whatsoever; provided, however, that: (a) you may
disclose this Agreement in confidence to your immediate family; (b) the parties
may disclose this Agreement in confidence to their respective attorneys,
accountants, auditors, tax preparers, and financial advisors; (c) the Company
may disclose this Agreement as necessary to fulfill standard or legally required
corporate reporting or disclosure requirements; and (d) the parties may disclose
this Agreement insofar as such disclosure may be necessary to enforce its terms
or as otherwise required by law. In particular, and without limitation, you
agree not to disclose the terms of this Agreement to any current or former
Company employee.

      11. NONDISPARAGEMENT. You agree not to disparage the Company, its
officers, directors, employees, shareholders, and agents, in any manner likely
to be harmful to its or their business, business reputation, or personal
reputation; provided that you will respond accurately and fully to any question,
inquiry or request for information when required by legal process.

      12. NO ADMISSIONS. You understand and agree that the promises and payments
in consideration of this Agreement shall not be construed to be an admission of
any liability or obligation by the Company to you or to any other person, and
that the Company makes no such admission.

      13. RELEASE OF CLAIMS. In exchange for the consideration under this
Agreement, you hereby generally and completely release the Company and its
directors, officers, employees, shareholders, partners, agents, attorneys,
predecessors, successors, parent and subsidiary entities,



insurers, affiliates, and assigns from any and all claims, liabilities and
obligations, both known and unknown, that arise out of or are in any way related
to events, acts, conduct, or omissions occurring at any time prior to and
including the date you sign this Agreement. This general release includes, but
is not limited to: (a) all claims arising out of or in any way related to your
employment with the Company or the termination of that employment; (b) all
claims related to your compensation or benefits from the Company, including
salary, bonuses, commissions, vacation pay, expense reimbursements, severance
pay, fringe benefits, stock, stock options, or any other ownership interests in
the Company; (c) all claims for breach of contract, wrongful termination, and
breach of the implied covenant of good faith and fair dealing; (d) all tort
claims, including claims for fraud, defamation, emotional distress, and
discharge in violation of public policy; and (e) all federal, state, and local
statutory claims, including claims for discrimination, harassment, retaliation,
attorneys' fees, or other claims arising under the federal Civil Rights Act of
1964 (as amended), the federal Americans with Disabilities Act of 1990, the
federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"), and
the California Fair Employment and Housing Act (as amended).

      14. ADEA WAIVER. You acknowledge that you are knowingly and voluntarily
waiving and releasing any rights you may have under the ADEA ("ADEA Waiver").
You also acknowledge that the consideration given for the ADEA Waiver is in
addition to anything of value to which you were already entitled. You further
acknowledge that you have been advised by this writing, as required by the ADEA,
that: (a) your ADEA Waiver does not apply to any rights or claims that arise
after the date you sign this Agreement; (b) you should consult with an attorney
prior to signing this Agreement; (c) you have twenty-one (21) days to consider
this Agreement (although you may choose to voluntarily sign it sooner); (d) you
have seven (7) days following the date you sign this Agreement to revoke the
ADEA Waiver (in a written revocation sent to me); and (e) the ADEA Waiver will
not be effective until the date upon which the revocation period has expired,
which will be the eighth day after you sign this Agreement (the "Effective
Date"). Nevertheless, your general release of claims, except for the ADEA
Waiver, is effective immediately and not revocable.

      15. SECTION 1542 WAIVER. In granting the release herein, which includes
claims which may be unknown to you at present, you acknowledge that you have
read and understand Section 1542 of the California Civil Code: "A GENERAL
RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO
EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." You hereby
expressly waive and relinquish all rights and benefits under that section and
any law or legal principle of similar effect in any jurisdiction with respect to
the releases granted herein, including but not limited to the release of unknown
and unsuspected claims granted in this Agreement.

      16. MISCELLANEOUS. This Agreement, including Exhibit A, constitutes the
complete, final and exclusive embodiment of the entire agreement between you and
the Company with regard to its subject matter. It is entered into without
reliance on any promise or representation, written or oral, other than those
expressly contained herein, and it supersedes any other such promises,
warranties or representations. This Agreement shall supersede and extinguish all
prior employment agreements, express or implied, verbal or written, between you
and the Company; provided, however, that this Agreement shall have no effect on
the Employment, Confidential Information and Invention Assignment Agreement,
previously signed by you. This Agreement



may not be modified or amended except in a writing signed by both you and a duly
authorized officer of the Company. This Agreement will bind the heirs, personal
representatives, successors and assigns of both you and the Company, and inure
to the benefit of both you and the Company, their heirs, successors and assigns.
If any provision of this Agreement is determined to be invalid or unenforceable,
in whole or in part, this determination will not affect any other provision of
this Agreement and the provision in question will be modified so as to be
rendered enforceable. This Agreement will be deemed to have been entered into
and will be construed and enforced in accordance with the laws of the State of
California as applied to contracts made and to be performed entirely within
California. Any ambiguity in this Agreement shall not be construed against
either party as the drafter. Any waiver of a breach of this Agreement shall be
in writing and shall not be deemed to be a waiver of any successive breach. This
Agreement may be executed in counterparts and facsimile signatures will suffice
as original signatures.

If this Agreement is acceptable to you, please sign below and return the
original to me.

We wish you the best in your future endeavors.

Sincerely,

SGX PHARMACEUTICALS, INC.

By: /s/ Mike Grey
    ---------------------
        MIKE GREY
        PRESIDENT AND CEO

I HAVE READ, UNDERSTAND AND AGREE FULLY TO THE FOREGOING AGREEMENT:


/s/ James Rotherham
- --------------------------------
JAMES ROTHERHAM



Date: 11/18/05
      --------------------------




                                    EXHIBIT A

     EMPLOYMENT, CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT

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, and paragraph 5 of Note 1 as to which the date is January 3, 2006, in Amendment No. 4 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 January 4, 2006.

San Diego, California
December 30, 2005

                                                  /s/ Ernst & Young LLP