10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2003

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

For the transition period from                      to                     .

Commission File Number 0-23272

NPS PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	87-0439579
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

420 Chipeta Way, Salt Lake City, Utah	84108-1256
(Address of Principal Executive Offices)	(Zip Code)

(801) 583-4939

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:	None
Securities registered pursuant to Section 12(g) of the Act:	Common Stock, $.001 Par Value
	Preferred Stock Purchase Rights

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. YES x NO ¨

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act 12b-2): YES x NO ¨

The aggregate market value of the Common Stock held by non-affiliates of the Registrant was $894,225,288 as of June 30, 2003, based upon the closing price for the shares of common stock reported on The Nasdaq Stock Market on such date.

As of February 6, 2004, there were 37,195,253 shares of Common Stock, par value $0.001 per share, outstanding.

Documents incorporated by reference: Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 20, 2004, to be filed with the Commission not later than 120 days after the close of the Registrant’s fiscal year, have been incorporated by reference, in whole or in part, into Part III Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.

PART I

This Annual Report on Form 10-K and the documents incorporated by reference therein contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the Company’s current expectations and are subject to uncertainty and changes in circumstances. We cannot guarantee the accuracy of such statements, and you should be aware that results and events could differ materially from those contained in such statements. You should consider carefully the statements set forth in the section of this report entitled “Risk Factors.”

ITEM 1. Business

Overview

Our objective is to build a profitable biopharmaceutical company by discovering, developing and commercializing small molecule drugs and recombinant proteins. Our current product candidates are primarily for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders.

Our product pipeline consists of product candidates in various stages of clinical and preclinical development. One of our product candidates, cinacalcet HCl, is the subject of a new drug application, or NDA, that has been filed with the United Stated Food and Drug Administration (FDA) by our corporate licensee, Amgen Inc., and is the subject of a similar application filed with the European Agency for the Evaluation of Medicinal Products (EMEA) in Europe. We have completed a pivotal Phase III clinical trial with another product candidate, PREOS^®. The data from this study are being collected and finalized and we have commenced preparation of an NDA to be filed with the FDA. Additional product candidates, teduglutide, formerly referred to as ALX-0600, and isovaleramide, formerly referred to as NPS 1776, are in Phase II clinical trials. PREOS, teduglutide, and isovaleramide are proprietary to and are being developed by us. PREOS is our brand name for our recombinant, full-length parathyroid hormone that we are developing for the treatment of osteoporosis. Teduglutide is our analog of glucagon-like peptide 2 that we are developing for the treatment of gastrointestinal disorders such as short bowel syndrome and Crohn’s disease. Isovaleramide is a small organic molecule that we are developing for the treatment of migraine. Cinacalcet HCl, our orally active, small molecule compound for the treatment of hyperparathyroidism, is being developed by our licensees, Amgen Inc. and Kirin Brewery Company, Ltd. Additional Phase I clinical development programs include: calcilytic compounds for the treatment of osteoporosis; and delucemine, formerly referred to as NPS 1506, for acute treatment of major depressive disorder. The calcilytic compounds are licensed to and are being developed by GlaxoSmithKline. We have entered into collaborative research, development and license agreements with AstraZeneca AB and Janssen Pharmaceutica N.V., a subsidiary of Johnson & Johnson, with respect to certain of our other product development programs.

Strategy

We intend to achieve our objective through the following strategy:

Build a diversified pipeline of products addressing a variety of medical conditions. We are developing a diverse pipeline of product candidates that are in various stages of clinical and preclinical development. Our portfolio approach allows us to reduce our exposure to the impact of any single product failure and increases our flexibility to focus on our most promising programs. We believe this strategy increases the likelihood that we will successfully develop commercially viable pharmaceutical products.

Develop sales, marketing and manufacturing capabilities and build-up inventory to facilitate product commercialization, either internally or through contract relationships. In order to commercialize our proprietary drug candidates and to exploit our co-promotion rights, we intend to develop sales and marketing capabilities, either internally or through contract relationships. We also intend to develop pre-launch and commercial-scale production capabilities through agreements with contract manufacturers.

Collaborate to reduce our risk and accelerate the commercialization of select product candidates. We believe collaborators with clinical development and marketing expertise in specific therapeutic areas will facilitate more rapid entry into the market for certain of our products and accelerate their acceptance by healthcare providers and third-party payors. We selectively enter into collaboration agreements and licenses with pharmaceutical and biotechnology companies to enhance our financial flexibility. This strategy allows us to devote greater resources to proprietary programs and to pursue a greater number of product candidates than would otherwise be possible.

In-license or acquire complementary products, technologies or companies. In addition to our internal discovery efforts, we intend to pursue our product portfolio strategy by identifying and evaluating potential products and technologies developed by third parties that we believe fit within our overall portfolio strategy. In 1999, we acquired Allelix Biopharmaceuticals Inc., in part because its product candidates complemented our existing programs in osteoporosis and central nervous system disorders and brought late-stage candidates to our product pipeline.

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Continue to develop and leverage our core discovery competencies and proprietary expertise. We believe that the continued evaluation, selection and winnowing of candidates in our product development pipeline will be effective based in part on the ability of our scientists to apply techniques within our core competencies. We intend to continue to use these abilities to identify molecular targets for the development of new drugs and to identify, evaluate, select, and winnow drug candidates in a way that allocates resources to compounds meriting continued evaluation and advancement. Our multidisciplinary discovery teams focus on developing a broad product pipeline covering a variety of disorders.

Our Product Development Programs

This table summarizes our product development programs by therapeutic area. A description of each product or program follows the table.

Product or Program	Indication(s)	Status	Licensees and Collaborators
Bone and Mineral Disorders
PREOS	Osteoporosis	Pivotal Phase III*	Proprietary
Calcilytic Compounds	Osteoporosis	Phase I	GlaxoSmithKline**
Cinacalcet HCl	Hyperparathyroidism Secondary Secondary Primary	NDA Phase II (Japan) Phase II	Amgen Kirin Amgen
Gastrointestinal Disorders
Teduglutide	Short Bowel Syndrome Crohn’s disease	Phase II completed Phase II	Proprietary Proprietary
mGluR5 Antagonists	GERD	Preclinical	AstraZeneca**
Central Nervous System Disorders
Isovaleramide	Migraine	Phase II	Proprietary
Delucemine	Depression	Phase I completed	Proprietary
Metabotropic Glutamate Receptors	Psychiatric and Neurologic Disorders and Pain	Preclinical	AstraZeneca**
Glycine Reuptake Inhibitors	Schizophrenia and Dementia	Preclinical	Janssen

  * Dosing has been completed. Top-line preliminary results expected to be released by the end of the first quarter 2004.

** We retain co-promotion rights for product candidate from these collaborations.

Bone and Mineral Disorders

Overview. Our products and programs in this field include PREOS, calcilytic compounds and cinacalcet HCl. Bone and mineral disorders include a range of diseases affecting nearly every major organ system in the body. The most common bone and mineral disorder is osteoporosis, an age-related disease characterized by reduced bone mineral density and increased susceptibility to fractures. Although bone loss is a universal consequence of ageing, the process is accelerated in women following menopause. Osteoporosis is often diagnosed only after fractures occur. Fractures of the hip, spine or wrist can result in serious long-term disability and mortality.

Hyperparathyroidism is also classified as a bone and mineral disorder. Persons with hyperparathyroidism experience an oversecretion of parathyroid hormone by the parathyroid glands located in the neck. Symptoms of hyperparathyroidism may include bone loss and pain, bone deformities, muscle weakness, severe generalized itching and abnormal calcification of soft tissues, including the heart. Patients may also experience depression and cognitive dysfunction. Hyperparathyroidism is characterized as either primary or secondary. Primary hyperparathyroidism is an age-related disorder that is characterized by enlargement of one of the four parathyroid glands. Secondary hyperparathyroidism is primarily a physiological response to failing kidney function. When a person

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has reduced kidney function, their body is unable to maintain proper levels of calcium, vitamin D and phosphorus in the blood. To compensate, parathyroid glands enlarge and produce increased amounts of parathyroid hormone in an attempt to increase calcium.

PREOS and Calcilytic Compounds for Osteoporosis

We are pursuing two separate but related programs for the treatment of osteoporosis. We are developing PREOS internally and we are pursuing calcilytic compounds in conjunction with GlaxoSmithKline.

PREOS. PREOS is our brand name for recombinant, full-length, human parathyroid hormone that we are developing for the treatment of osteoporosis. PREOS is delivered subcutaneously through a novel injector system that has been specifically developed for elderly patients. This new ergonomically designed system provides a simple three step process of delivery, with built-in patient feedback mechanisms designed to assist those patients who might otherwise have difficulty using a self-injection device. Chronically high levels of parathyroid hormone are known to cause bone loss, as in hyperparathyroidism. We have shown, however, in clinical studies, that daily dosing with PREOS, in which parathyroid hormone levels rise rapidly and then return to normal levels within a few hours, actually stimulates bone growth. In a Phase II clinical trial of over 200 post-menopausal women completed in 1997, daily injections of PREOS produced a clinically and statistically significant increase in bone mineral density in the lumbar spine of nearly seven percent in only one year.

We have completed dosing of patients with PREOS in a pivotal Phase III clinical trial, referred to as the Treatment of Osteoporosis with Parathyroid hormone Study, or TOP Study. We designed this trial to demonstrate PREOS’ ability to reduce fractures of the spine and build new bone in women with osteoporosis. We are also conducting other clinical trials with PREOS to support the filing of an NDA with the FDA. We anticipate filing an NDA for PREOS for the treatment of osteoporosis at the end of the third quarter of 2004.

Market Opportunity. The National Osteoporosis Foundation estimates that approximately 10 million American men and women aged 50 and over have osteoporosis and another 34 million men and women are osteopenic, i.e. are approaching osteoporosis, and therefore are at high risk of fractures because of low bone mineral density. This number is expected to rise to 52 million men and women by 2010, making low bone mass and osteoporosis a significant health threat. A recent study published in the Journal of the American Medical Association demonstrated that nearly one-half of post-menopausal women have undetected low bone mineral density, and women identified with low bone mineral density were at a significantly increased risk of fracture. In addition, 50 percent of women over 50 years of age in the United States will suffer an osteoporosis-related fracture during their lifetime. According to the National Osteoporosis Foundation, osteoporosis is responsible for more than 1.5 million fractures annually. The National Osteoporosis Foundation reports that an average of 24 percent of hip fracture patients age 50 and over die within one year after their fracture, and 25 percent of those who were ambulatory prior to a hip fracture require long-term care afterward. The size of the United States population aged 50 years and over is expected to increase significantly over the next several decades as a result of the aging of the “baby boomer” generation and longer life expectancies. Estimated United States expenditures for osteoporosis and related fractures is currently $17.0 billion each year.

Current therapies for osteoporosis include supplementing dietary calcium and vitamin D, estrogen replacement therapy in post-menopausal women, bisphosphonates, raloxifene, a selective estrogen receptor modulator, calcitonin, and Lilly’s teriparatide, a recombinant parathyroid-hormone fragment, called Forteo. With the exception of Forteo, all of these therapies act to prevent further bone loss by inhibiting bone resorption. These therapies have been shown to reduce the incidence of fracture, but they have only a limited positive effect on bone mineral density. These products only arrest further bone loss, and may not be effective treatments for all patients. For example, Fosamax, a bisphosphonate sold by Merck, showed a reduction in fractures but an increase in bone mineral density of only seven to ten percent over three years.

We believe there exists a significant need for improved therapy that will increase bone mineral density to a greater degree and at a faster rate, thereby reducing the risk of fracture. Parathyroid hormone treatment, such as our product candidate, PREOS, and Lilly’s parathyroid hormone-fragment, Forteo, are designed to address this medical need and to supplement currently available treatments. These agents stimulate bone formation and are the only near-term products demonstrated to build architecturally sound, high quality, new bone. Lilly initiated the first stage of its launch of Forteo in the United States in December 2002, focusing on 8,000 doctors who specialize in the treatment of osteoporosis. Lilly recently reported its intention to expand its marketing efforts to encompass an additional 15,000 primary-care physicians who treat osteoporosis. Lilly reported sales of Forteo in 2003 of $66.0 million.

PREOS consists of all 84 amino acids found in the naturally occurring human parathyroid hormone. Lilly’s Forteo is a fragment of the naturally occurring parathyroid hormone and is only composed of the first 34 amino acids. Data from Lilly’s Phase III clinical trial indicated that, in post-menopausal women with severe osteoporosis, daily injections of Forteo provided statistically significant reductions in fractures and rapid and significant increases in bone mineral density. Because PREOS consists of 84 amino acids found in the naturally occurring human parathyroid hormone, we believe that our Phase III clinical trials will also show efficacy in the treatment of osteoporosis with a potentially improved side effect profile. In

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addition, studies currently being conducted by us and our academic collaborators are designed to confirm what, if any, therapeutic advantage our full-length human parathyroid hormone may have compared to fragments of parathyroid hormone. For example, in November 2003, we reported encouraging preliminary results from a two-year rat carcinogenicity study of PREOS. Based upon these preliminary results, we believe we have identified a clinically relevant non-carcinogenic dose of PREOS, and confirmed the positive effects of PREOS on bone seen in other animal studies and in human clinical trials. Osteosarcoma was observed in similar studies of Lilly’s parathyroid hormone fragment, Forteo, at clinically relevant doses.

PREOS Development Status. We have completed dosing in a pivotal Phase III clinical trial with PREOS. The TOP Study, was a double-blind, placebo-controlled, multi-center clinical trial designed to demonstrate the ability of PREOS to reduce fractures and build new bone in women with osteoporosis. The TOP Study evaluated the effects of PREOS in post-menopausal women who have osteoporosis and who might have suffered a fracture, but who are not receiving drug or hormone therapy for osteoporosis. Women who participated in the study received daily, subcutaneous injections of PREOS or placebo. Dosing in this study lasted for 18 months. The TOP Study enrolled over 2,600 patients and dosing was completed in September 2003. We expect to report top line preliminary results of this study by the end of the first quarter of 2004. Women who have finished their participation in the TOP Study are able to receive additional treatment with PREOS. We refer to this study as the Open Label Extension Study, or the OLES study. Women who received PREOS in the TOP Study may receive an additional 6 months of PREOS treatment for a total of 24 months treatment. Women who received placebo in the TOP Study may receive 18 months of PREOS treatment.

We are also conducting a Phase III clinical study to measure the effects of PREOS in osteoporotic women undergoing estrogen replacement treatment. We refer to this trial as the Parathyroid Hormone for Osteoporotic Women on Estrogen Replacement Study, or POWER Study. This study is being conducted at 26 clinical centers in Europe, which is the largest pharmaceutical market for osteoporosis after the United States. Participants receive daily, subcutaneous injections of PREOS or placebo in addition to their ongoing hormone replacement therapies. Enrollment was completed in September 2002 with over 150 patients. By completing this trial in European countries, we expect to provide additional support for our regulatory submissions in Europe and our worldwide marketing efforts.

In addition, PREOS was tested in a clinical trial coordinated by the University of California at San Francisco and sponsored by the National Institutes of Health. Our participation in this study was limited to making available supplies of PREOS for use in the study. In return, we have been granted the right to use data and results generated from the study in our regulatory filings with the FDA. This 24-month, randomized, double-blind trial is referred to as the PaTH study, parathyroid hormone and alendronate in combination for the treatment of osteoporosis. This trial was designed to test whether PREOS is more effective in building bone mineral density than alendronate, marketed by Merck as Fosamax, and whether the combination of PREOS and Fosamax is more effective in building bone mineral density than either therapy alone. The trial enrolled approximately 238 post-menopausal women with low hip or spine bone mineral density. The participants were randomized into three groups to receive a daily regime for a period of twelve months of either PREOS, Fosamax, or PREOS and Fosamax together. The twelve-month results of the study were presented at the 25^th Annual Meeting of the American Society of Bone and Mineral Research and published in the New England Journal of Medicine in September 2003. The bone mineral density at the spine increased in all the treatment groups, and there was no significant difference in the increase between the parathyroid hormone group and the combination-therapy group. The volumetric density of the trabecular bone at the spine increased substantially in all groups, but the increase in the parathyroid hormone group was about twice that found in either of the other groups. Bone formation increased markedly in the parathyroid hormone group but not in the combination-therapy group. Bone resorption decreased in the combination-therapy group and the alendronate group. While there was no evidence of synergy between parathyroid hormone and alendronate, PREOS was shown to be more effective than alendronate alone in both bone mineral density and volumetric measurements, and the addition of PREOS to alendronate did show a greater increase in the volumetric density of the trabecular bone at the spine than alendronate alone. Changes in the volumetric density of trabecular bone, the cortical volume at the hip, and levels of markers of bone turnover suggest that the concurrent use of alendronate may reduce the anabolic effects of parathyroid hormone. Longer-term studies of fractures are needed to determine whether and how antiresorptive drugs can be optimally used in conjunction with parathyroid hormone therapy.

Calcilytic Compounds Development Status. We are pursuing another treatment for osteoporosis that focuses on the discovery and development of orally administered drugs called calcilytic compounds. Calcilytic compounds are small molecule antagonists of the calcium receptor that temporarily increase the secretion of the body’s own parathyroid hormone, which may result in the formation of new bone. In animal studies, we demonstrated that intermittent increases in circulating levels of parathyroid hormone can be obtained through the use of calcilytics. In these studies, we observed that increased levels of parathyroid hormone achieved by this mechanism are equivalent to those achieved by an injection of parathyroid hormone sufficient to cause bone growth. As a result, we believe that orally administered calcilytic drugs that act on the parathyroid cell calcium receptors could provide a cost-effective treatment for osteoporosis.

In November 1993, we entered into a collaborative research and worldwide exclusive license agreement with GlaxoSmithKline for the research, development and commercialization of calcium receptor active compounds for the treatment of osteoporosis and other bone metabolism disorders, excluding hyperparathyroidism. We have conducted preclinical studies in conjunction with GlaxoSmithKline on some of the lead compounds identified in this program. In December 2000, GlaxoSmithKline

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initiated a proof-of-principle Phase I clinical trial with a calcilytic compound for which we received a $1.0 million milestone payment. The purpose of this trial was to establish the safety of calcilytic compounds in humans. In November 2003, GlaxoSmithKline initiated new Phase I clinical studies with more advanced compounds for which we received an additional $2.0 million milestone payment.

GlaxoSmithKline has paid us a total of $35.7 million for license fees, research support, milestone payments and equity purchases as part of our collaboration. We will receive additional payments of up to an aggregate of $11.0 million if certain clinical milestones are achieved. Our agreement also provides for royalties on any sales by GlaxoSmithKline of products commercialized based on compounds identified in this collaboration. In addition to the milestone and royalty payments, we have a limited right to co-promote any products that are developed through our collaboration and we will receive co-promotion revenue if we elect to exercise these rights. Upon termination, rights and licenses we granted GlaxoSmithKline revert to us. In December 2003, we entered into an agreement with GlaxoSmithKline to amend the agreement to provide for the termination of the collaborative research portion of the agreement effective May 31, 2003. The amendment also permits us to conduct our own research and development efforts with calcilytic compounds not in the class of compounds being pursued by GlaxoSmithKline. We are not permitted to commercialize any compounds arising from our work if GlaxoSmithKline is commercializing a compound. We also granted to GlaxoSmithKline a right of first negotiation to acquire a license calcilytic compounds discovered after May 31, 2003.

Cinacalcet HCl for Hyperparathyroidism

Cinacalcet HCl is our orally active, small molecule calcimimetic compound being developed for the treatment of hyperparathyroidism. In contrast to calcilytic compounds, calcimimetic compounds activate the parathyroid cell calcium receptor and decrease the secretion of parathyroid hormone. Cinacalcet HCl has been licensed for development and commercialization to Amgen and Kirin. In July 2003, Amgen announced that it had successfully completed three Phase III studies supporting the use of cinacalcet HCl for the treatment of secondary hyperparathyroidism. In September 2003, Amgen filed an NDA which was granted priority review by the FDA. In connection with the filing of the NDA, Amgen paid to us a milestone payment of $6.0 million.

Amgen has conducted Phase II clinical trials of cinacalcet HCl for the treatment of primary hyperparathyroidism. Amgen has not publicly disclosed its current activities in primary hyperparathyroidism. Kirin is conducting Phase II clinical trials of cinacalcet HCl for the treatment of secondary hyperparathyroidism and plans to initiate Phase III clinical trials in the first quarter of 2004.

Cinacalcet HCl Market Opportunity. According to the National Institute of Health, over 75,000 people in the United States develop new cases of primary hyperparathyroidism each year, and our market studies lead us to believe that over 500,000 people in the United States are estimated to suffer from the disorder. The current treatment for primary hyperparathyroidism is the surgical removal of one or more of the parathyroid glands in the neck. There are currently no effective pharmaceutical therapies for the treatment of primary hyperparathyroidism. Studies suggest that over 30 percent of the estimated two million patients in the United States with chronic renal failure are affected by secondary hyperparathyroidism. Secondary hyperparathyroidism commonly develops during the early stages of chronic renal failure before dialysis is necessary. Current treatments for secondary hyperparathyroidism include vitamin D and phosphate binders, neither of which directly regulate the secretion of parathyroid hormone.

Cinacalcet HCl Development Status. In September 2003, Amgen announced that it had submitted a new drug application, or NDA, to the United States Food and Drug Administration seeking approval to market cinacalcet HCl as a therapy for the treatment of secondary hyperparathyroidism in patients with chronic kidney disease. The filing was based on Amgen’s successful conclusion of Phase III studies discussed in more detail below. In connection with the filing of the NDA, Amgen paid to us a $6.0 million milestone payment as required under the terms of our license agreement with them. In November 2003, Amgen announced that it had received notification that the FDA had granted a priority review of the NDA for cinacalcet HCl. A priority review designation by the FDA is intended for those products that address unmet medical needs and reduces the FDA’s target date for review from ten to twelve months to six months from the filing date. Amgen has indicated that it expects to receive regulatory approval to market cinacalcet HCl from the FDA in the first half of 2004. Amgen has also filed applications for regulatory approval to market cinacalcet HCl for the treatment of secondary hyperparathyroidism in Australia, Canada, the European Union and New Zealand.

At the American Society of Nephrology sponsored symposium in November 2003, Amgen announced results of Phase III studies evaluating the efficacy and safety of cinacalcet HCl. Amgen reported that it had completed three Phase III double-blind, randomized, placebo-controlled studies including more than eleven hundred patients on hemodialysis and peritoneal dialysis with uncontrolled secondary hyperparathyroidism. These studies were conducted in Australia, Canada, Europe and the United States. Across the Phase III trials, clinically relevant reductions in calcium-phosphorus product, thirteen to seventeen percent, calcium, six to eight percent, and phosphorus, seven to ten percent, were observed in patients receiving cinacalcet HCl, while they remained at baseline levels in those receiving standard therapy and placebo. In a separate study in patients with chronic kidney failure not requiring dialysis, administration of cinacalcet HCl resulted in reductions of parathyroid hormone comparable to those observed in patients with end-stage renal disease receiving dialysis.

Amgen reported that cinacalcet HCl was highly efficacious regardless of age, gender, race or disease severity. Cinacalcet HCl was also effective in patients receiving vitamin D and for patients where vitamin D was contraindicated due to hypercalcemia or

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hyperphosphatemia. The most commonly reported side effects in the Phase III clinicals trials with cinacalcet HCl were nausea and vomiting, which were generally mild to moderate in severity and brief in duration.

Amgen has also completed two Phase II clinical trials with cinacalcet HCl in patients with primary hyperparathyroidism. The preliminary results from these two studies were presented at the American Society of Bone and Mineral Research meetings in 2000 and 2001 and the final results were presented at the Endocrine Society meeting in June 2002 and published in the              2003 issue of JCEM.

The results from Amgen’s two Phase II studies in patients with primary hyperparathyroidism demonstrated that cinacalcet HCl was well tolerated and that it effectively lowered circulating levels of parathyroid hormone and calcium. The larger of the two trials was a one year study involving 78 male and female patients with elevated levels of serum parathyroid hormone and calcium. The patients were randomized to receive either oral doses of cinacalcet HCl or placebo twice a day for 52 weeks. Circulating levels of parathyroid hormone and calcium fell within hours following the oral administration of cinacalcet HCl and serum calcium levels were maintained within the normal range for one year following dosing with cinacalcet HCl. Amgen has made no additional public statements concerning its development activities with respect to primary hyperparathyroidism.

Amgen has paid to us license fees, research support payments, milestone payments, and has made equity purchases totaling $28.5 million, including the milestone payment for the filing of an NDA. Amgen will pay us up to an additional $17.0 million if it achieves other development and regulatory milestones. Amgen will also pay us royalties on any sales of cinacalcet HCl in its territories. Kirin has paid to us $19.0 million in license fees, research and development support payments and milestone payments, and under the terms of our agreement is required to pay us up to an additional $6.0 million upon accomplishment of additional milestones. Kirin also is required to pay us royalties on any sales of cinacalcet HCl in its territories.

Gastrointestinal Disorders

Overview. Our products and programs in this field include teduglutide, which we are developing for the treatment of short bowel syndrome and Crohn’s disease and mGluR5 antagonists for gastroesophageal reflux disease or GERD. The gastrointestinal tract is involved in the digestion and the absorption of nutrients. It also plays an important role in the excretion of toxic chemicals, pathogens and byproducts of metabolic and digestive processes, and in balancing the absorption and secretion of electrolytes and water. People that suffer from gastrointestinal disorders can have severe consequences on the quality of their life.

Short bowel syndrome affects the ability of the gastrointestinal tract to absorb nutrients and water. Short bowel syndrome is a condition that typically arises after extensive resection of the bowel. Patients with this problem suffer from malnutrition, severe diarrhea, dehydration, fatigue and weight loss due to a loss in the ability to absorb adequate amounts of nutrients and water. Treatment includes special dietary management and, often, parenteral nutrition. Crohn’s disease is a chronic disorder that causes inflammation of the gastrointestinal tract. The inflammation can lead to obstruction or blockage of the intestine, the development of sores or ulcers within the intestinal tract, and malnutrition or the presence of nutritional deficiencies. Treatment includes medications to manage the inflammation and associated complications and/or surgery to reduce or eliminate the obstruction, and administration of vitamins and other nutritional supplements.

GERD is a condition in which the backflow or reflux of acid from the stomach into the esophagus usually associated with common heartburn is frequent or severe enough to cause significant physiological complications. These complications include breaks in the lining of the esophagus or esophageal erosions, esophageal ulcer, and narrowing of the esophagus (esophageal stricture). In some patients, the normal esophageal lining or epithelium may be replaced with abnormal epithelium. This condition has been linked to cancer of the esophagus. Lung aspiration, asthma and inflammation of the vocal cords or throat may also be caused by GERD.

Teduglutide for Short Bowel Syndrome and Crohn’s Disease. Teduglutide is an analog of glucagon-like peptide 2, a naturally occurring hormone that regulates proliferation of the cells lining the small intestine. We are independently developing teduglutide for the treatment of gastrointestinal disorders such as short bowel syndrome and Crohn’s disease. Animal studies indicate that teduglutide stimulates the repair and regeneration of cells lining the small intestine, expanding the surface area for absorption of nutrients. In animal studies conducted by us in collaboration with outside researchers, teduglutide induced an approximately 50 percent increase in the weight of the small intestine within 14 days of administration. Further, these studies suggest the growth-promoting properties of teduglutide appear to be highly tissue-specific, predominantly affecting the small intestine, and thereby potentially reducing the risk of adverse side effects.

Teduglutide Market Opportunity. Scientific journal articles and our own market studies have indicated that approximately 25,000 adults and 7,000 children in North America are afflicted with short bowel syndrome. Many of these patients require parenteral nutrition, the cost of which can exceed $100,000 annually per patient. There are currently no effective therapies for enhancing the growth and repair of the cell lining of the small intestine. We believe that the short bowel syndrome market is an attractive one because of the high cost of treating patients and the absence of any effective drug therapies. We have been granted orphan drug designation for teduglutide for short bowel syndrome from the FDA, which provides, subject to several restrictions, seven years of

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marketing exclusivity once a product is approved for treatment of diseases that afflict fewer than 200,000 patients. The Commission of the European Communities has also designated teduglutide an orphan medicinal product for the treatment of short bowel syndrome.

The Crohn’s & Colitis Foundation of America estimates that as many as one million people in the United States have inflammatory bowel disease with approximately one-half of those being afflicted with Crohn’s disease. There currently is no cure for Crohn’s disease. The goal of medical treatment is to suppress the inflammatory response and bring the symptoms under control. Medical therapy is then used to decrease the frequency of the disease flares and to maintain remission. We believe that teduglutide may provide a more effective therapy than current treatment therapies.

Teduglutide Development Status. We have completed a Phase II study in adults with short bowel syndrome. The purposes of this study were to evaluate the safety, tolerability and effect of a 21-day subcutaneous dosing regimen of teduglutide. In this study, subgroups comprising a total of 22 patients with significant portions of the small intestine removed, received teduglutide in one of three doses by daily subcutaneous injection. After 21 days of treatment, the patients, all of whom were dependent on parenteral nutrition, showed significant improvements in intestinal function. An important result of the improved intestinal function in these patients was a statistically significant increase in fluid and nutrient absorption. Histological examination of tissue from patient biopsies showed a statistically significant increase in the number and size of epithelial cells lining the small intestine. The drug appeared to be safe and well-tolerated. We are preparing to initiate a pivotal study for adults in short bowel syndrome. We expect to commence this study in early 2004. A proof-of-concept clinical study with teduglutide in patients with Crohn’s disease was commenced in October 2003.

MGluR5 for GERD. Together with AstraZeneca, we have begun to pursue a line of discovery work in finding antagonists of the mGluR5 receptor for the possible treatment of GERD. Specifically, we are testing compounds that may reduce the transient relaxation of the lower esophageal sphincter, which results in fluid from the stomach entering the esophagus – a condition referred to as reflux. Our work with AstraZeneca and the identification of mGluR5 antagonists is in the very early stage of preclinical development. A more detailed description of our mGluR program and our collaboration with AstraZeneca can be found below under Central Nervous System Disorders.

Central Nervous System Disorders

Overview. Our products and programs in this field include isovaleramide, delucemine, mGluR modulators and glycine reuptake inhibitors. Central nervous system disorders are broad, complex and severe diseases that are a major focus of current medical research. However, few central nervous system disorders are able to be effectively treated, creating an opportunity for novel therapies. Central nervous system disorders affect a broad portion of the population through diseases such as epilepsy, bipolar disorder, stroke, Alzheimer’s disease, Parkinson’s disease, dementia, anxiety, depression, schizophrenia, migraine and pain. Recent market research reports indicate that nearly $50.6 billion is expended annually in retail prescription drug sales for central nervous system related products on a worldwide basis. However, many of these treatments are palliative with significant side effects and a need for new and improved treatment exists. We are addressing central nervous system disorders on a number of different fronts.

Isovaleramide for Migraine. Isovaleramide is a proprietary small organic molecule compound we formerly referred to as NPS 1776. We are independently developing this compound for the acute treatment of migraine. We have initiated a Phase IIa clinical trial with isovaleramide to evaluate the compound’s potential as a therapy for migraine headaches. The double-blind, placebo-controlled trial is designed to assess the effectiveness of a single oral administration of a low dose or a high dose of isovaleramide in the relief of migraine pain and associated systems, such as nausea and sensitivity to light or sound. Our preclinical studies show that isovaleramide is effective in a number of animal models of epilepsy, spasticity and pain. We have completed several Phase I clinical trials with isovaleramide to evaluate its safety and tolerability and its ability to be delivered in a controlled release formulation. Our analysis of the data indicates that the drug was safe and well tolerated. Initial formulation studies demonstrated that the compound is amenable to multiple controlled release formulation technologies. We are presently working to identify a controlled release formulation to take into further clinical trials for the treatment of epilepsy and other disorders.

Metabotropic Glutamate Receptor Program. Since 1996, we have been working to find compounds that act on targets in the central nervous system called metabotropic glutamate receptors, or mGluRs. There are three principal groups of mGluRs and several subtypes of mGluRs within those groups that differ in their chemical composition, their effects on cellular metabolism and their location throughout the central nervous system. Published research indicates that the different mGluRs subtypes are involved in diseases such as anxiety, schizophrenia, Parkinson’s disease and chronic pain among others. We believe that it is possible to pursue the development of a multitude of products that will provide novel treatments for many central nervous system disorders. Because these molecular receptors are structurally related to calcium receptors, we have been able to leverage our expertise in calcium receptors to create proprietary methods for screening drug candidates active at mGluRs and that are selective for each of the various mGluR subtypes.

We have discovered a number of compounds that activate or inhibit mGluRs and that are highly selective for specific subtypes of mGluRs. Our animal studies with a number of these compounds have demonstrated their potential as drug candidates for

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the treatment of central nervous system disorders such as psychiatric and neurologic disorders. We are working with AstraZeneca to develop these and other mGluR active compounds.

In March 2001, we entered into an agreement with AstraZeneca under which we collaborate exclusively in an extensive program around a number of mGluR subtypes. We granted AstraZeneca exclusive rights to commercialize mGluR subtype-selective compounds. Under our agreement, we are required to co-direct the research and pay for an equal share of the preclinical research costs, including capital and a minimum number of personnel, through March 2006 unless earlier terminated by AstraZeneca or us upon six months advance written notice. If certain milestones are met, AstraZeneca is required to pay us up to $30.0 million. AstraZeneca is also required to pay us royalties on sales of products that include those compounds. We have the right to co-promote any resulting product in the United States and Canada and receive co-promotion revenue, if any. Should we elect to co-promote products, in some circumstances we will be required to share in the development and regulatory costs associated with those products, and we may not receive some late-stage milestone payments. For more information about our agreement with AstraZeneca, see the section entitled “Business—Collaborative Research, Development and License Agreements.”

Delucemine for Major Depressive Disorder. Delucemine, formerly referred to as NPS 1506, is a novel compound for which we originally pursued development for the treatment of stroke. This compound targets NMDA receptor-operated calcium channels, which are activated by the neurotransmitter glutamate. In addition to targeting the NMDA receptor-operated calcium channels the compound also has appreciable activity as a serotonin reuptake inhibitor. Published research has suggested that glutamate may play a role in the development of depression. We believe delucemine may produce a rapid antidepressant effect in patients suffering from major depressive order. Delucemine does not appear to exhibit the side effects that have plagued other NMDA receptor antagonists. Delucemine, at neuroprotective or antidepressant doses in preclinical animal models, caused no PCP-like behavioral effects, no learning or memory impairment, no neuronal vacuolization, and no significant sedation or cardiovascular side effects. We expect to commence a clinical safety and efficacy study for delucemine for the acute treatment of symptoms of major depressive disorder in the second half of 2004.

Other Programs for Central Nervous System Disorders. We collaborated with Janssen on glycine reuptake inhibitors to identify prospective drug candidates for schizophrenia and dementia. Janssen has now assumed full responsibility for the development of product candidates identified under the collaboration. We are not expending any significant resources in the program. In November 2001 we received a milestone payment from Janssen as a result of the selection of a preclinical compound for further development as a potential treatment for schizophrenia. We will receive additional milestone payments of up to $20.5 million from Janssen, if certain milestones are met, and royalties on sales of any drugs developed or sold by Janssen under this collaboration agreement.

Internal Discovery Research

Through internal discovery efforts, we have developed a diverse product pipeline covering a variety of disorders. This pipeline allows us to reduce the impact of any single product failure and increases our flexibility to focus on our most promising programs. The continued expansion of our product pipeline is based on the ability of our scientists to apply techniques related to our core competencies such as the use of proteins as therapeutics, manipulating G-Protein Coupled receptors and finding compounds that act on those receptors. Our current discovery research activities span the spectrum from target identification and validation through late stage preclinical safety assessment.

Our internal discovery research group comprises 70 staff members, 22 of which hold doctorate degrees, with 36 members in our Salt Lake City location and 34 members in our Toronto location. The disciplines within our discovery research group include medicinal chemistry, molecular and cellular biology, pharmacology, physiology, and drug metabolism and pharmacokinetics. Areas of expertise within the group include bone and mineral metabolism, gastrointestinal physiology and pharmacology, and central nervous system physiology and pharmacology. We intend to continue our focus on scientific discovery by retaining creative scientists who we believe can make breakthrough discoveries leading to innovative products.

Collaborative Research, Development and License Agreements

We selectively enter into collaboration agreements and licenses with pharmaceutical and biotechnology companies to leverage our financial investment in our discovery, development and commercialization programs. These agreements generally include payments to us for research performed by us under the agreement, payments for the achievement of specified milestones, and payments for royalties on sales of products developed under the terms of the particular agreement. In return for these financial benefits, we grant to the particular collaborator an exclusive license to the technology that is the subject of the collaboration as well as to the products developed under the agreement. This strategy allows us to devote greater resources to selected programs and to pursue a greater number of programs and products than would otherwise be possible. In addition, we believe collaborators with clinical development and marketing expertise in specific therapeutic areas will facilitate more rapid entry into the market for our products and accelerate their acceptance by healthcare providers and third-party payors. These agreements generally contain provisions restricting the transfer of such agreements to a third party upon a change of control of the company, sale of substantially all of the assets of the company or a sale of a majority of the voting shares of the company, without first obtaining the written consent of the collaborator. In some instances, the collaborator has the right to terminate the agreement on the occurrence of such an event. We currently have

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collaborative research, development or license agreements with several collaborators, including Amgen, GlaxoSmithKline, AstraZeneca, Janssen and Kirin.

We also enter into research support agreements with various academic and other not-for-profit institutions. These agreements generally require us to fund certain research at the institution over a specific period of time in exchange for which we acquire the right to use the results of the research and obtain an option to exclusively license from the institution any inventions made during the term of the research on terms mutually agreed to at that time.

Amgen. In December 1995, we entered into a development and license agreement with Amgen in which we granted Amgen the exclusive right to develop and commercialize cinacalcet HCl and related compounds for the treatment of hyperparathyroidism and any other indications other than osteoporosis worldwide, excluding Japan, China, Hong Kong, North and South Korea and Taiwan, territories in which we licensed such rights to Kirin. If our agreement with Kirin is terminated, Amgen’s territory becomes worldwide. Under the terms of our agreement, Amgen is authorized and responsible to conduct, fund and pursue all aspects of the development, submissions for regulatory approvals, manufacture and commercialization of compounds licensed under the agreement, including cinacalcet HCl, in its territories. Amgen paid us an initial up-front license fee of $10.0 million upon signing the agreement, Amgen also purchased 1.0 million shares of our common stock at $7.50 per share in connection with the license, and agreed to pay us up to $400,000 per year in development support for five years, which obligation has now expired. In addition, if specified milestones are achieved, then Amgen is required to make milestone payments of up to $26.0 million and must pay royalties to us on any sales of cinacalcet HCl or other related compounds. To date, Amgen has paid to us $9.0 million in milestone payments. We may terminate the agreement if Amgen breaches the agreement and does not cure the breach within 120 days of receiving notice of the breach. Amgen may terminate the agreement for any reason on 90 days’ prior written notice. If there is a termination for a reason other than our breach of the agreement, the technology, patent and commercialization rights to all compounds licensed under the agreement including cinacalcet HCl would revert to us. Furthermore, if Amgen terminates the agreement none of their payments to us are refundable.

GlaxoSmithKline. In November 1993, we entered into a collaborative research and worldwide exclusive license agreement with GlaxoSmithKline for the research, development and commercialization of calcium receptor active compounds for the treatment of osteoporosis and other bone metabolism disorders, excluding hyperparathyroidism. We initially received from GlaxoSmithKline an upfront license fee payment of $6.0 million and we later began receiving payments from GlaxoSmithKline in support of our research efforts under the initial research term of the agreement. GlaxoSmithKline also has a first right to negotiate for an exclusive license regarding other company research for indications within the field of bone metabolism disorders, and an exclusive right to negotiate for a license to compounds developed under the agreement for indications outside the field of bone metabolism disorders, which rights expire upon termination of this agreement. Once compounds have been selected for development, GlaxoSmithKline has the authority and responsibility to conduct and fund all product development, including clinical trials and regulatory submissions, and manufacturing. We have the right to co-promote, in the United States, products resulting from the collaboration. In addition to research funding, and inclusive of prior milestone payments and the upfront license fee, GlaxoSmithKline has agreed to pay us up to an aggregate of $23.0 million as it achieves certain additional development or marketing milestones. GlaxoSmithKline must also pay us royalties on any sales of products for osteoporosis and other bone metabolism disorders that include compounds developed by GlaxoSmithKline under the agreement, and a percentage of profits from co-promotion of such products. To date, we have received license fee, milestone and research and development support payments totaling $23.1 million under this agreement. GlaxoSmithKline may terminate the agreement on 30 days’ written notice after a six-month waiting period. Additionally, in the event we breach the agreement GlaxoSmithKline may terminate on 60 days’ written notice for our breach. If GlaxoSmithKline terminates the agreement, none of their payments to us are refundable unless such termination is due to our material breach which is not cured, in which case we would be required to return to GlaxoSmithKline all milestone payments received by us, other than the initial license fee. Upon termination, rights and licenses we granted GlaxoSmithKline revert to us. In December 2003, we amended the agreement to provide for the termination of the collaborative research portion of the agreement effective May 31, 2003. The amendment permits us to conduct our own research and development efforts with certain calcilytic compounds subject to a limitation on our ability to commercialize any compounds arising from our work if GlaxoSmithKline is developing or commercializing a calcilytic compound. We also granted to GlaxoSmithKline a right of first negotiation to acquire a license to the calcilytic compounds we develop on our own.

AstraZeneca. In March 2001, we entered into an exclusive research collaboration and license agreement with AstraZeneca to collaborate on the discovery, development and marketing of small molecule therapies for the treatment of various disorders of the central nervous system. Specifically, the collaboration focuses on the identification of small molecules active on protein structures known as metabotropic glutamate receptors (mGluRs). We granted AstraZeneca an exclusive license to the worldwide development and commercialization of any mGluR-active compounds identified under the collaboration. During the research term, we will work together on the identification of mGluR-active compounds. We are required to co-direct the research and pay for an equal share of the preclinical research costs including capital and a minimum number of personnel, through March 2006, unless earlier terminated by AstraZeneca or us upon six months advance written notice. Once compounds have been selected for development, AstraZeneca will conduct and fund product development, including all human clinical trials, regulatory submissions, commercialization and manufacturing. We have the right to co-promote any resulting product in the United States and Canada and receive co-promotion

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revenue, if any. Should we elect to co-promote products, in some circumstances we will be required to share proportionately in the development and regulatory costs associated with those products. If we elect not to co-promote, we are entitled up to an aggregate of $30.0 million in milestone payments and royalties on any sales of products developed and marketed under the agreement. To date no milestone payments have been earned under the agreement. We may terminate the agreement if AstraZeneca breaches the agreement and does not cure the breach within 60 days of receiving notice of the breach. After two years of the research program, either party may terminate the agreement on six months’ prior written notice. After the research term, AstraZeneca may terminate the agreement at anytime upon 90 days’ prior written notice. Termination by AstraZeneca for reasons other than our breach or insolvency will result in the return to us of all rights we granted and the related technology, including improvements. Termination by AstraZeneca for our breach or insolvency would result in the assignment to AstraZeneca of rights to certain of our patents and technology related to mGluR-active breach or insolvency would result in AstraZeneca’s assignment of rights to certain patents and technology to us.

Janssen. In October 1998, we entered into a collaborative agreement with Janssen for the research, development and commercialization of new drugs for the treatment of schizophrenia and dementia. The research phase of this collaboration ended in October 2000. In addition, Janssen controls and is responsible for development and commercialization of the compounds, including manufacturing, and including all costs and expenses associated with the development and commercialization efforts. While Janssen has the right to market products worldwide, we may co-promote, in Canada, any products developed under the agreement. We will receive up to an aggregate of $21.5 million in milestone payments if Janssen reaches certain milestones, and royalties from any product sales resulting from the collaboration. To date, we have received research support and milestone payments totaling $2.9 million under this agreement. We may terminate the agreement if Janssen breaches the agreement and does not cure the breach within 60 days of receiving notice of the breach. In that case, all rights granted to Janssen revert to us. Janssen may terminate, for any reason, on 90 days notice to us. If Janssen terminates, other than for our breach, then the rights to any compounds or products are transferred to us. We can also terminate Janssen’s rights if Janssen does not launch the product in the United States, but must pay a royalty to Janssen on product sales after that termination. If Janssen terminates the agreement, none of their payments to us are refundable.

Kirin. In June 1995, we entered into a collaborative research and license agreement with Kirin to develop and commercialize cinacalcet HCl and other related compounds for the treatment of hyperparathyroidism and any other indications other than osteoporosis and bone metabolism disorders in Japan, China, Hong Kong, North and South Korea and Taiwan. Kirin is responsible for all costs associated with developing, obtaining regulatory approvals and commercializing products within its territories. The agreement also requires Kirin to use reasonable good faith efforts to introduce a product to market. Kirin paid us an initial up-front license fee of $5.0 million and agreed to pay us certain milestone payments on the achievement of specified events up to an aggregate of $13.0 million. To date, we have received $7.0 million in milestone payments from Kirin. Kirin is required to pay us royalties on any sales of products containing cinacalcet HCl or a similar compound within its territories. We may terminate the agreement if Kirin breaches the agreement and does not cure the breach within 90 days of receiving notice of the breach. In this event, Amgen would receive rights to develop and commercialize cinacalcet HCl for the treatment of hyperparathyroidism and other indications except osteoporosis, in the terminated territories. Kirin may terminate the agreement for any reason on 90 days’ prior written notice, and on a country by country basis on specified conditions relating to market size. If Kirin terminates the agreement, Amgen would receive rights to develop and commercialize cinacalcet HCl for the treatment of hyperparathyroidism and other indications, except osteoporosis, in the terminated territories. If Kirin terminates the agreement, none of their payments to us are refundable. We are advised that Kirin and Amgen have executed a separate data sharing agreement related to clinical data under their separate agreements with us. We have also authorized them to enter into a manufacturing agreement with one or more manufacturing companies for clinical and commercial supplies.

Sponsored and Government Funded Research Programs

We have entered into certain research and license agreements that require us to make research support payments to academic or research institutions when the research is performed. Additional payments may be required upon the accomplishment of research milestones by the institutions or as license fees or royalties to maintain the licenses.

In February 1993, we entered into a patent license agreement with The Brigham and Women’s Hospital, an affiliate of Harvard University Medical School. The patent license agreement grants us an exclusive license to certain calcium receptor and inorganic ion receptor technology covered by patents we jointly own with the hospital. Under the patent license agreement, we are responsible for all costs relating to obtaining regulatory approval from the FDA or any other federal, state or local government agency and carrying out any clinical studies, relating to the technology. The Brigham and Women’s Hospital is also entitled to a royalty on any sales of certain products under the patent license agreement, and we have committed to promote sales of any licensed products for hyperparathyroidism for which we receive regulatory approval. Brigham and Women’s Hospital may terminate the patent agreement if we breach the terms of the patent agreement and do not cure the breach within 60 days of receiving notice of the breach. Certain violations of terms of the patent agreement, if pursued by Brigham and Women’s Hospital, might result in the exclusive, royalty-free license of the technology to Brigham and Women’s Hospital or other adverse consequences.

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We have also entered into a license agreement with Dr. Daniel J. Drucker and his Canadian corporation 1149336 Ontario Inc. The license agreement grants to us an exclusive license under Dr. Drucker’s patent portfolio for glucagon-like peptide-2, or GLP-2, and its therapeutic uses. Under the license agreement we have agreed to ensure that reasonable commercial efforts are used to develop and commercialize any product covered by the licensed patents. The agreement requires us to pay annual nonrefundable license maintenance fees, royalties on sales and milestone payments. If we default on any of the material obligations under the agreement Dr. Drucker may terminate the license agreement and all rights granted under the agreement will revert to Dr. Drucker.

Prior to the time that we acquired Allelix in December 1999, Allelix had entered into a research funding agreement with the Government of Canada pursuant to the Technology Partnership Canada program. The agreement provided for the reimbursement of eligible research and development costs we incur for our teduglutide product candidate up to a maximum of Cdn. $8.4 million and for the payment of up to Cdn. $23.9 million in royalties by us to the Government of Canada on sales of teduglutide. In December 2003, we mutually agreed to terminate the agreement. As a result, we concluded that it was probable that we would have to repay amounts previously paid by TPC under this agreement and to write off receivables due from TPC. In exchange for mutual releases, we paid $4.3 million to the Government of Canada and agreed to release TPC from all outstanding reimbursement obligations, resulting in the write-off of $1.9 million in accounts receivable. We continue to independently develop teduglutide for the treatment of various gastrointestinal disorders.

New Drug Development and Approval Process

Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of pharmaceuticals and in our ongoing research and development activities. All of our product candidates will require regulatory approval by governmental agencies prior to commercialization. In particular, all of our drug candidates are subject to rigorous preclinical testing and clinical trials and other premarketing approval requirements by the FDA and regulatory authorities in other countries. In the United States, various federal, and in some cases state statutes and regulations also govern or affect the manufacturing, safety, labeling, storage, record keeping and marketing of such products. The lengthy process of seeking required approvals and the continuing need for compliance with applicable statutes and regulations require the expenditure of substantial resources. Regulatory approval, when and if obtained, may significantly limit the indicated uses for which our products may be marketed. Further, approved drugs, as well as their manufacturers, are subject to ongoing review and discovery of previously unknown problems with such products may result in restrictions on their manufacturer, sale or use or in their withdrawal from the market.

The steps required by the FDA before our drug candidates may be marketed in the United States include, among other things:

• the performance of preclinical laboratory and animal tests and formulation studies;

• the submission to the FDA of an Investigational New Drug application, or IND, which must become effective before human clinical trials may commence;

• the completion of adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug; and

• the submission and FDA approval of a drug application or NDA.

The testing and approval process requires substantial time, effort and financial resources and we cannot be certain that any approvals for any of our proposed products will be granted on a timely basis, if at all. Prior to commencing a clinical trial, we must submit an IND to the FDA. The IND becomes effective 30 days after receipt by the FDA, unless within the 30-day period, the FDA raises concerns or questions with respect to the conduct of the trial. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the study can begin. The submission of an IND may not result in FDA authorization to commence a clinical trial. Further, an independent institutional review board at the medical center or centers proposing to conduct the trial must review and approve the plan for any clinical trial before it commences.

Human clinical trials are typically conducted in three sequential phases that may overlap:

• PHASE I: the drug is initially introduced into healthy human subjects or patients and tested for safety, dosage tolerance, absorption, metabolism, distribution and excretion.

• PHASE II: involves studies in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted diseases and to determine optimal dosage.

• PHASE III: when Phase II evaluations demonstrate that a dosage range of the product is effective and has an acceptable safety profile, Phase III trials are undertaken to further evaluate dosage and clinical efficacy and to further test for safety in an expanded patient population at geographically dispersed clinical study sites.

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We cannot be certain that we or any of our collaborative partners will successfully complete Phase I, Phase II or Phase III testing of any compound within any specific time period, if at all. Furthermore, the FDA or the study sponsor may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

The results of product development, preclinical studies and clinical trials are submitted to the FDA as part of an NDA. The FDA may withhold approval for an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical data. Even if such data is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. If approved, the FDA may withdraw product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.

The FDA’s fast track program is intended to facilitate the development and expedite the review of drugs intended for the treatment of serious or life-threatening diseases and that demonstrate the potential to address unmet medical needs for such conditions. Under this program, the FDA can, for example, review portions of an NDA for a fast track product before the entire application is complete, thus potentially beginning the review process at an earlier time. We cannot guarantee that the FDA will grant any requests that we may make for fast track designation, that any fast track designation would affect the time of review, or that the FDA will approve the NDA submitted for any of our drug candidates, whether or not fast track designation is granted. Additionally, the FDA’s approval of a fast track product can include restrictions on the product’s use or distribution, such as permitting use only for specified medical procedures or limiting distribution to physicians or facilities with special training or experience. Approval of fast track products can be conditional with a requirement for additional clinical studies after approval. Satisfaction of the above FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes several years and the actual time required may vary substantially, based upon the type, complexity and novelty of a product or indication.

Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon our or our partner’s activities. The FDA or any other regulatory agency may not grant any approvals on a timely basis, if at all. Success in early stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages. Further, even if regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. Delays in obtaining, or failures to obtain regulatory approvals may have a material adverse effect on our business. In addition, we cannot predict what adverse governmental regulations may arise from future United States or foreign governmental action.

Any products manufactured or distributed by us or our partners pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA for compliance with Current Good Manufacturing Practice, or cGMP, regulations which impose certain procedural and documentation requirements upon us and our contract manufacturers. We cannot be certain that we or our present or future suppliers will be able to comply with the cGMP regulations and other FDA regulatory requirements.

Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in or shorten the duration of the regulatory review and approval process. If a product that has orphan drug designation subsequently receives FDA approval for the disease for which it has such designation, the product is entitled to orphan exclusivity. For example, the FDA may not approve any other applications to market the same drug for the same disease, except in very limited circumstances, for seven years. We intend to file for orphan drug designation for those diseases which meet the criteria for orphan exclusivity. Although obtaining FDA approval to market a product with orphan drug exclusivity can be advantageous, there can be no assurance that it would provide us with a material commercial advantage.

Steps similar to those in the United States must be undertaken in virtually every other country comprising the market for our product candidates before any such product can be commercialized in those countries. The approval procedure and the time required for approval vary from country to country and may involve additional testing. There can be no assurance that approvals will be granted on a timely basis, or at all. In addition, regulatory approval of prices is required in most countries other than the United States. There can be no assurance that the resulting prices would be sufficient to generate an acceptable return to us. In addition, the impact of recent changes to Medicare prescription drug benefits is uncertain.

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Patents and Other Proprietary Technology

Our intellectual property portfolio includes patents, patent applications, trade secrets, know-how and trademarks. Our success will depend in part on our ability to obtain additional patents, maintain trade secrets and operate without infringing the proprietary rights of others, both in the United States and in other countries. We periodically file patent applications to protect the technology, inventions and improvements that may be important to the development of our business. We rely on trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position.

We file patent applications on our own behalf as assignee and, when appropriate, have filed and expect to continue to file, applications jointly with our collaborators. These patent applications cover compositions of matter, methods of treatment, methods of discovery, use of novel compounds and novel modes of action, as well as recombinantly expressed receptors and gene sequences that are important in our research and development activities. Some of our principal intellectual property rights related to processes, compounds, uses and techniques related to calcium receptor science are now protected by issued United States patents. We intend to file additional patent applications relating to our technology and to specific products, as we think appropriate.

We hold patents directed to potential therapeutic products such as new chemical entities, pharmaceutical compositions and methods of treating diseases. We hold patents directed also to nucleic acid and amino acid sequences of novel cellular receptors and methods of screening for compounds active at such cellular receptors. We continue actively to seek patent protection for these and related technologies in the United States and in foreign countries.

We have been issued approximately 175 patents in the U.S. and have been granted approximately 373 patents in other countries. Ten issued U.S. patents cover technology related to parathyroid hormone. These patents have expiration dates (not including any patent term extensions) ranging from 2008 to 2018. Six issued U.S. patents cover technology related to calcilytic compounds. These patents have expiration dates (not including any patent term extensions) ranging from 2016 to 2019. Twelve issued U.S. patents cover calcimimetics (including cinacalcet HCl) and calcium receptor technology. These patents have expiration dates (not including any patent term extensions) ranging from 2013 to 2017. Twelve issued U.S. patents cover technology related to teduglutide and GLP-2, certain of which are licensed from 1149336 Ontario Inc. These patents have expiration dates (not including any patent term extensions) ranging from 2015 to 2018. Four issued U.S. patents cover technology related to isovaleramide. These patents have expiration dates (not including any patent term extensions) ranging from 2013 to 2020. Six issued U.S. patents cover technology related to delucemine. These patents have expiration dates (not including any patent term extensions) ranging from 2013 to 2018. Eight issued U.S. patents cover technology related to metabotropic glutamate receptors. These patents have expiration dates (not including any patent term extensions) ranging from 2016 to 2020. Fourteen issued U.S. patents cover technology related to glycine reuptake inhibitors. These patents have expiration dates (not including any patent term extensions) ranging from 2016 to 2022.

We also rely on trade secrets and contractual arrangements to protect our trade secrets. Much of the know-how important to our technology and many of its processes are dependent upon the knowledge, experience and skills of our key scientific and technical personnel and are not the subject of pending patent applications or issued patents. To protect our rights to know-how and technology, we require all of our employees, consultants, advisors and collaborators to enter into confidentiality agreements that prohibit the unauthorized use of, and restrict the disclosure of, confidential information and require disclosure and assignment to us of their ideas, developments, discoveries and inventions.

In connection with our research and development activities, we have sponsored research at various university and government laboratories. For example, we have executed license and research agreements regarding research in the area of calcium and other ion receptors with The Brigham and Women’s Hospital. We have also sponsored work at other government and academic laboratories for various evaluations, assays, screenings and other tests. Generally, under these agreements, we fund the work of investigators in exchange for the results of the specified work and the right or option to a license to any patentable inventions that may result in certain designated areas. If the sponsored work produces patentable subject matter, we generally have the first right to negotiate for license rights related to that subject matter. Any resulting license would be expected to require us to pay royalties on net sales of licensed products.

Competition

We and our collaborators and licensees are pursuing areas of product development in which we believe there is a potential for extensive technological innovation in relatively short periods of time. We operate in a field in which new discoveries occur at a rapid pace. Our competitors may succeed in developing technologies or products that are more effective than ours, or in obtaining regulatory approvals for their drugs more rapidly than we are able to, which could render our products obsolete or noncompetitive. Competition in the pharmaceutical industry is intense and is expected to continue to increase. Many competitors, including biotechnology and pharmaceutical companies, are actively engaged in research and development in areas where we are also developing products, including the fields of osteoporosis, hyperparathyroidism, and central nervous system disorders. Current therapies for osteoporosis include supplementing dietary calcium and vitamin D, estrogen replacement therapy in post-menopausal women, bisphosphonates, raloxifene, a selective estrogen receptor modulator, calcitonin, and Lilly’s teriparatide, a recombinant

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parathyroid-hormone fragment, called Forteo. With the exception of Forteo, all of these therapies act to prevent further bone loss by inhibiting bone resorption. These therapies have been shown to reduce the incidence of fracture, but they have only a limited positive effect on bone mineral density. These products only arrest further bone loss, and may not be effective treatments for all patients. For example, Fosamax, a bisphosphonate sold by Merck, showed a reduction in fractures but an increase in bone mineral density of only seven to ten percent over three years. Lilly also launched Forteo in December 2002, which will compete directly with PREOS as a bone-building agent for the treatment of osteoporosis patients at high risk for fracture. Lilly’s product is the first to market in the treatment of osteoporosis using an injectable bone-building drug. Lilly has also announced that it is investigating alternate methods of delivery of Forteo.

Many of our competitors have substantially greater financial, technical, marketing and personnel resources. In addition, some of them have considerable experience in preclinical testing, human clinical trials and other regulatory approval procedures. Moreover, certain academic institutions, governmental agencies and other research organizations are conducting research in the same areas in which we are working. These institutions are becoming increasingly aware of the commercial value of their findings and are more actively seeking patent protection and licensing arrangements to collect royalties for the technology that they have developed. These institutions may also market competitive commercial products on their own or through joint ventures and will compete with us in recruiting highly qualified scientific personnel. Our ability to compete successfully will depend, in part, on our ability to:

• develop marketing, sales and distribution capabilities for our proprietary products;

• leverage our established collaborations and enter into new collaborations for the development of our products;

• identify new product candidates through our internal discovery effort or through acquisition;

• develop products that reach the market first;

• develop products that are superior to other products in the market;

• develop products that are cost-effective and competitively priced; and

• obtain and enforce patents covering our technology.

Manufacturing

We do not have manufacturing facilities to produce sufficient supplies of PREOS, teduglutide or any of our other product candidates to support clinical trials or commercial launch of these products, if they are approved. We are dependent on third parties for manufacturing and storage of our product candidates. If we are unable to contract for a sufficient supply of our product candidates on acceptable terms, or if we encounter delays or difficulties in the manufacturing process or our relationships with our manufacturers, we may not have sufficient product to conduct or complete our clinical trials or support preparations for the commercial launch of our product candidates, if approved.

We have entered into agreements with contract manufacturers to manufacture clinical and commercial supplies of PREOS. These contract manufacturers are our only source for the production and formulation of PREOS. To date, these contract manufacturers have produced only small quantities of PREOS relative to those needed for commercialization. In addition, we have experienced difficulties in producing clinical supplies of PREOS that meet our specifications.

On May 15, 2002, we reported that we were unable to produce finished clinical supplies of PREOS that met our release specifications. PREOS is formulated as a freeze-dried powder that is reconstituted into a liquid when inserted into its injector pen for patient use. We require that the reconstituted drug remain stable in liquid form for a specified period under refrigeration. Some production batches at that time had exhibited precipitation of the reconstituted drug before the expiration of the required time period. We have since implemented process and formulation changes in the “fill and finish” procedures used to prepare the finished drug. Since we instituted those changes, all batches have passed stability specifications. Based on our continued work, and on contacts with regulatory agencies, we do not believe that any further changes will be required in our production processes to proceed with the filing of an NDA for PREOS.

We currently have sufficient clinical supplies of PREOS to complete those clinical studies to be included in our NDA filing, but have not yet produced sufficient quantities of PREOS to meet all of our clinical trial needs. We believe that our contract manufacturers will be able to produce sufficient supply of PREOS to complete all of our ongoing clinical studies. However, if any of the problems we have experienced in the past reoccur and as a result we are unable to produce, in a timely manner, adequate clinical supplies to meet the needs of our current clinical trials, we may be required to modify our finished product formulation and modify or terminate our clinical trials for PREOS. Any modification of our finished product or modification or termination of our clinical trials

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could adversely affect our ability to obtain necessary regulatory approvals and significantly delay or prevent the commercial launch of the product, which would materially harm our business, cause our stock price to decline and impair our ability to raise capital.

We depend on a number of contract manufacturers to supply key components of PREOS. For instance, we depend on SynCo Bio Partners B.V., or SynCo and Boehringer Ingelheim Austria GmbH, or BI, to produce supplies of bulk drug product of PREOS to support clinical trials and commercial launch. To date SynCo has been able to produce sufficient supplies of bulk drug product to meet our requirements. The technology transfer process at BI has started and we expect BI to be able to produce bulk drug supply of PREOS on a timely basis. We also depend on Vetter Pharma-Fertigung GmbH, or Vetter, for the production of finished supplies of PREOS. Because the “fill and finish” part of the manufacturing process for PREOS requires the use of Vetter’s proprietary technology, Vetter is our sole source for finished supplies of PREOS. Absent the development of an alternative method of delivery of PREOS, we will remain dependent on the availability of this proprietary technology. Vetter has only produced small quantities of finished supplies of PREOS to date. There is a risk that Vetter may not be able to scale to commercial production of PREOS. We are also subject to the risk that disruptions in Vetter’s operations would result in delays in PREOS’ clinical trials, regulatory approvals and commercial introduction. In January 2004, we entered into a capacity reservation agreement with Vetter under which we have reserved future production capacity at Vetter for commercial supplies of PREOS. If Vetter is unable to produce finished supplies of PREOS in required quantities, on a timely basis or at all, we could be forced to ultimately develop an alternative delivery process for PREOS, which would require additional clinical trials and regulatory approvals. Any disruption or termination of our relationship with Vetter would materially harm our business and financial condition and cause our stock price to decline.

In October 2002, we entered into an agreement with BI for the manufacture of bulk drug supplies of PREOS in support of commercial launch. Under this agreement, we have initiated the technology transfer process and are implementing appropriate testing, documentation and quality standards and procedures in preparation for the commencement of commercial production. The technology transfer process will be lengthy and complicated, and we will expend substantial resources over the term of the agreement. We will be required to establish bioequivalency between the finished drug product used in the conduct of our clinical trials and the commercial supplies of the finished drug product composed of the bulk drug product manufactured by BI. Additionally, FDA and comparable foreign regulatory approvals may also be required. The BI agreement further provides a general basis for the parties to mutually agree as to the terms of any future production of PREOS, based in part on current projections as to yield and other matters. Any failure to successfully transition on a timely basis our bulk manufacturing to BI would delay our commercialization efforts.

We are also seeking arrangements with contract manufacturers for supplies of teduglutide and isovaleramide to be used in future clinical trials. We are engaged in discussions with contract manufacturers for supplies of isovaleramide. If clinical supplies of teduglutide or isovaleramide are disrupted, exhausted, or fail to arrive when needed, we will have to substantially curtail or postpone initiation of planned clinical trials with those product candidates.

Dependence on contract manufacturers for commercial production involves a number of risks, many of which are outside our control. These risks include potential delays in transferring technology, and the inability of our contract manufacturer to scale production on a timely basis, to manufacture commercial quantities at reasonable costs, to comply with current good manufacturing practices and to implement procedures that result in the production of drugs that meet our specifications and regulatory requirements.

Employees

As of December 31, 2003, we employed 272 individuals full-time, of which 57 hold Ph.D. degrees and 59 hold other advanced degrees. A total of 195 full-time employees are engaged in research, development and support activities. A total of 77 full-time employees are employed in finance, legal, human resources, market research, corporate development and general administrative activities. None of our employees are covered by collective bargaining agreements and our management considers its relations with our employees to be good.

Trademarks

“NPS”, “NPS Pharmaceuticals” and “PREOS” are our registered trademarks. All other trademarks, trade names or service marks appearing in this Annual Report on Form 10-K are the property of their respective owners.

Available Information

Our Internet address is www.npsp.com. We make available free of charge on or through our Internet website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

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RISK FACTORS

Before making an investment in our common stock, you should carefully consider the following Risk Factors, in addition to the other information included or incorporated by reference into this prospectus. The risks set out below are not the only risks we face. If any of the following risks occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our notes or common stock could decline, and you may lose all or part of the money you paid to buy our notes or common stock.

Risks Related to Our Business

We have a history of operating losses. We expect to incur net losses and we may never achieve or maintain profitability.

With the exception of 1996, we have not been profitable since our inception in 1986. We reported net losses of $170.4 million, $86.8 million and $50.0 million for the years ended 2003, 2002 and 2001, respectively. As of December 31, 2003, we had an accumulated deficit of approximately $418.2 million. We have not generated any revenue from product sales to date, and it is possible that we will never have significant, if any, product sales revenue. We expect to continue to incur losses for at least the next several years as we and our collaborators and licensees pursue clinical trials and research and development efforts. To become profitable, we, either alone or with our collaborators and licensees, must successfully develop, manufacture and market our current product candidates, particularly PREOS and cinacalcet HCl, as well as continue to identify, develop, manufacture and market new product candidates. It is possible that we will never have significant product sales revenue or receive significant royalties on our licensed product candidates.

We may need additional financing, but our access to capital funding is uncertain.

Our current and anticipated operations, particularly our product development and commercialization programs for PREOS and teduglutide, require substantial capital. We expect that our existing cash and cash equivalents will sufficiently fund our current and planned operations through at least mid-2005. However, our future capital needs will depend on many factors, including the extent to which we enter into collaboration agreements with respect to any of our proprietary product candidates, receive milestone payments from our collaborators and make progress in our internally funded research, development and commercialization activities. Our capital requirements will also depend on the magnitude and scope of these activities, our ability to maintain existing and establish new collaborations, the terms of those collaborations, the success of our collaborators in developing and marketing products under their respective collaborations with us, the success of our contract manufacturers in producing clinical and commercial supplies of our product candidates on a timely basis and in sufficient quantities to meet our requirements, competing technological and market developments, the time and cost of obtaining regulatory approvals, the extent to which we choose to commercialize our future products through our own sales and marketing capabilities, the cost of preparing, filing, prosecuting, maintaining and enforcing patent and other rights and our success in acquiring and integrating complimentary products, technologies or companies. We do not have committed external sources of funding, and we cannot assure you that we will be able to obtain additional funds on acceptable terms, if at all. If adequate funds are not available, we may be required to:

• engage in equity financings that would be dilutive to current stockholders;

• delay, reduce the scope of or eliminate one or more of our development programs;

• obtain funds through arrangements with collaborators or others that may require us to relinquish rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves; or

• license rights to technologies, product candidates or products on terms that are less favorable to us than might otherwise be available.

If funding is insufficient at any time in the future, we may not be able to develop or commercialize our products, take advantage of business opportunities or respond to competitive pressures.

We do not have, and may never develop, any commercial drugs or other products that generate revenues.

Our existing product candidates will require significant additional development, clinical trials, regulatory clearances and additional investment before they can be commercialized. Our product development efforts may not lead to commercial drugs for a number of reasons, including the failure of our product candidates to be safe and effective in clinical trials or because we have inadequate financial or other resources to pursue the programs through the clinical trial process. We do not expect to be able to market any of our existing product candidates for a number of years, if at all.

We are substantially dependent on our and our licensees’ ability to successfully and timely complete clinical trials and obtain regulatory approval to market our most advanced product candidates, PREOS and cinacalcet HCl. Our business will be materially harmed and our stock price adversely affected if regulatory approval is not obtained with respect to either or both of these product candidates.

We have completed dosing in a pivotal Phase III clinical trial for PREOS and are gathering and analyzing the final data from the trial. We are also conducting other clinical trials with PREOS to support the expected filing of an NDA with the FDA at the end of the third quarter of 2004. Amgen has completed Phase III clinical trials for cinacalcet HCl, a compound intended to treat hyperparathyroidism, and has filed applications to market the product with both the FDA and the EMEA. Our success will depend, to a great degree, on Amgen’s and our ability to obtain the requisite regulatory approval to market the two product candidates. The process of obtaining FDA and other regulatory approvals is costly, time consuming, uncertain and subject to unanticipated delays. In order to obtain the necessary regulatory approval, we must demonstrate with substantial evidence from well-controlled clinical trials and to the satisfaction of the applicable regulatory reviewing agency that each of these products is both safe and efficacious. To date we have not demonstrated long-term safety or efficacy with PREOS and the results of the pivotal Phase III clinical trial have yet to be finalized and analyzed. While Amgen has completed Phase III clinical trials with cinacalcet HCl and announced the successful results of those studies, there is no assurance that the FDA or the EMEA will accept the results of those studies and determine that the applicable regulatory requirements for approval have been met. We cannot predict the ability of our third party service providers to collect the data from our pivotal trials with PREOS, analyze the data, and deliver their final reports to us. There may be significant delays in this process. Furthermore, the results of the pivotal trial with PREOS may indicate that the product is neither safe nor efficacious. Additionally, the FDA may require additional testing for safety and efficacy, which would result in a substantial delay in the regulatory approval process for both Amgen and us. If Amgen or we fail to successfully obtain regulatory approvals for PREOS or cinacalcet HCl, or both or either of us face significant delays, our business will be materially harmed and our stock price will be adversely affected.

We have no manufacturing capabilities. We depend on third parties, including a number of sole suppliers, for manufacturing and storage of our product candidates used in our clinical trials. Product introductions may be delayed or suspended if the manufacture of our products is interrupted or discontinued.

We do not have manufacturing facilities to produce sufficient supplies of PREOS, teduglutide or any of our other product candidates to support clinical trials or commercial launch of these products, if they are approved. We are dependent on third parties for

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manufacturing and storage of our product candidates. If we are unable to contract for a sufficient supply of our product candidates on acceptable terms, or if we encounter delays or difficulties in the manufacturing process or our relationships with our manufacturers, we may not have sufficient product to conduct or complete our clinical trials or support preparations for the commercial launch of our product candidates, if approved.

We have entered into agreements with contract manufacturers to manufacture clinical and commercial supplies of PREOS. These contract manufacturers are our only source for the production and formulation of PREOS. To date, these contract manufacturers have produced only small quantities of PREOS relative to those needed for commercialization. In addition, we have experienced difficulties in producing clinical supplies of PREOS that meet our specifications on a timely basis. We cannot be certain that these difficulties will not reoccur in the future.

We will depend on contract manufacturers to supply commercial-scale quantities of PREOS. In October 2002, we entered into an agreement with Boehringer Ingelheim Austria GmbH, or BI, for the manufacture of bulk drug supplies of PREOS in support of commercial launch. Under this agreement, we have initiated the technology transfer process and are implementing appropriate testing, documentation and quality standards and procedures in preparation for the commencement of commercial production. The technology transfer process will be lengthy and complicated, and we will expend substantial resources over the term of the agreement. We will be required to establish bioequivalency between the finished drug product used in the conduct of our clinical trials and the commercial supplies of the finished drug product composed of the bulk drug product manufactured by BI. Additionally, FDA and comparable foreign regulatory approvals of the production process at BI may be required. The BI agreement further provides a general basis for the parties to mutually agree as to the terms of any future production of PREOS, based in part on current projections as to yield and other matters. Any failure to successfully transition on a timely basis our bulk manufacturing to BI would delay our commercialization efforts.

We are also seeking arrangements with contract manufacturers for supplies of teduglutide and isovaleramide to be used in future clinical trials. We are engaged in discussions with contract manufacturers for supplies of isovaleramide. If clinical supplies of teduglutide or isovaleramide are disrupted, exhausted, or fail to arrive when needed, we will have to substantially curtail or postpone initiation of planned clinical trials with those product candidates.

We depend on a number of contract manufacturers to supply key components of PREOS. For instance, we depend on SynCo Bio Partners B.V., or SynCo and BI to produce supplies of bulk drug product of PREOS to support clinical trials and commercial launch. To date SynCo has been able to produce sufficient supplies of bulk drug product to meet our requirements. The technology transfer process at BI has started and we expect BI to be able to produce bulk drug supply of PREOS on a timely basis. We also depend on Vetter Pharma-Fertigung GmbH, or Vetter, for the production of finished supplies of PREOS. Because the “fill and finish” part of the manufacturing process for PREOS requires the use of Vetter’s proprietary technology, Vetter is our sole source for finished supplies of PREOS. Absent the development of an alternative method of delivery of PREOS, we will remain dependent on the availability of this proprietary technology. Vetter has only produced small quantities of finished supplies of PREOS to date. There is a risk that Vetter may not be able to scale to commercial production of PREOS. We are also subject to the risk that disruptions in Vetter’s operations would result in delays in PREOS’ clinical trials, regulatory approvals and commercial introduction. In January 2004, we entered into a capacity reservation agreement with Vetter under which we have reserved future production capacity at Vetter for commercial supplies of PREOS. If Vetter is unable to produce finished supplies of PREOS in required quantities, on a timely basis or at all, we could be forced to ultimately develop an alternative delivery process for PREOS, which would require additional clinical trials and regulatory approvals. Any disruption or termination of our relationship with Vetter would materially harm our business and financial condition and cause our stock price to decline.

Dependence on contract manufacturers for commercial production involves a number of risks, many of which are outside our control. These risks include potential delays in transferring technology, and the inability of our contract manufacturer to scale production on a timely basis, to manufacture commercial quantities at reasonable costs, to comply with current good manufacturing practices and to implement procedures that result in the production of drugs that meet our specifications and regulatory requirements.

Our reliance on contract manufacturers exposes us to additional risks, including:

• there may be delays in scale-up to quantities needed for clinical trials or failure to manufacture such quantities to our specifications, or to deliver such quantities on the dates we require;

• our current and future manufactures are subject to ongoing, periodic, unannounced inspection by the FDA and corresponding state and international regulatory authorities for compliance with strictly enforced cGMP regulations and similar foreign standards, and we do not have control over our contract manufactures’ compliance with these regulations and standards;

• our current and future manufacturers may not be able to comply with applicable regulatory requirements, which would prohibit them from manufacturing products for us;

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• if we need to change to other commercial manufacturing contractors, the FDA and comparable foreign regulators must approve these contractors prior to our use, which would require new testing and compliance inspections, and the new manufacturers would have to be educated in, or themselves develop substantially equivalent processes necessary for, the production or our products;

• our manufacturers might not be able to fulfill our commercial needs, which would require us to seek new manufacturing arrangements and may result in substantial delays in meeting market demand; and

• we may not have intellectual property rights, or may have to share intellectual property rights, to any improvements in the manufacturing processes or new manufacturing processes for our products.

Any of these factors could cause us to delay or suspend clinical trials, regulatory submission, required approvals or commercialization of our products under development, entail higher costs and result in our being unable to effectively commercialize our products.

We do not currently intend to manufacture any of our product candidates, although we may choose to do so in the future. If we decide to manufacture our products, we would be subject to the regulatory risks and requirements described above. We would also be subject to similar risks regarding delays or difficulties encountered in manufacturing our pharmaceutical products and we would require additional facilities and substantial additional capital. We cannot assure you that we would be able to manufacture any of our products successfully in accordance with regulatory requirements and in a cost-effective manner.

Failure to timely produce adequate clinical and commercial supplies of our lead product candidate, PREOS, could require us to modify or terminate certain of our Phase III clinical trials of PREOS, or delay commercial launch, which would materially harm our business, cause our stock price to decline and impair our ability to raise capital.

On May 15, 2002, we reported that we were unable to produce finished clinical supplies of PREOS that met our release specifications. PREOS is formulated as a freeze-dried powder that is reconstituted into a liquid when inserted into its injector pen for patient use. We require that the reconstituted drug remain stable in liquid form for a specified period under refrigeration. Some production batches at that time had exhibited precipitation of the reconstituted drug before the expiration of the required time period. We have since implemented process and formulation changes in the “fill and finish” procedures used to prepare the finished drug. Since we instituted those changes, all batches have passed stability specifications. Based on our continued work, and on contacts with regulatory agencies, we do not believe that any further changes will be required in our production processes to proceed with the filing of an NDA for PREOS.

We currently have sufficient clinical supplies of PREOS to complete those clinical studies to be included in our NDA filing, but have not yet produced sufficient quantities of PREOS to meet all of our clinical trial needs. We believe that our contract manufacturers will be able to produce sufficient supply of PREOS to complete all of our ongoing clinical studies. However, if any of the problems we have experienced in the past reoccur and as a result we are unable to produce, in a timely manner, adequate clinical supplies to meet the needs of our current clinical trials, we may be required to modify our finished product formulation and modify or terminate our clinical trials for PREOS. Any modification of our finished product or modification or termination of our clinical trials could adversely affect our ability to obtain necessary regulatory approvals and significantly delay or prevent the commercial launch of the product, which would materially harm our business, cause our stock price to decline and impair our ability to raise capital.

Clinical trials are long, expensive and uncertain processes and the FDA may ultimately not approve any of our product candidates. We cannot assure you that data collected from preclinical and clinical trials of our product candidates will be sufficient to support approval by the FDA, the failure of which could delay our profitability and adversely affect our stock price.

Many of our research and development programs are at an early stage. Clinical trials are long, expensive and uncertain processes. Clinical trials may not be commenced or completed on schedule, and the FDA may not ultimately approve our product candidates for commercial sale. Further, even if the results of our preclinical studies or clinical trials are initially positive, it is possible that we will obtain different results in the later stages of drug development or that results seen in clinical trials will not continue with longer-term treatment. Drugs in late stages of clinical development may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing. For example, positive results in early Phase I or Phase II clinical trials may not be repeated in larger Phase II or Phase III clinical trials. All of our potential drug candidates are prone to the risks of failure inherent in drug development. The clinical trials of any of our drug candidates, including PREOS, teduglutide and isovaleramide, could be unsuccessful, which would prevent us from commercializing the drug. Our failure to develop safe, commercially viable drugs would substantially impair our ability to generate revenues and sustain our operations and would materially harm our business and adversely affect our stock price.

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If we fail to maintain our existing or establish new collaborative relationships, or if our collaborators do not devote adequate resources to the development and commercialization of our licensed drug candidates, we may have to reduce our rate of product development and may not see products brought to market or be able to achieve profitability.

Our strategy for developing, manufacturing and commercializing our products includes entering into various relationships with large pharmaceutical companies to advance many of our programs. We have granted exclusive development, commercialization and marketing rights to a number of our collaborators for some of our key product development programs, including cinacalcet HCl, calcilytics, mGluRs and glycine reuptake inhibitors. Except in the case of our collaboration with AstraZeneca for research involving mGluRs, our collaborators have full control over those efforts in their territories and the resources they commit to the programs. Accordingly, the success of the development and commercialization of product candidates in those programs depends on their efforts and is beyond our control. For us to receive any significant milestone or royalty payments from our collaborators, they must advance drugs through clinical trials, establish the safety and efficacy of our drug candidates, obtain regulatory approvals and achieve market acceptance of those products. As a result, if a collaborator elects to terminate its agreement with us with respect to a research program, our ability to advance the program may be significantly impaired or we may elect to discontinue funding the program altogether. For example, in early 2002, Abbott terminated its agreement with respect to isovaleramide, and Forest Laboratories has terminated its agreement with us with respect to ALX-0646. As a result, the advancement of these programs was delayed.

Under our agreement with AstraZeneca, we are required to co-direct the research and to pay for an equal share of the preclinical research costs, including capital and a minimum number of personnel through March 2006 unless earlier terminated by AstraZeneca or us upon six months advance written notice. This commitment of personnel and capital may limit or restrict our ability to initiate or pursue other research efforts.

As part of our product development and commercialization strategy, we evaluate whether to seek collaborators for our product candidates. If we elect to collaborate, we may not be able to negotiate collaborative arrangements for our product candidates on acceptable terms, if at all. If we are unable to establish collaborative arrangements, we will either need to increase our expenditures and undertake the development and commercialization activities at our own expense or delay further development of the affected product candidate.

Collaborative agreements, including our existing collaborative agreements, pose the following risks:

• our contracts with collaborators may be terminated and we may not be able to replace our collaborators;

• the terms of our contracts with our collaborators may not be favorable to us in the future;

• our collaborators may not pursue further development and commercialization of compounds resulting from their collaborations with us;

• a collaborator with marketing and distribution rights to one or more of our product candidates may not commit enough resources to the marketing and distribution of such candidates;

• disputes with our collaborators may arise, leading to delays in or termination of the research, development or commercialization of our product candidates, or resulting in significant litigation or arbitration;

• contracts with our collaborators may fail to provide significant protection if one or more of them fail to perform;

• in some circumstances, if a collaborator terminates an agreement, or if we are found to be in breach of our obligations, we may be unable to secure all of the necessary intellectual property rights and regulatory approval to continue developing the same compound or product;

• our collaborators could independently develop, or develop with third parties, drugs that compete with our products; and

• we may be unable to meet our financial or other obligations under our collaborative agreements.

We cannot assure you of the success of our current collaborative efforts nor can we assure you of the success of any of our future collaborative efforts. If our collaborative efforts fail, our business and financial condition would be materially harmed.

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Because we do not have marketing, sales or distribution capabilities, we may be unable to market and sell our products and generate revenues.

We have recruited and continue to recruit sales, marketing, market research, and product planning personnel. However, we still require additional sales, marketing and distribution capabilities. In order to commercialize any product candidates for which we receive FDA approval, we will have to develop a sales and marketing force or rely on third parties to perform these functions. To market products directly, we will have to develop a marketing and sales force with technical expertise and supporting distribution capability. Our inability to develop expertise and attract skilled marketing and sales personnel to establish in-house sales and distribution capabilities may limit our ability to gain market acceptance for our products and generate revenues. For example, if we are successful in our Phase III clinical trials with PREOS, and the FDA grants approval for the commercialization of PREOS, we will be unable to introduce the product to market without developing these capabilities internally or establishing a marketing collaboration with a pharmaceutical company with those resources. We have begun to develop our internal sales and marketing force but cannot assure you that we will be successful in our efforts to establish this force. Further, if we establish relationships with one or more large pharmaceutical companies with existing distribution systems and direct sales forces to market any or all of our product candidates, we cannot assure you that we will be able to enter into or maintain agreements with these companies on acceptable terms, if at all.

In addition, we expect to begin to incur significant expenses in developing sales, marketing and distribution capabilities in advance of determining our commercialization strategy with respect to one or more of our product candidates, including determining whether to establish a collaboration with one or more pharmaceutical companies. The determination of our commercialization strategy with respect to a product candidate will depend on a number of factors, including:

• the extent to which we are successful in securing collaborative partners to offset some or all of the funding obligations with respect to product candidates;

• the extent to which our agreement with our collaborators permits us to exercise marketing or promotion rights with respect to the product candidate;

• how our product candidates compare to competitive products with respect to labeling, pricing, therapeutic effect and method of delivery; and

• whether we are able to establish agreements with third party collaborators, including large pharmaceutical companies, with respect to any of our product candidates on terms that are acceptable to us.

A number of these factors are outside of our control and will be difficult to determine. Therefore, we may change commercialization strategies by entering into agreements with our collaborators or third parties after we have incurred significant expenses in developing internal sales, marketing and distribution capabilities. A change of this nature could result in increased expenses or delays in commercialization and therefore could delay revenues and adversely affect our future operating results.

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Because of the uncertainty of pharmaceutical pricing, reimbursement and healthcare reform measures, we may be unable to sell our products profitably.

The availability of reimbursement by governmental and other third-party payors affects the market for any pharmaceutical product. These third-party payors continually attempt to contain or reduce the costs of healthcare. There have been a number of legislative and regulatory proposals to change the healthcare system and further proposals are likely. Under current guidelines, Medicare does not reimburse patients for self-administered drugs. Medicare’s policy may decrease the market for our products that are designed to treat patients with age-related disorders, such as osteoporosis and hyperparathyroidism. Significant uncertainty exists with respect to the reimbursement status of newly approved healthcare products. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. We might not be able to sell our products profitably or recoup the value of our investment in product development if reimbursement is unavailable or limited in scope, particularly for product candidates addressing small patient populations, such as teduglutide for the treatment of short bowel syndrome.

As a result of intense competition and technological change in the pharmaceutical industry, the marketplace may not accept our products, and we may not be able to complete successfully against other companies in our industry and achieve profitability.

Many of our competitors have drug products that have already been approved or are in development, and operate large, well-funded research and development programs in these fields. For example, Forteo, a fragment of the full-length parathyroid hormone for the treatment of osteoporosis, was introduced into the United States market in December 2002 by Lilly as a treatment for patients with osteoporosis who are at high risk of bone fracture. If PREOS is approved by the FDA, it will compete directly with Forteo and other approved therapies, including supplementing dietary calcium and vitamin D, estrogen replacement therapies, calcitonin bisphosphonate and selective estrogen modulators therapies. Many of our competitors have substantially greater financial and management resources, superior intellectual property positions and greater manufacturing, marketing and sales capabilities, areas in which we have limited or no experience. In addition, many of our competitors have significantly greater experience than we do in undertaking preclinical testing and clinical trials of new or improved pharmaceutical products and obtaining required regulatory approvals. Consequently, our competitors may obtain FDA and other regulatory approvals for product candidates sooner and may be more successful in manufacturing and marketing their products than we or our collaborators.

Existing and future products, therapies and technological approaches will compete directly with the products we seek to develop. Current and prospective competing products may provide greater therapeutic benefits for a specific problem, may offer easier delivery or may offer comparable performance at a lower cost. Any product candidate that we develop and that obtains regulatory approval must then compete for market acceptance and market share. Our product candidates may not gain market acceptance among physicians, patients, healthcare payors and the medical community. Further, any products we develop may become obsolete before we recover any expenses we incurred in connection with the development of these products. As a result, we may never achieve profitability.

We may be unable to obtain patents to protect our technologies from other companies with competitive products, and patents of other companies could prevent us from manufacturing, developing or marketing our products.

The patent positions of pharmaceutical and biotechnology firms are uncertain and involve complex legal and factual questions. The U.S. Patent and Trademark Office has not established a consistent policy regarding the breadth of claims that it will allow in biotechnology patents. If it allows broad claims, the number and cost of patent interference proceedings in the U.S. and the risk of infringement litigation may increase. If it allows narrow claims, the risk of infringement may decrease, but the value of our rights under our patents, licenses and patent applications may also decrease. In addition, the scope of the claims in a patent application can be significantly modified during prosecution before the patent is issued. Consequently, we cannot know whether our pending applications will result in the issuance of patents or, if any patents are issued, whether they will provide us with significant proprietary protection or will be circumvented, invalidated, or found to be unenforceable. Until recently, patent applications in the United States were maintained in secrecy until the patents issued, and publication of discoveries in scientific or patent literature often lags behind actual discoveries. Patent applications filed in the United States after November 2000 generally will be published 18 months after the

22

filing date unless the applicant certifies that the invention will not be the subject of a foreign patent application. We cannot assure you that, even if published, we will be aware of all such literature. Accordingly, we cannot be certain that the named inventors of our products and processes were the first to invent that product or process or that we were the first to pursue patent coverage for our inventions.

Our commercial success depends in part on our ability to maintain and enforce our proprietary rights. If third parties engage in activities that infringe our proprietary rights, our management’s focus will be diverted and we may incur significant costs in asserting our rights. We may not be successful in asserting our proprietary rights, which could result in our patents being held invalid or a court holding that the third party is not infringing, either of which would harm our competitive position. In addition, we cannot assure you that others will not design around our patented technology.

Moreover, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office or other analogous proceedings in other parts of the world to determine priority of invention and the validity of patent rights granted or applied for, which could result in substantial cost and delay, even if the eventual outcome is favorable to us. We cannot assure you that our pending patent applications, if issued, would be held valid or enforceable. Additionally, many of our foreign patent applications have been published as part of the patent prosecution process in such countries. Protection of the rights revealed in published patent applications can be complex, costly and uncertain.

In order to protect goodwill associated with our company and product names, we rely on trademark protection for our marks. We have filed to register the “PREOS” trademark with the United States Patent and Trademark Office, which may or may not register this mark. A third party may assert a claim that the PREOS mark is confusingly similar to its mark, and such claims or the failure to timely register the PREOS mark or objections by the FDA could force us to select a new name for PREOS, which could cause us to incur additional expense or delay its introduction to market.

We also rely on trade secrets, know-how and confidentially provisions in our agreements with our collaborators, employees and consultants to protect our intellectual property. However, these and other parties may not comply with the terms of their agreements with us, and we might be unable to adequately enforce our rights against these people or obtain adequate compensation for the damages caused by their unauthorized disclosure or use. Our trade secrets or those of our collaborators may become known or may be independently discovered by others.

Our products and product candidates may infringe the intellectual property rights of others, which could increase our costs and negatively affect our profitability.

Our success also depends on avoiding infringement of the proprietary technologies of others. In particular, there may be certain issued patents and patent applications claiming subject matter which we or our collaborators may be required to license in order to research, develop or commercialize at least some of our product candidates, including PREOS and teduglutide. In addition, third parties may assert infringement or other intellectual property claims against us based on our patents or other intellectual property rights. An adverse outcome in these proceedings could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease or modify our use of the technology. If we are required to license such technology, we cannot assure you that a license under such patents and patent applications will be available on acceptable terms or at all. Further, we may incur substantial costs defending ourselves in lawsuits against charges of patent infringement or other unlawful use of another’s proprietary technology.

We are subject to extensive government regulations that may cause us to cancel or delay the introduction of our products to market.

Our research and development activities and the clinical investigation, manufacture, distribution and marketing of drug products are subject to extensive regulation by governmental authorities in the United States and other countries. Prior to marketing in the United States, a drug must undergo rigorous testing and an extensive regulatory approval process implemented by the FDA under federal law, including the Federal Food, Drug and Cosmetic Act. To receive approval, we or our collaborators must, among other things, demonstrate with substantial evidence from well-controlled clinical trials that the product is both safe and effective for each indication where approval is sought. Depending upon the type, complexity and novelty of the product and the nature of the disease or disorder to be treated, that approval process can take several years and require substantial expenditures. Data obtained from testing are susceptible to varying interpretations that could delay, limit or prevent regulatory approvals of our products. Drug testing is subject to complex FDA rules and regulations, including the requirement to conduct human testing on a large number of test subjects. We, our collaborators or the FDA may suspend human trials at any time if a party believes that the test subjects are exposed to unacceptable health risks. We cannot assure you that any of our product candidates will be safe for human use. Other countries also have extensive requirements regarding clinical trials, market authorization and pricing. These regulatory schemes vary widely from country to country, but, in general, are subject to all of the risks associated with United States approvals.

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If any of our products receive regulatory approval, the approval will be limited to those disease states and conditions for which the product is safe and effective, as demonstrated through clinical trials. In addition, results of pre-clinical studies and clinical trials with respect to our products could subject us to adverse product labeling requirements which could harm the sale of such products. Even if regulatory approval is obtained, later discovery of previously unknown problems may result in restrictions of the product, including withdrawal of the product from the market. Further, governmental approval may subject us to ongoing requirements for post-marketing studies. Even if we obtain governmental approval, a marketed product, its respective manufacturer and its manufacturing facilities are subject to unannounced inspections by the FDA and must comply with the FDA’s current Good Manufacturing Practices, or cGMP, and other regulations. These regulations govern all areas of production, record keeping, personnel and quality control. If a manufacturer fails to comply with any of the manufacturing regulations, it may be subject to, among other things, product seizures, recalls, fines, injunctions, suspensions or revocations of marketing licenses, operating restrictions and criminal prosecution. Other countries also impose similar manufacturing requirements.

If we fail to attract and retain key employees, the development and commercialization of our products may be adversely affected.

We depend heavily on the principal members of our scientific and management staff. If we lose any of these persons, our ability to develop products and become profitable could suffer. The risk of being unable to retain key personnel may be increased by the fact that we have not executed long-term employment contracts with our employees. We do not carry life insurance policies on any of our employees. Our future success will also depend in large part on our ability to attract and retain other highly qualified scientific and management personnel. We face competition for personnel from other companies, academic institutions, government entities and other organizations. We have operations in Salt Lake City, Utah, Parsipanny, New Jersey, Mississauga, Ontario and Toronto, Ontario. We also have executive officers and principal members of our scientific staff at each of these locations. Our future success will depend in part on how well we are able to integrate each of their efforts with the operations of the Company and how successful they are in managing personnel who are working on the same program but are spread out at various geographic locations.

If product liability claims are brought against us or we are unable to obtain or maintain product liability insurance, we may incur substantial liabilities that could reduce our financial resources.

The clinical testing and commercial use of pharmaceutical products involves significant exposure to product liability claims. We have obtained limited product liability insurance coverage for our clinical trial on humans, however, our insurance coverage may be insufficient to protect us against all product liability damages. Further, liability insurance coverage is becoming increasingly expensive and we might not be able to obtain or maintain product liability insurance in the future on acceptable terms or in sufficient amounts to protect us against product liability damages. Regardless of merit or eventual outcome, liability claims may result in decreased demand for a future product, injury to reputation, withdrawal of clinical trial volunteers, loss of revenue, costs of litigation, distraction of management and substantial monetary awards to plaintiffs. Additionally, if we are required to pay a product liability claim, we may not have sufficient financial resources to complete development or commercialization of any of our product candidates and our business and results of operations will be adversely affected.

Our operations involve hazardous materials and we must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our research and development activities involve the controlled use of hazardous materials, radioactive compounds and other potentially dangerous chemicals and biological agents. Although we believe our safety procedures for these materials comply with governmental standards, we cannot entirely eliminate the risk of accidental contamination or injury from these materials. We currently have insurance, in amounts and on terms typical for companies in businesses that are similarly situated, that could cover all or a portion of a damage claim arising from our use of hazardous and other materials. However, if an accident or environmental discharge occurs, and we are held liable for any resulting damages, the associated liability could exceed our insurance coverage and our financial resources.

Risks Related to Our Common Stock and Convertible Notes

Our stock price has been and may continue to be volatile and an investment in our common stock could suffer a decline in value.

You should consider an investment in our common stock as risky and invest only if you can withstand a significant loss and wide fluctuations in the market value of your investment. We receive only limited attention by securities analysts and frequently experience an imbalance between supply and demand for our common stock. The market price of our common stock has been highly volatile and is likely to continue to be volatile. Factors affecting our common stock price include:

• fluctuations in our operating results;

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• announcements of technological innovations or new commercial products by us, our collaborators or our competitors;

• published reports by securities analysts;

• the progress of our and our collaborators’ clinical trials, including our and our collaborators’ ability to produce clinical supplies of our product candidates on a timely basis and in sufficient quantities to meet our clinical trial requirements;

• governmental regulation and changes in medical and pharmaceutical product reimbursement policies;

• developments in patent or other intellectual property rights;

• publicity concerning the discovery and development activities by our licensees;

• public concern as to the safety and efficacy of drugs that we and our competitors develop; and

• general market conditions.

Antitakeover provisions in our Certificate of Incorporation, Bylaws, stockholder rights plan and under Delaware law may discourage or prevent a change of control.

Provisions of our Certificate of Incorporation and Bylaws and Section 203 of the Delaware General Corporation Law could delay or prevent a change of control of the Company. For example, our Board of Directors, without further stockholder approval, may issue preferred stock that could delay or prevent a change of control as well as reduce the voting power of the holders of common stock, even to the extent of losing control to others. In addition, our Board of Directors has adopted a stockholder rights plan, commonly known as a “poison pill,” that may delay or prevent a change of control.

Substantial future sales of our common stock by us or by our existing stockholders could cause our stock price to fall.

Additional equity financings or other share issuances by us could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public market, including the sale of the shares issued to Enzon Pharmaceuticals, Inc. in June 2003 in connection with the termination of our merger agreement with Enzon, and the sale of shares issued in connection with strategic alliances, or the perception that such additional sales could occur, could cause the market price of our common stock to drop.

Our cash flow may not be sufficient to cover interest payments on the notes or to repay the notes at maturity.

Our ability to make interest payments on and to repay at maturity or refinance our 3% Convertible Notes due 2008 will depend on our ability to generate sufficient cash. We have never generated positive annual cash flow from our operating activities, and we may not generate or sustain positive cash flows from operations in the future. Our ability to generate sufficient cash flow will depend on our ability, or the ability of our strategic partners, to successfully develop and obtain regulatory approval for new products and to successfully market these products, as well as the results of our research and development efforts and other factors, including general economic, financial, competitive, legislative and regulatory conditions, many of which are outside of our control.

Conversion of the notes will dilute the ownership interest of existing stockholders, including holders who had previously converted their notes.

The conversion of some or all of the notes will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes may encourage short selling by market participants.

ITEM 2. Properties.

We have ongoing operations in Salt Lake City, Utah; Parsipanny, New Jersey; Mississauga, Ontario; and Toronto, Ontario. In Salt Lake City, we currently lease approximately 62,000 square feet of laboratory, support and administrative space in the Research Park of the University of Utah. In December 2003, we executed a ground lease for land in the Research Park of the University of Utah and have commenced construction of a 90,000 square feet building consisting of laboratory, support, and administrative space. We expect to complete construction by the first quarter of 2005 and move all Salt Lake City operations to that facility. In Parsipanny, we

25

lease approximately 76,500 square feet of administrative space. The Parsipanny lease will expire in September 2007. In Mississauga, we own a building consisting of approximately 90,000 square feet of laboratory, support and administrative space. In Toronto, we lease approximately 4,500 square feet of administrative space. The Toronto lease expires in February 2005.

In January 2004, we signed a binding term sheet with the MaRS Discovery District in downtown Toronto, Ontario, concerning the lease of approximately 52,000 square feet of laboratory, support and administrative space. The MaRS Discovery District is located in downtown Toronto and includes the University of Toronto and over thirty internationally renowned hospitals and research institutes.

ITEM 3. Legal Proceedings.

From time to time, we are involved in litigation arising out of our operations. We maintain liability insurance, including product liability coverage, in amounts our management believes is adequate. We are not currently engaged in any legal proceedings that we expect would materially harm our business or financial condition.

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

No matter was submitted to the stockholders during the fourth quarter of 2003.

Executive Officers of the Registrant.

The following table sets forth certain information concerning our executive officers as of December 31, 2003:

Name	Age	Position
Hunter Jackson, Ph.D.	53	Chief Executive Officer, President and Chairman of the Board
Morgan R. Brown	35	Vice President, Finance and Treasurer
David L. Clark	50	Vice President, Corporate Affairs
G. Thomas Heath	54	Senior Vice President, Sales and Marketing
James U. Jensen, J.D.	59	Vice President, Corporate Development and Legal Affairs, and Secretary
Thomas B. Marriott, Ph.D.	56	Vice President, Development Research
Gerard J. Michel	40	Chief Financial Officer and Vice President, Corporate Development
Alan L. Mueller, Ph.D.	49	Vice President, Drug Discovery
Edward F. Nemeth, Ph.D.	51	Vice President and Chief Scientific Officer
Stephen R. Parrish	47	Vice President, Manufacturing
Alan M. Rauch, M.D.	54	Senior Vice President and Chief Medical Officer

Hunter Jackson, Ph.D. has been Chief Executive Officer and Chairman of our board since founding NPS in 1986. He was appointed to the additional position of President in January 1994. Before founding NPS, he was an Associate Professor in the Department of Anatomy at the University of Utah School of Medicine. Dr. Jackson received a Ph.D. in Psychobiology from Yale University. He received postdoctoral training in the Department of Neurosurgery, University of Virginia Medical School.

Morgan R. Brown has been Vice President, Finance and Treasurer since October 2003. Before being appointed to that position, he served as Corporate Controller and Senior Director of Financial Reporting since June 2000. From 1993 to June 2000, he held various positions with the accounting firm of KPMG LLP, most recently as a Senior Manager. Mr. Brown received an M.B.A. from the University of Utah and a B.S. in accounting from Utah State University.

David L. Clark has been Vice President, Corporate Affairs since October 2003. He served as our Vice President, Operations and Vice President, Investor Relations from December 1999 to October 2003. Before being appointed to these positions, he served as Director of Business Development and Corporate Communications for us from September 1998 to December 1999. He served as Director of Corporate Communications for us from March 1996 to September 1998. From 1988 to 1996 he served as Vice President, Business Development for Agridyne Technologies Inc., a publicly held biotechnology company. Mr. Clark received an M.S. in Plant Genetics from the University of Illinois. He received an M.B.A. from the University of Utah.

G. Thomas Heath, has been Senior Vice President, Sales and Marketing since November 2001. In 1997, Mr. Heath co-founded Echelon Biosciences Inc., where he served as President and continues to serve as a director. From 1976 to 1996, Mr. Heath served in various marketing and sales positions at Pfizer Inc., where he managed the pre-launch planning and successful introductions of a

26

number of new pharmaceutical products. Mr. Heath also served as Vice President, Sales and Marketing at Pfizer Canada, where he managed a force of over 250 salespeople. Mr. Heath received B.A. and M.B.A. degrees from the University of Utah.

James U. Jensen, J.D. has been Vice President, Corporate Development and Legal Affairs, and Secretary since August 1991. He has been Secretary of NPS since 1987, and served as a director from 1987 to 2001. From 1986 to July 1991, he was a partner in the law firm of Woodbury, Jensen, Kesler & Swinton, P.C., or its predecessor firm, concentrating on technology transfer and licensing and corporate finance. From July 1985 until October 1986, he served as Chief Financial Officer of Cericor, a software company. He serves as a director of Wasatch Funds, Inc., a registered investment company, and various private companies. Mr. Jensen received J.D. and M.B.A. degrees from Columbia University.

Thomas B. Marriott, Ph.D. has been Vice President, Development Research since August 1993. From February 1990 to July 1993, he served as Director, Clinical Investigations for McNeil Pharmaceutical, a subsidiary of Johnson & Johnson, with responsibility for developing and implementing clinical trial strategies for a number of products. From 1986 to 1990, Dr. Marriott was Director, Drug Metabolism for McNeil Pharmaceutical with the responsibility for planning, initiating and completing bioanalytical, drug disposition and clinical biopharmaceutics and pharmacokinetics research required for investigational new drug applications and new drug applications. He received a Ph.D. in Chemistry from the University of Oregon.

Gerard J. Michel, M.S., M.B.A. has been Chief Financial Officer since October 2003 and Vice President, Corporate Development since July 2002. From 1995 to July 2002, Mr. Michel served as a Principal of the consulting firm of Booz-Allen & Hamilton. In this consulting capacity, he worked with large pharmaceutical companies, biotech firms, and service firms. From 1988 to 1995 Mr. Michel was with Lederle Labs, serving in Marketing, Sales and Corporate Development roles, both domestically and international. Mr. Michel received an M.S. in Microbiology and an M.B.A., both from the University of Rochester.

Alan L. Mueller, Ph.D. has been Vice President, Drug Discovery since January 2001. Before being appointed to that position, he served us as Director, Discovery Research from September 1999 to January 2001. He joined NPS in February 1989 as a Senior Scientist. Prior to that time, he was a Pharmacologist at Abbott Laboratories. Dr. Mueller received a Ph.D. in Pharmacology from the University of Colorado Health Sciences Center, Denver.

Edward F. Nemeth, Ph.D. has been a Vice President of NPS since January 1994 and was appointed Chief Scientific Officer in July 1997. He joined NPS as Director of Pharmacology in March 1990. From 1986 until joining NPS, Dr. Nemeth was an Assistant Professor in the Department of Physiology and Biophysics at Case Western Reserve University School of Medicine. He received a Ph.D. in Pharmacology from Yale University.

Stephen R. Parrish, M.S. has been Vice President, Manufacturing since September 2002. Prior to joining NPS as an employee, Mr. Parrish worked with NPS for six months as a consultant through ManuPharm Consulting, Mr. Parrish’s own consulting company since October 1998. In that capacity, he provided manufacturing consulting services to the biotechnology and pharmaceutical industries. From March 1995 to September 1998, he served as Head of Operations for Medeva Pharma. Mr. Parrish received a B.S. in Pharmacy and an M.S. in Pharmaceutical Analysis, both from the University of Manchester.

Alan M. Rauch, M.D. has been Senior Vice President, Clinical Research and Medical Affairs and Chief Medical Officer since November 2003. From March 2002 to July 2003, he was the Chief Executive Officer of Galaxy Biomedical Services. From January 1998 to March 2002 he served as Senior Vice President, Clinical Affairs for Miravant Pharmaceuticals, Inc. where he managed their clinical programs. From January 1991 to January 1998 he served as Director, Medical Affairs for GlaxoWellcome, Inc. and various subsidiaries of Glaxo, Inc. Dr. Rauch currently serves as a Director for Medicab, Inc. and on the Advisory Board, Houston Technology Center. Dr. Rauch received an AB in Chemistry and an M.D. from the University of North Carolina, Chapel Hill.

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PART II

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

Since May 26, 1994, our common stock has been quoted on the Nasdaq National Market under the symbol “NPSP.” The following table sets forth, for the periods indicated, the high and low closing sales prices for our common stock, as reported on the Nasdaq National Market.

	High		Low
2002
First Quarter	$	36.41	$	26.87
Second Quarter		34.65		13.95
Third Quarter		25.40		12.21
Fourth Quarter		30.03		21.90
2003
First Quarter	$	28.28	$	15.45
Second Quarter		28.96		15.51
Third Quarter		32.82		22.74
Fourth Quarter		32.64		25.21

As of December 31, 2003, there were approximately 310 holders of record of our common stock.

We have never declared or paid cash dividends on capital stock. We intend to retain any future earnings to finance growth and development and therefore do not anticipate paying cash dividends in the foreseeable future.

We have adopted a policy and implemented procedures allowing directors and officers to effect sales of the Company’s securities under SEC Rule 10b5-1. Under this rule, directors and officers may adopt a prearranged contract, instructions, or written plan arranging for the sale of Company securities on specified conditions. To this effect, prearranged plans have already been implemented and additional such plans may be adopted from time to time.

Equity Compensation Plan Information.

The following table sets forth information regarding outstanding options and shares reserved for future issuance under our equity compensation plans as of December 31, 2003.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	3,998,000	$	19.95	2,881,394
Equity compensation plans not approved by security holders	None		N/A	None
Total	3,998,000	$	19.95	2,881,394

ITEM 6. Selected Financial Data.

The selected consolidated financial data presented below are for each fiscal year in the five-year period ended December 31, 2003, and for the period from October 22, 1986 (inception) through December 31, 2003. This is derived from, and qualified by reference to, NPS’s audited consolidated financial statements and notes thereto. The selected quarterly data presented below are derived from our unaudited consolidated financial statements. NPS is considered a development stage enterprise as described in note 1 to the consolidated financial statements.

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Consolidated Statements of Operations Data:

	Year Ended December 31,															October 22, 1986 (inception) through December 31, 2003
	2003			2002			2001			2000			1999
	(in thousands, except per share amounts)
Revenues from research and license agreements	$	9,919		$	2,154		$	10,410		$	7,596		$	3,445		$	85,593
Operating expenses:
Research and development		118,173			80,872			60,090			27,888			16,935			378,588
General and administrative		20,337			14,777			12,099			12,036			5,983			94,266
Amortization of goodwill and acquired intangibles (1)		1,485			1,322			3,411			3,561			—			9,779
In process research and development acquired		—			—			—			—			17,760			17,760
Merger costs and termination fees		46,114			—			—			—			—			46,114
Total operating expenses		186,109			96,971			75,600			43,485			40,678			546,507
Operating loss		(176,190	)		(94,817	)		(65,190	)		(35,889	)		(37,233	)		(460,914	)
Other income, net		3,265			7,883			15,522			4,277			1,579			41,871
Loss before income tax expense		(172,925	)		(86,934	)		(49,668	)		(31,612	)		(35,654	)		(419,043	)
Income tax expense (benefit)		(2,530	)		(102	)		300			—			—			(1,313	)
Loss before cumulative effect of change in accounting principle		(170,395	)		(86,832	)		(49,968	)		(31,612	)		(35,654	)		(417,730	)
Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method(2)		—			—			—			(500	)		—			(500	)
Net loss	$	(170,395	)	$	(86,832	)	$	(49,968	)	$	(32,112	)	$	(35,654	)	$	(418,230	)
Diluted loss per share:
Loss before cumulative effect of change in accounting principle	$	(4.71	)	$	(2.79	)	$	(1.67	)	$	(1.32	)	$	(2.77	)
Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method (2)		—			—			—			(0.02	)		—
Net loss per share (3)	$	(4.71	)	$	(2.79	)	$	(1.67	)	$	(1.34	)	$	(2.77	)
Diluted weighted average shares outstanding (3)		36,148			31,165			29,912			24,007			12,863
Proforma amounts assuming revenue recognition method is applied retroactively:
Net loss													$	(34,654	)
Diluted net loss per share													$	(2.69	)

⁽¹⁾ The Company adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) as of January 1, 2002. The Company recognized $2.1 million and $2.2 million respectively, for the years ended December 2001 and 2000 of amortization of goodwill and the assembled workforce component of purchased intangibles, which was not recorded in 2003 and 2002 under SFAS No. 142.

⁽²⁾ During the fourth quarter of 2000, the Company adopted Staff Accounting Bulletin No. 101, Revenue Recognition (SAB No. 101). SAB No. 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. The result of the adoption of SAB No. 101 was to reduce recognition of previously reported license fee revenues prior to December 31, 1999 by $500,000 through a cumulative effect of accounting change for the year ended December 31, 2000. These revenues were recognized as income in the year ended December 31, 2000.

⁽³⁾ See note 1 to the consolidated financial statements for information concerning the computation of net loss per share.

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Consolidated Balance Sheets Data:

	Year Ended December 31,
	2003			2002			2001			2000			1999
	(in thousands)
Cash, cash equivalents, and marketable investment securities	$	303,874		$	234,454		$	207,518		$	246,936		$	35,679
Working capital		283,906			228,497			206,314			244,712			32,532
Total assets		327,508			253,468			234,976			269,270			64,966
Long-term portion of capital leases and long-term debt		192,000			—			—			54			1,940
Deficit accumulated during development stage		(418,230	)		(247,835	)		(161,003	)		(111,035	)		(78,923	)
Stockholders’ equity		112,785			242,362			221,935			265,340			56,079

Quarterly Financial Data:

	Quarter Ended
	December 31			September 30			June 30			March 31
	(in thousands, except per share amounts)
2003
Revenue from research and license agreements	$	2,008		$	7,700		$	73		$	138
Operating loss		(49,098	)		(29,168	)		(67,919	)		(30,005	)
Net loss		(48,487	)		(28,943	)		(64,875	)		(28,090	)
Basic and diluted loss per common and common share equivalent (1)	$	(1.31	)	$	(0.79	)	$	(1.82	)	$	(0.80	)
	December 31			September 30			June 30			March 31
	(in thousands, except per share amounts)
2002
Revenue from research and license agreements	$	133		$	140		$	1,094		$	787
Operating loss		(27,265	)		(20,274	)		(23,054	)		(24,224	)
Net loss		(25,399	)		(18,284	)		(21,145	)		(22,004	)
Basic and diluted loss per common and common share equivalent (1)	$	(0.76	)	$	(0.60	)	$	(0.70	)	$	(0.73	)

⁽¹⁾ Earnings per share are computed independently for each of the quarters presented and therefore may not sum to the total for the year.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the documents incorporated by reference therein contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent our management’s judgment regarding future events. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “plan,” “expect,” “anticipate,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other words of similar import, although some forward-looking statements are expressed differently. All statements other than statements of historical fact included in this Annual Report on Form 10-K and the documents incorporated by reference therein regarding our financial position, business strategy and plans or objectives for future operations are forward-looking statements. Without limiting the broader description of forward-looking statements above, we specifically note that statements regarding potential drug candidates, their potential therapeutic effect, the possibility of obtaining regulatory approval, our ability or the ability of our collaborators to manufacture and sell any products, market acceptance or our ability to earn a profit from sales or licenses of any drug candidate or discover new drugs in the future are all forward-looking in nature. We cannot guarantee the accuracy of the forward-looking statements, and you should be aware that results and events could differ materially and adversely from those contained in the forward-looking statements due to a number of factors, including:

• the risks inherent in our research and development activities, including the successful continuation of our strategic collaborations, our and our collaborators’ ability to successfully complete clinical trials, commercialize products and receive required regulatory approvals, and the length, time and cost of obtaining such regulatory approvals;

• competitive factors;

• our ability to maintain the level of our expenses consistent with our internal budgets and forecasts;

• the ability of our contract manufacturers to successfully produce adequate supplies of our product candidates to meet our clinical trial and commercial launch requirements;

• changes in our relationships with our collaborators;

• variability of our royalty, license and other revenues;

• our ability to enter into and maintain agreements with current and future collaborators on commercially reasonable terms;

• uncertainty regarding our patents and patent rights;

• compliance with current or prospective governmental regulation;

• technological change; and

• general economic and market conditions.

You should also consider carefully the statements set forth in the section entitled “Risk Factors” of this Annual Report on Form 10-K, which addresses these and additional factors that could cause results or events to differ from those set forth in the forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. We have no plans to update these forward-looking statements.

Overview

Our objective is to build a profitable biopharmaceutical company by discovering, developing and commercializing small molecule drugs and recombinant proteins. Our current product candidates are primarily for the treatment of bone and mineral disorders, gastrointestinal disorders and central nervous system disorders.

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Our product pipeline consists of product candidates in various stages of clinical development and preclinical development. One of our product candidates, cinacalcet HCl, is the subject of a new drug application, or NDA, that has been filed with the United Stated Food and Drug Administration (FDA) by our corporate licensee, Amgen Inc., and is the subject of a similar application filed with the European Agency for the Evaluation of Medicinal Products (EMEA) in Europe. We have completed a pivotal Phase III clinical trial with another product candidate, PREOS. The data from this study are being collected and finalized and we have commenced preparation of an NDA to be filed with the FDA. Additional product candidates, teduglutide, formerly referred to as ALX-0600, and isovaleramide, formerly referred to as NPS 1776, are in Phase II clinical trials. PREOS, teduglutide, and isovaleramide are proprietary to and are being developed by us. PREOS is our brand name for our recombinant, full-length parathyroid hormone that we are developing for the treatment of osteoporosis. Teduglutide is our analog of glucagon-like peptide 2 that we are developing for the treatment of gastrointestinal disorders such as short bowel syndrome and Crohn’s disease. Isovaleramide is a small organic molecule that we are developing for the treatment of migraine. Cinacalcet HCl, our orally active, small molecule compound for the treatment of hyperparathyroidism, is being developed by our licensees, Amgen Inc. and Kirin Brewery Company, Ltd. Additional Phase I clinical development programs include: calcilytic compounds for the treatment of osteoporosis; and delucemine, formerly referred to as NPS 1506, for acute treatment of major depressive disorder. The calcilytic compounds are licensed to and are being developed by GlaxoSmithKline. We have entered into collaborative research, development and license agreements with AstraZeneca AB, GlaxoSmithKline and Janssen Pharmaceutica N.V., a subsidiary of Johnson & Johnson, with respect to certain of our product development programs.

We have incurred cumulative losses from inception through December 31, 2003 of approximately $418.2 million, net of cumulative revenues from research and license agreements of approximately $85.6 million. We expect to continue to incur significant operating losses over at least the next several years as we continue our current and anticipated development projects, particularly our clinical trial programs for PREOS, teduglutide, isovaleramide and delucemine, as we maintain our contractual commitment to fund research activities in our metabotropic glutamate receptor program, and as we develop marketing, sales and manufacturing capabilities.

Major Research and Development Projects

Our major research and development projects involve PREOS and teduglutide. We also have other research and development efforts in central nervous system disorders.

PREOS. PREOS is our brand name for recombinant, full length, human parathyroid hormone that we are developing for the treatment of osteoporosis. We have completed dosing of patients with PREOS in a pivotal Phase III clinical trial, referred to as the TOP Study. We designed this trial to demonstrate PREOS’ ability to reduce fractures and build new bone in women with osteoporosis. We are also conducting other clinical trials with PREOS to support the filing of an NDA with the FDA. We anticipate filing an NDA for PREOS for the treatment of osteoporosis at the end of the third quarter of 2004. During the years ended December 31, 2003, 2002 and 2001 we incurred $80.6 million, $54.7 million, and $43.7 million, respectively, in the research and development of this product candidate, including costs associated with the manufacture of clinical and commercial supplies of PREOS. We have incurred costs of approximately $192.5 million since we acquired this product candidate with our acquisition of Allelix Biopharmaceuticals Inc. (Allelix) in December 1999.

Our development administration overhead costs are included in total research and development expense for each period, but are not allocated among our various projects.

The goal of our PREOS development program is to obtain marketing approval from the FDA, and analogous international agencies; and we will consider the project substantially complete if we obtain those approvals even though subsequent to that time we might incur additional expenses in conducting additional clinical trials and follow-up studies. To obtain the first of such approvals, we plan to file an NDA with the FDA at the conclusion of our Phase III trials, assuming that the clinical trials’ results support a filing. We have completed dosing of all patients that participated in our pivotal, 18-month Phase III trial for PREOS. We expect to report results of this study by the end of the first quarter of 2004. We are also conducting other clinical trials with PREOS to support an eventual NDA. Assuming successful completion of the Phase III trials, we anticipate filing an NDA for the treatment of osteoporosis at the end of the third quarter of 2004. Because of the ongoing work with respect to the Phase III trials, the preparation and filing of the NDA, the FDA review process, the initiation of commercial manufacturing activities, the preparations for sales and marketing, and the risks associated with the clinical trial approval process, including the risk that we may have to repeat, revise or expand the scope of trials or conduct additional clinical trials not presently planned to secure marketing approvals and the additional risks identified herein, we are unable to estimate the costs to completion or the completion date for the PREOS program. Material cash inflows relating to our PREOS development program will not commence until after marketing approvals are

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obtained, and then only if PREOS finds acceptance in the marketplace. To date, we have not received any revenues from product sales of PREOS. The risks and uncertainties associated with completing the development of PREOS on schedule, or at all, include the following:

• PREOS may not be shown to be safe and efficacious in the Phase III trials;

• We may be unable to obtain regulatory approval of the drug or be unable to obtain such approval on a timely basis;

• Our ability to secure adequate clinical and commercial supplies of PREOS in order to complete the Phase III clinical trials and initiate commercial launch upon approval;

• Our ability to prepare and file an NDA with the FDA; and

• We may not have adequate funds to complete the development of PREOS.

A failure to obtain marketing approval for PREOS, secure adequate clinical and commercial supplies of PREOS, or to timely complete development and obtain regulatory approval would likely have the following results on our operations, financial position and liquidity:

• We would not earn any sales revenue from PREOS, which would increase the likelihood that we would need to obtain additional financing for our other development efforts; and

• Our reputation among investors might be harmed, which might make it more difficult for us to obtain equity capital on attractive terms or at all.

Because of the many risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows from this program will commence, if ever.

Teduglutide. Teduglutide is an analog of glucagon-like peptide 2, a naturally occurring hormone that regulates proliferation of the cells lining the small intestine. We are independently developing teduglutide for the treatment of gastrointestinal disorders such as short bowel syndrome and Crohn’s disease. We have completed a Phase II study in adults with short bowel syndrome. The drug appeared to be safe and well tolerated in this study. We are preparing to initiate a pivotal study for adults with short bowel syndrome. We expect to commence this study in early 2004. A proof-of-concept clinical study to evaluate the possible utility of teduglutide in the treatment of patients with Crohn’s disease was commenced in October 2003.

Our development administration overhead costs are included in total research and development expense for each period, but are not allocated among our various projects.

During the years ended December 31, 2003, 2002 and 2001, we incurred $18.1 million, $10.2 million and $3.6 million, respectively, in the research and development of this product candidate, including costs associated with the manufacture of clinical and commercial supplies of teduglutide. We have incurred costs of approximately $36.1 million since we acquired this product candidate with our acquisition of Allelix in December 1999.

The goal of our teduglutide development program is to obtain marketing approval from the FDA, and analogous international agencies; and we will consider the project substantially complete if we obtain those approvals even though subsequent to that time we might incur additional expenses in conducting additional clinical trials and follow-up studies. Before we can obtain such marketing approvals we will need to complete pivotal clinical trials with satisfactory results and submit a NDA to the FDA. Because of the ongoing work with respect to the pivotal trial in adults with short bowel syndrome, the early stage of the clinical trials in Crohn’s disease, and the risks associated with the clinical trial process, including the risk that we may repeat, revise or expand the scope of future trials or conduct additional clinical trials not presently planned to secure marketing approvals and the additional risks identified herein, we are unable to estimate the costs to completion or the completion date for the teduglutide program. Because of the many risks and uncertainties relating to the completion of clinicals trials, receipt of marketing approval from the applicable regulatory agency and acceptance in the marketplace, the availability of sufficient funds to complete development of the product, we cannot predict when material cash inflows from our teduglutide program will commence, if ever. To date, we have not received any revenues from

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product sales of teduglutide. The risks and uncertainties associated with completing the development of teduglutide on schedule, or at all, include the following:

• Teduglutide may not be shown to be safe and efficacious in the pivotal clinical trials;

• We may be unable to obtain regulatory approval of the drug or be unable to obtain such approval on a timely basis;

• Our ability to continue to be able to secure adequate clinical and commercial supplies of teduglutide in order to complete the pivotal clinical trials and initiate commercial launch upon approval; and

• We may not have adequate funds to complete the development of teduglutide.

A failure to obtain marketing approval for teduglutide or to timely complete development and obtain regulatory approval would likely have the following results on our operations, financial position and liquidity:

• We would not earn any sales revenue from teduglutide, which would increase the likelihood that we would need to obtain additional financing for our other development efforts; and

• Our reputation among investors might be harmed, which might make it more difficult for us to obtain equity capital on attractive terms or at all.

Central Nervous System Disorders

Most of the remaining research and development expenses for the three years ended December 31, 2003, 2002 and 2001 were generated by various early clinical stage programs, pre-clinical studies and drug discovery programs, including our clinical development efforts with isovaleramide and delucemine and our collaboration with AstraZeneca in metabotropic glutamate receptors (mGluRs) described below.

Isovaleramide. Isovaleramide is a proprietary small organic molecule compound we formerly referred to as NPS 1776. We are independently developing this compound for the acute treatment of migraine. We have initiated a Phase IIa clinical trial with isovaleramide to evaluate the compound’s potential as an acute therapy for migraine headaches. The double-blind, placebo-controlled trial is designed to assess the effectiveness of a single oral administration of a low dose or a high dose of isovaleramide in the relief of migraine pain and associated systems, such as nausea and sensitivity to light or sound. Our preclinical studies show that isovaleramide is effective in a number of animal models of epilepsy and spasticity. We have completed several Phase I clinical trials with isovaleramide to evaluate its safety and tolerability and its ability to be delivered in a controlled release formulation. Our analysis of the data indicates that the drug was safe and well tolerated. Initial formulation studies demonstrated that the compound is amenable to multiple controlled release formulation technologies. We are presently working to identify a controlled release formulation to take into further clinical trials for the treatment of epilepsy.

Our development, administration, overhead costs are included in total research and development expenses for each period, but are not allocated among our various projects.

During the years ended December 31, 2003, 2002 and 2001, we incurred $3.3 million, $145,000 and $324,000, respectively in research and development of this product candidate, including costs associated with the manufacture of clinical supplies of isovaleramide.

The goal of our isovaleramide development program is to obtain marketing approval from the FDA, and analogous international agencies; and we will consider the project substantially complete if we obtain those approvals even though subsequent to that time we might incur additional expenses in conducting additional clinical trials and follow-up studies. Before we can obtain such marketing approvals we will need to complete pivotal clinical trials with satisfactory results and submit a NDA to the FDA. Because of the early stage of the clinical trials in the acute treatment of migraine, and the risks associated with the clinical trial process, including the risk that we may repeat, revise or expand the scope of future trials or conduct additional clinical trials not presently planned to secure marketing approvals and the additional risks identified herein, we are unable to estimate the costs to completion or the completion date for the teduglutide program. Because of the many risks and uncertainties relating to the completion of clinicals trials, receipt of marketing approval from the applicable regulatory agency and acceptance in the marketplace, the availability of sufficient funds to complete development of the product, we cannot predict when material cash inflows from our isovaleramide program will commence, if ever. To date, we

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have not received any revenues from product sales of isovaleramide. The risks and uncertainties associated with completing the development of isovaleramide on schedule, or at all, include the following:

• Isovaleramide may not be shown to be safe and efficacious in the pivotal clinical trials;

• We may be unable to obtain regulatory approval of the drug or be unable to obtain such approval on a timely basis;

• Our ability to continue to be able to secure adequate clinical and commercial supplies of isovaleramide in order to complete the pivotal clinical trials and initiate commercial launch upon approval; and

• We may not have adequate funds to complete the development of isovaleramide.

A failure to obtain marketing approval for teduglutide or to timely complete development and obtain regulatory approval would likely have the following results on our operations, financial position and liquidity:

• We would not earn any sales revenue from isovaleramide, which would increase the likelihood that we would need to obtain additional financing for our other development efforts; and

• Our reputation among investors might be harmed, which might make it more difficult for us to obtain equity capital on attractive terms or at all.

Metabotropic Glutamate Receptor Program. Since 1996, we have been working to find compounds that act on targets in the central nervous system called metabotropic glutamate receptors, or mGluRs. We have discovered a number of compounds that activate or inhibit mGluRs and that are highly selective for specific subtypes of mGluRs. Our animal studies with a number of these compounds have demonstrated their potential as drug candidates for the treatment of central nervous system disorders such as psychiatric and neurologic disorders.

In March 2001, we entered into an agreement with AstraZeneca under which we collaborate exclusively in an extensive program around a number of mGluR subtypes. We granted AstraZeneca exclusive rights to commercialize mGluR subtype-selective compounds. Under our agreement, we are required to co-direct the research and pay for an equal share of the preclinical research costs, including capital and a minimum number of personnel, through March 2006 unless earlier terminated by AstraZeneca or us upon six months advance written notice. If certain milestones are met, AstraZeneca is required to pay us up to $30.0 million. AstraZeneca is also required to pay us royalties on sales of products that include those compounds. We have the right to co-promote any resulting product in the United States and Canada and to receive co-promotion revenue, if any. Should we elect to co-promote products, in some circumstances we will be required to share in the development and regulatory costs associated with those products, and we may not receive some late-stage milestone payments.

During the three years ended December 31, 2003, 2002 and 2001, we incurred $3.9 million, $2.2 million and $1.3 million, respectively, in research and development expenses under our collaboration with AstraZeneca.

Material cash inflows in the form of royalties relating to this collaboration will not commence until after marketing approvals are obtained, and then only if the product finds acceptance in the marketplace. No product candidates have yet entered clinical trials. In order to obtain marketing approval, we will need to complete Phase I, II and III clinical trials with satisfactory results and submit a NDA to the FDA. Because of this, and the substantial risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows from our collaboration with AstraZeneca will commence, if ever.

Delucemine for Major Depressive Disorder. Delucemine, formerly referred to as NPS 1506, is a novel compound for which we originally pursued development for the treatment of stroke. This compound targets NMDA receptor-operated calcium channels that are activated by the neurotransmitter glutamate. The compound also has appreciable activity as a serotonin reuptake inhibitor. Published research has suggested that glutamate may play a role in the development of depression. We believe delucemine may produce a rapid antidepressant effect in patients suffering from major depressive order. Delucemine does not appear to exhibit the side effects that have plagued other NMDA receptor antagonists. Delucemine, at neuroprotective or antidepressant doses in preclinical animal models, caused no PCP-like behavioral effects, no learning or memory impairment, no neuronal vacuolization, and no significant sedation or cardiovascular side effects. We expect to commence a clinical study for delucemine for the treatment of acute and urgent symptoms of major depressive disorders in the second half of 2004.

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During the three years ended December 31, 2003, 2002 and 2001, we incurred $1.9 million, $135,000 and $133,000, respectively, in research and development of this product candidate.

Other Programs for Central Nervous System Disorders. We collaborated with Janssen on glycine reuptake inhibitors to identify prospective drug candidates for schizophrenia and dementia. Janssen has now assumed full responsibility for the development of product candidates identified under the collaboration. We are not expending any significant resources in the program. In November 2001 we received a milestone payment from Janssen as a result of the selection of a preclinical compound for further development as a potential treatment for schizophrenia. We will receive additional milestone payments of up to $20.5 million from Janssen, if certain milestones are met, and royalties on sales of any drugs developed or sold by Janssen under this collaboration agreement.

The goal of these central nervous system programs is to discover, synthesize and obtain marketing approval for product candidates. Material cash inflows will not commence until after marketing approvals are obtained, and then only if the product finds acceptance in the marketplace. Currently all compounds are in pre-clinical stages or early clinical stages. In order to obtain marketing approval, we will need to initiate and complete Phase I, II and III clinical trials with satisfactory results and submit a NDA to the FDA. Because of this, and the many risks and uncertainties relating to the completion of clinical trials, receipt of marketing approvals and acceptance in the marketplace, we cannot predict when material cash inflows from these projects will commence, if ever.

Results of Operations

Revenues. Substantially all our revenues have come from license fees, research and development support or milestone payments from our licensees and collaborators. These revenues fluctuate from year to year. Our revenues were $9.9 million, $2.2 million, and $10.4 million in 2003, 2002 and 2001, respectively. The increase in revenues from 2002 to 2003 is primarily the result of a $6.0 million milestone payment we received from Amgen Inc. for the submission of a new drug application to the United States Food and Drug Administration (FDA) for cinacalcet HCl in September 2003 and a $2.0 million milestone payment we received from GlaxoSmithKline for the initiation of a clinical study with a new calcilytic compound. Additionally, we recognized $1.5 million in revenue during 2003 as a result of our settled arbitration with Forest Laboratories, Inc. relating to a milestone owed to us. The decrease from 2001 to 2002 is primarily due to the recognition of milestone payments from our licensees Amgen, Kirin, Forest, and Janssen in 2001 that did not recur in 2002. We recognized revenue from our agreements as follows:

• Under our agreement with GlaxoSmithKline, we recognized $2.2 million in 2003, $438,000 in 2002 and $750,000 in 2001;

• Under our agreement with Kirin, we recognized no revenue in each of 2003 and 2002 and $3.0 million in 2001;

• Under our agreement with Amgen, we recognized $6.0 million in 2003, no revenue in 2002 and $3.0 million in 2001;

• Under our agreement with Janssen, we recognized no revenue in each of 2003 and 2002 and $1.0 million in 2001;

• Under our terminated agreement with Forest, we recognized $1.5 million in 2003, no revenue in 2002 and $1.0 million in 2001; and

• Under our recently terminated research funding agreement with the Government of Canada, we recognized no revenue in 2003, $1.8 million in 2002 and $1.3 million in 2001.

See “Liquidity and Capital Resources” below for further discussion of payments that we may earn in the future under these agreements.

Research and Development. Our research and development expenses arise primarily from compensation and other related costs of our personnel who are dedicated to research and development activities and from the fees paid and costs reimbursed to outside professionals to conduct research, clinical studies and trials, and to manufacture drug compounds and related supplies prior to FDA approval. Our research and development expenses increased to

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$118.2 million in 2003 from $80.9 million in 2002 and $60.1 million in 2001. Research and development expenses increased from 2002 to 2003 principally due to a $16.2 million increase in the costs of advancing the development of our PREOS program, including personnel related costs, a $5.3 million increase in the costs of advancing the development of our teduglutide program, a $6.3 million increase in costs associated with the manufacture of clinical and commercial supplies of PREOS, and a $6.6 million increase in the costs related to advancing our central nervous system programs. Research and development expenses increased from 2001 to 2002 principally due to an $8.9 million increase in the costs of advancing the development of our PREOS program, a $4.1 million increase in the costs of advancing the development of teduglutide, and an $8.7 million increase in costs associated with the manufacture of clinical and commercial supplies of PREOS and teduglutide.

General and Administrative. Our general and administrative expenses consist primarily of the costs of our management and administrative staff, business insurance, taxes, professional fees and market research and promotion activities for our product candidates. Our general and administrative expenses increased to $20.3 million in 2003 from $14.8 million in 2002 and $12.1 million in 2001. The increase in general and administrative expenses from 2002 to 2003 is due primarily to a $3.0 million increase in costs related to marketing activities associated with PREOS and teduglutide and the hiring of additional marketing personnel, a $1.5 million increase in administrative costs, including hiring additional administrative personnel with related benefits and costs, and $1.0 million non-cash compensation charge related to the intrinsic value of modified stock options upon the retirement of certain individuals. The increase in general and administrative expenses from 2001 to 2002 was due primarily to a $2.8 million increase in costs associated with increased marketing activities for PREOS and the hiring of additional marketing personnel.

Amortization of Goodwill and Purchased Intangibles. Goodwill and purchased intangibles originated with our December 1999 acquisition of Allelix Biopharmaceuticals, Inc. (Allelix). The remaining intangible assets, net of accumulated amortization, at December 31, 2003 totaled approximately $10.0 million. Amortization of goodwill and acquired intangibles decreased from $3.4 million in 2001 to $1.3 million in 2002 and $1.5 million in 2003. The decrease in 2003 and 2002 is the result of our adoption of the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. SFAS No. 142 eliminated the amortization of goodwill. During 2001 we recorded amortization expense of $2.1 million, or $0.07, per basic and diluted share, that would not have been recorded under SFAS No. 142.

Merger Costs and Termination Fees. Merger costs and termination fees were $46.1 million for the year ended December 31, 2003 as a result of the termination of our merger with Enzon Pharmaceuticals, Inc. (Enzon) and the termination of our agreement with the Government of Canada pursuant to the Technology Partnerships Canada program (TPC).

On February 19, 2003 we entered into an Agreement and Plan of Reorganization (Merger Agreement) with Enzon, which set forth the terms and conditions of the proposed merger of NPS and Enzon. On June 4, 2003, we announced that NPS and Enzon had mutually agreed to terminate the Merger Agreement and other ancillary documents entered into in connection with the Merger Agreement. As part of the agreements to terminate the merger, we paid Enzon a termination fee in the form of a private placement of 1.5 million shares of our common stock valued at $35.6 million based upon the $23.747 per share closing price of our common stock on the Nasdaq National Market on June 4, 2003. A Shelf Registration Statement on Form S-3, providing for the resale of these shares by Enzon was filed with the Securities and Exchange Commission on July 2, 2003. We also incurred direct costs relating to the proposed merger of approximately $4.3 million.

In December 2003, we reached an agreement to mutually terminate our contract with the Government of Canada under its TPC program. As a result, we concluded that it was probable that we would have to repay amounts previously paid by TPC under this agreement and to write off receivables due from TPC. In exchange for mutual releases, we paid $4.3 million to the Government of Canada. Additionally, we released TPC from all outstanding reimbursement obligations, resulting in the write-off of $1.9 million in accounts receivable. We are relieved of any further or continuing obligations related to the development or commercialization of teduglutide. We are continuing our clinical work with this compound for the treatment of various gastrointestinal disorders.

In-Process Research and Development Acquired. We recorded an expense of $17.8 million in 1999 for in-process research and development that we acquired as part of our purchase of Allelix. The acquired in-process research and development consisted of five drug development programs, of which PREOS, for osteoporosis, and teduglutide, for gastrointestinal disorders, accounted for 83 percent of the total value.

Since the date of the acquisition, we revised our plans for the next series of clinical trials for PREOS and teduglutide. We have completed dosing of all patients that participated in our pivotal, 18-month Phase III trial for PREOS. We have also completed a pilot Phase II clinical trial with teduglutide in adults with short bowel syndrome

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and have initiated a Phase II proof-of-concept clinical study in patients for the treatment of Crohn’s disease. Since the date of acquisition and through December 31, 2003, we have incurred total costs of approximately $192.5 million for PREOS and $36.1 million for teduglutide. Total costs include all costs associated with the programs including all clinical development costs, manufacturing costs, outside legal and patent costs, personnel costs, and marketing related costs. Total costs and time-to-completion for each of these product candidates will depend on the costs we incur to conduct current clinical trials and to perform any additional work we find necessary to obtain FDA approval.

We believe the assumptions we used in the valuation of the in-process research and development we acquired from Allelix were reasonable at the time of the acquisition. However, we have modified our development plans as new data have become available regarding each product candidate. Accordingly, actual results may vary from the projected results in the valuation.

Total Other Income, Net. Our total other income, net, decreased from $7.9 million in 2002 to $3.3 million in 2003. The decrease from 2002 to 2003 was primarily the result of a recording interest expense of $3.7 million in 2003 on our $192.0 million of outstanding 3% convertible notes due 2008. Additionally, interest income decreased $918,000, primarily the result of lower interest rates during 2003 as compared to 2002.

Our total other income, net, decreased from $15.5 million in 2001 to $7.9 million in 2002. The decrease from 2001 to 2002 is mainly the result of decreased interest income of $5.1 million and decreased gain on sale of marketable investment securities of $1.0 million, both the result of lower interest rates and lower average cash, cash equivalents, and marketable investment security. Balances of cash, cash equivalent and marketable investment securities during the fiscal year ended December 31, 2002 decreased as a result of the need to fund current operations; however, we were able to increase our cash, cash equivalent and marketable investment securities in the fourth quarter of 2002 due to proceeds we received from a public offering of 4.6 million shares of our common stock, which was completed in October 2002. Additionally during 2001, we recognized income of $1.7 million from equity method investments and recognized only $200,000 from equity method investments in 2002.

Income Taxes

Our income tax benefit was $2.5 million in 2003 and $102,000 in 2002 as compared to expense of $300,000 in 2001. We recorded an income tax benefit of $2.4 million during 2003 for refundable income tax credits relating to research and development activities in the Canadian province of Quebec. The amount recorded in 2003 represents our estimate of amounts we believe are probable of being received and retained by us. Prior to 2003, we were not able to estimate or conclude that it was probable that we would receive and retain amounts related to this credit.

As of December 31, 2003, we had a United States federal income tax net operating loss carryforward of approximately $157.7 million and a United States federal income tax research credit carryforward of approximately $5.7 million. We also had a Canadian federal and provincial income tax net operating loss carryforward of approximately $171.6 million and $191.4 million, respectively, a Canadian research pool carryforward of approximately $193.9 million and a Canadian investment tax credit carryforward of approximately $29.5 million. Our ability to utilize the United States operating loss and credit carryforwards against future taxable income will be subject to annual limitations in future periods pursuant to the “change in ownership rules” under Section 382 of the Internal Revenue Code of 1986.

Liquidity and Capital Resources

We require cash to fund our operating expenses, to make capital expenditures, acquisitions and investments, and to pay debt service. We have financed operations since inception primarily through payments received under collaborative research and license agreements and the private and public issuance and sale of equity securities, and the issuance and sale of convertible debt. As of December 31, 2003, we had recognized $85.6 million of cumulative revenues from payments for research support, license fees and milestone payments, $437.6 million from the sale of equity securities for cash and $185.9 million from the sale of convertible debt for cash. Our principal sources of liquidity are cash, cash equivalents, and marketable investment securities, which totaled $303.9 million at December 31, 2003. The primary objectives for our marketable investment security portfolio are liquidity and safety of principal. Investments are intended to achieve the highest rate of return to us, consistent with these two objectives. Our investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.

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Our cash, cash equivalents, and marketable investment securities totaled $303.9 million as of December 31, 2003, as compared to $234.5 million as of December 31, 2002, and $207.5 million as of December 31, 2001. The increase from 2001 and 2002 to 2003 in total cash, cash equivalents, and marketable investment securities was primarily the result of our sale of $192.0 million of our 3.0% convertible notes due 2008, which was completed in July 2003. We received net proceeds of $185.9 million from this private placement after deducting debt issuance costs. The notes bear interest at an annual rate of 3.0 percent. Interest is payable on June 15 and December 15 of each year beginning December 15, 2003. Accrued interest on the notes was approximately $256,000 as of December 31, 2003. The holders may convert all or a portion of the notes into common stock at any time on or before June 15, 2008. The notes are convertible into our common stock at a conversion rate equal to approximately $36.59 per share, subject to adjustment in certain events. The notes are unsecured senior debt obligations and rank equally in right of payment with all existing and future unsecured senior indebtedness. On or after June 20, 2006, we may redeem any or all of the notes at a redemption price of 100 percent of their principal amount, plus accrued and unpaid interest to the day preceding the redemption date. The notes will mature on June 15, 2008 unless earlier converted, redeemed at our option or redeemed at the option of the noteholder upon a fundamental change, as described in the note indenture. Neither we nor any of our subsidiaries are subject to any financial covenants under the indenture. In addition, neither we nor any of our subsidiaries are restricted under the indenture from paying dividends, incurring debt, or issuing or repurchasing our securities.

Net cash used in operating activities was $117.5 million in 2003, $79.3 million in 2002 and $44.5 million in 2001. Net cash used in operating activities for the year ended December 31, 2003 of $117.5 million resulted from a net loss of $170.4 million, realized gains and non-cash expense of $43.0 million, a decrease in operating assets of $845,000 and an increase in operating liabilities of $9.1 million. Net cash used in operating activities for the year ended December 31, 2002 of $79.3 million resulted from a net loss of $86.8 million, realized gains/losses and non-cash expense/income of $3.2 million, a decrease in operating assets of $6.5 million and a decrease in operating liabilities of $2.1 million. Net cash used in operating activities for the year ended December 31, 2001 of $44.5 million resulted from a net loss of $50.0 million, realized gains and non-cash expense of $5.7 million, an increase in operating assets of $9.8 million and an increase in operating liabilities of $9.6 million. Net cash used in investing activities was $105.0 million in 2003 and $50.1 million in 2001 compared to cash provided by investing activities of $30.3 million in 2002. Net cash used in investing activities for the year ended December 31, 2003 was primarily the result of investing the net proceeds from our convertible debt offering. Net cash provided by investing activities for the year ended December 31, 2002 was primarily the result of net proceeds from the sale of marketable investment securities to fund operations. Net cash used in investing activities for the year ended December 31, 2001 was primarily the result of investing the net proceeds from our public stock offering in November 2000. Net cash provided by financing activities was $189.2 million in 2003, $105.5 million in 2002, and $2.9 million in 2001. Net cash provided by financing activities in 2003 is primarily the result of cash proceeds from the sale of convertible debentures totaling $185.9 million, net, in September 2003. Net cash provided by financing activities in 2002 is primarily the result of cash proceeds from the sale of common stock from our public offering totaling $102.9 million, net, in October 2002.

We could receive future milestone payments of up to $84.5 million in the aggregate if each of our current licensees accomplishes the specified research and/or development milestones provided in the respective agreements. In addition, all of the agreements require the licensees to make royalty payments to us if they sell products covered by the terms of our license agreements. However, we do not control the subject matter, timing or resources applied by our licensees to their development programs. Thus, potential receipt of milestone and royalty payments from these licensees is largely beyond our control. Some of the late-stage development milestone payments from AstraZeneca will not be due if we elect a co-promotion option under which we may commercialize products. Further, each of these agreements may be terminated before its scheduled expiration date by the respective licensee either for any reason or under certain conditions.

We have entered into certain research and license agreements that require us to make research support payments to academic or research institutions when the research is performed. Additional payments may be required upon the accomplishment of research milestones by the institutions or as license fees or royalties to maintain the licenses. As of December 31, 2003, we have a total commitment of up to $3.0 million for future research support and milestone payments. Further, depending on the commercial success of certain of our products, we may be required to pay license fees or royalties. For example, we are required to make royalty payments on teduglutide net sales. We expect to enter into additional sponsored research and license agreements in the future.

Under our agreement with AstraZeneca, we are required to co-direct the research and pay for an equal share of the preclinical research costs, including capital and a minimum number of personnel through March 2006 unless earlier terminated by AstraZeneca or us upon six months advance written notice. Additionally, we have

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entered into long-term agreements with certain manufacturers, contract research organizations, and suppliers that require us to make contractual payment to these organizations. As of December 31, 2003, we have outstanding commitments under these agreements of approximately $154.6 million. In February 2004, we initiated discussions with certain contract research organizations to pursue mutually acceptable adjustments to the terms of the respective agreements. As these negotiations are still ongoing, the ultimate outcome of these negotiations is uncertain. However, any adjustments which are agreed to will impact the amount of commitments to be paid in the future. We expect to enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the future, which may require up-front payments and long-term commitments of cash.

The following represents the contractual obligations of the Company as of December 31, 2003 (in millions):

Contractual Obligations	Total		Less than 1 year		2-3 years		4-5 years		More than 5 years
Operating Leases	$	12.9	$	1.8	$	1.5	$	0.7	$	8.9
Purchase Commitments	$	156.4	$	55.1	$	72.3	$	29.0	$	—
Convertible Notes Payable	$	192.0	$	—	$	—	$	192.0	$	—

In December 2003, we executed a ground lease for land in the Research Park of the University of Utah in Salt Lake City, Utah and have commenced construction of a 90,000 square foot building consisting of laboratory, support and administrative support. We expect construction costs to be approximately $15.0 million with a completion date by the first quarter of 2005. Additionally, in January 2004, we signed a binding term sheet with the MaRS Discovery District in downtown Toronto, Ontario concerning the lease of approximately 52,000 square feet of laboratory, support and administrative space. The term of the lease is ten years and eight months with a commencement date of November 1, 2004. No payments are required during the first eight months of the lease term followed by an annual base rent commitment of approximately $860,000 through June 30, 2015. Leasehold improvement costs are expected to be approximately $3.9 million, commencing in late 2004 and being complete in 2005.

We expect that our existing capital resources including interest earned thereon, will be sufficient to allow us to maintain our current and planned operations through mid-2005. However, our actual needs will depend on numerous factors, including the progress and scope of our internally funded research, development and commercialization activities; our ability to comply with the terms of our research funding agreements; our ability to maintain existing collaborations; our decision to seek additional collaboration; the success of our collaborators in developing and marketing products under their respective collaborations with us; our success in producing clinical supplies of our product candidates on a timely basis sufficient to meet the needs of our clinical trials; the costs we incur in obtaining and enforcing patent and other proprietary rights or gaining the freedom to operate under the patents of others; and our success in acquiring and integrating complementary products, technologies or businesses. Our clinical trials may be modified or terminated for several reasons including the risk that our product candidates will demonstrate safety concerns; the risk that regulatory authorities may not approve our product candidates for further development or may require additional or expanded clinical trials to be performed; and the risk that our manufacturers may not be able to supply sufficient quantities of our drug candidates to support our clinical trials, which could lead to a disruption or cessation of the clinical trials. We do not have on hand sufficient supplies of our product candidates to meet all of our clinical trial requirements and we are dependent on outside manufacturers to provide these supplies on a timely basis. We currently have sufficient clinical supplies of PREOS to complete those clinical studies to be included in our NDA filing, but have not yet produced sufficient quantities of PREOS to meet all of our clinical trial needs. If any of the events that pose these risks comes to fruition, we may have to substantially modify or terminate current and planned clinical trials, our business may be materially harmed, our stock price may be adversely affected, and our ability to raise additional capital may be impaired.

We need to raise substantial additional funds to support our long-term research, product development, and commercialization programs. We regularly consider various fund raising alternatives, including, for example, partnering of existing programs, monitizing of potential revenue streams, debt or equity financing and merger and acquisition alternatives. We may also seek additional funding through strategic alliances, collaborations, or license agreements and other financing mechanisms. There can be no assurance that additional financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research and development programs, or to obtain funds through arrangements with licensees or others that may require us to relinquish rights to certain of our technologies or product candidates that we may otherwise seek to develop or commercialize on our own.

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Critical Accounting Policies

Our critical accounting policies are as follows:

• revenue recognition; and

• valuation of long-lived and intangible assets and goodwill.

Revenue Recognition. We earn our revenue from research and development support payments, license fees and milestone payments. As described below, significant management judgment and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.

We apply the provisions of Staff Accounting Bulletin No. 104, Revenue Recognition (SAB No. 104), to all of our revenue transactions and Emerging Issues Task Force (EITF) Issue No. 00-21 to all revenue transactions entered into in fiscal periods beginning after June 15, 2003. We recognize revenue from our research and development support agreements as related research and development costs are incurred and the services are performed. The terms and conditions of our research and development support agreements are such that revenues are earned as the related costs are incurred. The principal costs under these agreements are for personnel employed to conduct research and development under these agreements. We recognize revenue from milestone payments as agreed upon events representing the achievement of substantive steps in the development process are achieved and where the amount of the milestone payment, approximates the value of achieving the milestone. We recognize revenue from up-front nonrefundable license fees on a straight-line basis over the period we have continuing involvement in the research and development project. Cash received in advance of the performance of the related research and development support and for nonrefundable license fees when we have continuing involvement is recorded as deferred income. Where questions arise about contract interpretation, contract performance, or possible breach, we continue to recognize revenue unless we determine that such circumstances are material and/or that payment is not probable.

We analyze our arrangements entered into after June 15, 2003 to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. Allocation of revenue to individual elements which qualify for separate accounting is based on the estimated fair value of the respective elements.

Valuation of Long-lived and Intangible Assets and Goodwill. We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

• significant underperformance relative to expected historical or projected future operating results;

• significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

• significant negative industry or economic trends;

• significant decline in our stock price for a sustained period; and

• our market capitalization relative to net book value.

Our balance sheet reflects net intangible assets of $1.6 million, long-lived assets of $5.4 million, and goodwill of $8.4 million as of December 31, 2003.

When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. To date, we have not determined the existence of any indication of impairment sufficient to require us to adjust our historical measure of value of such assets.

In 2002, Statement on Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, became effective and as a result, we have ceased amortizing goodwill. In lieu of amortization, we perform an annual impairment review of goodwill. During the year ended December 31, 2001 we recorded amortization expense of $2.1 million, or $0.07, per basic and diluted share, that would not have been recorded under SFAS No. 142. The assembled workforce component of identifiable intangible assets was fully amortized as of

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December 31, 2001. We completed our impairment review of goodwill during 2003 and determined that no impairment charge was required, additionally, we did not record an impairment charge in 2002.

Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company’s existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003. The adoption of this statement did not have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows.

Recent Events

In January 2004, we signed a long-term reservation agreement with a manufacturer for the “fill and finish” production of PREOS in support of commercial launch. As part of this commitment we will be required to pay $5.7 million in 2004 prior to the production of commercial supplies of PREOS which will occur over a three-year period commencing in 2005.

In January 2004, we signed a binding term sheet with the MaRs Discovery District in downtown Toronto, Ontario, concerning the lease of approximately 52,000 square feet of laboratory, support and administrative space. The term of the lease is ten years and eight months with a commencement date of November 1, 2004. No payments are required during the first eight months of the lease term followed by an annual base rent commitment of approximately $860,000 through June 30, 2015. Two of our outside board of directors serve as directors of the MaRs Discovery District. These directors receive no financial remuneration for serving as directors of the MaRs Discovery District.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk. Our interest rate risk exposure results from our investment portfolio and our convertible notes. Our primary objectives in managing our investment portfolio are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. The securities we hold in our investment portfolio are subject to interest rate risk. At any time, sharp changes in interest rates can affect the fair value of the investment portfolio and its interest earnings. After a review of our marketable investment securities, we believe that in the event of a hypothetical ten percent increase in interest rates, the resulting decrease in fair market value of our marketable investment securities would be insignificant to the financial statements. Currently, we do not hedge these interest rate exposures. We have established policies and procedures to manage exposure to fluctuations in interest rates. We place our investments with high quality issuers and limit the amount of credit exposure to any one issuer

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and do not use derivative financial instruments in our investment portfolio. We invest in highly liquid, investment-grade securities and money market funds of various issues, types and maturities. These securities are classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as accumulated other comprehensive income as a separate component in stockholders’ equity. Our 3.0 percent convertible notes in the principal amount of $192.0 million due June 15, 2008 have a fixed rate. The fair value of the convertible notes is affected by changes in the interest rates and by changes in the price of our common stock.

Foreign Currency Risk. We have research and development operations are in Canada. As a result, our financial results could be affected by factors such as a change in the foreign currency exchange rate between the U.S. dollar and the Canadian dollar, or by weak economic conditions in Canada. When the U.S. dollar strengthens against the Canadian dollar, the cost of expenses in Canada decreases. When the U.S. dollar weakens against the Canadian dollar, the cost of expenses in Canada increases. The monetary assets and liabilities in our foreign subsidiary which are impacted by the foreign currency fluctuations are cash, marketable investment securities, accounts receivable, accounts payable, and certain accrued liabilities. A hypothetical 10% increase or decrease in the exchange rate between the U.S. dollar and the Canadian dollar from the December 31, 2003 rate would cause the fair value of such monetary assets and liabilities in Canada to change by an insignificant amount. We are not currently engaged in any foreign currency hedging activities.

ITEM 8. Financial Statements and Supplementary Data.

Financial statements and notes thereto appear on pages F-1 to F-35 of this Form 10-K Annual Report.

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

There have been no changes in and disagreements with accountants on accounting and financial disclosure.

ITEM 9A. Controls and Procedures.

We maintain “disclosure controls and procedures” within the meaning of Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures, or Disclosure Controls, are designed to ensure that information required to be disclosed by the Company in the reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Our Disclosure Controls are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our Disclosure Controls, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Annual Report on Form 10-K, we evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, which was done under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Immediately following the Signatures section of this Annual Report of Form 10-K are certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented. Based on the controls evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the date of their evaluation, our Disclosure Controls and Procedures were effective to ensure that material information is made known to management, including our Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

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PART III

ITEM 10. Directors and Executive Officers of the Registrant.

Certain of the information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 20, 2004, under the captions “Election of Directors,” and “Compliance with Section 16(a) of the Exchange Act” and “Code of Ethics” and is incorporated by reference herein. For information regarding executive officers see Part I of this Form 10-K under the caption “Executive Officers of the Registrant.”

ITEM 11. Executive Compensation.

Certain of the information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 20, 2004, under the captions “Executive Compensation” and except for the information appearing under the captions “Report of the Compensation Committee of the Board of Directors” is incorporated by reference herein.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management.

Certain of the information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 20, 2004, under the captions “Security Ownership of Certain Beneficial Owners and Management” and is incorporated by reference herein.

ITEM 13. Certain Relationships and Related Transactions.

Certain of the information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 20, 2004, under the captions “Certain Relationships and Related Transactions” and is incorporated by reference herein.

ITEM 14. Principal Accountant Fees and Services.

Certain of the information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 20, 2004, under the captions “Principal Accountant Fees and Services” and is incorporated by reference herein.

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PART IV

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

(a) 1. Index to consolidated financial statements and report of independent auditors. The consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 of this report.

	Page Number
Table of Contents to Consolidated Financial Statements	F-1
Independent Auditors’ Report	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)	F-5
Consolidated Statements of Cash Flows	F-12
Notes to Consolidated Financial Statements	F-13

2. Index to financial statement schedules. There are no financial statements schedules included because they are either not applicable or the required information is shown in the consolidated financial statements or the notes thereto.

3. Exhibits.

Exhibit Number	Description of Document
2.1	Arrangement Agreement made as of September 27, 1999, as amended by Amendment No. 1 as of October 28, 1999 and as amended and restated as of November 15, 1999 between Allelix Biopharmaceuticals Inc. and the Registrant (1)
3.1A	Amended and Restated Certificate of Incorporation of the Registrant (2)
3.1B	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, dated December 16, 1999 (3)
3.1C	Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant, dated December 18, 1996 (4)
3.1D	Amendment to Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant, dated September 5, 2000 (5)
3.1E	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, dated September 30, 2003
3.2A	Amended and Restated Bylaws of the Registrant (4)
3.2B	Certificate of Adoption of Amendments to the Amended and Restated Bylaws of the Registrant, dated February 19, 2003 (12)
4.1	Specimen Common Stock Certificate (4)
4.2A	Rights Agreement, dated as of December 4, 1996, between the Registrant and American Stock Transfer & Trust, Inc., with Exhibit A, Form of Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant; Exhibit B, Form of Right Certificate; and Exhibit C, Summary of Rights to Purchase Shares of Preferred Stock of the Registrant (6)
4.2B	First Amendment to the Rights Agreement and Certificate of Compliance with Section 27 thereof, dated December 31, 2001 (7)
4.2C	Second Amendment to the Rights Agreement and Certificate of Compliance with Section 27 thereof, dated February 19, 2003 (8)
4.3	Indenture, dated as of June 17, 2003, between Registrant and U.S. Bank National Association, as Trustee, including the form of 3% Convertible Subordinated Notes due 2008 attached as Exhibit A thereto. (14)
10.1	1987 Stock Option Plan and Form of Stock Option Agreement (4)
10.1B	1987 Stock Option Plan, as amended December 2002 (12)
10.2A	1994 Equity Incentive Plan and Form of Stock Option Grant Agreement (4)
10.2B	1994 Equity Incentive Plan, as amended December 1996 (9)
10.2C	1994 Equity Incentive Plan, as amended December 2002 (12)
10.3A	1994 Non-Employee Directors’ Stock Option Plan (4)
10.3B	1994 Non-Employee Directors’ Stock Option Plan, as amended December 1996 (9)

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10.3C	1994 Non-Employee Directors’ Stock Option Plan, as amended December 2002 (12)
10.4A	1994 Employee Stock Purchase Plan and Form of Offering Document (4)
10.4B	1994 Employee Stock Purchase Plan as amended December 1996, and Form of Offering Document (9)
10.4C	1994 Employee Stock Purchase Plan, as amended December 2002 (12)
10.4D	1994 Employee Stock Purchase Plan, as amended June 2003
10.5A	1998 Stock Option Plan (10)
10.5B	1998 Stock Option Plan, as amended December 2002 (12)
10.5C	1998 Stock Option Plan, as amended June 2003
10.6	Form of Indemnity Agreement entered into between the Registrant and each of its officers and directors (4)
10.7A	Severance Pay Plan (12)
10.7B	Form of Agreement Providing Specified Benefits Following Termination of Employment Incident to a Merger, Acquisition or Other Change of Control or to Some Other Strategic Corporate Event, between the Registrant and each of its executive officers
10.8A	Collaborative Research and License Agreement between the Registrant and SmithKline Beecham Corporation (now GlaxoSmithKline), dated November 1, 1993 (4)
10.8B	Amendment Agreement to Collaborative Research and License Agreement between GlaxoSmithKline, effective June 29, 1995 (9)
10.8C	Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 28, 1996 (4)
10.8D	Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 24, 1997 (10)
10.8E	Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 27, 1997 (10)
10.8F	Amendment to Collaborative Research and License Agreement between the Registrant and GlaxoSmithKline, dated November 26, 1997 (10)
10.8G	Letter, dated January 24, 2000, from SmithKline Beecham to NPS Re: Amendment Agreement to Amend the November 26, 1997 Amendment Agreement to Amend the November 26, 1997 Amendment Agreement (12)
10.8H	Letter, dated May 15, 2000, from SmithKline Beecham to NPS Re: Amendment Agreement (12)
10.8I	Letter, dated August 1, 2001, from GlaxoSmithKline to NPS Re: Amendment Agreement to Amend the January 24, 2000 Amendment Agreement (12)
10.9A	Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc., dated February 19, 1993 (4)
10.9B	Letter dated March 15, 1993 from the Registrant to The Brigham and Women’s Hospital, Inc. regarding Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc. (12)
10.9C	Amendment to Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc., effective February 7, 1996 (11)
10.9D	1999 Patent Agreement Amendment between the Registrant and The Brigham and Women’s Hospital, Inc., effective February 18, 1999 (12)
10.10	Collaborative Research and License Agreement between the Registrant and Kirin Brewery Company, Ltd. dated June 29, 1995 (11)
10.11	Development and License Agreement between the Registrant and Amgen Inc. effective as of December 27, 1995 (9)
10.12A	Office Lease between Registrant and Salt Lake Research Park Associates, dated June 3, 1994 (11)
10.12B	Amendment to Lease between Registrant and Salt Lake Research Park Associates, effective December 1, 1995 (12)
10.12C	Amendment to Office Lease between Registrant and Salt Lake Research Park Associates, effective July 1, 1997 (12)
10.12D	Third Amendment to Lease between Registrant and Salt Lake Research Park Associates, effective March 1, 1997 (12)
10.12E	Fourth Amendment to Lease between Registrant and Salt Lake Research Associates, LC, dated September 22, 1998 (12)
10.12F	Fifth Amendment to Lease between Registrant and Salt Lake Research Associates, LC, dated April 14, 1999 (12)
10.13	Manufacturing Agreement between NPS Allelix Corp. and SynCo Bio Partners B.V., effective as of May 17, 2001 (13)
10.14	Addendum to Manufacturing Agreement between NPS Allelix Corp. and SynCo Bio Partners B.V., effective as of October 26, 2001 (13)

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10.15	Lease Agreement between Registrant and University of Utah, effective December 10, 2003
10.16	Agreement of Sublease between Harrison & Star, Inc. d/b/a Hyphen Solutions, effective November 2003
10.17	Term Sheet between the MaRS Discovery District and the Registrant, dated January 23, 2004
12.1	Computation Ratio of Earnings Available to Cover Fixed Charges
21.1	List of Subsidiaries
23.1	Consent of Independent Auditors
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 Certification), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 Certification), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

⁽¹⁾ Incorporated herein by reference to the Registrant’s Definitive Proxy Statement (SEC File No. 000-23272, Film No. 99760104, filing date November 18, 1999).

⁽²⁾ Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 filed on January 21, 1994 (SEC File No. 333-74318).

⁽³⁾ Incorporated herein by reference to the Registrant’s Registration Statement on Form S-3 filed on September 6, 2000 (SEC File No. 333-45274, Film No. 717603).

⁽⁴⁾ Incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated December 19, 1996 (SEC File No. 000-23272, Film No. 96683282).

⁽⁵⁾ Incorporated herein by reference to the Registrant’s Registration Statement on Form 8-A12G/A (SEC File No. 000-23272, Film No. 1826478, filing date December 31, 2001).

⁽⁶⁾ Incorporated herein by reference to the Registrant’s Registration Statement on Form 8-A/A (SEC File No. 000-23272, Film No. 03575669, filing date February 21, 2003).

⁽⁷⁾ Incorporated herein by reference to the Registrant’s Registration Statement on Form S-8 (SEC File No. 333-17521, Film No. 96677983, filing date December 9, 1996).

⁽⁸⁾ Incorporated herein by reference to the Registrant’s Definitive Proxy Statement (SEC File No. 000-23272, Film No. 98590984, filing date April 9, 1998).

⁽⁹⁾ Incorporated herein by reference to Amendment No. 1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed on March 29, 1996.

⁽¹⁰⁾ Incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated January 27, 1998 (SEC File No. 000-23272, Film No. 98513828).

⁽¹¹⁾ Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended on December 31, 1995.

⁽¹²⁾ Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended on December 31, 2002 (SEC File No. 000-23272, Film No. 03612691, filing date March 21, 2003).

⁽¹³⁾ Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K/A for the fiscal year ended on December 31, 2002 (SEC File No. 000-23272, Film No. 03739737, filing date June 11, 2003).

⁽¹⁴⁾ Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 (SEC File No. 000-23272. Film No. 03838243, filing date August 12, 2003).

(b) Reports on Form 8-K.

On November 6, 2003, we furnished a report on Form 8-K with the SEC relating to the announcement of our results of operation and financial condition for the 3^rd quarter and nine month period ending September 30, 2003.

On November 20, 2003, we filed a report on Form 8-K with the SEC relating to the presentation of positive study results with respect to our product candidate, PREOS, as presented in a press release issued by us on November 20, 2003.

(c) See Exhibits listed under Item 14(a)(3).

(d) The financial statement schedules required by this Item are listed under Item 14(a)(2).

47

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NPS PHARMACEUTICALS, INC.
Date: February 10, 2004	By:	/s/ Hunter Jackson
		Hunter Jackson, President Chief Executive Officer and Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Name	Title	Date
/s/ Santo J. Costa Santo J. Costa	Director	February 10, 2004
/s/ John R. Evans John R. Evans	Director	February 10, 2004
/s/ James G. Groninger James G. Groninger	Director	February 10, 2004
/s/ Joseph Klein, III Joseph Klein, III	Director	February 10, 2004
/s/ Donald E. Kuhla Donald E. Kuhla, Ph.D.	Director	February 10, 2004
/s/ Thomas N. Parks Thomas N. Parks, Ph.D.	Director	February 10, 2004
/s/ Calvin Stiller Calvin Stiller, M.D.	Director	February 10, 2004
/s/ Peter G. Tombros Peter G. Tombros	Director	February 10, 2004
/s/ Hunter Jackson Hunter Jackson	Chief Executive Officer and Chairman of the Board	February 10, 2004
/s/ Gerard J. Michel Gerard J. Michel	Chief Financial Officer	February 10, 2004

48

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Table of Contents

	Page
Independent Auditors’ Report	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)	F-5
Consolidated Statements of Cash Flows	F-13
Notes to Consolidated Financial Statements	F-14

F-1

Independent Auditors’ Report

The Board of Directors and Stockholders

NPS Pharmaceuticals, Inc.:

We have audited the accompanying consolidated balance sheets of NPS Pharmaceuticals, Inc. and subsidiaries (a development stage enterprise) as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2003, and for the period from October 22, 1986 (inception) through December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NPS Pharmaceuticals, Inc. and subsidiaries (a development stage enterprise) as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, and for the period from October 22, 1986 (inception) through December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in note 1 to the consolidated financial statements, the Company changed its method of amortizing goodwill and intangible assets in 2002.

Salt Lake City, Utah

February 9, 2004

F-2

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Balance Sheets

December 31, 2003 and 2002

(In thousands, except share data)

	2003			2002
Assets
Current assets:
Cash and cash equivalents	$	63,324		96,094
Marketable investment securities (note 3)		240,550		138,360
Accounts receivable		42		1,958
Other current assets		2,713		3,191
Total current assets		306,629		239,603
Plant and equipment:
Land		502		412
Building		1,448		1,164
Equipment		11,654		9,727
Leasehold improvements		3,199		3,016
		16,803		14,319
Less accumulated depreciation and amortization		11,684		10,009
		5,119		4,310
Construction-in-progress		136		—
Net plant and equipment		5,255		4,310
Goodwill, net of accumulated amortization of $4,203 and $3,450 at December 31, 2003 and 2002, respectively (note 4)		8,406		6,900
Purchased intangible assets, net of accumulated amortization of $6,413 and $3,949 at December 31, 2003 and 2002, respectively (note 4)		1,603		2,632
Debt issuance costs, net of accumulated amortization of $658 at December 31, 2003		5,464		—
Other assets		151		23
	$	327,508		253,468
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	12,461		6,623
Accrued expenses and other liabilities		8,553		4,408
Accrued income taxes		1,696		—
Deferred income		13		75
Total current liabilities		22,723		11,106
Convertible notes payable (note 6)		192,000		—
Total liabilities		214,723		11,106
Stockholders’ equity (notes 7 and 8):
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; issued and outstanding no shares		—		—
Common stock, $0.001 par value. Authorized 105,000,000 shares; issued and outstanding 37,060,633 shares at December 31, 2003 and 35,089,784 shares at December 31, 2002		37		35
Additional paid-in capital		533,929		489,352
Deferred compensation		(3,716	)	(370	)
Accumulated other comprehensive income		765		1,180
Deficit accumulated during development stage		(418,230	)	(247,835	)
Total stockholders’ equity		112,785		242,362
Commitments, contingencies, and subsequent events (notes 2, 5, 6, 8,14, and 15)
	$	327,508		253,468

See accompanying notes to consolidated financial statements.

F-3

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Statements of Operations

(In thousands, except share data)

	Years ended December 31							October 22, 1986 (inception) through December 31, 2003
	2003			2002		2001
Revenues from research and license agreements	$	9,919		2,154		10,410		85,593
Operating expenses:
Research and development		118,173		80,872		60,090		378,588
General and administrative		20,337		14,777		12,099		94,266
Amortization of goodwill and purchased intangibles		1,485		1,322		3,411		9,779
In-process research and development acquired (note 4)		—		—		—		17,760
Merger costs and termination fees (note 12)		46,114		—		—		46,114
Total operating expenses		186,109		96,971		75,600		546,507
Operating loss		(176,190	)	(94,817	)	(65,190	)	(460,914	)
Other income (expense):
Interest income		5,942		6,861		12,010		41,353
Interest expense		(3,718	)	—		(5	)	(4,524	)
Gain on sale of marketable investment securities		259		617		1,642		2,716
Gain (loss) on disposition of equipment, leasehold improvements, and leases		24		62		11		(1,101	)
Foreign currency transaction gain (loss)		541		(39	)	51		690
Other		217		382		1,813		2,737
Total other income		3,265		7,883		15,522		41,871
Loss before income tax expense (benefit)		(172,925	)	(86,934	)	(49,668	)	(419,043	)
Income tax expense (benefit) (note 9)		(2,530	)	(102	)	300		(1,313	)
Loss before cumulative effect of change in accounting principle		(170,395	)	(86,832	)	(49,968	)	(417,730	)
Cumulative effect on prior years (to December 31, 1999) of changing to a different revenue recognition method		—		—		—		(500	)
Net loss	$	(170,395	)	(86,832	)	(49,968	)	(418,230	)
Basic and diluted net loss per common and potential common shares	$	(4.71	)	(2.79	)	(1.67	)
Weighted average common and potential common shares outstanding during the year:
Basic and diluted		36,148		31,165		29,912

See accompanying notes to consolidated financial statements.

F-4

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

October 22, 1986 (inception) through December 31, 2003

(In thousands, except share data)

	Preferred stock		Common stock	Additional paid-in capital		Deferred compensation	Deficit accumulated during development stage		Comprehensive income (loss)			Accumulated other comprehensive income (loss)	Total stockholders’ equity
Balances, December 31, 1985	$	—	—	—		—	—					—	—
Issuance of 1,125,000 shares of common stock for cash and equipment valued at fair value upon incorporation at October 22, 1986		—	1	14		—	—					—	15
Net loss		—	—	—		—	(12	)		(12	)	—	(12	)
Comprehensive loss		—	—	—		—	—		$	(12	)	—	—
Balances, December 31, 1986		—	1	14		—	(12	)				—	3
Repurchase of 375,000 shares of common stock		—	—	(5	)	—	—					—	(5	)
Issuance of 82,500 shares of common stock for services		—	—	1		—	—					—	1
Net income		—	—	—		—	121			121		—	121
Comprehensive income		—	—	—		—	—		$	121		—	—
Balances, December 31, 1987		—	1	10		—	109					—	120
Issuance of 55,556 shares of preferred stock for cash		6	—	294		—	—					—	300
Issuance of 11,448 shares of common stock for cash under option plan		—	—	1		—	—					—	1
Issuance of 97,500 shares of common stock for services under option plan		—	—	33		—	—					—	33
Net loss		—	—	—		—	(106	)		(106	)	—	(106	)
Comprehensive loss		—	—	—		—	—		$	(106	)	—	—
Balances, December 31, 1988		6	1	338		—	3					—	348
Issuance of 37,037 shares of preferred stock for cash		4	—	336		—	—					—	340
Issuance of 7,500 shares of common stock for services under option plan		—	—	3		—	—					—	3
Net loss		—	—	—		—	(5	)		(5	)	—	(5	)
Comprehensive loss		—	—	—		—	—		$	(5	)	—	—
Balances, December 31, 1989		10	1	677		—	(2	)				—	686

F-5 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

October 22, 1986 (inception) through December 31, 2003

(In thousands, except share data)

	Preferred stock			Common stock	Additional paid-in capital		Deferred compensation	Deficit accumulated during development stage		Comprehensive income (loss)			Accumulated other comprehensive income (loss)	Total stockholders’ equity
Issuance of 37,037 shares of preferred stock for cash	$	3		—	337		—	—					—	340
Issuance of 2,475 shares of common stock for cash under option plan		—		—	1		—	—					—	1
Net loss		—		—	—		—	(213	)		(213	)	—	(213	)
Comprehensive loss		—		—	—		—	—		$	(213	)	—	—
Balances, December 31, 1990		13		1	1,015		—	(215	)				—	814
Issuance of 4,500 shares of common stock for cash under option plan		—		—	2		—	—					—	2
Net loss		—		—	—		—	(462	)		(462	)	—	(462	)
Comprehensive loss		—		—	—		—	—		$	(462	)	—	—
Balances, December 31, 1991		13		1	1,017		—	(677	)				—	354
Issuance of 3,675 shares of common stock for cash under option plan		—		—	2		—	—					—	2
Issuance of 230,334 shares of common stock upon conversion of 129,630 shares of preferred stock		(13	)	—	13		—	—					—	—
Repurchase and cancellation of 83,334 shares of common stock for cash		—		—	(300	)	—	—					—	(300	)
Issuance of 781,250 shares of preferred stock for cash, net of offering costs		1		—	4,937		—	—					—	4,938
Issuance of 678,573 shares of preferred stock for cash, net of offering costs		1		—	4,694		—	—					—	4,695
Issuance of 101,452 shares of common stock for services related to preferred stock offering		—		—	—		—	—					—	—
Net loss		—		—	—		—	(2,607	)		(2,607	)	—	(2,607	)
Comprehensive loss		—		—	—		—	—		$	(2,607	)	—	—
Balances, December 31, 1992		2		1	10,363		—	(3,284	)				—	7,082

F-6 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

October 22, 1986 (inception) through December 31, 2003

(In thousands, except share data)

	Preferred stock			Common stock	Additional paid-in capital		Deferred compensation		Deficit accumulated during development stage		Comprehensive income (loss)			Accumulated other comprehensive income (loss)	Total stockholders’ equity
Issuance of 37,524 shares of common stock for cash under option plan	$	—		—	26		—		—					—	26
Issuance of 583,334 shares of preferred stock for cash, net of offering costs		—		—	6,968		—		—					—	6,968
Issuance of 6,050 shares of preferred stock for services		—		—	73		—		—					—	73
Deferred compensation related to grant of stock options, net of current year expense		—		—	766		(745	)	—					—	21
Net loss		—		—	—		—		(7,159	)		(7,159	)	—	(7,159	)
Comprehensive loss		—		—	—		—		—		$	(7,159	)	—	—
Balances, December 31, 1993		2		1	18,196		(745	)	(10,443	)				—	7,011
Issuance of 3,475,666 shares of common stock upon conversion of 2,049,207 shares of preferred stock		(2	)	4	(2	)	—		—					—	—
Issuance of 2,000,000 shares of common stock for cash, net of offering costs		—		2	9,530		—		—					—	9,532
Issuance of 20,000 shares of common stock for services		—		—	96		—		—					—	96
Issuance of 46,118 shares of common stock for cash and options for 432 shares under option plans		—		—	27		—		—					—	27
Amortization of deferred compensation		—		—	—		255		—					—	255
Net loss		—		—	—		—		(6,756	)		(6,756	)	—	(6,756	)
Comprehensive loss		—		—	—		—		—		$	(6,756	)	—	—
Balances, December 31, 1994		—		7	27,847		(490	)	(17,199	)				—	10,165
Issuance of 242,385 shares of common stock for cash and options for 14,816 shares under option plans		—		—	100		—		—					—	100
Issuance of 39,771 shares of common stock for cash under employee purchase plan		—		—	110		—		—					—	110
Issuance of 3,287 shares of common stock for services		—		—	10		—		—					—	10
Amortization of deferred compensation		—		—	—		255		—					—	255
Net loss		—		—	—		—		(3,318	)		(3,318	)	—	(3,318	)
Comprehensive loss		—		—	—		—		—		$	(3,318	)	—	—
Balances, December 31, 1995		—		7	28,067		(235	)	(20,517	)				—	7,322

F-7 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

October 22, 1986 (inception) through December 31, 2003

(In thousands, except share data)

	Preferred stock		Common stock	Additional paid-in capital	Deferred compensation	Deficit accumulated during development stage		Comprehensive income (loss)			Accumulated other comprehensive income (loss)	Total stockholders’ equity
Issuance of 1,000,000 shares of common stock for cash	$	—	1	7,499	—	—					—	7,500
Issuance of 3,450,000 shares of common stock for cash, net of offering costs		—	4	47,909	—	—					—	47,913
Issuance of 223,940 shares of common stock for cash and options for 5,746 shares under option plans		—	—	221	—	—					—	221
Issuance of 24,814 shares of common stock for services under option plans		—	—	334	—	—					—	334
Issuance of 18,147 shares of common stock for cash under employee purchase plan		—	—	110	—	—					—	110
Issuance of 17,519 shares of common stock for warrants for 2,731 shares upon exercise of warrants		—	—	—	—	—					—	—
Consulting expense related to the grant of stock options for services rendered		—	—	130	—	—					—	130
Amortization of deferred compensation		—	—	—	235	—					—	235
Net income		—	—	—	—	6,105			6,105		—	6,105
Comprehensive income		—	—	—	—	—		$	6,105		—	—
Balances, December 31, 1996		—	12	84,270	—	(14,412	)				—	69,870
Issuance of 160,000 shares of common stock for cash		—	—	1,554	—	—					—	1,554
Issuance of 211,554 shares of common stock for cash and 11,864 shares under option plans		—	—	302	—	—					—	302
Issuance of 11,200 shares of common stock for services under option plans		—	—	128	—	—					—	128
Issuance of 20,343 shares of common stock for cash under employee purchase plan		—	—	160	—	—					—	160
Net loss		—	—	—	—	(11,695	)		(11,695	)	—	(11,695	)
Comprehensive loss		—	—	—	—	—		$	(11,695	)	—	—
Balances, December 31, 1997		—	12	86,414	—	(26,107	)				—	60,319

F-8 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

October 22, 1986 (inception) through December 31, 2003

(In thousands, except share data)

	Preferred stock		Common stock	Additional paid-in capital	Deferred compensation	Deficit accumulated during development stage		Comprehensive income (loss)			Accumulated other comprehensive income (loss)		Total stockholders’ equity
Issuance of 204,000 shares of common stock for cash	$	—	—	1,299	—	—					—		1,299
Issuance of 124,252 shares of common stock for cash under option plans		—	—	243	—	—					—		243
Issuance of 16,097 shares of common stock for services under option plans		—	—	121	—	—					—		121
Issuance of 31,669 shares of common stock for cash under employee purchase plan		—	—	215	—	—					—		215
Gross unrealized gains on marketable securities									433
Reclassification for realized gains on marketable securities									(323	)
Net unrealized gains on marketable investment securities		—	—	—	—	—			110		110		110
Net loss		—	—	—	—	(17,162	)		(17,162	)	—		(17,162	)
Comprehensive loss		—	—	—	—	—		$	(17,052	)	—		—
Balances, December 31, 1998		—	12	88,292	—	(43,269	)				110		45,145
Issuance of 249,000 shares of common stock for cash		—	1	1,323	—	—					—		1,324
Issuance of 124,365 shares of common stock for cash under option plans		—	—	251	—	—					—		251
Issuance of 15,062 shares of common stock for services under option plans		—	—	105	—	—					—		105
Issuance of 38,034 shares of common stock for cash under employee purchase plan		—	—	222	—	—					—		222
Issuance of 6,516,923 shares and options and warrants to purchase 675,520 shares of common stock in purchase business combination		—	7	44,746	—	—					—		44,753
Compensation expense on stock option issuances		—	—	97	—	—					—		97
Gross unrealized losses on marketable securities									(266	)
Reclassification for realized losses on marketable securities									102
Net unrealized losses on marketable investment securities		—	—	—	—	—			(164	)	(164	)	(164	)
Net loss		—	—	—	—	(35,654	)		(35,654	)	—		(35,654	)
Comprehensive loss		—	—	—	—	—		$	(35,818	)	—		—
Balances, December 31, 1999		—	20	135,036	—	(78,923	)				(54	)	56,079

F-9 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

October 22, 1986 (inception) through December 31, 2003

(In thousands, except share data)

	Preferred stock		Common stock	Additional paid-in capital	Deferred compensation		Deficit accumulated during development stage		Comprehensive income (loss)			Accumulated other comprehensive income (loss)		Total stockholders’ equity
Issuance of 3,900,000 shares of common stock for cash	$	—	4	43,314	—		—					—		43,318
Issuance of 210,526 common shares in exchange for minority interest		—	—	2,500	—		—					—		2,500
Issuance of 168,492 shares of common stock for cash		—	—	2,000	—		—					—		2,000
Issuance of 4,600,000 shares of common stock for cash		—	5	180,716	—		—					—		180,721
Issuance of 1,254,791 shares of common stock for cash of $11,109 and receivables of $193 under option and warrant plans		—	1	11,301	—		—					—		11,302
Issuance of 10,700 shares of common stock for services		—	—	241	—		—					—		241
Issuance of 17,243 shares of common stock for cash under employee purchase plan		—	—	136	—		—					—		136
Compensation expense on stock option issuances		—	—	1,758	—		—					—		1,758
Deferred compensation, net of current year expense		—	—	800	(800	)	—					—		—
Gross unrealized gains on marketable securities										426
Reclassification for realized gains on marketable securities										(181	)
Net unrealized gains on marketable investment securities		—	—	—	—		—			245		245		245
Foreign currency translation loss		—	—	—	—		—			(848	)	(848	)	(848	)
Net loss		—	—	—	—		(32,112	)		(32,112	)	—		(32,112	)
Comprehensive loss		—	—	—	—		—		$	(32,715	)	—		—
Balances, December 31, 2000		—	30	377,802	(800	)	(111,035	)				(657	)	265,340

F-10 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

October 22, 1986 (inception) through December 31, 2003

(In thousands, except share data)

	Preferred stock		Common stock	Additional paid-in capital		Deferred compensation		Deficit accumulated during development stage		Comprehensive income (loss)			Accumulated other comprehensive income (loss)		Total stockholders’ equity
Issuance of 432,216 shares of common stock for cash of $2,741 and receivables of $271 under option and warrant plans	$	—	—	3,012		—		—					—		3,012
Issuance of 20,096 shares of common stock for services		—	—	402		—		—					—		402
Issuance of 20,813 shares of common stock for cash under employee purchase plan		—	—	337		—		—					—		337
Compensation expense on stock option issuances		—	—	1,894		—		—					—		1,894
Deferred compensation, net of current year expense		—	—	(766	)	766		—					—		—
Gross unrealized gains on marketable securities											3,481
Reclassification for realized gains on marketable securities											(1,642	)
Net unrealized gains on marketable investment securities		—	—	—		—		—			1,839		1,839		1,839
Foreign currency translation loss		—	—	—		—		—			(921	)	(921	)	(921	)
Net loss		—	—	—		—		(49,968	)		(49,968	)	—		(49,968	)
Comprehensive loss		—	—	—		—		—		$	(49,050	)	—		—
Balances, December 31, 2001		—	30	382,681		(34	)	(161,003	)				261		221,935
Issuance of 4,600,000 shares of common stock for cash (note 7)		—	5	102,943		—		—					—		102,948
Issuance of 284,560 shares of common stock for cash under option and warrant plans		—	—	2,024		—		—					—		2,024
Issuance of 21,140 shares of common stock for services		—	—	602		—		—					—		602
Issuance of 19,487 shares of common stock for cash under employee purchase plan		—	—	329		—		—					—		329
Compensation expense on stock option issuances		—	—	437		—		—					—		437
Deferred compensation, net of current year expense		—	—	336		(336	)	—					—		—
Gross unrealized gains on marketable securities											1,127
Reclassification for realized gains on marketable securities											(617	)
Net unrealized gains on marketable investment securities		—	—	—		—		—			510		510		510
Foreign currency translation gain		—	—	—		—		—			409		409		409
Net loss		—	—	—		—		(86,832	)		(86,832	)	—		(86,832	)
Comprehensive loss		—	—	—		—		—		$	(85,913	)	—		—
Balances, December 31, 2002		—	35	489,352		(370	)	(247,835	)				1,180		242,362

F-11 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)

October 22, 1986 (inception) through December 31, 2003

(In thousands, except share data)

	Preferred stock		Common stock	Additional paid-in capital	Deferred compensation		Deficit accumulated during development stage		Comprehensive income (loss)			Accumulated other comprehensive income (loss)		Total stockholders’ equity
Issuance of 1,500,000 shares of common stock for termination fee (notes 7 and 12)	$	—	2	35,619	—		—					—		35,621
Issuance of 419,216 shares of common stock for cash under option and warrant plans		—	—	2,795	—		—					—		2,795
Issuance of 19,100 shares of common stock for services		—	—	495	—		—					—		495
Issuance of 32,533 shares of common stock for cash under employee purchase plan		—	—	573	—		—					—		573
Compensation expense on stock option issuances		—	—	1,749	—		—					—		1,749
Deferred compensation, net of current year expense		—	—	3,346	(3,346	)	—					—		—
Gross unrealized losses on marketable securities										(1,015	)
Reclassification for realized gains on marketable securities										(259	)
Net unrealized losses on marketable investment securities		—	—	—	—		—			(1,274	)	(1,274	)	(1,274	)
Foreign currency translation gain		—	—	—	—		—			859		859		859
Net loss		—	—	—	—		(170,395	)		(170,395	)	—		(170,395	)
Comprehensive loss		—	—	—	—		—		$	(170,810	)	—		—
Balances, December 31, 2003	$	—	37	533,929	(3,716	)	(418,230	)				765		112,785

See accompanying notes to consolidated financial statements.

F-12

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Consolidated Statements of Cash Flows

(In thousands)

								October 22, 1986 (inception) through December 31, 2003
	Years ended December 31
	2003			2002		2001
Cash flows from operating activities:
Net loss	$	(170,395	)	(86,832	)	(49,968	)	(418,230	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,488		2,807		5,066		23,499
Loss (gain) on disposition of equipment, leasehold improvements, and leases		(24	)	(62	)	(11	)	1,101
Realized gain on sale of marketable investment securities		(259	)	(617	)	(1,642	)	(2,716	)
Issuance of common and preferred stock in lieu of cash for services		495		602		402		2,775
Compensation expense on stock options		1,749		437		1,894		6,977
Issuance of common stock as part of merger termination fee		35,621		—		—		35,621
Write-off of accounts receivable in TPC termination		1,920		—		—		1,920
Write-off of in-process research and development		—		—		—		17,760
Decrease (increase) in operating assets:
Accounts receivable		54		6,668		(8,182	)	(1,617	)
Other current assets and other assets		791		(210	)	(1,655	)	(1,574	)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses, and other liabilities		7,548		(2,129	)	9,551		16,328
Accrued income taxes		1,572		—		—		1,572
Deferred income		(62	)	75		—		(473	)
Net cash used in operating activities		(117,502	)	(79,261	)	(44,545	)	(317,057	)
Cash flows from investing activities:
Net sale (purchase) of marketable investment securities		(103,205	)	31,143		(48,406	)	(226,057	)
Acquisitions of equipment and leasehold improvements		(1,812	)	(906	)	(1,682	)	(14,601	)
Proceeds from sale of equipment		24		62		11		1,372
Cash paid for acquisition, net of cash received		—		—		—		(676	)
Net cash provided by (used in) investing activities		(104,993	)	30,299		(50,077	)	(239,962	)
Cash flows from financing activities:
Proceeds from convertible notes		192,000		—		—		192,000
Payment of debt issuance costs		(6,122	)	—		—		(6,122	)
Proceeds from issuance of preferred stock		—		—		—		17,581
Proceeds from issuance of common stock		3,368		105,536		3,271		420,308
Proceeds from long-term debt		—		—		—		1,290
Principal payments under capital lease obligations		—		(4	)	(344	)	(2,161	)
Principal payments on long-term debt		—		—		—		(2,978	)
Repurchase of preferred stock		—		—		—		(300	)
Net cash provided by financing activities		189,246		105,532		2,927		619,618
Effect of exchange rate changes on cash		479		382		(246	)	725
Net increase (decrease) in cash and cash equivalents		(32,770	)	56,952		(91,941	)	63,324
Cash and cash equivalents at beginning of period		96,094		39,142		131,083		—
Cash and cash equivalents at end of period	$	63,324		96,094		39,142		63,324
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	2,848		—		5		3,654
Cash paid (received) for income taxes		(4,213	)	(102	)	300		(2,997	)
Supplemental Schedule of Noncash Investing and Financing Activities:
Acquisition of equipment through incurrence of capital lease obligations	$	—		—		—		1,478
Acquisition of leasehold improvements through incurrence of debt		—		—		—		177
Issuance of stock for stock subscription receivable		—		—		271		4,000
Unrealized gains (losses) on marketable investment securities		(1,274	)	510		1,839		1,266

See accompanying notes to consolidated financial statements.

F-13

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(1) Organization and Summary of Significant Accounting Policies

The consolidated financial statements are comprised of the financial statements of NPS Pharmaceuticals, Inc. (NPS) and its subsidiaries, collectively referred to as the Company. The Company, a development stage enterprise, is engaged in the discovery, development, and commercialization of pharmaceutical products. Since inception, the Company’s principal activities have been performing research and development, raising capital, and establishing research and license agreements. All monetary amounts are reported in U.S. dollars unless specified otherwise. The following significant accounting policies are followed by the Company in preparing its consolidated financial statements:

(a) Cash Equivalents

The Company considers all highly liquid investments with maturities at the date of purchase of three months or less to be cash equivalents. Cash equivalents consist of commercial paper, money market funds, and debt securities of approximately $60.1 million and $90.9 million at December 31, 2003 and 2002, respectively. At December 31, 2003 and 2002, the book value of cash equivalents approximates fair value.

(b) Revenue Recognition

The Company earns revenue from research and development support payments, license fees, and milestone payments. The Company recognizes revenue from its research and development support agreements as related research and development costs are incurred and from milestone payments as agreed-upon events representing the achievement of substantive steps in the development process are achieved and where the amount of the milestone payments approximates the value of achieving the milestone. The Company recognizes revenue from upfront nonrefundable license fees on a straight-line basis over the period wherein the Company has continuing involvement in the research and development project. Cash received in advance of the performance of the related research and development support is recorded as deferred income.

The Company analyzes its arrangements entered into after June 15, 2003 to determine whether the elements can be separated and accounted for individually or as a single unit of accounting in accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Allocation of revenue to individual elements which qualify for separate accounting is based on the estimated fair value of the respective elements.

(c) Trade Accounts Receivable

Trade accounts receivable are recorded for research and development support performed and license fees and milestone payments due and do not bear interest. The Company determines the allowance for doubtful accounts based on assessed customers’ ability to pay, historical write-off experience, and economic trends and is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. The Company did not record a provision for bad debts in 2003, 2002, and 2001.

F-14 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(d) Plant and Equipment

Plant and equipment are stated at cost. Depreciation of plant is calculated on the straight-line method over its estimated useful life of 15 years. Depreciation and amortization of equipment are calculated on the straight-line method over their estimated useful lives of 3 to 5 years. Leasehold improvements are amortized using the straight-line method over the shorter of the life of the asset or remainder of the lease term.

(e) Income Taxes

The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating loss, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(f) Loss per Common Share

Basic loss per common share is the amount of loss for the period applicable to each share of common stock outstanding during the reporting period. Diluted loss per common share is the amount of loss for the period applicable to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period.

Potential common shares of approximately 9.2 million, 3.1 million, and 2.6 million during the years ended December 31, 2003, 2002, and 2001, respectively, that could potentially dilute basic earnings per share in the future were not included in the computation of diluted loss per share because to do so would have been antidilutive for the period. Potential dilutive common shares for the year ended December 31, 2003 include approximately 5.2 million common shares related to convertible debentures and 4.0 million shares related to stock options.

F-15 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(g) Stock-Based Compensation

The Company employs the footnote disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of Financial Accounting Standards Board (FASB) Statement No. 123. SFAS No. 123 encourages entities to adopt a fair-value-based method of accounting for stock options or similar equity instruments. However, it also allows an entity to continue measuring compensation cost for stock-based compensation using the intrinsic-value method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). The Company has elected to continue to apply the provisions APB No. 25, under which no compensation cost has been recognized when the exercise price of the option equals the market price of the stock on the date of grant. The Company generally uses the straight-line method of amortization for stock-based compensation. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company’s net loss and net loss per share would have been increased to the following pro forma amounts (in thousands, except per share amounts):

	2003			2002		2001
Net loss:
As reported	$	(170,395	)	(86,832	)	(49,968	)
Add: Stock-based employee compensation expense included in reported net loss		1,716		101		1,476
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards		(11,649	)	(8,387	)	(6,008	)
Pro forma	$	(180,328	)	(95,118	)	(54,500	)
Net loss per share as reported:
Basic and diluted	$	(4.71	)	(2.79	)	(1.67	)
Pro forma:
Basic and diluted	$	(4.99	)	(3.05	)	(1.82	)

Net loss, as reported, also included compensation cost of $33,000, $336,000, and $375,000 for stock-based compensation awards for nonemployees in 2003, 2002, and 2001, respectively.

(h) Use of Estimates

Management of the Company has made estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

F-16 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(i) Marketable Investment Securities

The Company classifies its marketable investment securities as available for sale. Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. A decline in the market value below cost that is deemed other than temporary is charged to results of operations resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as adjustments to yield using the effective-interest method. Interest income is recognized when earned. Realized gains and losses from the sale of marketable investment securities are included in results of operations and are determined on the specific-identification basis.

(j) Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all subsidiaries in which it owns a majority voting interest. The Company carries one investment in a nonpublic corporation at cost, and the Company eliminates all intercompany accounts and transactions in consolidation. The Company reports all monetary amounts in U.S. dollars unless specified otherwise.

(k) Goodwill and Other Purchased Intangibles

Goodwill represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over six years. All other purchased intangible assets are amortized on a straight-line basis over five years.

(l) Accounting for Impairment of Long-Lived Assets

The Company reviews its long-lived assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of their carrying amount or fair value, less cost to sell.

F-17 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

The Company reviews its goodwill for impairment at least annually or more often if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. The goodwill impairment test is a two-step test. Goodwill is considered impaired and a loss is recognized when the carry value of the reporting unit exceeds its fair value and the carrying value of the goodwill exceeds its implied fair value. The Company completed its impairment review of goodwill during 2003 and 2002 and determined that no impairment charge was required.

(m) Foreign Currency Translation

The local foreign currency is the functional currency for the Company’s foreign subsidiaries. Assets and liabilities of foreign operations are translated to U.S. dollars at the current exchange rates as of the applicable balance sheet date. Revenues and expenses are translated at the average exchange rates prevailing during the period. Adjustments resulting from translation are reported as a separate component of stockholders’ equity. Certain transactions of the foreign subsidiaries are denominated in currencies other than the functional currency, including transactions with the parent company. Transaction gains and losses are included in other income (expense) for the period in which the transaction occurs. The Company’s subsidiaries operating in Canada had net liabilities of approximately $3.9 million as of December 31, 2003, and net assets of approximately $8.3 million as of December 31, 2002.

(n) Operating Segments

The Company is engaged in the discovery, development, and commercialization of pharmaceutical products and, in its current state of development, considers its operations to be a single reportable segment. Financial results of this reportable segment are presented in the accompanying consolidated financial statements. The Company’s only non-United States revenues relate to the Company’s Canadian subsidiary and represent 2%, 73%, and 22% of the Company’s total revenues for the years ended December 31, 2003, 2002, and 2001, respectively.

(o) Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other gains and losses affecting stockholders’ equity that, under accounting principles generally accepted in the United States of America, are excluded from net income (loss). For the Company, these consist of net unrealized gains or losses on marketable investment securities and foreign currency translation gains and losses. Accumulated other comprehensive income as of December 31, 2003 and 2002 consists of accumulated net unrealized gains on marketable investment securities of $1.3 million and $2.5 million, respectively, and foreign currency translation losses of $501,000 and $1.4 million, respectively.

F-18 (Continued)

.0NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(p) Concentration of Suppliers

The Company has entered into agreements with contract manufacturers to manufacture clinical and commercial supplies of its product candidates. In some instances, the Company is are dependent upon a single supplier. The loss of one of these suppliers could have a material adverse effect upon the Company’s operations.

(q) Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.

(2) Collaborative and License Agreements

The Company is pursuing product development both on an independent basis and in collaboration with others. Because the Company has granted exclusive development, commercialization, and marketing rights to each party (Licensee) under certain of the below-described collaborative research, development, and license agreements, the success of each program is dependent upon the efforts of the Licensee. Each of the respective agreements may be terminated early. If any of the Licensees terminates an agreement, such termination may have a material adverse effect on the Company’s operations. Following is a description of significant current collaborations and license agreements:

(a) Amgen Inc.

Effective December 1995, the Company entered into a development and license agreement with Amgen Inc. (Amgen) to develop and commercialize compounds for the treatment of hyperparathyroidism and indications other than osteoporosis. Amgen also acquired an equity investment in the Company in 1995. Amgen paid the Company a $10.0 million nonrefundable license fee and agreed to pay up to $400,000 per year through 2003 in development support, potential additional development milestone payments totaling $26.0 million, and royalties on any future product sales. To date, Amgen has paid the Company $9.0 million in milestone payments. Amgen is incurring all costs of developing and commercializing products. Amgen received exclusive worldwide rights excluding Japan, China, Korea, and Taiwan. The Company recognized research and licensing revenue of $6.0 million, $0, and $3.0 million in 2003, 2002 and 2001, respectively, under the contract.

(b) AstraZeneca AB

In March 2001, the Company entered into a collaborative effort with AstraZeneca AB (AstraZeneca) to discover, develop, and market new small molecule therapies for the treatment of various disorders of the central nervous system. Under the terms of the agreement, the Company licensed to AstraZeneca its proprietary technology related to protein structures known as metabotropic glutamate receptors (mGluRs). Additionally, the Company granted AstraZeneca exclusive rights to commercialize mGluRs subtype-selective compounds. If certain milestones are met, the Company may receive milestone payments of up to $30.0 million and royalties on sales of products that include those compounds. During the five-year research term, the Company and AstraZeneca will work together on the identification of mGluR-active compounds. The Company is required to co-direct the research and pay for an equal share of the preclinical research costs, including capital and a minimum number of personnel, through March 2006 unless earlier terminated by AstraZeneca

F-19 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

or the Company upon six months advance written notice. Once compounds have been selected for development, AstraZeneca will conduct and fund product development. The Company has the right to co-promote any resulting product in the United States and Canada and receive co-promotion revenue, if any. Should the Company elect to co-promote products, in some circumstances it will be required to share in the development and regulatory costs associated with those products.

(c) Eli Lilly and Company and Lilly Canada

In December 1989, Allelix Biopharmaceuticals Inc. (Allelix) entered into a collaborative research and license agreement with Eli Lilly and Company and Lilly Canada (Lilly). Lilly is solely responsible for development, preclinical and clinical testing, and commercialization of any products related to excitatory amino acid receptors under the collaboration, and has an exclusive worldwide license to manufacture and market products developed under the agreement. The Company acquired Allelix in 1999. The Company is entitled to royalties on any sales of products developed under the agreement. The Company recognized no research and licensing revenue under the terms of the agreement in 2003, 2002, and 2001. Lilly is incurring all costs of developing and commercializing products.

(d) GlaxoSmithKline

Effective November 1, 1993, the Company entered into an agreement with GalxoSmithKline (GSK) to collaborate on the research, development and commercialization of calcium receptor active compounds to treat osteoporosis and other bone metabolism disorders, excluding hyperparathyroidism. GSK also acquired an equity investment in the Company in 1993. Under the terms of the agreement, the Company may receive milestone payments of up to $23.0 million and royalties from any product sales under the license. To date, GSK has paid the Company $12.0 million in milestone payments. The GSK agreement established a three-year research collaboration between the parties, which was extended through October 2002. The Company and GSK agreed to continue the funded research on a month-to-month basis through May 2003. Under the GSK agreement, the Company granted GSK the exclusive license to develop and market worldwide compounds described under the GSK agreement, subject to the Company’s right to co-promote in the United States. Once compounds have been selected for development, GSK has agreed to conduct and fund all development of such products, including all human clinical trials and regulatory submissions. In December 2003, the Company entered into an amendment to the agreement with GSK that permits the Company to conduct its own research and development efforts with compounds not in the same class of compounds being pursued by GSK. Under the amendment, the Company is not permitted to commercialize any compounds deriving from the Company’s research if GSK is commercializing a compound. The Company also granted to GSK a right of first negotiation to acquire a license to such compounds.

Under the GSK agreement, the Company has recognized research and licensing revenue of $2.2 million, $438,000, and $750,000 in 2003, 2002, and 2001, respectively. The Company is entitled to receive additional payments upon the achievement of specific development and regulatory milestones. The Company is entitled to receive royalties on sales of such compounds by GSK and a share of the profits from co-promoted products.

F-20 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(e) Janssen Pharmaceutica N.V.

On October 30, 1998, Allelix entered into a collaborative agreement with Janssen Pharmaceutica N.V. (Janssen), a wholly owned subsidiary of Johnson & Johnson, for the research, development, and marketing of new drugs for neuropsychiatric disorders. Johnson & Johnson Development Corporation also acquired an equity investment in Allelix in 1998. Under the terms of the agreement, the Company may receive total milestone payments of up to $21.5 million, development support through November 2003, and royalties from any product sales under this license. Janssen has the right to market products worldwide, subject to a company option for co-promotion in Canada. Under the Janssen agreement, the Company has recognized research and licensing revenue of $1.0 million in 2001. No research and licensing revenue was recognized in 2003 and 2002 under the agreement. Janssen is incurring all costs of developing and commercializing products.

(f) Kirin Brewery Company, Ltd.

Effective June 30, 1995, the Company entered into a five-year agreement with the pharmaceutical division of Kirin Brewery Company, Ltd., a Japanese company (Kirin), to develop and commercialize compounds for the treatment of hyperparathyroidism in Japan, China, Korea, and Taiwan. Kirin paid the Company a $5.0 million license fee and agreed to pay up to $7.0 million in research support, potential additional milestone payments totaling $13.0 million, and royalties on product sales. Kirin research support payments were $500,000 per quarter through June 1997 and were $250,000 per quarter through June 2000. Kirin is incurring all costs of developing and commercializing products. Any payments subsequent to June 2000 represent milestone and royalty payments. Kirin received exclusive rights to develop and sell products within its territory. The parties participate in a collaborative research program utilizing the Company’s parathyroid calcium receptor technology. The Company recognized research and licensing revenue of $3.0 million in 2001. No research and licensing revenue was recognized in 2003 and 2002 under the agreement.

(g) Technology Partnerships Canada

In November 1999, Allelix entered into an agreement with the Government of Canada under its Technology Partnerships Canada (TPC) program relating to the Company’s clinical development program for various intestinal disorders utilizing the ALX-0600 technology. The terms of the agreement called for the Canadian Government to reimburse the Company for up to 30% of qualified costs incurred by Allelix in pursuing clinical development through December 2002, up to a maximum of Cnd. $8.4 million and for the payment by the Company of royalties on revenues received from the sale or license of any product developed from the ALX-0600 technology up to a total of Cnd. $23.9 million or under some circumstances through the period of December 2017, whichever occurs first. Effective December 31, 2003, the Company and TPC mutually agreed to terminate the agreement. See note 12. The Company recognized $0, $1.8 million, and $1.3 million as research support revenue in 2003, 2002, and 2001, respectively.

F-21 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(h) In-License and Purchase Agreements

The Company has entered into certain sponsored research, license, and purchase agreements that require the Company to make research support and milestone payments to academic or commercial research institutions. During 2003, 2002, and 2001, the Company paid to these institutions $3.9 million, $1.2 million, and $885,000, respectively, in sponsored research payments and license fees. As of December 31, 2003, the Company had a total commitment of up to $3.0 million for future research support and milestone payments. Depending on the commercial success of certain products, the Company may be required to pay license fees or royalties.

(3) Marketable Investment Securities

Investment securities available for sale as of December 31, 2003 are summarized as follows (in thousands):

	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses		Fair value
Equity securities:
Common stock	$	1	—	—		1
Debt securities:
Corporate		71,148	1,176	(17	)	72,307
Municipal		51,780	24	(14	)	51,790
Government agency		116,356	218	(122	)	116,452
	$	239,285	1,418	(153	)	240,550

Investment securities available for sale as of December 31, 2002 are summarized as follows (in thousands):

	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses		Fair value
Equity securities:
Common stock	$	1	—	—		1
Debt securities:
Treasury		17,089	224	—		17,313
Corporate		63,513	2,033	(26	)	65,520
Municipal		11,387	15	—		11,402
Government agency		43,830	299	(5	)	44,124
	$	135,820	2,571	(31	)	138,360

F-22 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

Investment securities available for sale in an unrealized loss position as of December 31, 2003 are summarized as follows (in thousands):

	Less than 12 months			More than 12 months		Total
	Fair value		Unrealized losses	Fair value	Unrealized losses	Fair value	Unrealized losses
Debt securities:
Corporate	$	5,621	17	—	—	5,621	17
Municipal		7,010	14	—	—	7,010	14
Government agency		31,536	122	—	—	31,536	122
	$	44,167	153	—	—	44,167	153

All securities in an unrealized loss position as of December 31, 2003 are debt securities. Debt securities in an unrealized loss position as of December 31, 2003 were not impaired at acquisition, and the decline in fair value is due to interest rate fluctuations.

Maturities of investment securities available for sale are as follows at December 31, 2003 (in thousands):

	Amortized cost		Fair value
Due within one year	$	123,680	124,133
Due after one year through five years		115,604	116,416
Total debt securities		239,284	240,549
Equity securities		1	1
	$	239,285	240,550

For the years ended December 31, 2003, 2002, and 2001, purchases of marketable investment securities were $333.6 million, $220.5 million, and $422.7 million, respectively. For the years ended December 31, 2003, 2002, and 2001, sales and maturities of marketable investment securities were $230.4 million, $251.6 million, and $374.3 million, respectively.

F-23 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(4) Goodwill and Identifiable Intangible Assets

Goodwill. The cost of acquired companies in excess of the fair value of the net assets and purchased intangible assets at acquisition date was recorded as goodwill. As of December 31, 2003, the Company had goodwill of $8.4 million, which is net of $4.2 million in accumulated amortization, from the acquisition of Allelix in December 1999. The Company recorded an expense of $17.8 million in December 1999 for in-process research and development that was acquired as part of the Company’s purchase of Allelix. Through December 31, 2001, goodwill was amortized over a period of six years on a straight-line basis. The following table sets forth reported net loss and basic and diluted net loss per share, as adjusted, to exclude amortization of goodwill and the assembled workforce component of purchased intangibles, which would not have been recorded under SFAS No. 142:

	Year ended December 31, 2001
Net loss, as reported	$	(49,968	)
Amortization expense of goodwill and assembled workforce		2,074
Net loss, as adjusted	$	(47,894	)
Basic and diluted net loss per share, as reported	$	(1.67	)
Amortization expense of goodwill and assembled workforce per basic and diluted share		.07
Basic and diluted net loss per share, as adjusted	$	(1.60	)

Purchased Intangible Assets. Purchased intangible assets consist of patents acquired in our December 1999 acquisition of Allelix and are amortized over a period of five years on a straight-line basis. The following table sets forth the gross carrying amount, accumulated amortization, and net carrying amount of purchased intangible assets:

	As of December 31, 2003			As of December 31, 2002
Gross carrying amount	$	8,016		6,581
Accumulated amortization		(6,413	)	(3,949	)
Net carrying amount	$	1,603		2,632

F-24 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

Amortization expense associated with purchased intangible assets was $1.5 million, $1.3 million, and $1.3 million for 2003, 2002, and 2001, respectively. Estimated amortization expense for existing purchased intangible assets is expected to be $1.6 million for the fiscal year ending December 31, 2004.

(5) Leases

The Company has noncancelable operating leases for office and laboratory space that expire in 2007, noncancelable operating leases for certain equipment that expire in 2006, and a noncancelable ground lease that expires in 2043. See also note 15. Rental expense for these operating leases was approximately $1.4 million, $1.2 million, and $1.1 million for 2003, 2002, and 2001, respectively. The future lease payments under noncancelable operating leases as of December 31, 2003 are as follows (in thousands):

	Operating leases
Year ending December 31:
2004	$	1,752
2005		788
2006		695
2007		564
2008		185
Thereafter		8,904
Total minimum lease payments	$	12,888

(6) Convertible Notes Payable

In July 2003, the Company completed a private placement of $192.0 million in 3.0% Convertible Notes due June 15, 2008 (Notes). The Company received net proceeds from these notes of approximately $185.9 million, after deducting costs associated with the offering. The Notes accrue interest at an annual rate of 3.0% payable semiannually in arrears on June 15 and December 15 of each year, beginning December 15, 2003. Accrued interest on the Notes was approximately $256,000 as of December 31, 2003. The holders may convert all or a portion of the Notes into common stock at any time on or before June 15, 2008. The Notes are convertible into common stock at a conversion price of $36.59 per share, subject to adjustment in certain events. The Notes are unsecured senior debt obligations and rank equally in right of payment with all existing and future unsecured senior indebtedness. On or after June 20, 2006, the Company may redeem any or all of the Notes at redemption prices of 100% of their principal amount, plus accrued and unpaid interest through the day preceding the redemption date. Upon the occurrence of a “fundamental change,” as defined in the indenture governing the Notes, holders of the Notes may require the Company to redeem all or a part of the Notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest and liquidated damages, if any. The Company has filed a registration statement with the United States Securities and Exchange Commission covering the resale of the Notes and common stock issuable upon conversion of the Notes. The Company incurred debt issuance costs of $6.1 million, which are being amortized over a five-year period. The effective interest rate on the Notes, including debt issuance costs, is 3.6%.

F-25 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(7) Capital Stock

(a) Stockholder Rights Plan

In December 1996, the board of directors approved the adoption of a Stockholder Rights Plan (the Rights Plan). The Rights Plan was subsequently amended on December 31, 2001 to increase the purchase price of a share of Series A Junior Participating Preferred Stock and to extend the expiration date of the Rights Plan. The Rights Plan provides for the distribution of a preferred stock purchase right (Right) as a dividend for each outstanding share of the Company’s common stock. This Right entitles stockholders to acquire stock in the Company or in an acquirer of the Company at a discounted price in the event that a person or group acquires 20% or more of the Company’s outstanding voting stock or announces a tender or exchange offer that would result in ownership of 20% or more of the Company’s stock. Each right entitles the registered holder to purchase from the Company 1/100th of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share at a price of $300 per 1/100th of a preferred share, subject to adjustment. The Rights may only be exercised on the occurrence of certain events related to a hostile takeover of the Company as described above. In any event, the Rights will expire on December 31, 2011. The Rights may be redeemed by the Company at $0.01 per right at any time prior to expiration or the occurrence of an event triggering exercise. At December 31, 2003, the Rights were not exercisable.

(b) Exchangeable Shares of NPS Allelix Inc.

On December 23, 1999, in connection with the acquisition of all of the outstanding common shares of Allelix, NPS Allelix Inc., an acquisition subsidiary of the Company, issued 3,476,009 exchangeable shares to certain Canadian stockholders of Allelix in exchange for its shares of Allelix. The exchangeable shares are treated as the functional equivalent of NPS common stock. On July 4, 2003, the Company redeemed all outstanding exchangeable shares for shares of NPS common stock. As a result, there are no longer any exchangeable shares outstanding.

(c) Capital Stock Transactions

As more fully described in note 12, in June 2003, the Company and Enzon Pharmaceuticals, Inc. (Enzon) mutually agreed to terminate the Agreement and Plan of Reorganization (Merger Agreement). As part of the agreement to terminate the merger, the Company issued Enzon 1.5 million shares of its common stock valued at $35.6 million.

In October 2002, the Company completed a public offering of 4.6 million shares of its common stock at $23.95 per share, with net proceeds after deducting offering costs of $7.3 million to the Company of approximately $102.9 million.

F-26 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(8) Stock-Based Compensation Plans

As of December 31, 2003, the Company has four stock option plans: the 1987 Stock Option Plan (the 1987 Plan), the 1994 Equity Incentive Plan (the 1994 Plan), the 1994 Nonemployee Directors’ Stock Option Plan (the Directors’ Plan), and the 1998 Stock Option Plan (the 1998 Plan). An aggregate of 6,880,114 shares are authorized for issuance under the four plans.

As of December 31, 2003, there are no shares reserved for future grant under the 1987 Plan, there are 243,534 shares reserved for future grant under the 1994 Plan, there are 65,430 shares reserved for future grant under the Directors’ Plan, and there are 2,572,430 shares reserved for future grant under the 1998 Plan. Under the Company’s 1994 Plan and the 1998 Plan, the exercise price of options granted is generally not less than the fair market value on the date of grant. The number of shares, terms, and exercise period are determined by the board of directors on an option-by-option basis, and the exercise period does not extend beyond ten years from the date of the grant. Options generally vest 28% after one year and 2% to 3% per month thereafter. Each of the Company’s stock option plans have a ten year life.

Under the Directors’ Plan, each new director who is not an employee of the Company is initially granted options to purchase 15,000 shares of common stock. Additional options for 3,000 shares are granted annually for each year of service. The exercise price of options granted is the fair market value on the date of grant.

On March 26, 2001, the Company modified the 1994 Plan and the 1998 Plan such that all outstanding options at the date of modification vest upon a change in control of the Company. The March 26, 2001 intrinsic value of the remaining unvested modified options is $608,000 at December 31, 2003. The Company has not recorded compensation expense for the intrinsic value of unvested options as a change in control is not considered probable as of December 31, 2003. At such time that a change in control is considered probable, the Company may incur a charge to compensation expense.

On December 13, 2002, the Company modified the option grants of certain employees. The result of the option modification was that upon the occurrence of a strategic corporate event in which the employee is severed, the employee would receive some period of vesting acceleration and have an increased period of time to exercise vested options. The December 13, 2002 intrinsic value of the affected options is $22.1 million at December 31, 2003. The Company has not recorded compensation expense for the intrinsic value of affected options for any one of these employees as the strategic corporate event and ultimate severance is not considered probable as of December 31, 2003. At such time that severance is deemed probable for any one of these employees, the Company may incur a charge to compensation expense.

On December 13, 2002, the Company adopted an arrangement for the exercise of employee stock options following retirement. Pursuant to this arrangement, the Company modified option grants for each employee who later retires and meets certain criteria. Under the plan, retiring employees receive two years of vesting acceleration and have the remaining life of the options to exercise vested options. Employees are eligible to retire when the combination of years of service and age, with a minimum age of 55, equal at least 70 years. During 2003, the Company recorded compensation expense of $960,000 upon the retirement of one employee and one Board member which represented the December 13, 2002 intrinsic value of the affected options. The Company has not recorded additional compensation expense for the intrinsic value of

F-27 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

impacted options for any other employee as the Company is not able to estimate which employees will retire, the timing of that retirement, or the number of affected options. As of December 31, 2003, no employee has notified the Company of his/her intention to retire. At such time as it is possible to estimate the number of employees who will benefit from the modification, the Company may incur a charge to compensation expense.

The Company also has an Employee Stock Purchase Plan (the Purchase Plan) whereby qualified employees are allowed to purchase limited amounts of the Company’s common stock at the lesser of 85% of the market price at the beginning or end of the offering period or purchase period. The Company has authorized 335,000 shares for purchase by employees. Employees purchased 32,533, 19,487, and 20,813 shares under the Purchase Plan in the years ended December 31, 2003, 2002, and 2001, respectively, and 96,961 shares remain available for future purchase.

A summary of activity related to aggregate options under all four plans is indicated in the following table (shares in thousands):

	Years ended December 31
	2003			2002			2001
	Number of shares	Weighted average exercise price		Number of shares	Weighted average exercise price		Number of shares	Weighted average exercise price
Options outstanding at beginning of year	3,111	$	16.64	2,632	$	14.05	2,485	$	8.74
Options granted	1,385		23.64	900		22.34	694		29.24
	4,496			3,532			3,179
Options exercised	445		8.12	309		8.72	460		7.40
Options canceled	53		21.83	112		23.51	87		18.68
	498			421			547
Options outstanding at end of year	3,998		19.95	3,111		16.64	2,632		14.05
Options exercisable at end of year	1,941		16.03	1,635		11.54	1,417		8.45
Weighted average fair value of options granted during the year			16.04			14.91			19.60

F-28 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

The following table summarizes information about stock options outstanding at December 31, 2003 (shares in thousands):

	Options outstanding				Options exercisable
Range of exercise price	Outstanding as of December 31, 2003	Weighted average remaining contractual life	Weighted average exercise price		Exercisable as of December 31, 2003	Weighted average exercise price
$ 0.00 – 5.63	227	4.0	$	3.97	227	$	3.97
5.64 – 11.26	896	4.6		9.25	857		9.18
11.27 – 16.89	119	6.8		13.95	58		13.06
16.90 – 22.52	1,503	8.8		21.66	322		22.07
22.53 – 28.16	467	9.5		26.48	28		26.15
28.17 – 33.79	714	7.7		29.70	402		29.67
33.80 – 39.42	59	7.5		35.94	36		35.89
39.43 – 45.05	5	6.8		41.29	4		41.33
45.06 – 50.68	2	4.5		48.13	2		47.98
50.69 – 56.31	6	6.7		54.02	5		54.04
	3,998	7.4		19.95	1,941		16.03

Pursuant to SFAS No. 123, the Company has estimated the fair value of each option grant on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2003, 2002, and 2001, respectively: risk free interest rates of 3.2%, 4.5%, and 4.9%; expected dividend yields of 0%; expected lives of 5 years; and expected volatility of 85%, 80%, and 76%. The weighted average fair value of employee stock purchase rights granted under the Employee Stock Purchase Plan (the Purchase Plan) in 2003, 2002, and 2001 was $10.82, $13.85, and $23.03, respectively. The fair value for the employee stock purchase rights was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions in 2003, 2002, and 2001, respectively: risk free interest rates of 1.2%, 1.8%, and 4.1%; expected dividend yields of 0%; expected lives of 0.5 years; and expected volatility of 79%, 75%, and 103%. The Company granted options in 2003, 2002, and 2001 to nonemployees for the performance of services. Options granted to nonemployees are remeasured based on their fair value until such options vest. Stock compensation cost for nonemployees is recognized over the period services are provided. The fair value of the options granted to nonemployees was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions in 2003, 2002 and 2001, respectively: risk free interest rates of 3.1%, 3.1%, and 5.4%; expected dividend yields of 0%; contract lives of 4.8 years, 2.0 years, and 5.7 years; and expected volatility of 103%, 99%, and 71%.

The Company granted 811,540 stock options during 2003 to employees with a weighted average exercise price of $21.46 and a weighted average fair value of $14.60 that were contingent upon the shareholders approving an increase in the authorized shares. The shareholders of the Company approved the increase in authorized shares on August 21, 2003 when the market value of the common stock was $26.51. As a result, the Company recorded deferred compensation of $4.1 million. The deferred compensation is being amortized over the four-year vesting period of the stock options.

F-29 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(9) Income Taxes

The Company has income tax expense (benefit) for the years ended December 31, 2003, 2002, and 2001 of $(2,530,000), $(102,000), and $300,000, respectively.

Income tax differed from the amounts computed by applying the U.S. federal income tax rate of 34% to loss before income tax expense as a result of the following (in thousands):

	2003			2002		2001
Computed “expected” tax benefit	$	(58,795	)	(29,558	)	(16,887	)
Goodwill amortization		—		—		529
Foreign tax rate differential		(3,188	)	(3,395	)	2,078
Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets attributable to operations and other adjustments		87,073		34,341		9,484
Adjustment to deferred tax assets for enacted changes in foreign tax laws and rates		(16,468	)	6,268		12,930
U.S. and foreign credits		(6,446	)	(6,699	)	(7,953	)
State income taxes, net of federal tax effect		(2,200	)	(577	)	117
Foreign R&D wage tax credits recoverable		(2,530	)	—		—
Other		24		(482	)	2
	$	(2,530	)	(102	)	300

The Company recorded an income tax benefit of $2.4 million during the year ended December 31, 2003 for refundable income tax credits relating to research and development activities in the Canadian province of Quebec. The amounts recorded in the year ended December 31, 2003 represents the Company’s estimate of amounts it believes are probable of being received and retained by the Company. Prior to the year ended December 31, 2003, the Company was not able to estimate or conclude that it was probable that the Company would receive and retain amounts related to this credit.

Domestic and foreign components of income (loss) before taxes are as follows (in thousands):

	2003			2002		2001
Domestic	$	(61,747	)	(13,038	)	3,893
Foreign		(111,178	)	(73,896	)	(53,561	)
Total loss before taxes	$	(172,925	)	(86,934	)	(49,668	)

F-30 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2003 and 2002 are presented below (in thousands):

	2003					2002
	Domestic			Foreign		Domestic		Foreign
Deferred tax assets:
Stock compensation expense	$	3,098		—		1,193		—
Accrued compensation		173		—		—		—
Equipment and leasehold improvements, principally due to differences in depreciation		562		13		495		63
Intangible assets		—		5,454		—		3,507
Research and development pool carryforward		—		64,772		—		42,820
Net operating loss carryforward		58,816		70,021		36,393		20,670
Research credit carryforward		5,733		—		5,437		—
Investment tax credit carryforward		—		22,988		—		15,739
Total gross deferred tax assets		68,382		163,248		43,518		82,799
Less valuation allowance		(68,382	)	(163,248	)	(43,518	)	(82,799	)
Deferred tax assets		—		—		—		—
Deferred tax liabilities		—		—		—		—
Net deferred tax asset (liability)	$	—		—		—		—

Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 2003 will be allocated as follows: 1) To the extent that the Allelix acquired net deferred tax assets are recognized, the tax benefit will be applied to reduce any remaining unamortized goodwill and then any remaining unamortized other purchased intangible assets related to the acquisition. At December 31, 2003, the remaining unamortized goodwill and other intangible assets equaled $10.0 million. 2) Tax benefits in excess of the acquired goodwill and other purchased intangibles related to the acquisition will be reported as a reduction of income tax expense. The valuation allowance includes the benefit for stock option exercises which increased the size of the domestic net operating loss carryovers. Future reductions to the domestic valuation allowance will be allocated $59.5 million to operations and $8.9 million to paid-in capital.

The valuation allowance for deferred tax assets as of January 1, 2003 and 2002 was $126.3 million and $97.3 million, respectively. The net change in the Company’s total valuation allowance for the years ended December 31, 2003, 2002, and 2001 was an increase of $105.3 million, $29.0 million, and $11.9 million, respectively.

F-31 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

At December 31, 2003, the Company had domestic and foreign net operating loss and credit carryforwards available to offset future income for tax purposes approximately as follows (in thousands):

	Domestic net operating loss carry- forward for regular income tax purposes		Domestic research credit carry- forward	Canadian net operating loss carryforward for regular income tax purposes		Canadian research pool carry- forward	Canadian investment tax credit carry- forward (net of tax)
				Federal	Provincial
Expiring:
2004	$	—	—	—	1,690		1,981
2005		247	—	606	2,350		2,998
2006		244	—	7	121		—
2007		—	49	12,693	19,674		2,410
2008		2,452	334	27,659	31,403		222
2009		6,342	317	54,081	57,118		—
2010		2,928	166	76,583	79,127		1,478
2011		58	360	—	—		6,393
2012		10,890	846	—	—		6,138
2013		—	—	—	—		7,897
2018		19,497	1,035
2019		18,529	988	—	—		—
2020		19,044	724	—	—		—
2021		1,164	255	—	—		—
2022		16,083	363	—	—		—
2023		60,206	296	—	—		—
Total	$	157,684	5,733	171,629	191,483	193,857	29,517

The Company also has domestic state net operating loss carryovers in varying amounts depending on the different state laws. The Company’s domestic tax loss carryover for alternative minimum tax purposes is approximately the same as the Company’s regular tax loss carryover. The Company’s Canadian research pool carryover of $193.9 million carries forward indefinitely.

As measured under the rules of the Tax Reform Act of 1986, the Company has undergone one or more greater than 50% changes of ownership since 1986. Consequently, use of the Company’s domestic net operating loss carryforward and research credit carryforward against future taxable income in any one year may be limited. The maximum amount of carryforwards available in a given year is limited to the product of the Company’s fair market value on the date of ownership change and the federal long-term tax-exempt rate, plus any limited carryforward not utilized in prior years. Management does not believe that these rules will adversely impact the Company’s ability to utilize the above losses and credits in the aggregate.

F-32 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(10) Employee Benefit Plan

The Company maintains a tax-qualified employee savings and retirement plan (the 401(k) Plan) covering all of the Company’s employees in the United States. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by the lesser of 15% of eligible compensation or the prescribed IRS annual limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching contributions to the 401(k) Plan by the Company on behalf of all participants. The Company matched one-half of employee contributions in 2003 up to a maximum contribution from the Company of the lesser of 3% of employee compensation or $6,000. Total matching contributions for the years ended December 31, 2003, 2002, and 2001 were $263,000, $217,000, and $164,000, respectively.

Additionally, the Company maintains a tax-qualified defined contribution pension plan for its Canadian employees. Employees may elect to reduce their current compensation by 2% or 4% of eligible compensation up to a maximum of Cnd. $7,250 per year and have the amount of such reduction contributed to the pension plan. The Company matches 100% of such contributions. Total matching contributions for the years ended December 31, 2003, 2002, and 2001 were Cnd. $226,000, Cnd. $200,000, and Cnd. $180,000, respectively.

(11) Disclosure about the Fair Value of Financial Instruments

The carrying value for certain short-term financial instruments that mature or reprice frequently at market rates approximates fair value. Such financial instruments include: cash and cash equivalents, accounts receivable, accounts payable, and accrued and other liabilities. The fair values of marketable investment securities are based on quoted market prices at the reporting date. The fair value of the Company’s convertible notes payable, based on quoted market prices at the reporting date, was $211.0 million. The Company does not invest in derivatives.

(12) Merger Costs and Termination Fees

On February 19, 2003, the Company entered into an Merger Agreement with Enzon, which set forth the terms and conditions of the proposed merger of NPS and Enzon. On June 4, 2003, NPS and Enzon announced they had mutually agreed to terminate the Merger Agreement and other ancillary documents entered into in connection with the Merger Agreement. As part of the agreements to terminate the merger, the Company paid Enzon a termination fee in the form of a private placement of 1.5 million shares of the Company’s common stock valued at $35.6 million based upon the $23.747 per share closing price of our common stock on the Nasdaq National Market on June 4, 2003. A Shelf Registration Statement on Form S-3, providing for the resale of these shares by Enzon, was filed with the Securities and Exchange Commission on July 2, 2003. The Company also incurred direct costs relating to the proposed merger of approximately $4.3 million.

In December 2003, the Company reached an agreement to terminate its contract with the Government of Canada under its TPC program. As a result, the Company concluded that it was probable that it would have to repay amounts previously paid by TPC under this research and development agreement and to write off receivables due from TPC. In exchange for mutual releases, the Company paid $4.3 million to the Government of Canada and agreed to release TPC from all outstanding reimbursement obligations, resulting in the write off of $1.9 million in accounts receivable.

F-33 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(13) Recent Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company’s existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003. The adoption of this statement did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

(14) Commitments and Contingencies

The Company has agreed to indemnify, under certain circumstances, certain manufacturers and service providers from and against any and all losses, claims, damages or liabilities arising from services provided by such manufacturers and service providers or from any use, including clinical trials, or sale by the Company or any Company agent of any product supplied by the manufacturers.

The Company has entered into long-term agreements with certain manufacturers, contract research organizations and suppliers that require the Company to make contractual payments to these organizations. As of December 31, 2003, the Company has outstanding commitments under these agreements of approximately $154.6 million. The Company estimates that the outstanding commitments will be paid as follows: $53.7 million in 2004, $36.8 million in 2005, $35.2 million in 2006, $14.5 million in 2007, and $14.4 million in 2008. In February 2004, the Company initiated discussions with certain contract research organizations to pursue mutually acceptable adjustments to the terms of the respective agreements. As these negotiations are still ongoing, the ultimate outcome of these negotiations is uncertain. However, the amount of any adjustments which are agreed to will impact the amount of commitments to be paid in the future.

On July 22, 2003, the Company settled its pending arbitration with Forest Laboratories, Inc. (Forest). The Company had sought a milestone payment of $2.0 million under a 2000 Development and License Agreement between the companies, while Forest had claimed the agreement was terminated before the payment was due. Under the terms of the settlement, Forest paid the Company $1.5 million, and the parties exchanged mutual general releases.

F-34 (Continued)

NPS PHARMACEUTICALS, INC. AND SUBSIDIARIES

(A Development Stage Enterprise)

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

(15) Subsequent Events

In January 2004, the Company signed a long-term reservation agreement with a manufacturer for the “fill and finish” production of PREOS in support of commercial launch. As part of this commitment, the Company will be required to pay $5.7 million in 2004 prior to the production of commercial supplies of PREOS which will occur over a three-year period commencing in 2005.

In January 2004, the Company signed a binding term sheet with the MaRs Discovery District in downtown Toronto, Ontario, concerning the lease of approximately 52,000 square feet of laboratory, support and administrative space. The term of the lease is ten years and eight months with a commencement date of November 1, 2004. No payments are required during the first eight months of the lease term followed by an annual base rent commitment of approximately $860,000 through June 30, 2015. Two of the Company’s outside board of directors serve as directors of the MaRs Discovery District. These directors receive no financial remuneration for serving as directors of the MaRs Discovery District.

F-35

EXHIBIT INDEX

Exhibit Number	Description of Document
2.1	Arrangement Agreement made as of September 27, 1999, as amended by Amendment No. 1 as of October 28, 1999 and as amended and restated as of November 15, 1999 between Allelix Biopharmaceuticals Inc. and the Registrant (1)
3.1A	Amended and Restated Certificate of Incorporation of the Registrant (2)
3.1B	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, dated December 16, 1999 (3)
3.1C	Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant, dated December 18, 1996 (4)
3.1D	Amendment to Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant, dated September 5, 2000 (5)
3.1E	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, dated September 30, 2003
3.2A	Amended and Restated Bylaws of the Registrant (4)
3.2B	Certificate of Adoption of Amendments to the Amended and Restated Bylaws of the Registrant, dated February 19, 2003 (12)
4.1	Specimen Common Stock Certificate (4)
4.2A	Rights Agreement, dated as of December 4, 1996, between the Registrant and American Stock Transfer & Trust, Inc., with Exhibit A, Form of Certificate of Designation of Series A Junior Participating Preferred Stock of the Registrant; Exhibit B, Form of Right Certificate; and Exhibit C, Summary of Rights to Purchase Shares of Preferred Stock of the Registrant (6)
4.2B	First Amendment to the Rights Agreement and Certificate of Compliance with Section 27 thereof, dated December 31, 2001 (7)
4.2C	Second Amendment to the Rights Agreement and Certificate of Compliance with Section 27 thereof, dated February 19, 2003 (8)
4.3	Indenture, dated as of June 17, 2003, between Registrant and U.S. Bank National Association, as Trustee, including the form of 3% Convertible Subordinated Notes due 2008 attached as Exhibit A thereto. (14)
10.1	1987 Stock Option Plan and Form of Stock Option Agreement (4)
10.1B	1987 Stock Option Plan, as amended December 2002 (12)
10.2A	1994 Equity Incentive Plan and Form of Stock Option Grant Agreement (4)
10.2B	1994 Equity Incentive Plan, as amended December 1996 (9)
10.2C	1994 Equity Incentive Plan, as amended December 2002 (12)
10.3A	1994 Non-Employee Directors’ Stock Option Plan (4)
10.3B	1994 Non-Employee Directors’ Stock Option Plan, as amended December 1996 (9)
10.3C	1994 Non-Employee Directors’ Stock Option Plan, as amended December 2002 (12)
10.4A	1994 Employee Stock Purchase Plan and Form of Offering Document (4)
10.4B	1994 Employee Stock Purchase Plan as amended December 1996, and Form of Offering Document (9)
10.4C	1994 Employee Stock Purchase Plan, as amended December 2002 (12)
10.4D	1994 Employee Stock Purchase Plan, as amended June 2003
10.5A	1998 Stock Option Plan (10)
10.5B	1998 Stock Option Plan, as amended December 2002 (12)
10.5C	1998 Stock Option Plan, as amended June 2003
10.6	Form of Indemnity Agreement entered into between the Registrant and each of its officers and directors (4)
10.7A	Severance Pay Plan (12)
10.7B	Form of Agreement Providing Specified Benefits Following Termination of Employment Incident to a Merger, Acquisition or Other Change of Control or to Some Other Strategic Corporate Event, between the Registrant and each of its executive officers
10.8A	Collaborative Research and License Agreement between the Registrant and SmithKline Beecham Corporation (now GlaxoSmithKline), dated November 1, 1993 (4)

10.8B	Amendment Agreement to Collaborative Research and License Agreement between GlaxoSmithKline, effective June 29, 1995 (9)
10.8C	Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 28, 1996 (4)
10.8D	Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 24, 1997 (10)
10.8E	Amendment Agreement between the Registrant and GlaxoSmithKline, dated October 27, 1997 (10)
10.8F	Amendment to Collaborative Research and License Agreement between the Registrant and GlaxoSmithKline, dated November 26, 1997 (10)
10.8G	Letter, dated January 24, 2000, from SmithKline Beecham to NPS Re: Amendment Agreement to Amend the November 26, 1997 Amendment Agreement to Amend the November 26, 1997 Amendment Agreement (12)
10.8H	Letter, dated May 15, 2000, from SmithKline Beecham to NPS Re: Amendment Agreement (12)
10.8I	Letter, dated August 1, 2001, from GlaxoSmithKline to NPS Re: Amendment Agreement to Amend the January 24, 2000 Amendment Agreement (12)
10.9A	Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc., dated February 19, 1993 (4)
10.9B	Letter dated March 15, 1993 from the Registrant to The Brigham and Women’s Hospital, Inc. regarding Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc. (12)
10.9C	Amendment to Patent Agreement between the Registrant and The Brigham and Women’s Hospital, Inc., effective February 7, 1996 (11)
10.9D	1999 Patent Agreement Amendment between the Registrant and The Brigham and Women’s Hospital, Inc., effective February 18, 1999 (12)
10.10	Collaborative Research and License Agreement between the Registrant and Kirin Brewery Company, Ltd. dated June 29, 1995 (11)
10.11	Development and License Agreement between the Registrant and Amgen Inc. effective as of December 27, 1995 (9)
10.12A	Office Lease between Registrant and Salt Lake Research Park Associates, dated June 3, 1994 (11)
10.12B	Amendment to Lease between Registrant and Salt Lake Research Park Associates, effective December 1, 1995 (12)
10.12C	Amendment to Office Lease between Registrant and Salt Lake Research Park Associates, effective July 1, 1997 (12)
10.12D	Third Amendment to Lease between Registrant and Salt Lake Research Park Associates, effective March 1, 1997 (12)
10.12E	Fourth Amendment to Lease between Registrant and Salt Lake Research Associates, LC, dated September 22, 1998 (12)
10.12F	Fifth Amendment to Lease between Registrant and Salt Lake Research Associates, LC, dated April 14, 1999 (12)
10.13	Manufacturing Agreement between NPS Allelix Corp. and SynCo Bio Partners B.V., effective as of May 17, 2001 (13)
10.14	Addendum to Manufacturing Agreement between NPS Allelix Corp. and SynCo Bio Partners B.V., effective as of October 26, 2001 (13)
10.15	Lease Agreement between Registrant and University of Utah, effective December 10, 2003
10.16	Agreement of Sublease between Harrison & Star, Inc. d/b/a Hyphen Solutions, effective November 2003
10.17	Term Sheet between the MaRS Discovery District and the Registrant, dated January 23, 2004
12.1	Computation Ratio of Earnings Available to Cover Fixed Charges
21.1	List of Subsidiaries
23.1	Consent of Independent Auditors
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 Certification), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 Certification), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

⁽¹⁾ Incorporated herein by reference to the Registrant’s Definitive Proxy Statement (SEC File No. 000-23272, Film No. 99760104, filing date November 18, 1999).

⁽²⁾ Incorporated herein by reference to the Registrant’s Registration Statement on Form S-1 filed on January 21, 1994 (SEC File No. 333-74318).

⁽³⁾ Incorporated herein by reference to the Registrant’s Registration Statement on Form S-3 filed on September 6, 2000 (SEC File No. 333-45274, Film No. 717603).

⁽⁴⁾ Incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated December 19, 1996 (SEC File No. 000-23272, Film No. 96683282).

⁽⁵⁾ Incorporated herein by reference to the Registrant’s Registration Statement on Form 8-A12G/A (SEC File No. 000-23272, Film No. 1826478, filing date December 31, 2001).

⁽⁶⁾ Incorporated herein by reference to the Registrant’s Registration Statement on Form 8-A/A (SEC File No. 000-23272, Film No. 03575669, filing date February 21, 2003).

⁽⁷⁾ Incorporated herein by reference to the Registrant’s Registration Statement on Form S-8 (SEC File No. 333-17521, Film No. 96677983, filing date December 9, 1996).

⁽⁸⁾ Incorporated herein by reference to the Registrant’s Definitive Proxy Statement (SEC File No. 000-23272, Film No. 98590984, filing date April 9, 1998).

⁽⁹⁾ Incorporated herein by reference to Amendment No. 1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed on March 29, 1996.

⁽¹⁰⁾ Incorporated herein by reference to the Registrant’s Current Report on Form 8-K dated January 27, 1998 (SEC File No. 000-23272, Film No. 98513828).

⁽¹¹⁾ Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended on December 31, 1995.

⁽¹²⁾ Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended on December 31, 2002 (SEC File No. 000-23272, Film No. 03612691, filing date March 21, 2003).

⁽¹³⁾ Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K/A for the fiscal year ended on December 31, 2002 (SEC File No. 000-23272, Film No. 03739737, filing date June 11, 2003).

⁽¹⁴⁾ Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 (SEC File No. 000-23272. Film No. 03838243, filing date August 12, 2003).

EX-3.1E

EXHIBIT 3.1E

CERTIFICATE OF AMENDMENT

of the

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

of

NPS PHARMACEUTICALS, INC.

The undersigned, being the President and Assistant Secretary of NPS Pharmaceuticals, Inc. (“NPS” or the “Corporation”), do hereby certify and set forth that the Certificate of Incorporation was originally filed with the Secretary of State of Delaware on March 2, 1992, and was amended and restated in its entirety on June 4, 1994 (the “Certificate of Incorporation”).

1. Paragraph 4.1 of the Certificate of Incorporation, which sets forth the authorized capital stock of the Corporation, is amended to read as follows:

4.1 This 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 one hundred ten million (110,000,000) shares. One hundred five million (105,000,000) shares shall be Common Stock, each having a par value of one-tenth of one cent ($.001). Five million (5,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($.001).

2. This Certificate of Amendment was authorized by a unanimous resolution of the Board of Directors followed by the affirmative vote of the holders of a majority of all shares of capital stock of the Corporation entitled to vote thereon at a meeting of the stockholders of the Corporation duly called and held on the 21^st day of August 2003, a quorum being present.

This Amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation law of the State of Delaware.

IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be executed by its President and attested to by its Assistant Secretary this 30^th day of September 2003.

ATTEST:	NPS PHARMACEUTICALS, INC.
/s/ KEVIN J. ONTIVEROS	/s/ HUNTER JACKSON
Kevin J. Ontiveros, Assistant Secretary	Hunter Jackson, Ph.D., President

EX-10.4D

EXHIBIT 10.4D

NPS PHARMACEUTICALS, INC.

1994 EMPLOYEE STOCK PURCHASE PLAN

(as Amended by the Board of Directors in June 2003

and adopted by the Shareholders in August 2003)

1. PURPOSE.

1.1 The purpose of the Employee Stock Purchase Plan (the “Plan”) is to provide a means by which employees of NPS Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and its Affiliates, as defined in subparagraph 1.2, which are designated as provided in subparagraph 2.2, may be given an opportunity to purchase stock of the Company.

1.2 The word “Affiliate” as used in the Plan means any parent corporation or subsidiary corporation of the Company, as those terms are defined in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended (the “Code”).

1.3 The Company, by means of the Plan, seeks to retain the services of its employees, to secure and retain the services of new employees, and to provide incentives for such persons to exert maximum efforts for the success of the Company.

1.4 The Company intends that the rights to purchase stock of the Company granted under the Plan be considered options issued under an “employee stock purchase plan” as that term is defined in Section 423(b) of the Code.

2. ADMINISTRATION.

2.1 The Plan shall be administered by the Board of Directors (the “Board”) of the Company unless and until the Board delegates administration to a Committee, as provided in subparagraph 2.3. 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.

2.2 The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

2.2.1 To determine when and how rights to purchase stock of the Company shall be granted and the provisions of each offering of such rights (which need not be identical).

2.2.2 To designate from time to time which Affiliates of the Company shall be eligible to participate in the Plan.

2.2.3 To construe and interpret the Plan and rights 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, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.

2.2.4 To amend the Plan as provided in paragraph 13.

2.2.5 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.

2.3 The Board may delegate administration of the Plan to a Committee composed of not fewer than two (2) members of the Board (the “Committee”). 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, 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.

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3. SHARES SUBJECT TO THE PLAN.

3.1 Subject to the provisions of paragraph 12 relating to adjustments upon changes in stock, the stock that may be sold pursuant to rights granted under the Plan shall not exceed in the aggregate three hundred thirty five thousand (335,000) shares of the Company’s common stock (the “Common Stock”). If any right granted under the Plan shall for any reason terminate without having been exercised, the Common Stock not purchased under such right shall again become available for the Plan.

3.2 The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.

4. GRANT OF RIGHTS; OFFERING.

The Board or the Committee may from time to time grant or provide for the grant of rights to purchase Common Stock of the Company under the Plan to eligible employees (an “Offering”) on a date or dates (the “Offering Date(s)”) selected by the Board or the Committee. Each Offering shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. If an employee has more than one right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (a) each agreement or notice delivered by that employee will be deemed to apply to all of his or her rights under the Plan, and (b) a right with a lower exercise price (or an earlier-granted right, if two rights have identical exercise prices), will be exercised to the fullest possible extent before a right with a higher exercise price (or a later-granted right, if two rights have identical exercise prices) will be exercised. 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 Offering or otherwise) the substance of the provisions contained in paragraphs 5 through 8, inclusive.

5. ELIGIBILITY.

5.1 Rights may be granted only to employees of the Company or, as the Board or the Committee may designate as provided in subparagraph 2.2, to employees of any Affiliate of the Company. Except as provided in subparagraph 5.2, an employee of the Company or any Affiliate shall not be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee has been in the employ of the Company or any Affiliate for such continuous period preceding such grant as the Board or the Committee may require, but in no event shall the required period of continuous employment be equal to or greater than two (2) years. In addition, unless otherwise determined by the Board or the Committee and set forth in the terms of the applicable Offering, no employee of the Company or any Affiliate shall be eligible to be granted rights under the Plan, unless, on the Offering Date, such employee’s customary employment with the Company or such Affiliate is at least twenty (20) hours per week and at least five (5) months per calendar year.

5.2 The Board or the Committee may provide that, each person who, during the course of an Offering, first becomes an eligible employee of the Company or designated Affiliate will, on a date or dates specified in the Offering which coincides with the day on which such person becomes an eligible employee or occurs thereafter, receive a right under that Offering, which right shall thereafter be deemed to be a part of that Offering. Such right shall have the same characteristics as any rights originally granted under that Offering, as described herein, except that:

5.2.1 the date on which such right is granted shall be the “Offering Date” of such right for all purposes, including determination of the purchase price of such right;

5.2.2 the Offering Period (as defined below) for such right shall begin on its Offering Date and end coincident with the end of such Offering; and

5.2.3 the Board or the Committee may provide that if such person first becomes an eligible employee within a specified period of time before the end of the Offering Period (as defined below) for such Offering, he or she will not receive any right under that Offering.

5.3 No employee shall be eligible for the grant of any rights under the Plan if, immediately after any such rights are granted, such employee owns stock possessing five percent (5%) or more of the total combined voting

2

power or value of all classes of stock of the Company or of any Affiliate. For purposes of this subparagraph 5.3, 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 rights and options shall be treated as stock owned by such employee.

5.4 An eligible employee may be granted rights under the Plan only if such rights, together with any other rights granted under “employee stock purchase plans” of the Company and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit such employee’s rights to purchase stock of the Company or any Affiliate 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) for each calendar year in which such rights are outstanding at any time.

5.5 Officers of the Company and any designated Affiliate shall be eligible to participate in Offerings under the Plan, provided, however, that the Board may provide in an Offering that certain employees who are highly compensated employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate.

6. RIGHTS; PURCHASE PRICE.

6.1 On each Offering Date, each eligible employee, pursuant to an Offering made under the Plan, shall be granted the right to purchase up to the number of shares of Common Stock of the Company purchasable with a percentage designated by the Board or the Committee not exceeding fifteen percent (15%) of such employee’s Earnings (as defined in Section 7(a)) during the period which begins on the Offering Date (or such later date as the Board or the Committee determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no more than twenty-seven (27) months after the Offering Date (the “Offering Period”). In connection with each Offering made under this Plan, the Board or the Committee shall specify a maximum number of shares which may be purchased by any employee as well as a maximum aggregate number of shares which may be purchased by all eligible employees pursuant to such Offering. In addition, in connection with each Offering which contains more than one Purchase Date and a corresponding Purchase Period (as defined in the Offering), the Board or the Committee may specify a maximum aggregate number of shares which may be purchased by all eligible employees on any given Purchase Date under the Offering. If the aggregate purchase of shares upon exercise of rights granted under the Offering would exceed any such maximum aggregate number, the Board or the Committee shall make a pro rata allocation of the shares available in as nearly a uniform manner as shall be practicable and as it shall deem to be equitable.

6.2 The purchase price of stock acquired pursuant to rights granted under the Plan shall be not less than the lesser of:

6.2.1 an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Offering Date; or

6.2.2 an amount equal to eighty-five percent (85%) of the fair market value of the stock on the Purchase Date.

6.3 In the event that the fair market value of the shares on a Purchase Date of an Offering Period is less than the fair market value of the shares on the Offering Date for such Offering Period, then every participant shall automatically (a) be withdrawn from such Purchase Period at the close of such Purchase Date (after the acquisition of shares for such Purchase Period), and (b) be re-enrolled on the first business day subsequent to such Purchase Date with such date now constituting the “Offering Date” for all purposes, including determination of the Purchase Price of such right.

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7. PARTICIPATION; WITHDRAWAL; TERMINATION.

7.1 An eligible employee may become a participant in an Offering by delivering a participation agreement to the Company within the time specified in the Offering, in such form as the Company provides. Each such agreement shall authorize payroll deductions of up to the maximum percentage specified by the Board or the Committee of such employee’s Earnings during the Offering Period. “Earnings” is defined as the total compensation paid to an employee, including all salary, wages (including amounts elected to be deferred by the employee, that would otherwise have been paid, under any cash or deferred arrangement established by the Company), overtime pay, commissions, bonuses, and other remuneration paid directly to the employee, but excluding profit sharing, the cost of employee benefits paid for by the Company, education or tuition reimbursements, imputed income arising under any Company group insurance or benefit program, traveling expenses, business and moving expense reimbursements, income received in connection with stock options, contributions made by the Company under any employee benefit plan, and similar items of compensation. The payroll deductions made for each participant shall be credited to an account for such participant under the Plan and shall be deposited with the general funds of the Company. A participant may reduce (including to zero), increase or begin such payroll deductions after the beginning of any Purchase Period only as provided for in the Offering. A participant may make additional payments into his or her account only if specifically provided for in the Offering and only if the participant has not had the maximum amount withheld during the Purchase Period.

7.2 At any time during an Offering Period a participant may terminate his or her payroll deductions under the Plan and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company provides. Such withdrawal may be elected at any time prior to the end of the Offering Period except as provided by the Board or the Committee 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 payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the participant) under the Offering, without interest, and such participant’s interest in that Offering shall be automatically terminated. A participant’s withdrawal from an Offering will have no effect upon such participant’s eligibility to participate in any other Offerings under the Plan but such participant will be required to deliver a new participation agreement in order to participate in subsequent Offerings under the Plan.

7.3 Rights granted pursuant to any Offering under the Plan shall terminate immediately upon cessation of any participating employee’s employment with the Company and any designated Affiliate, for any reason, and the Company shall distribute to such terminated employee all of his or her accumulated payroll deductions (reduced to the extent, if any, such deductions have been used to acquire stock for the terminated employee), under the Offering, without interest.

7.4 Rights granted under the Plan shall not be transferable, and, except as provided in Section 14, shall be exercisable only by the person to whom such rights are granted.

8. EXERCISE.

8.1 On each purchase date, as defined in the relevant Offering (a “Purchase Date”), each participant’s accumulated payroll deductions and other additional payments specifically provided for in the Offering (without any increase for interest) will be applied to the purchase of whole shares of stock of the Company, up to the maximum number of shares 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 rights granted under the Plan. The amount, if any, of accumulated payroll deductions remaining in each participant’s account after the purchase of shares which is less than the amount required to purchase one share of stock on the final Purchase Date of an Offering shall be held in each such participant’s account for the purchase of shares under the next Offering under the Plan, unless such participant withdraws from such next Offering, as provided in subparagraph 7.2, or is no longer eligible to be granted rights under the Plan, as provided in paragraph 5, in which case such amount shall be distributed to the participant after said final Purchase Date of the Offering, without interest. The amount, if any, of accumulated payroll deductions remaining in any participant’s account after the purchase of shares which is equal to the amount required to purchase whole shares of stock on the final Purchase Date of an Offering shall be distributed in full to the participant after such Purchase Date, without interest.

8.2 No rights granted under the Plan may be exercised to any extent unless the Plan (including rights granted thereunder) is covered by an effective registration statement pursuant to the Securities Act of 1933, as

4

amended (the “Securities Act”). If on a Purchase Date of any Offering hereunder the Plan is not so registered, no rights granted under the Plan or any Offering shall be exercised on said Purchase Date and the Purchase Date shall be delayed until the Plan is subject to such an effective registration statement, except that the Purchase Date shall not be delayed more than two (2) 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 of any Offering hereunder, as delayed to the maximum extent permissible, the Plan is not registered, no rights granted under the Plan or any Offering shall be exercised and all payroll deductions accumulated during the Offering Period (reduced to the extent, if any, such deductions have been used to acquire stock) shall be distributed to the participants, without interest.

9. COVENANTS OF THE COMPANY.

9.1 During the terms of the rights granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such rights.

9.2 The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the rights granted under the Plan. 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 stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such rights unless and until such authority is obtained.

10. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to rights granted under the Plan shall constitute general funds of the Company.

11. 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, any shares subject to rights granted under the Plan unless and until the participant’s shareholdings acquired upon exercise of rights hereunder are recorded in the books of the Company.

12. ADJUSTMENTS UPON CHANGES IN STOCK.

12.1 If any change is made in the stock subject to the Plan, or subject to any rights granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding rights will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding rights.

12.2 In the event of: (a) a dissolution or liquidation of the Company; (b) a merger or consolidation in which the Company is not the surviving corporation; (c) a reverse merger in which the Company is the surviving corporation but the shares of the Company’s 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; (d) a strategic corporate event, such as a merger or acquisition, where the Company is technically the surviving entity, but where other elements of a change of control are present, i.e. change in management team or board composition; (e) a transaction which the Board determines in its sole discretion to constitute a change in control of the Company; or (f) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then, as determined by the Board in its sole discretion (i) any surviving corporation may assume outstanding rights or substitute similar rights for those under the Plan, (ii) such rights may continue in full force and effect, or (iii) participants’ accumulated payroll deductions may be used to purchase Common Stock immediately prior to the transaction described above and the participants’ rights under the ongoing Offering terminated.

13. AMENDMENT OF THE PLAN.

13.1 The Board at any time, and from time to time, may amend the Plan. However, except as provided in paragraph 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by

5

the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will:

13.1.1 Increase the number of shares reserved for rights under the Plan;

13.1.2 Modify the provisions as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (“Rule 16b-3”)); or

13.1.3 Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to obtain employee stock purchase plan treatment under Section 423 of the Code or to comply with the requirements of Rule 16b-3.

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 employee stock purchase plans and/or to bring the Plan and/or rights granted under it into compliance therewith.

13.2 Rights and obligations under any rights granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan, except with the consent of the person to whom such rights were granted or except as necessary to comply with any laws or governmental regulation.

14. DESIGNATION OF BENEFICIARY.

14.1 A participant may file a written designation of a beneficiary who is to receive any shares and 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 him of such shares and 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 Period.

14.2 Such designation of beneficiary may be changed by the participant at any time by written notice. 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 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 discretion, may deliver such shares 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.

15. TERMINATION OR SUSPENSION OF THE PLAN.

15.1 The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on midnight, January 6, 2009. No rights may be granted under the Plan while the Plan is suspended or after it is terminated.

15.2 Rights and obligations under any rights granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person to whom such rights were granted or except as necessary to comply with any laws or governmental regulation.

16. EFFECTIVE DATE OF PLAN.

The Plan shall become effective as determined by the Board, but no rights granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company.

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EX-10.5C

EXHIBIT 10.5C

NPS PHARMACEUTICALS, INC.

1998 STOCK OPTION PLAN

(reflects all amendments by the Board of Directors through June 2003)

1. GENERAL.

1.1 Purpose. The 1998 Stock Option Plan has been established by the Company to provide a means by which employees, directors, and consultants of the Company and its Affiliates may be given the opportunity to benefit from increases in value of NPS stock through the granting of Options. NPS seeks to (a) retain the services of present employees, directors, and consultants; (b) secure and retain the services of new employees, directors, and consultants; and (c) provide incentives for such persons to exert maximum efforts for the success of the Company and thereby promote the long-term interest of the Company, including the growth in value of the Company’s equity and enhancement of long-term stockholder return.

1.2 Types of Options. The Company intends that the Options issued under the Plan shall, in the discretion of the Board or any Board Committee (see paragraph 3.2), be either Incentive Stock Options or Nonstatutory Stock Options (defined below).

1.3 Definitions. Unless otherwise defined, capitalized terms shall have the meaning set forth in Section 2.

2. DEFINITIONS.

2.1 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.

2.2 Board means the Board of Directors of the Company.

2.3 Code means the Internal Revenue Code of 1986, as amended.

2.4 Committee means a Committee appointed by the Board in accordance with paragraph 3.2 herein.

2.5 Company means NPS Pharmaceuticals, Inc., a Delaware corporation.

2.6 Consultant means any person (including an advisor) engaged by the Company or an Affiliate to render consulting services under arrangements intended to compensate such person for such services. The term “Consultant” shall not include a Director who is paid only a director’s fee by the Company or who is not compensated by the Company for services as a Director.

2.7 Continuous Status as an Employee, Director, or Consultant means the employment or relationship as an Employee, Director, or Consultant is not interrupted or terminated by the Company or any Affiliate. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director, or Consultant shall be considered interrupted in the case of:

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2.7.1 any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; provided, however, that for purposes of Incentive Stock Options, any such leave may not exceed 90 days unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company policies) or statute; or

2.7.2 transfers between locations of the Company or between the Company, Affiliates or its successor.

2.8 Day of Determination means the date of the occurrence of an event that requires the determination of the Fair Market Value of an award made hereunder.

2.9 Director means a member of the Board.

2.10 Disability means total and permanent disability as defined in Section 22(e)(3) of the Code.

2.11 Employee means any person, including Officers and Directors, employed by the Company or any Affiliate. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company.

2.12 Exchange Act means the Securities Exchange Act of 1934, as amended.

2.13 Fair Market Value means, as of any date, the value of the common stock of the Company as determined as follows:

2.13.1 If the common stock is listed on any established stock exchange or a national market system, including without limitation, the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation (“Nasdaq”) System, the Fair Market Value of a share of common stock shall be the closing price for such stock on the Day of Determination as quoted on such system as reported in the Wall Street Journal or such other source as the Board deems reliable. In the event the Day of Determination falls on a date that the Nasdaq system is closed, then the Fair Market Value shall be the closing sales price for such stock on the last market trading day prior to the Day of Determination as quoted on such system as reported in the Wall Street Journal or such other source as the Board deems reliable.

2.13.2 If the common stock is quoted on Nasdaq (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a share of common stock shall be the mean between the bid and asked prices for 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;

2.13.3 In the absence of an established market for the common stock, the Fair Market Value shall be determined in good faith by the Board.

2.14 Incentive Stock Option (or “ISO”) 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.

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2.15 Non-Employee Director means a Director who is considered to be a “Non-Employee Director” in accordance with Rule 16b-3(b)(3), or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission.

2.16 Nonstatutory Stock Option (or “NSO”) means an Option not intended to qualify or not eligible to qualify as an ISO or an ISO which, subsequent to its date of grant, no longer qualifies as an ISO under Section 422 of the Code.

2.17 Officer means a person who is an officer of the Company within the meaning of Section 16a-1(f) of the Exchange Act and the rules and regulations promulgated thereunder.

2.18 Option means a stock option granted pursuant to the Plan.

2.19 Option Agreement means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant.

2.20 Optionee means an Employee, Director, or Consultant who holds an outstanding Option.

2.21 Outside Director means a Director who is considered to be an “Outside Director” in accordance with Section 162(m) of the Code, or any other applicable Code sections, regulations, or interpretations of the IRS.

2.22 Plan means this 1998 Stock Option Plan.

2.23 Rule 16b-3 means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

2.24 Securities Act means the Securities Act of 1933, as amended.

3. ADMINISTRATION.

3.1 Powers and Authority. The Plan shall be administered by or under the direction of the Board unless and until the Board delegates administration to a Committee, as provided in paragraph 3.2. The Board shall have the power subject to and within the limitations of the express provisions of the Plan:

3.1.1 To determine from time to time: (a) which of the persons eligible under the Plan shall be granted Options; (b) when and how Options shall be granted; (c) whether an Option shall be intended to qualify as an ISO; (d) the provisions of each Option granted (which need not be identical) including the time or times when a person shall be permitted to receive stock pursuant to the exercise of such Option; (e) whether a person shall be permitted to exercise such Option; and (f) the number of shares with respect to which Options shall be granted to each such person.

3.1.2 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.

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3.1.3 To amend the Plan as provided in Section 12.

3.1.4 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.

3.2 Delegation. The Board may delegate administration of the Plan to a Board committee composed of not fewer than two members (the “Committee”). All members of the Committee shall be Outside Directors or Non-Employee Directors, to the extent necessary to comply with the applicable provisions of Rule 16b-3 and Section 162(m). 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 (and references in this Plan to the Board shall in such event, be to the Committee), 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.

3.3 Director Status. Any requirement that an administrator of the Plan be a Non-Employee Director or an Outside Director shall not apply if the Board or the Committee expressly declares that such requirement shall not apply.

4. SHARES SUBJECT TO THE PLAN.

4.1 Available Shares. Subject to the provisions of Section 11, the number of shares that may be issued pursuant to Options granted hereunder shall not exceed in the aggregate six million five hundred thousand (6,500,000) shares of the Company’s common stock.

4.2 Forfeited or Canceled Shares. Any shares of stock for which an Option has been granted under the Plan that are forfeited because of the failure to meet an Option grant contingency or condition shall again be available for delivery pursuant to new grants under the Plan. To the extent any shares of stock covered by an Option are not delivered to an Optionee or beneficiary because the award is forfeited or canceled, or the shares of stock are not delivered because the award is settled in cash, such shares shall not be deemed to have been delivered for purposes of determining the maximum number of shares of stock available for delivery under the Plan.

4.3 Payment with Shares. If the exercise price of any Option granted under the Plan is satisfied by tendering shares of stock to the Company (by either actual delivery or by attestation), only the number of shares of stock issued net of the shares of stock tendered shall be deemed delivered for purposes of determining the maximum number of shares of stock available for delivery under the Plan.

4.4 Plan Limits. Shares of stock delivered under the Plan in settlement, assumption, or substitution of outstanding awards (or obligations to grant future awards) under the plans or arrangements of another entity shall not reduce the maximum number of shares of stock available for delivery under the Plan, to the extent that such settlement, assumption, or substitution is a result of the Company or Affiliate acquiring another entity (or an interest in another entity). Subject to the provisions of Section 11, the maximum number of shares that may be covered by grants to any one individual shall be 750,000 shares during any three consecutive calendar years.

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5. ELIGIBILITY.

5.1 Option Type. ISOs may be granted only to Employees. NSOs may be granted to Employees, Directors, or Consultants.

5.2 Section 16 Compliance. No Officer or Director shall be eligible for the benefits of the Plan unless at the time discretion is exercised in the selection of an Officer or Director as a person to whom Options may be granted, or in the determination of the number of shares which may be covered by Options granted to the Officer or Director, the Plan otherwise complies with the requirements of Rule 16b-3. This paragraph 5.2 shall not apply if the Board or Committee expressly declares that it shall not apply.

6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. 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:

6.1 Term. No Option shall be exercisable after the expiration of ten years from the date it was granted.

6.2 Price. The exercise price of each Option shall be not less than 100% of the Fair Market Value of the stock subject to the Option on the date the Option is granted.

6.3 Consideration. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations:

6.3.1 in cash; or

6.3.2 by delivery of already-owned shares of common stock of the Company, held by the Optionee for at least six months, or a combination of cash and already-owned shares of common stock of the Company; or

6.3.3 according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other common stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to paragraph 6.4; or

6.3.4 pursuant to a broker assisted exercise same-day sales program; or

6.3.5 as required in the discretion of the Board or the Committee, either at the time of the grant or exercise of the Option; or

6.3.6 any combination of 6.3.1 through 6.3.5 above.

In the case of any deferred payment arrangement, interest shall be payable 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.

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6.4 Transferability.

6.4.1 Incentive Stock Options. In order for an Option to qualify for treatment as an ISO, it may not be transferable except by will or by the laws of descent and distribution. In the event an Optionee transfers such Option, such transfer shall constitute a disqualifying event and the Option shall no longer qualify as an ISO but shall be considered a NSO under the terms of this Plan.

6.4.2 Nonstatutory Stock Option. The Board or Committee may, in its discretion, authorize all or a portion of the NSOs to be granted to an Optionee to be on terms that permit transfer by such Optionee to (a) the spouse, children, or grandchildren of the Optionee (“Immediate Family Members”), (b) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (c) a partnership in which such Immediate Family Members are the only partners, provided that (i) there may be no consideration for any such transfer, (ii) the Option Agreement pursuant to which such Options are granted must expressly provide for transferability in a manner consistent with this Section, (iii) subsequent transfers of transferred Options shall be prohibited except those occurring by will or the laws of descent and distribution, and (iv) the Options shall continue to be subject to all the terms and conditions that applied prior to transfer in the same manner and to the same extent as non-transferred Options, including paragraphs 6.5 through 6.9. The Options shall be exercisable by the transferee only to the extent, and for the periods specified in such sections. The Company expressly disclaims any obligation to provide notice to a transferee of the termination of the Option.

6.4.3 Unless transfer by an Optionee is specifically provided for in an Option Agreement, a NSO shall not be transferable except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder (a “QDRO”), and shall be exercisable during the lifetime of the person to whom the NSO is granted only by such person or any transferee pursuant to a QDRO.

6.5 Vesting. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable (“vest”) with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. 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 criteria) as the Board may deem appropriate. The provisions of this paragraph 6.5 are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised.

6.6 Securities Law Compliance. The Company may require any Optionee, or any person to whom an Option is transferred under paragraph 6.4, as a condition of exercising any such Option, (a) to give written assurances satisfactory to the Company as to the Optionee’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 (b) to give written assurances satisfactory to the Company stating that such

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person is acquiring the stock subject to the Option for such person’s own account and not with any present intention of selling or otherwise distributing the stock. These requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise of the Option has been registered under a then currently effective registration statement under the Securities Act, or (ii) 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.

6.7 Termination of Employment or Relationship as an Employee, Director, or Consultant. In the event an Optionee’s Continuous Status as an Employee, Director, or Consultant terminates (other than upon the Optionee’s death or Disability), the Optionee may exercise his or her Option, but only within such period of time as is determined by the Board, and only to the extent that the Optionee was entitled to exercise at the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the case of an ISO, the Board shall determine such period of time (in no event to exceed three months from the date of termination) when the Option is granted. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to the Plan. Provided, however, that in the event an employee is a Covered Employee as defined under the Company’s Severance Plan, and such employee’s status as an employee is terminated as a result of a change-in-control as defined in the Severance Plan and such employee has elected to receive the severance benefit provided for in the Severance Plan then all employee’s vested options shall remain exercisable for a period of two years from the date of termination of such employee’s employment with the Company.

6.8 Retirement of Optionee. Notwithstanding any contrary Plan provision, in the event an Optionee’s employment as an Employee, Director, or Consultant terminates due to Optionee’ s Retirement, the Optionee shall vest in that number of shares subject to the Option that would have vested had the Optionee remained an Employee, Director or Consultant for an additional two (2) years from the date of Retirement. In addition, the Option shall remain exercisable until the expiration of its term. For purposes of this paragraph, Retirement shall mean the termination of service with the Company or an Affiliate of an Optionee on or after the date on which the Optionee’s number of completed years of service with the Company or Affiliate and age equal or exceed seventy (70) (including termination due to death or Disability after such time).

6.9 Disability of Optionee. In the event an Optionee’s Continuous Status as an Employee, Director, or Consultant terminates as a result of the Optionee’s Disability, the Optionee may exercise his or her Option, but only within twelve months from the date of such termination (or such shorter period specified in the Option Agreement), and only to the extent that the Optionee was entitled to exercise at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to the Plan.

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6.10 Death of Optionee. In the event of the death of an Optionee, the Option may be exercised, at any time within eighteen months following the date of death (or such shorter period specified in the Option Agreement, but in no event later than the expiration of the term of such Option as set forth in the Option Agreement), by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee was entitled to exercise the Option at the date of death. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to the Plan. If, after death, the Optionee’s estate or a person who acquired the right to exercise the Option by bequest or inheritance, or by assignment as provided herein, does not exercise the Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to the Plan.

6.11 Early Exercise. The Option Agreement may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director, or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any nonvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate.

6.12 Withholding. To the extent provided by the terms of an Option Agreement, the Optionee may satisfy any federal, state, or local tax withholding obligation relating to the exercise of such Option by any of the following means or by a combination of such means:

6.12.1 cash payment; or

6.12.2 authorizing the Company to withhold shares from the shares of the common stock otherwise issuable to the participant as a result of the exercise of the Option; or

6.12.3 delivering to the Company owned and unencumbered shares of the common stock of the Company.

7. NO REPRICING, CANCELLATION, OR RE-GRANT OF OPTIONS. Except for certain adjustments due to corporate transactions described in Section 11, the exercise price for any outstanding Option granted under the Plan may not be decreased after the Day of Determination for such Option grant nor may an outstanding Option granted under the Plan be surrendered to the Company as consideration in exchange for the grant of a new Option with a lower exercise price.

8. COVENANTS OF THE COMPANY.

8.1 Stock Availability. During the terms of the Option granted under the Plan, the Company shall keep available at all times the number of shares of stock required to satisfy such grants up to the number of shares of stock authorized under the Plan.

8.2 Authority. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock acquired under the grants, provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan or any 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 stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell stock under such Options unless and until such authority is obtained.

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9. USE OF PROCEEDS FROM STOCK. Proceeds from the exercise of Options under the Plan shall constitute general funds of the Company.

10. MISCELLANEOUS.

10.1 Acceleration. The Board or the Committee shall have the power to accelerate the time at which an Option may first be exercised or the time during which an Option or any part thereof will vest, notwithstanding the provisions in the Option Agreement stating the time at which it may first be exercised or the time during which it will vest.

10.2 Ownership Rights. Neither an Optionee nor any person to whom an Option is transferred under paragraph 6.4 shall be deemed to be the holder of, or to have any of the rights of a holder with respect to any shares subject to such Option unless and until such person has satisfied all requirements for exercise of the Option pursuant to its terms.

10.3 Employment Rights. Nothing in the Plan or any instrument executed pursuant thereto shall confer upon any Employee, Director, Consultant, Optionee, or other holder of Options any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment or relationship as a Director or Consultant of any Employee, Director, Consultant, or Optionee with or without cause.

10.4 ISO Value Limit. To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which ISOs granted after 1998 are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds $100,000, the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as NSOs.

11. ADJUSTMENTS UPON CHANGES IN STOCK AND CORPORATE TRANSACTIONS.

11.1 Stock Adjustments. If any change is made in the stock subject to the Plan, or subject to any Option (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan and outstanding Options will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the class(es) and number of shares and price per share of stock subject to outstanding Options.

11.2 Corporate Transactions. In the event of: (a) a merger or consolidation in which the Company is not the surviving corporation; (b) a reverse merger in which the Company is the surviving corporation but the shares of the Company’s 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; (c) a strategic corporate event, such as a merger or acquisition, where the Company is technically the surviving entity, but where other elements of a change of control are present, i.e. change in management team or board composition; (d) a transaction which the Board determines in its sole discretion to constitute a change in control of the Company; or (e) any capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, then, the time during which Options outstanding under the Plan become vested shall be accelerated and all outstanding Options shall become immediately exercisable upon such event and such Options shall continue to be exercisable until the later of (i) twenty-four (24) months from the effective date of such event, or (ii) the time specified in the Option Agreement during which the Option is

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exercisable following an Optionee’s termination of service; provided, however, that in no event shall the Option be exercisable after the expiration of its term.

12. AMENDMENT OF THE PLAN.

12.1 Amendments. The Board at any time, and from time to time, may amend the Plan. However, as provided in Section 11, no amendment shall be effective unless approved by the stockholders of the Company within twelve months before or after the adoption of the amendment, where the amendment will:

12.1.1 Increase the number of shares reserved for Options under the Plan;

12.1.2 Modify the requirements as to eligibility for participation in the Plan to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Sections 162(m) and 422 of the Code;

12.1.3 Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3 or Nasdaq or other applicable securities exchange listing requirements;

12.1.4 Decrease the minimum exercise price set forth in paragraph 6.2; or

12.1.5 Remove the limitation provided in Section 7.

12.2 Compliance. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide under the provisions of the Code and the regulations promulgated thereunder relating to ISOs and/or to bring the Plan and/or ISOs granted under it into compliance therewith.

12.3 Consent. Rights and obligations under any Option granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan unless (a) the Company requests the consent of the person to whom the Option was granted and (b) such person consents in writing.

13. TERMINATION OR SUSPENSION OF THE PLAN.

13.1 Termination. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on midnight, May 31, 2008. No Options may be granted under the Plan while the Plan is suspended or after it is terminated.

13.2 Rights and Obligations. Any Options granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the holder of the Options.

14. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Options granted under the Plan shall be exercisable unless and until the Plan has been approved by the stockholders of the Company.

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EX-10.7B

EXHIBIT 10.7B

AGREEMENT PROVIDING SPECIFIED BENEFITS

FOLLOWING TERMINATION OF EMPLOYMENT INCIDENT TO

A MERGER, ACQUISITION OR OTHER CHANGE OF CONTROL

OR TO SOME OTHER STRATEGIC CORPORATE EVENT OR OTHER EVENT

Executive:

State or Province of Domicile on Effective Date:

Duration of Determination Period:

Duration of Severance Period:

Effective Date:

This Agreement is entered into on the Effective Date shown above (the “Effective Date”) between NPS Pharmaceuticals, Inc., a Delaware corporation, for itself and its subsidiaries (the “Company”) and the Executive identified above (“Executive”), an employee of the Company.

WHEREAS, the Executive has been hired into or otherwise designated a member of the Company’s “Leadership Corps” due to his/her serving as an officer, professional, or other senior executive of the Company; and

WHEREAS, the Company has previously adopted and currently maintains, for the benefit of the Leadership Corps, a Severance Pay Plan (the “Plan”), a copy of which is attached hereto and incorporated by reference, which provides for certain post-employment benefits as specified therein; and

WHEREAS, in furtherance of the purposes of the Plan and as further assurances to the Executive, the Company’s Board of Directors and its Compensation Committee have previously determined that it is desirable and in the best interest of the Company, its shareholders, and other constituencies to execute this Agreement providing the Executive with specified benefits following termination of Executive’s employment with the Company incident to a merger, acquisition or other form of a Change in Control or incident to some other Strategic Corporate Event or as otherwise set forth herein;

NOW THEREFORE, in consideration of one dollar and other good and valuable consideration, receipt and sufficiency whereof are hereby acknowledged, the Company and Executive hereby agree as follows:

1. Termination of Employment. A covered termination of employment may occur hereunder as follows:

1.1 Change in Control. If at any time within the Executive’s Determination Period (shown above) following a Change in Control (i) the Executive terminates his or her employment with the Company (or any parent or subsidiary of the Company) for Good Reason, or (ii) the Company (or any parent or subsidiary of the Company) terminates Executive’s employment for other than Cause, death or permanent

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disability, then the Company shall pay and provide to the Executive the specified Severance Benefit provided herein for the Severance Period (shown above).

1.2 Strategic Corporate Event. If at any time within the Executive’s Determination Period, following a Strategic Corporate Event, as defined herein, the Executive voluntarily implements a termination of his/her employment for Good Reason then the Company shall pay and provide to the Executive the specified Severance Benefit provided herein for the Severance Period. The Determination Period for this purpose shall begin on the first date when the job prospects for the Executive have been materially altered as a result of such Strategic Corporate Event.

1.3 Other Event. If at any time (i) Executive terminates his employment with Company (or any parent or subsidiary of Company) for Good Reason (as defined in paragraph 2.10 of the attached Plan), or (ii) Company (or any parent or subsidiary of Company) terminates Executive’s employment for other than Cause (as defined in paragraph 2.4 of the attached Plan), then Executive shall receive as severance compensation for the Severance Period his salary and other items of value as set forth in paragraphs 2.1, 2.2, and 2.3 of this Agreement (a) regardless of whether a Change of Control or a Strategic Corporate Event is deemed to exist; (b) regardless of whether Executive is deemed a Covered Employee under the Plan; and (c) regardless of whether the Plan is in effect, has been changed, or if the Plan otherwise fails to provide for Executive a severance compensation at least equal to the severance compensation as set forth in paragraphs 2.1, 2.2, and 2.3 of this Agreement. In the event that any conflict or ambiguity arises between the provisions of this paragraph 1.3 and the provisions of the Plan, any other part of this Agreement, or any other document, then the provisions of this paragraph 1.3 shall supersede and control.

2. Severance Benefits. Upon termination of an Executive’s employment due to a Change in Control (paragraph 1.1), Strategic Corporate Event (paragraph 1.2) or Other Event (paragraph 1.3) during the Executive’s Determination Period, or as otherwise set forth in this Agreement, Executive will become entitled to the following Severance Benefits for his/her Severance Period as follows:

2.1 Salary. The Company will continue to pay Executive his or her annual Base Pay (less applicable withholding taxes), as in effect immediately prior to the date of termination, to be paid periodically in accordance with the Company’s normal payroll policies, or (ii) on mutual agreement of the Company and Executive, Executive shall be paid the aggregate of such pay in a lump sum single payment to be made within the first 90 days of termination. Payments will not be terminated early or reduced in the event of death, disability or reemployment of the Executive prior to receipt of the full amount of this benefit.

2.2 Insurance. If Executive, and any spouse and/or dependents of Executive (“Family Members”) has/have medical and/or dental coverage on the date of Executive’s termination of employment under a group health plan sponsored by

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the Company, the Company will reimburse Executive for the total applicable premium cost for medical and dental coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986, 29 U.S.C. Sections 1161-1168; 26 U.S.C. Section 4980B(f), as amended, and all applicable regulations (referred to collectively as “COBRA”) for Executive and Family Members for the Determination Period (to the extent COBRA coverage lasts for the full term); provided, that the Company shall have no obligation to reimburse Executive for the premium cost of COBRA coverage beginning on or after the date Executive and Family Members first become eligible to obtain comparable benefits from a subsequent employer.

2.3 Stock Options. Effective on the first day of the Executive’s Severance Period, the Executive’s existing stock options will receive accelerated vesting for the longer of (i) the period ending on the last day of the Executive’s Severance Period, or (ii) such other period as the Executive may be entitled under any stock option plan or grant or retirement plan or other provision of any applicable Company practice. The Executive will have the right to exercise all stock options previously vested or vested hereunder beginning of the first day of the Executive’s Severance Period and continuing for the longer of (i) the duration of the Executive’s Severance Period, or (ii) such other period as the Executive may be entitled under any stock option plan or grant or retirement plan or other provision of any applicable Company policy or practice. Notwithstanding the foregoing, the Executive will be required to abide by the terms of any existing “lock-up” agreement to which he/she is a party and by the applicable terms of the Company’s Insider Trading Policy for the period of time otherwise required, and all applicable securities law and regulations.

3. Stipulation. The Executive hereby agrees and stipulates that except as specified in this Agreement, the terms of employment of the Executive remain as they were before this Agreement was executed and acknowledges that this Agreement is not the entire statement of the terms of employment of the Executive but rather constitutes the entire and sole agreement for the subject matter addressed herein.

4. Interpretation and Definitions.

4.1 Interpretation. The provisions of this Agreement are intended to advance the purposes of the Plan and except to the extent any provision hereof supersedes or conflicts with a provision of the Plan, this Agreement and the Plan should be interpreted so has to make them harmonious.

4.2 Incorporation of the Plan in this Agreement. To the extent applicable to the Executive, the Plan is incorporated herein and made a part hereof.

4.3 Definitions. Capitalized terms used herein that are not defined herein have the meaning given in the Plan, unless the context specifies otherwise.

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5. Severability. In case any of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, any such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had been limited or modified (consistent with its general intent) to the extent necessary to make it valid, legal and enforceable, or if it shall not be possible to so limit or modify such invalid, illegal or unenforceable provision or part of a provision, this Agreement shall be construed as if such invalid, illegal or unenforceable provision or part of a provision had never been contained in this Agreement.

6. Amendment. This Agreement shall not be amended, modified or discharged in whole or in part except in writing signed by both of the parties hereto. The failure of either of the parties to require the performance of a term or obligation or to exercise any right under this Agreement or the waiver of any breach hereunder shall not prevent subsequent enforcement of such term or obligation or exercise of such right or the enforcement at any time of any other right hereunder or be deemed a waiver of any subsequent breach of the provision so breached, or of any other breach hereunder.

7. Successors and Assigns. This Agreement shall inure to the benefit of (i) successors of the Company by way of merger, consolidation or transfer of all or substantially all of the assets of the Company and may not be assigned by Executive; and (ii) the heirs, executors, administrators, legal representatives and successors of Executive.

8. Entire Agreement. This Agreement constitutes the entire agreement between the parties concerning the subjects hereof and supersedes all prior understandings and agreements between the parties relating to the subject matter hereof.

9. Governing Law. This Agreement shall be construed and regulated in all respects under the laws of the State or Province where Executive is domiciled on the date hereof.

10. Counterparts. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be taken to be an original, but such counterparts shall together constitute one and the same document.

11. Examples of Change in Control and Other Strategic Corporate Events. By way of illustration and not limitation, provided below are examples to aid in the interpretation of this Agreement.

11.1. Change in Control. Many circumstances that constitute a Change in Control are provided in the Plan. The Compensation Committee of the Board of Directors may declare other circumstances, from time to time.

11.2 Strategic Corporate Event. A Strategic Corporate Event occurs, in general when an individual Executive’s job prospects within the Company are materially altered without Cause. Circumstances that constitute a Strategic Corporate Event leading to a material alteration in the Executive’s job prospects must be determined on a

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case-by-case basis. Such an event may occur for this Executive and not for another executive who has signed a similar severance agreement with the Company and vice-versa. For example, if the Company signs a major product out-license agreement, that event by its terms might constitute a Strategic Corporate Event if it resulted in a material alteration of another executive’s job prospects (given other circumstances) and not for this Executive or vice-versa. Also, the failure in the clinic of one or more late stage programs might constitute a Strategic Corporate Event for this Executive (given relevant circumstances) and a concomitant alteration in this Executive’s job prospects while not constituting a Strategic Corporate Event and not producing a concomitant alteration in the job prospects for another executive and vice-versa. Additionally, a substantial acquisition for cash (with attendant properties and personnel) might cause a re-alignment of duties of senior personnel in a way that caused a material alteration in the job prospects of this Executive (given relevant circumstances) thus constituting a Strategic Corporate Event for this Executive and not for another executive and vice-versa. In circumstances where doubt or uncertainties attend for this Executive, about the occurrence of a Strategic Corporate Event and the required attendant material alteration in this Executive’s job prospects, the Executive and the Company expect that discussion and evaluation will usually bring required clarity and agreement. Where such is not timely obtained, the Company or the Executive may petition the Compensation Committee of the Board of Directors by written correspondence directed to the Chairman of the Committee to resolve any difference. Alternatively, the Executive may use the claims procedure under the Plan.

12. Indemnity. Indemnity is the subject of a separate agreement between the Company and the Executive executed on or about the date of hire.

IN WITNESS WHEREOF, the parties have executed this Agreement, effective the Effective Date shown above.

	NPS Pharmaceuticals, Inc.
	By:
[Executive]	Its:

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EX-10.15

EXHIBIT 10.15

UNIVERSITY OF UTAH

RESEARCH PARK MASTER FORM LEASE

LEASE AGREEMENT

THIS LEASE AGREEMENT (this “Lease”) is entered into this 10th day of December, 2003, by and between the UNIVERSITY OF UTAH, a body politic and corporate, hereinafter referred to as the “Lessor”, and NPS PHARMACEUTICALS, INC., a Delaware Corporation, hereinafter referred to as the “Lessee”.

RECITALS:

A. Lessor has created and established the University of Utah Research Park (the “Research Park”) to acquire, construct and operate an academic research park which will promote industry, research, learning and dissemination of information.

B. Industry is encouraged to participate in this educational endeavor by leasing land owned by Lessor and cooperating with Lessor in the construction and operation of the necessary facilities.

NOW THEREFORE, the parties mutually consent and agree to the following terms and conditions:

ARTICLE I.

DEMISE, TERM AND RENTAL.

SECTION 1.1. The Demise. Lessor does hereby lease unto Lessee the following described tract of land located within the boundaries of the Research Park, hereinafter referred to as the “Leased Premises.” The interest of Lessee created pursuant to this Lease is referred to as the “Leasehold Estate.”

Legal Description:

SEE EXHIBIT “A”

Nothing in this Lease shall be deemed to include as any part of the Leased Premises a fee title interest in the land itself. It is understood and agreed that Lessor cannot and shall not alienate or encumber its fee title interest in the land.

SECTION 1.2. Term. The term of this Lease shall be forty (40) years, commencing on the 10th day of December, 2003, (the “Commencement Date”), and terminating on the 9th day of December, 2043.

SECTION 1.3. Rent. Upon the execution of this Agreement, Lessee shall commence or cause third parties to commence planning and preparations for the construction of a building upon the land the subject hereof, and shall complete or cause to be completed the construction of said Building (hereafter “Building”) as expeditiously as good and proper business practice will permit. In any event, such construction shall be completed by December 10, 2005, (the “Completion Date”); provided that if construction is delayed because of changes, deletions, or additions in construction, strikes, lockouts, casualties, acts of God, war, material or labor shortages, governmental regulation or control or other like or unlike causes beyond the control of Lessee, the construction time period shall be extended for the amount of time construction is delayed.

(a) The sum of One Hundred Eighty Four Thousand Eight Hundred Dollars ($184,800.00) per year, payable in amounts and upon the terms and conditions as hereinafter set forth, shall constitute the base land rental between the date hereof and a date being five (5) years thereafter (the “Base Land Rental”). Said Base Land Rental, to the extent payable as hereinafter provided, shall be paid in advance in equal monthly installments of Fifteen Thousand Four Hundred Dollars ($15,400.00).

(b) The first monthly installment of Base Land Rental shall accrue and be due and payable on January 1, 2004. The monthly installments of Base Land Rental to be thereafter paid by Lessee to Lessor shall be made on the same day of each and every month thereafter during the succeeding five (5) years of this Lease. Lessee shall pay Base Land Rental to Lessor at the Research Park Office, University of Utah, Salt Lake City, Utah, or at such other place as Lessor may from time to time designate in writing.

(c) In addition to any other amounts to be paid to Lessor by Lessee pursuant to the terms of this Lease, Lessee agrees to pay Lessor a one-time payment of EIGHT HUNDRED DOLLARS ($800.00) per acre on the Leased Premises (prorated for any portion of an acre) as

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reimbursement for the installation of underground power distribution lines and utilities in the Research Park. Payment shall be made at the time of execution of this Lease by Lessee. Lessee will also be responsible for normal electrical connections and service fees relating to the use and development of the Leased Premises as specified elsewhere in this Lease.

SECTION 1.4. Escalation Clause. On the fifth (5^th) anniversary of the Commencement Date and every five (5) years thereafter (each such date being referred to as an “Adjustment Date”), a new Land Rental to be paid by Lessee to Lessor shall be determined for the five-year (5) period immediately following such Adjustment Date or for the remaining term of this Lease, whichever is the shorter time. The new Land Rental, payable commencing on such Adjustment Date, shall be such an amount as shall bear the same ratio to the Consumer Price Index for all Urban Consumers, U.S. cities average – all items (1967=100), as shown in the “Survey of Current Business” of the U.S. Department of Commerce (the “Consumer Price Index”) determined as of the date which is sixty (60) days prior to such Adjustment Date as the Base Land Rental bore to the Consumer Price Index on the Commencement Date. Under no circumstances shall the new Land Rental so determined exceed the new Land Rental that would have been due had the Consumer Price Index increased from the Commencement Date at a rate of eight percent (8%) compounded annually; neither shall such new Land Rental be less than the new Land Rental that would have been due had the Consumer Price Index increased from the Commencement Date at a rate of three percent (3%) compounded annually.

SECTION 1.5. Additional Rent. In addition to the Base Land Rental and new Land Rental and as part of the consideration for this Lease and as additional rent under this Lease, Lessee covenants and agrees to bear, pay and discharge promptly as the same becomes due and before delinquency, all taxes, assessments, rates, charges, license fees, ordinary or extraordinary and of every name, nature or kind whatsoever as hereinafter set forth in this Lease.

ARTICLE II.

RENEWAL.

SECTION 2.1. Option to Renew. Lessee shall have the option to renew this Lease for an additional ten (10) years upon the same terms and conditions as herein contained, including the

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provisions with respect to rental contained in Sections 1.3 and 1.4 hereof. Said option may be exercised by Lessee on or before a date sixty (60) days prior to the expiration of the term of this Lease by delivery to Lessor of written notice of its election in the manner as hereinafter provided.

ARTICLE III.

MORTGAGING THE LEASEHOLD ESTATE

AND THE BUILDING.

SECTION 3.1. Limitation on Mortgages. Lessee is hereby given the right, at any time and from time to time, to encumber or pledge its Leasehold Estate or any portion thereof and its interest in any and all buildings, improvements, furnishings, furniture, equipment, fixtures and personal property situated on the Leased Premises and its interest in and to this Lease by mortgage, trust deed, collateral assignment and/or other security instrument (collectively referred to as a “Mortgage”); provided, however, (a) that at the time such Mortgage is made Lessee has not been notified of any default which exists under this Lease which has not been cured, and (b) that no mortgagee, trustee, assignee, beneficiary, secured party or other benefited party with respect to a security instrument (collectively a “Mortgagee”) or anyone claiming by, through or under such Mortgagee shall by virtue of such Mortgage acquire any rights in the land or greater rights in the Leased Premises and building than Lessee then had under this Lease except to the extent that this Lease expressly provides to the contrary. The Mortgagee pursuant to any such Mortgage and the owner of the indebtedness secured by said Mortgage, upon acquiring ownership of the legal and equitable title to the Leasehold Estate or to the Building and other improvements shall hold the same subject to (but shall not be required to assume) the obligations and covenants of Lessee pursuant to this Lease.

SECTION 3.2. Qualifications of Mortgagee. No Mortgagee shall be deemed to be a Mortgagee unless approved by Lessor; however, a college or university, savings bank, bank, trust or insurance company, credit union, pension or profit sharing trust, mortgage banking company, real estate investment trust, eleemosynary association, an organization holding commercial mortgage backed securities, or any other monetary or lending institution, authorized to make loans secured by interests in real estate are herein approved by Lessor.

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Other potential lenders not listed herein must be approved in writing by Lessor to qualify as a Mortgagee hereunder. Lessor agrees to act reasonably and in good faith in granting or withholding such approval. Factors considered by Lessor shall include, but not be limited to, financial reputation, stability and relation to Lessee.

Nothing herein shall be deemed to restrict the right of any Mortgagee to sell or assign all or a portion of or participation in its Mortgage to any person or entity. No Mortgagee shall be entitled to enforce any right or remedy provided for in this Lease or by law until a photocopy, xerox copy, or an executed counterpart of such Mortgage shall be recorded with the Salt Lake County Recorder or delivered to Lessor.

SECTION 3.3. Consent of Mortgage Required. There shall be no cancellation, modification, surrender or amendment of this Lease without the prior written consent of all Mortgagees, unless an Event of Default has occurred under this Lease and Mortgagees have not timely caused said Event of Default to be cured or have not timely filed a foreclosure proceeding pursuant to Section 3.5 of this Lease.

SECTION 3.4. Notices to Mortgagee and Performance by Mortgagee. If a Mortgagee shall have given to Lessor, before any default shall have occurred under this Lease which has not been cured, a written notice, specifying the name and address of such Mortgagee, Lessor shall give to each such Mortgagee a copy of each notice at the same time as and whenever any such notice shall thereafter be given by Lessor to Lessee, addressed to such Mortgagee at the address last furnished to Lessor. No notice from Lessor to Lessee (including any notice relating to a default outstanding on the date of Mortgagee’s notice) shall be deemed to have been given unless and until a copy thereof shall have been so given to such Mortgagee, and no default predicated on the giving of any notice shall be complete unless a copy of such notice shall have been given to said Mortgagee. Lessee irrevocably directs that Lessor accept, and Lessor agrees to accept, performance by any such Mortgagee of any term, covenant, agreement, provision, condition or limitation on Lessee’s part to be performed as though performed and observed by Lessee; provided, except as permitted by Section 3.5 hereof, such performance by said Mortgagee shall occur within the time prescribed therefor in this Lease and for an additional

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period of thirty (30) days with respect to any default by Lessee other than a default in the payment of money due hereunder, or for an additional period of ten (10) days with respect to a default by Lessee in the payment of a sum of money due hereunder. Lessor hereby agrees that the curing or remedying of a default by any Mortgagee within such time shall be deemed the curing or remedying thereof by Lessee, except that with respect to any default which cannot be cured by a Mortgagee until it obtains possession of the Leased Premises, a Mortgagee shall have a reasonable time after it obtains possession to cure such default, provided it diligently proceeds in good faith to enforce its remedies under its Mortgage so as to obtain possession.

SECTION 3.5. Mortgagee’s Grace Period to Cure Certain Defaults and to File Foreclosure Proceedings. Notwithstanding any other provisions contained in this Lease, Lessor will not terminate this Lease or invoke its right to take possession of the land and Building on the happening of an Event of Default specified in subparagraphs (a) or (b) of this Section 3.5 unless it shall first give all Mortgagees whose addresses have been delivered to Lessor as provided in Section 3.4 of this Lease, sixty (60) days prior written notice of such Event of Default and unless any Mortgagee shall within said sixty (60) day period,

(a) As to an Event of Default specified in Section 20.1 (c) or 20.1 (d) or which is not susceptible of being cured by an act which such Mortgagee can perform, have instituted appropriate proceedings to foreclose such Mortgage or otherwise obtain possession of the Leased Premises; or

(b) As to any Event of Default which is not specified in Section 3.5(a) and which is not susceptible of being cured by an act which such Mortgagee can perform without first obtaining possession of the Leased Premises; have obtained possession of the Leased Premises and cured such Event of Default or, if such Event of Default cannot by its nature be cured within such sixty (60) day period, have commenced and thereafter diligently proceeded toward the curing of such Event of Default or have instituted appropriate proceedings to foreclose such Mortgage or otherwise obtain possession of the Leased Premises.

Lessor will not terminate this Lease or invoke its right to take possession of the Leased Premises so long as such Mortgagee diligently proceeds in good faith to enforce its foreclosure

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remedy, and so long as such Mortgagee fully performs all the obligations of Lessee under this Lease that can be performed by such Mortgagee without possession of the Leased Premises including, but not limited to, payment of all rent and any and all other moneys due and payable by Lessee hereunder (but for any Event of Default); provided, however, that if such Mortgagee is able to obtain possession of the Leased Premises during the time that it is enforcing its foreclosure remedy or as a result thereof then such Mortgagee shall perform fully all of Lessee’s obligations under this Lease. In the event such Mortgagee acquires Lessee’s interest in and to the Leased Premises and Building through such a foreclosure proceeding, or otherwise, it shall thereupon become subrogated to all the rights of Lessee under this Lease whereupon:

(a) Lessee shall have no further rights hereunder, and

(b) Such Mortgagee shall take subject to, but shall not be obligated to assume and perform, each and all of Lessee’s obligations and covenants under this Lease.

SECTION 3.6. Right of Mortgagee to Make a New Lease. As an alternative to the rights and obligations of the Mortgagee set forth in Section 3.5, upon receipt by Mortgagee of the notice of Event of Default specified in said Section 3.5, if, within sixty (60) days after the receipt of such notice and continuing thereafter or at any time while Mortgagee is diligently proceeding in good faith to enforce its foreclosure remedy in accordance with Section 3.5, Mortgagee shall

(a) Pay all rent and any and all other moneys due and payable by Lessee hereunder (but for such default and termination);

(b) Perform all the other obligations of Lessee under this Lease to the extent that Lessee shall have failed to perform them (except that with respect to any default which cannot be cured by Mortgagee until it obtains possession, Mortgagee shall have a reasonable time after it obtains possession to cure such default, provided, however, that such extension of time shall not subject Lessor to either fine or imprisonment); and

(c) Surrender to Lessor a fully executed copy of this Lease for cancellation.

Lessor shall, upon written request of Mortgagee made at any time within such time period terminate this Lease and deliver a new lease of the land and a deed to the improvements thereon (subject to the terms and conditions of the new lease) to Mortgagee or its nominee. The new

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lease (whether it be granted to the Mortgagee or its nominee) shall have a term equal to the remainder of the term of this Lease (including any unexercised option to extend the term of this Lease), and shall be at the then applicable rent and upon the terms and conditions herein contained, except for requirements which are no longer applicable or have already been performed. Both said new lease and deed shall be subject only to such exceptions to Lessor’s title as existed as of the date of this Lease and to the rights of any person, firm or other entity of whatsoever kind, character or nature claiming through or under Lessee and any and all matters created or caused by acts or omissions of or by Lessee, provided Lessor shall use reasonable efforts to terminate such rights at the cost and expense of Mortgagee. Mortgagee shall have the right to a new lease as set forth above provided that Mortgagee shall reimburse Lessor for all of Lessor’s expenses, including attorneys’ fees, incident to such efforts, and provided that Mortgagee shall have paid to Lessor all the rent and other sums, charges, costs and expenses due under this Lease (but for such default and termination) up to and including the date of the commencement of the term of such new lease, together with all expenses, including attorneys’ fees, incident to the execution and delivery of such new lease. Nothing contained in this Section 3.6 shall be deemed to impose any obligation on Lessor to deliver physical possession of the Leased Premises to such Mortgagee provided Lessor shall use reasonable efforts to join with and assist Mortgagee in removing any third parties from the Leased Premises as long as Lessor incurs no out-of-pocket cost or expense.

SECTION 3.7. Foreclosure of Leasehold Lien. Prior to commencement of any action to foreclose said Mortgage, the Mortgagee, or any assigns of the Mortgagee, shall notify Lessor in writing of the default by Lessee with a statement of the amount then due and offer to withhold any acceleration of maturity of the promissory note, payment of which is secured by the Mortgage, in the event Lessor shall pay forthwith to said Mortgagee all amounts then in arrears on said Mortgage, and upon such payment to reinstate the Mortgage in all respects as if no default had occurred. Lessor may, at its option, provide Lessee with written notice that it intends to make such payments on said Mortgage. Lessor may then make such payments on the Mortgage unless, within ten (10) days after receiving such notice, Lessee provides to Lessor

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written notice that it contests the existence of a default under the Mortgage and adequate assurance that the default shall be cured if Lessee does not prevail in contesting such default. If Lessee does not provide such notice to Lessor, Lessor may make such payments on the Mortgage and the amount of such payments shall constitute a separate obligation of Lessee to Lessor. Subsequent and successive defaults by Lessee in making payments required by any Mortgage shall be subject to the foregoing provisions each time any such default occurs. The judgment foreclosing the Mortgage and the foreclosure sale thereunder shall not release Lessee from any of its obligations herein set forth.

SECTION 3.8. Estoppel Certificate. Upon the written request of any Mortgagee or prospective Mortgagee, and for the exclusive benefit of said Mortgagee, Lessor will promptly deliver to said Mortgagee a written instrument certifying as to any of the following facts or matters, to the extent the same are then the case or applicable: that such Mortgagee is qualified under Section 3.2 of this Lease; that there are no existing defaults under this Lease; that this Lease is then unmodified and in full force and effect; that plans and specifications then existing and covering improvements proposed to be constructed on the Leased Premises have been approved by or on behalf of Lessor; that improvements constructed upon the Leased Premises have been completed and have been constructed pursuant to and in compliance with this Lease; that the uses to which the Leased Premises are being put or are proposed to be put are permissible under this Lease; the date which constitutes the date the Building was tenant occupied; the amount of the Base Land Rental or after the first Adjustment Date the new Land Rental; and such other reasonable matters to which the Mortgagee makes inquiry.

ARTICLE IV.

RESTRICTIONS ON USE.

SECTION 4.1. Use and Compliance. Lessee may use and occupy the Leased Premises for any lawful purpose permitted by the Protective Covenants attached to and made a part of this Lease (the “Protective Covenants”), but Lessee shall not use or knowingly permit any part of the Leased Premises to be used for any unlawful purpose. Lessee will comply with all applicable federal, state and local laws, ordinances and regulations relating to the Leased Premises and its use and operation by Lessee.

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ARTICLE V.

IMPROVEMENTS, ALTERATIONS AND ADDITIONS.

SECTION 5.1. Permission to Construct. Lessee is granted permission and agrees at its sole cost and expense to construct or contract to construct upon the Leased Premises the Building and auxiliary structures, and shall have the right to develop the remaining Leased Premises in or substantially in accordance with general plans and specifications approved by Lessor in accordance with the Protective Covenants. Said construction shall be pursued by Lessee with due diligence, shall be accomplished in a good and workmanlike manner and shall fully comply with all applicable rules, regulations, ordinances and laws of all governmental authorities having jurisdiction over the same. Lessee shall have the right after the construction of the improvements during the term of this Lease to construct additional buildings or improvements on the Leased Premises, or make alterations and additions to existing buildings and improvements subject to the Protective Covenants.

SECTION 5.2. Ownership of Building and Right of Reversion. So long as this Lease or any lease given in substitution for it pursuant to Section 3.6 remains in force, any building, structure and other improvements constructed by Lessee on the Leased Premises shall be owned in fee simple by Lessee (Lessee to stand seized of the title for the purpose herein set forth). All buildings, structures and improvements constructed by Lessee upon the Leased Premises shall revert to and be and become the property of Lessor immediately upon the termination of the term of this Lease, including any renewal thereof.

ARTICLE VI.

OPTION TO PURCHASE.

SECTION 6.1. Option to Purchase. Lessor shall have the option to purchase the Building under the terms and conditions described in EXHIBIT “B”.

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ARTICLE VII.

PROTECTIVE COVENANTS.

SECTION 7.1. Lessee’s Rights Subject to Protective Covenants. Lessee shall improve, occupy and use the Leased Premises subject to the Protective Covenants.

ARTICLE VIII.

REPAIR AND MAINTENANCE.

SECTION 8.1. Repair and Maintenance. Lessee shall, during the term of this Lease, at its own cost and expense and without cost or expense to Lessor, keep and maintain all buildings and improvements which may be erected on the Leased Premises and all appurtenances thereto in reasonably good and neat order and repair and shall allow no nuisances to exist or be maintained on the Leased Premises. Lessee shall likewise keep and maintain the grounds, sidewalks, roads and parking and landscaped areas located on the Leased Premises in reasonably good and neat order and repair and in substantial conformity with the plans and specifications therefor and in compliance with the Protective Covenants. Lessor shall not be obligated to make any repairs, replacements, or renewals of any kind, nature or description whatsoever to the Leased Premises or any buildings or improvements thereon.

SECTION 8.2. Compliance with Governmental Regulations. Lessee shall comply with all federal, state, county, municipal and other governmental statutes, ordinances, laws and regulations affecting the Leased Premises, the improvements thereon, or any activity or condition on or in the Leased Premises, including without limitation, those governing employee health and safety, environmental compliance and waste disposal.

SECTION 8.3. Waste. Lessee agrees that, except for construction, alteration and refurbishment of improvements as contemplated by this Lease, it will not commit or permit waste upon the Leased Premises other than to the extent necessary for the removal of any buildings or improvements upon the Leased Premises for the purpose of constructing and erecting other buildings and improvements thereon.

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SECTION 8.4. Hazardous Material.

(a) Compliance; Indemnification. Lessee shall comply with all federal, state, county, municipal and other governmental statutes, ordinances, laws, regulations, and judicial and administrative orders relating to the protection of human health and safety, the environment, Hazardous Material (as hereafter defined), and waste storage and disposal except where such compliance obligation arises with respect to facts regarding the Leased Premises in existence prior to the commencement of the term of this Lease or results from migrating of Hazardous Waste from property not part of the Leased Premises. Lessee shall also manage all Hazardous Material so as to avoid any unreasonable risk of contamination to the Leased Premises. If Lessee breaches any of the obligations, warranties or representations of this Lease, including the obligations contained in this Section 8.4., or if the presence of Hazardous Material on or about the Leased Premises caused by Lessee or on the Leased Premises permitted by Lessee violates any applicable law, order, or regulation or results in contamination of the Leased Premises, or if contamination of the Leased Premises or surrounding area by Hazardous Material otherwise occurs for which Lessee is legally liable to Lessor for damage resulting therefrom, Lessee and its successors, assigns and guarantors shall indemnify, defend, and hold Lessor harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities, or losses (including, without limitation, diminution in value of the Leased Premises or Lessor’s reversionary interest in the buildings or other improvements thereon, damages for the loss of restriction of or the use of rentable or usable space or of any amenity of the Leased Premises, damages arising from any injury to employees or third parties and sums paid in settlement of claims, reasonable attorneys’ fees, reasonable consultant fees, and reasonable expert fees) that arise during or after the term of this Lease as a result of that contamination or violation. This indemnification of Lessor by Lessee includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, or restoration work required by any federal, state, or local government agency or political subdivision because of Hazardous Material present in the soil or ground water on, under or about the Leased Premises or migrating or threatening to migrate to or from the Leased Premises resulting from the acts of Lessee, or its tenants, subtenants, licensees, contractors, or employees. Without limiting the foregoing, if the presence of any Hazardous Material on or about the Leased Premises caused by Lessee or on the Leased Premises

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permitted by Lessee, results in any contamination of the Leased Premises or surrounding area, or causes the Leased Premises or surrounding area to be in violation of any laws, rules, statutes, or ordinances, Lessee shall promptly take all actions at its sole expense as are necessary to bring the Leased Premises and surrounding area into compliance with applicable laws, codes, ordinances and regulations; provided that Lessor’s approval of those actions shall first be obtained, which approval shall not be unreasonably withheld so long as those actions would not potentially have any material adverse long-term or short-term effect on the Leased Premises or surrounding area.

As used herein, the term “Hazardous Material” means any hazardous or toxic substance, chemical, material, or waste, which is or becomes regulated by any local governmental authority, the state of Utah, or the United States Government. The term “Hazardous Material” includes, without limitation, any material or substance which is (i) defined as a “hazardous waste” or “hazardous substance” under Utah law; (ii) petroleum, (iii) asbestos; (iv) defined as a hazardous chemical regulated under the OSHA Hazard Communications Standard; (v) defined as a “hazardous waste” pursuant to section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et. seq. (42 U.S.C. Section 6903) as it from time to time may be amended or (vi) defined as a “hazardous substance” pursuant to section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 43 U.S.C. Section 9601 et. seq ., as it from time to time may be amended.

(b) Notification. If Lessee shall become aware or receive notice or other communication concerning (1) any actual, alleged, suspected or threatened violation of laws or regulations governing the environment, the release, investigation, cleanup, remediation or abatement of Hazardous Material, health and safety, or waste disposal; or (2) liability or potential liability of Lessee for any damages in connection with the Leased Premises or past or present activities of any person thereon, including but not limited to notice, report or other communication concerning any actual or threatened event or investigation, letter of warning, inquiry, lawsuit, administrative or judicial complaint, claim, citation, directive, summons, proceeding, notice, order, writ, or injunction, relating to same, then Lessee shall notify Lessor immediately of such notice or

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communication and shall thereafter deliver to Lessor, within fifteen (15) days of the receipt of such notice or communication by Lessee, a written explanation of the notice and any other relevant information. The receipt of such notice shall not be deemed to create any obligation on the part of Lessor to defend or otherwise respond to any such notification except to the extent permission to cure is requested by Lessee as provided herein.

(c) Right of Inspection. In addition to its rights to inspect under Section 17.1, Lessor and Lessor’s agents shall have the right, but not the obligation, at reasonable times after notice to Lessee and without interfering with the business of Lessee and/or its tenants, to inspect, investigate, sample, or monitor the Leased Premises, including any soil, water, ground water, or other sampling, and any other testing, digging, drilling, or analyses, at any time to determine whether Lessee is complying with the terms of these provisions, and in connection therewith, Lessee shall provide Lessor with reasonable access to all relevant facilities, records and personnel (subject to the entry provisions of this Lease). Lessor and Lessor’s agents and employees shall endeavor to minimize interference with Lessee’s or its subtenants’ business but shall not be liable for any such interference, unless Lessor acts in reckless disregard for said business or interferes not in the normal course of prudently remedying the presence of Hazardous Substance. In the event Lessee is in violation of this provision, then all sums reasonably disbursed, deposited, or incurred by Lessor in connection therewith, including, but not limited to, all cost, expense and actual attorneys’ fees, shall be due and payable by Lessee to Lessor, as an item of additional rent, on demand by Lessor, together with interest thereon at the maximum rate allowed by law from the date of that demand until paid by Lessee.

(d) Right to Participate. Lessor, at Lessee’s sole cost and expense, shall have the right, but not the obligation, to join and participate in any legal proceedings or actions initiated in connection with any claims or causes of action arising out of the storage, generation, use, transportation, or disposal by Lessee or Lessee’s agents, of Hazardous Material in, on, under, from, or about the Leased Premises. If the presence of any Hazardous Material in, on, under, or about the Leased Premises caused or permitted by Lessee or Lessee’s agents results in (i) injury to any person, or (ii) injury to or any contamination of the Leased Premises, Lessee, at

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its sole cost and expense, shall promptly take all actions necessary to return the Leased Premises to compliance with applicable codes, regulations, and ordinances. Notwithstanding the foregoing, Lessee shall not, without first obtaining Lessor’s prior written consent, which consent will not be unreasonably withheld and shall be given or rejected within five (5) business days after consent of Lessor is requested, take any remedial action in response to the presence of any Hazardous Material, in, on, under or about the Leased Premises or enter into any settlement agreement, consent decree, or other compromise with any governmental agency with respect to any Hazardous Material claims; provided, however, Lessor’s prior written consent shall not be necessary if the presence of Hazardous Material in, on, under or about the Leased Premises (i) poses an immediate threat to the health, safety, or welfare of any individual, or (ii) is of such a nature that an immediate remedial response is necessary and it is not possible to obtain Lessor’s consent before taking that action.

(c) Surrender. Promptly upon the expiration or sooner termination of this Lease, Lessee shall represent to Lessor in writing that (i) Lessee has made a diligent effort to determine whether any Hazardous Material is in, on, under, or about the Leased Premises, and (ii) no Hazardous Material exists in, on, under, or about the Leased Premises other than as specifically identified to Lessor by Lessee in writing. Prior to the expiration of the term, Lessor may require Lessee, at Lessee’s sole cost and expense, to immediately hire an outside consultant satisfactory to Lessor to perform a Phase I or equivalent environmental audit of the Leased Premises, an executed copy of which shall be delivered to Lessor within thirty (30) days after Lessor’s request therefor. If said Phase I evaluation reveals sufficient evidence to warrant a Phase II investigation, Lessee shall promptly cause such Phase II investigation to be completed and the results therefrom provided to Lessor as set forth herein. If Lessor or the environmental audit discloses the existence of Hazardous Material in, on, under or about the Leased Premises, Lessee shall, at Lessor’s request, immediately prepare and submit to Lessor within thirty (30) days after that request a comprehensive plan, subject to Lessor’s approval, specifying the actions to be taken by Lessor to return the Leased Premises to the condition existing before the introduction therein of Hazardous Material. Upon Lessor’s approval of that cleanup plan, Lessee

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shall, at Lessee’s sole cost and expense, without limitation on any rights and remedies of Lessor under this Lease, or applicable law, immediately implement that plan and proceed to clean up the Hazardous Material in accordance with all applicable laws and as required by that plan and this Lease.

(d) Survival. The provisions of this Lease including, without limitation, the indemnification provisions set forth herein, shall survive any termination of this Lease.

(e) Lessor’s Indemnity. Lessor shall indemnify, defend, and hold Lessee harmless from and against any claims, judgments, damages, penalties, fines, costs, liabilities, and loss (including reasonable attorneys’ fees), subject to the limits and conditions of the Utah Governmental Immunity Act, for death of or injury to any person or damage to any property whatsoever relating to the presence of Hazardous Material in, on, under, or about the Leased Premises where the presence existed prior to the Commencement Date or was caused or permitted by Lessor or persons claiming under Lessor and not caused by Lessee.

SECTION 8.5. Destruction. In the event that at any time prior to the expiration of the term of this Lease there shall be a partial or total destruction of the buildings and improvements on the Leased Premises from any cause, Lessee shall restore the Leased Premises to a safe condition forthwith and Lessee shall either:

(a) Diligently restore and rehabilitate said buildings and improvements, Lessee to be obligated to pay the cost of such restoration and rehabilitation only out of the net proceeds actually received by it from the insurance required under this Lease; or

(b) Within ninety (90) days after such destruction notify Lessor in writing of its election to terminate this Lease and surrender the Leased Premises to Lessor, in which event Lessee shall (1) promptly remove all buildings and improvements from the Leased Premises; (2) diligently restore the land as nearly as possible to the condition existing prior to the construction of said buildings and improvements; (3) make, execute and acknowledge and deliver to Lessor any documents necessary to convey to Lessor all right, title and interest herein granted to Lessee in and to the Leased Premises; and (4) thereupon redeliver the land to Lessor in a reasonably neat and clean condition. Lessee shall be entitled to pay the cost of such restoration

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of the land out of any proceeds received from insurance; the balance of such proceeds shall be divided between Mortgagee, Lessor and Lessee as follows: Mortgagee shall receive an amount equal to the unpaid principal balance of the Mortgage plus accrued interest and any other sums due thereunder or secured thereby; of the sum then remaining, two and one-half percent (2  ¹/2%) shall be paid to Lessor for each year or fractional year which shall have expired after the date of the execution of this Lease. The remainder of such proceeds shall be paid to Lessee. Notwithstanding any such proceeding in which this Lease is terminated, Lessee shall fully perform any obligation under this Lease (except the obligation of restoring and rehabilitating said buildings and improvements and any rental installments) relating to an event occurring or circumstance existing prior to the date of termination of this Lease, including the payment of the accrued portion of any taxes, contributions in lieu of taxes, assessments, or any charges which Lessee is obligated to pay under the terms of this Lease which may be a lien upon the Leased Premises as of the date of termination.

SECTION 8.6. Condemnation. As used in this Section 8.6, the following terms shall have the indicated definitions: (i) “Condemnation Proceeding” shall mean any action or proceeding in which any interest in the Leased Premises or in the buildings or improvements thereon is taken for any public or quasi-public purpose by any lawful authority (except Lessor) through exercise of the power of eminent domain or right of condemnation or by purchase or otherwise in lieu thereof; (ii) “Reversion” shall mean Lessor’s interest in the Leased Premises and in the buildings or improvements thereon, i.e., fee ownership of the Leased Premises subject to Lessee’s ownership of the improvements thereon and subject to Lessee’s Leasehold Estate in the Leased Premises. In the event the provisions of this Section 8.6 become operable during the initial term of this Lease provided for in Section 1.2 hereof, the remaining term of Lessee’s Leasehold Estate shall, for purposes of this Section 8.6, be deemed to be the balance of said initial term plus the entire extended term provided for in Section 2.1 hereof; and (iii) “Leasehold Estate” shall mean all interests in the Leased Premises and in the improvements thereon, less the Reversion.

If the whole of the Leased Premises and the improvements thereon be taken through Condemnation Proceedings, this Lease shall automatically terminate as of the date of taking and

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the entire award resulting therefrom shall be divided between Mortgagee, Lessor, and Lessee as follows: Lessor shall receive that portion of the award attributable to the Reversion; Mortgagee shall receive an amount equal to the unpaid principal balance secured by the Mortgage plus accrued interest and any other sums due thereunder or secured thereby. Lessee shall receive any remaining sum.

If only a portion of the Leased Premises or the improvements thereon be taken through Condemnation Proceedings, Lessor shall receive that portion of the award attributable to the Reversion. In the event a Mortgage then affects the Leased Premises, all or any portion of the award attributable to the Leasehold Estate shall be applied toward reduction of the Mortgage debt and/or toward minimizing or compensating for adverse effects on the Leased Premises and paying the cost of improvements or refurbishing required on account of the Condemnation Proceeding, with the amount applied toward each purpose being that specified in a writing delivered to Lessor and Lessee by the Mortgagee. Lessee hereby consents to the Mortgagee’s decision concerning the manner in which said award is to be applied and hereby authorizes Lessor to rely upon such decision. That portion, if any, of said award specified by the Mortgage to be used in minimizing or compensating for adverse effects on the Leased Premises and improvements which result from the taking shall be available for use by Lessee under subparagraphs (a) and (b) below. That portion, if any, of said award remaining after deduction of the amounts required by the Mortgagee to be applied toward reduction of the Mortgage debt or toward minimizing or compensating for adverse effects on the Leased Premises and improvements shall be paid to Lessee.

If only a portion of the Leased Premises or the improvements thereon be taken through Condemnation Proceedings Lessee, notwithstanding the provisions of the immediately following paragraph of this Section 8.6, shall not have the right to terminate this Lease without the prior written consent of any Mortgagee interested in the Leased Premises. If such Mortgagee refuses to give such consent or if Lessee does not elect to terminate this Lease after obtaining such consent:

(a) Lessee shall take such steps approved by the Mortgagee and Lessor as may be necessary to minimize or compensate for adverse effects on the Leased Premises and improvements which result from the taking.

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(b) All or any portion of the award attributable to the Leasehold Estate and the improvements shall be applied toward reduction of the Mortgage debt and/or toward minimizing or compensating for adverse effects on the Leased Premises and improvements which result from the taking, with the amount applied toward each purpose being determined by the Mortgagee as aforesaid. Lessee shall receive any remaining sum.

(c) The rent payable hereunder shall, from and after the date of taking, be equitably reduced on the basis of that portion of the Leased Premises and the improvements thereon which remain usable by Lessee.

If a portion of the Leased Premises or the improvements thereon be taken and in Lessee’s reasonable judgment the balance is thereby rendered unsuitable for its purposes, Lessee at its option may terminate this Lease by giving Lessor written notice of such election at any time within ninety (90) days after the date of taking. In connection with any such termination, Lessee shall take the steps called for by items (1) through (4) of subparagraph (b) of Section 8.5 above. That portion of the award attributable to the Reversion shall be paid to Lessor. That portion of the award which is attributable to the Leasehold Estate and which is available for such use shall be applied as follows: Lessee shall receive an amount sufficient to enable any necessary clearing of the Leased Premises; if a portion of said award remains thereafter, it shall be paid to the Mortgagee for application against the unpaid principal balance secured by the Mortgage plus accrued interest and other sums due thereon; and Lessee shall receive any

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remaining sum. Notwithstanding any such termination, Lessee shall fully perform any obligation under this Lease relating to an event occurring or circumstance existing prior to the date of termination, including the payment of the accrued portion of taxes, contributions in lieu of taxes, assessments or any charges which Lessee is obligated to pay under the terms of this Lease which may be a lien upon the remaining portion of the Leased Premises at the date of termination.

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ARTICLE IX.

TAXES AND ASSESSMENTS.

SECTION 9.1. Privilege Tax. Lessee shall be subject to the applicable provisions of Section 59-4-101 et. seq. of the Utah Code Annotated, 1953, as amended (or to such subsequent legislation as may be applicable), and all the terms and conditions as required in said law are made a part of this Lease.

SECTION 9.2. Payment of Taxes and Assessments. Lessee will pay at its own expense all applicable taxes, charges and assessments against the Leased Premises and improvements during the term of this Lease, including assessments against shares of stock in water companies, water, sewer, and other charges ordinary or extraordinary, foreseen or unforeseen, general or special (hereinafter referred to generally as “Assessments”) as shall from and after the date hereof be assessed upon the Leased Premises. Payment of all such Assessments shall be made on or before the last day when payment may be made without interest or penalty. Within thirty (30) days thereafter Lessee shall submit to Lessor receipted bills showing the payment of such Assessments. If any Assessment shall not have been paid within the required time or within thirty (30) days after written request therefor a receipted bill showing the payment thereof shall not have been sent by registered mail or personally presented to Lessor, then in either event Lessor may pay the same and the sum paid, together with interest thereon at the prime rate of interest being charged from time to time by Wells Fargo Bank Northwest, N.A. plus one-half (1/2 %) percent per annum shall constitute additional rent hereunder.

SECTION 9.3. Contesting Taxes. Lessee may contest in good faith by appropriate proceedings at Lessee’s expense any Assessments and may defer payment thereof provided that Lessee shall deposit with Lessor a sum which shall be at least ten (10%) percent greater than the amount of the item so contested or deposit with Lessor an irrevocable letter of credit, surety bond or similar assurance of payment in the foregoing amount and also from time to time on demand of the Lessor deposit such additional sum as may be reasonably required to cover interest or penalties accrued or to accrue on any such item. Lessor may upon thirty (30) days’ written notice to Lessee pay such contested item out of the sum so deposited in case of undue delay in the

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prosecution of such proceeding or if the protection of the Leased Premises or of Lessor’s interest therein shall in the reasonable judgment of Lessor require such payment. When any such contested item shall have been paid, any sum so deposited to cover it and not applied to such payment by Lessor shall be repaid to Lessee.

Lessee may, if it shall so desire, endeavor at any time to contest the validity of any Assessment or to obtain a lowering of the assessed valuation upon the Leased Premises for the purpose of reducing any assessment. In such event Lessor shall offer no objection and at the request of Lessee, but without expense to Lessor, will cooperate with Lessee. If requested by Lessee and provided that Lessor will not in the reasonable judgment of Lessor incur any expense or liability thereby, Lessor will execute any document which may be necessary and proper for any such proceeding. Any such refund shall be the property of Lessee to the extent to which it may be based upon the payment of any Assessment made by Lessee.

SECTION 9.4. Payment to Lessor. In case any person or entity to whom any such sum is directly payable by Lessee under any of the provisions of this Lease shall refuse to accept payment of such sum from Lessee, Lessee shall thereupon give written notice of such fact to Lessor and shall pay such sum directly to Lessor at the office of Lessor at such place or to such agent as Lessor from time to time may designate to Lessee and Lessor shall thereupon pay such sum to such person or entity.

SECTION 9.5. Lessor Not Liable for Taxes. It is understood that Lessor shall in no way be liable or responsible for any tax or Assessment against the Leased Premises, whether it be real, personal or mixed.

ARTICLE X.

UTILITIES AND OTHER SERVICES.

SECTION 10.1. Obligation of Lessee. Lessor shall not be required to furnish to Lessee any service of any kind such as, but not limited to, heat, water, power and security and shall not be liable for the failure of any such service. Lessee shall pay all charges for such services and shall indemnify Lessor against any liability on account thereof.

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SECTION 10.2. Obligation of Lessor. Lessor shall provide Lessee adequate and satisfactory easements or rights-of-way across other land owned and controlled by Lessor for electricity, gas, water, sewer and other customary and necessary utility lines, pipes, conduits or extensions to service the needs of any improvements constructed on the Leased Premises.

ARTICLE XI.

UTILITY EASEMENT AND IMPROVEMENTS.

SECTION 11.1. Right to Enter. Lessor expressly reserves the right of itself and/or any public utility to enter upon those portions of the Leased Premises which are not occupied by buildings or other improvements for the purposes of installing, using, maintaining, renewing and replacing such underground water, oil, gas, steam, sewer and other pipe lines and telephone, electric, power and other lines and conduits as Lessor and/or such public utility may deem desirable in connection with the development or use of any other property in the neighborhood of the Leased Premises, provided that such entry and such work shall not interfere with Lessee’s use and development of the Leased Premises or any building, structure or improvements thereon and provided that except for emergencies requiring immediate actions, Lessee will receive thirty (30) days’ written notice of any such entry. In the event that this right is exercised, Lessor and/or the public utility shall restore the land and all improvements, including landscaping, to their condition prior to such entry and work.

ARTICLE XII.

MECHANICS’ AND OTHER LIENS.

SECTION 12.1. Mechanics’ Lien Claims. Except for mechanics’ liens arising from work performed by or through Lessor pursuant to Section 11.1, Lessee covenants and agrees to keep all of the Leased Premises and every part thereof and all buildings and other improvements thereon free and clear of and from any and all mechanics’, materialmen’s and other liens for work or labor done, services performed, materials, appliances, steam or power contributed, used or furnished or to be used in or about the Leased Premises for or in connection with any operations of Lessee, any alterations, improvements or repairs or additions which Lessee may make or permit or cause to be made, or any work or construction, by, for or permitted by Lessee on or

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about the Leased Premises, and at all times promptly and fully to pay and discharge any and all claims upon which any such lien may or could be based, and to save and hold Lessor and all of the Leased Premises and all buildings and improvements thereon free and harmless of and from any and all liens and claims of liens and suits or other proceedings pertaining thereto.

SECTION 12.2. Interest of Lessor. No mechanics’ or materialmen’s liens or mortgages, or deeds of trust (other than Mortgages on Lessee’s interest in the Leased Premises and the buildings and other improvements thereon) or other liens of any character whatsoever created or suffered by Lessee shall in any way, or to any extent, affect the interest or right of Lessor in any building or other improvements on the Leased Premises, or attach to or affect Lessor’s title to or right in the Leased Premises, except as might be specifically provided under the terms and conditions of this Lease.

SECTION 12.3. Contesting Claims. Lessee shall not be required to pay or discharge any mechanics’ or other lien so long as Lessee shall in good faith proceed to contest the same by appropriate proceedings; provided, however, that Lessee shall give notice in writing to Lessor of its intention to contest the validity of such lien and shall give Lessor security in the form of a surety bond or in form otherwise reasonably acceptable to Lessor in an amount equal to 110% of the amount of such contested lien claim with interest thereon.

ARTICLE XIII.

INDEMNITY.

SECTION 13.1. Indemnity of Lessor. Lessee covenants and agrees that except for claims arising by reason of the sole negligence or willful misconduct of Lessor, its agents or employees, Lessor shall not at any time or to any extent be liable, responsible or in any way accountable for any costs, claims, causes of action, judgments, expenses, loss, injury, death, or damage to persons or property or any other loss or damages whatsoever, including attorneys’ fees, which at any time may be suffered or sustained by Lessee, its employees or by any person whomsoever who may at any time be using or occupying or visiting the Leased Premises or be in, on or about the same, whether such loss, injury, death or damage shall be caused by or in any way result from or arise out of any act, omission or negligence of Lessee, its employees, contractors,

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subcontractors, vendors, suppliers or agents or of any occupant, subtenant, visitor or user of any portion of the Leased Premises or shall result from or be caused by any other matter or thing whether of the same kind as or of a different kind than the matters or things above set forth, and Lessee shall further indemnify, defend, hold and save harmless of, from and against any and all claims, liability, causes of action, judgments, expenses, loss or damage whatsoever, including attorneys’ fees, on account of any such loss, injury, death or damage, except those arising by reason of the sole negligence or willful misconduct of Lessor, its agents or employees. Lessee waives all claims against Lessor for damages to the Building and improvements that are hereafter placed, remodeled, demolished, or rebuilt upon the Leased Premises, and for injuries to persons or property in or about the Leased Premises, from any cause arising at any time, except those arising by reason of the sole negligence or willful misconduct of Lessor, its agents or employees.

SECTION 13.2. Indemnity of Lessee. To the extent allowed by the Utah Governmental Immunity Act, Lessor shall indemnify, defend, hold and save harmless Lessee and its employees, agents, occupants, subtenants and its visitors or the visitors of any subtenant, from and against any and all claims, liabilities, losses or damages on account of loss, injury, death or damage to such indemnified persons arising solely from or by reason of the negligence or willful misconduct of Lessor, its agents and employees.

ARTICLE XIV.

INSURANCE.

SECTION 14.1. Property Insurance. Lessee shall, at its sole expense, obtain and keep in force during the term of this Lease “all risk” property insurance on all buildings, boilers, machinery, equipment, and improvements that are hereafter placed or built upon the Leased Premises. Lessee shall also endeavor to obtain and keep in force earthquake insurance if available and reasonably priced in the insurance market place. Lessor shall be named as a “loss payee as its interests may appear”. The amount of such insurance shall not be less than the full replacement cost of said Building and improvements. Lessee waives as against Lessor any and all claims and demands, of whatsoever nature, for damages, loss or injury to the buildings and improvements that are hereafter placed or built upon the Leased Premises and to the property of

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Lessee in, upon or about the Leased Premises which shall be caused by or result from any and all perils, events or happenings. Lessee further agrees that each such policy of property insurance on the Leased Premises shall specifically waive Lessee’s and Lessee’s insurer’s right of subrogation against Lessor.

The “full replacement cost” shall be defined as replacement cost with new buildings and improvements of like kind and quality.

SECTION 14.2. Other Insurance. During the term of this Lease Lessee shall procure and maintain in full force and effect commercial general liability and pollution liability insurance with limits of not less than One Million Dollars ($1,000,000.00) and general aggregate limits of at least $2,000,000 insuring against any and all liability of Lessee with respect to the Leased Premises or arising out of the construction, improvement, maintenance, use or occupancy thereof. All of such insurance shall provide coverage to insure the performance by Lessee of the indemnity agreement as to liability for injury to or death of persons and injury or damage to property subject of this Lease.

Lessee shall also maintain, if applicable to Lessee’s operations or performance of this contract, business automobile liability covering Lessee’s owned, non-owned and hired motor vehicles, aircraft liability insurance covering any aircraft and/or professional liability insurance with liability limits of at least $1,000,000 per occurrence.

Lessee shall maintain all employee related insurances, in the statutory amounts, such as unemployment compensation, worker’s compensation, and employer’s liability, for its employees or volunteers involved in performing services pursuant to this contract.

SECTION 14.3. Bonding Requirements. In and for Salt Lake County, State of Utah, upon application by either party made after five (5) days of such application, and the decision of such impartial third person as to such limits then to be carried shall be binding upon the parties. Such insurance shall be carried with the limits as thus agreed upon or determined until such limits shall again be changed pursuant to the provisions of this Section 14.3. The expenses of such determination shall be borne equally by Lessor and Lessee.

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SECTION 14.4. Parties Covered. Lessor shall be named as an insured as its interest may appear. The fire and extended coverage insurance shall contain a standard mortgage clause naming the Mortgagee. Any loss adjustment shall require the written consent of Lessor, Lessee, and Mortgagee. The certificate with respect to the policies provided for in this Article XIV shall expressly provide that the policies shall not be canceled or altered without thirty (30) days prior written notice to Lessor and Mortgagee. Upon the issuance of a policy, each such policy or a duplicate or certificate thereof shall be delivered to Lessor for retention by it.

ARTICLE XV.

ASSIGNMENT AND SUBLEASES.

SECTION 15.1. Sublease, Assignment, Successors and Assigns.

(a) Voluntary Assignment. Lessee agrees not to sublet the whole or any part of the Leased Premises or to sell, assign or transfer this Lease or any part or portion of the term hereby created or any interest therein or to permit the use of the Leased Premises except for Lessee’s own purposes without having first obtained the consent in writing of Lessor, which consent Lessor agrees shall not be unreasonably withheld, and in case such consent is given no subsequent similar transaction shall be entered into by Lessee without again obtaining the written consent of Lessor.

A true copy of the documents evidencing such assignment shall be delivered to Lessor and any Mortgagee within ten (10) days after the recording thereof with the Salt Lake County Recorder, together with the address of such assignee.

Lessee covenants that it will not make any assignment of this Lease, except in the manner and upon the conditions set forth above, other than as collateral security to any Mortgagee.

(b) Involuntary Assignment. Except as expressly permitted by this Lease, neither this Lease nor the Leasehold Estate nor any interest of Lessee hereunder in the Leased Premises or any buildings or improvements thereon shall be subject to involuntary assignment, transfer or sale or to assignment, transfer or sale by operation of law in any manner whatsoever, and any such attempted involuntary assignment, transfer or sale shall be void and of no effect.

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Without limiting the generality of the provisions of the preceding paragraph, Lessee covenants and agrees that (i) in the event any proceedings under the Bankruptcy Act or any amendment thereto be commenced by or against Lessee, and, if against Lessee, said proceedings shall not be dismissed before either an adjudication in bankruptcy or the confirmation of a composition, arrangement or plan of reorganization, or (ii) in the event Lessee shall admit to being or be adjudged insolvent or make an assignment for the benefit of its creditors, or (iii) if a writ of attachment or execution be levied on the Leasehold Estate hereby created and be not released or satisfied within forty-five (45) days thereafter, or (iv) if a receiver be appointed in any proceeding or action to which Lessee is a party with authority to take possession or control of the Leased Premises or the business conducted thereon by Lessee, and such receiver be not discharged within a period of ninety (90) days after its appointment, any such event or any involuntary assignment shall be deemed to constitute an Event of Default.

SECTION 15.2. Release of Lessee’s Liability. If an assignment shall be made by Lessee or any successor of Lessee after complying with the conditions and in the manner set forth in Section 15.1 (a), the assignee shall be subject to the same terms and conditions as to future assignments, and to all the covenants, agreements, provisions and conditions contained in this Lease, and Lessee or any successor herein so assigning and conveying shall thereafter be forever released and discharged from this Lease and from the agreements and covenants contained in this Lease.

SECTION 15.3. Limitations on Sublease. All subleases entered into demising all or any part of the improvements or the Leased Premises shall be expressly subject and subordinate to this Lease.

ARTICLE XVI.

WAIVER.

SECTION 16.1. Limitations on Waiver. Lessee further covenants and agrees that if Lessor fails or neglects for any reason to take advantage of any of the terms hereof providing for the termination of this Lease or for the termination or forfeiture of Lessee’s Leasehold Estate, or if Lessor, having the right to declare this Lease terminated or the estate hereby demised,

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terminated or forfeited, shall fail so to do, any such failure or neglect of Lessor shall not be or be deemed or be construed to be waiver of any subsequently arising cause for the termination of this Lease or for the termination or forfeiture of Lessee’s Leasehold Estate, subsequently arising, or as a waiver of any of the covenants, terms or conditions of this Lease or of the performance thereof. None of the covenants, terms or conditions of this Lease can be waived except by the written consent of Lessor.

ARTICLE XVII.

INSPECTION OF PREMISES.

SECTION 17.1. Right of Lessor to Inspect. Lessor shall be entitled at all reasonable times to go on and into the Leased Premises for the purposes of inspecting the Leased Premises and inspecting the performance by Lessee of the terms and conditions of this Lease, including the Protective Covenants.

ARTICLE XVIII.

LESSOR’S DEFENSE OF ACTIONS.

SECTION 18.1. Right to Defend. If Lessee is required to defend any action or proceeding relating to the Leased Premises to which Lessor is made a party, Lessor shall be entitled to appear, defend or otherwise take part in the matter involved at its election by counsel of its own choosing, providing such action by Lessor does not limit or make void any coverage by any insurer of Lessor or Lessee hereunder in respect to the claim or matter in question.

ARTICLE XIX.

NO GENERAL OBLIGATION AGAINST THE STATE OF UTAH

OR THE UNIVERSITY OF UTAH.

SECTION 19.1. Limitation on Lessor’s Obligations. It is understood and agreed that no terms and conditions in this Lease shall be construed to create or establish any general financial obligation for a deficiency judgment against the State of Utah and/or the University of Utah.

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ARTICLE XX.

DEFAULT PROVISIONS.

SECTION 20.1. Events of Default. The following events are hereby defined as “Events of Default”:

(a) The failure of Lessee to pay any installment of rent, or any other payments or deposits of money as herein provided or required, when due and the continuance of such failure for a period of fifteen (15) days after notice thereof in writing.

(b) The failure of Lessee to perform any of the other covenants, conditions and agreements of this Lease on the part of Lessee to be performed, and the continuance of such failure for a period of sixty (60) days after notice in writing thereof from Lessor to Lessee (which notice shall specify the respects in which Lessor contends that Lessee has failed to perform any of such covenants, conditions and agreements) unless, with respect to any default which cannot be cured within sixty (60) days, Lessee, or any person holding by, through or under Lessee, in good faith, promptly after receipt of such written notice, shall have commenced and thereafter continue diligently to prosecute all action necessary to cure such default.

(c) The Event of Default described in Section 15.1 of this Lease.

SECTION 20.2. Remedies in Event of Default. Lessor may treat any one or more of the Events of Default (defined in Section 20.1 hereof) as a breach of this Lease and thereupon at its option by serving written notice by certified mail on Lessee and on Mortgagees at their last known addresses of which Lessor shall have received notice in writing. Such notice by Lessor shall not be effective unless served on both Lessee and Mortgagees. After such notice by Lessor is effective, Lessor shall have, subject to the provisions of Section 3.5 hereof, in addition to all other remedies provided by law, one or more of the following remedies:

(a) Lessor may terminate this Lease and the term created hereby, in which event Lessor may forthwith repossess the Leased Premises and all buildings and improvements thereon and be entitled to recover forthwith as damages a sum of money equal to the value of the rent and other sums provided to be paid by Lessee for the balance of the stated term of this Lease less the rental value of the Leased Premises and all buildings and improvements thereon

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received for said period in the event said land and improvements are re-rented, and any other sum of money and damages due or to become due to Lessor from Lessee.

(b) Lessor may terminate Lessee’s right of possession and may repossess the Leased Premises and all buildings and improvements thereon by forcible entry and detainer suit or otherwise, without demand or notice of any kind to Lessee (except as hereinabove expressly provided) and without terminating this Lease, in which event Lessor may, but shall be under no obligation so to do, relet all or any part of such property for such rent and upon such terms as shall be satisfactory to Lessor (including the right to relet the Leased Premises and all buildings and improvements thereon for a term greater or lesser than that remaining under the stated term of this Lease and the right to relet the Leased Premises and all buildings and improvements thereon as a part of a larger area and the right to change the character or use made of the Leased Premises). For the purpose of such reletting, Lessor may make any repairs, changes, alterations or additions in or to the Leased Premises and all buildings and improvements that may be necessary or convenient; and if Lessor shall fail or refuse to relet the Leased Premises, or if the Leased Premises and all buildings and improvements thereon are relet and a sufficient sum shall not be realized from such reletting, after paying all the costs and expenses of such repairs, changes, alterations and additions and the expense of such reletting and the collection of the rent accruing therefrom, to satisfy the rent above provided to be paid, then Lessee shall pay to Lessor as damages a sum equal to the amount of the rent reserved in this Lease for such period or periods, or, if the Leased Premises have been relet, Lessee shall satisfy and pay any such deficiency upon demand therefor from time to time; and Lessee agrees that Lessor may file suit to recover any sums falling due under the terms of this paragraph from time to time and that any suit or recovery of any portion due Lessor hereunder shall be no defense to any subsequent action brought for any amount not theretofore reduced to judgment in favor of Lessor.

(c) Lessor may take possession of the Leased Premises including all improvements and pay and fully discharge any mortgages or outstanding loans or obligations at which time Lessor would be the sole owner of the real property and all improvements thereon.

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Upon the termination of this Lease and the term created hereby, or upon the termination of Lessee’s right of possession, whether by lapse of time or at the option of Lessor, as aforesaid, Lessee will at once surrender possession of the land and Building to Lessor and remove all effects therefrom; and if such possession be not immediately surrendered, Lessor may forthwith re-enter the land and Building and repossess itself thereof as in its former estate and remove all persons and their effects, using such force as may be necessary without being deemed guilty of any manner of trespass or forcible entry or detainer.

SECTION 20.3. Limitation on Termination of Lease. Notwithstanding any other provision of this Lease, in the event Lessor claims that an Event of Default or other breach of this Lease shall have occurred and such claim becomes the subject of litigation or other binding alternative method of dispute resolution including, without limitation, binding arbitration, all periods to cure granted to Lessee or any Mortgagee pursuant to this Lease shall be tolled and this Lease may not be terminated by Lessor until:

(a) All such litigation or other proceedings are final and all appeal or rehearing periods have expired; and

(b) All cure periods granted to Lessee and Mortgagee under this Lease (which periods shall be deemed to commence to run anew only as of the date described in subsection (a) of this Section 20.3) shall have expired.

ARTICLE XXI.

QUIET ENJOYMENT.

SECTION 21.1. Quiet Enjoyment. Lessor agrees, covenants, represents and warrants: that Lessee, upon paying the rent and all impositions and other charges herein provided for and performing all the covenants and conditions of this Lease, may lawfully and quietly occupy the Leased Premises during the term of this Lease without hindrance or molestation by Lessor or any persons claiming under Lessor; and that Lessor has good right to make this Lease for the full term hereby granted.

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ARTICLE XXII.

DELIVER OF POSSESSION OF PREMISES.

SECTION 22.1. Lessor’s Obligation to Deliver. Lessor agrees to deliver possession of the Leased Premises to Lessee upon delivery of this Lease by Lessor to Lessee, and, if the Leased Premises are at such date occupied by any person, whether under claim of right emanating from Lessor, or otherwise, Lessor shall at its sole cost and expense remove any such person from the Leased Premises.

ARTICLE XXIII.

ATTORNEY’S FEES.

SECTION 23.1. Right to Recover Fees. If any action at law or in equity shall be brought by Lessor or Lessee to recover any rent under this Lease, or for or on account of any breach of or to enforce or interpret any of the covenants, terms or conditions of this Lease, or for the recovery of the possession of the Leased Premises, the prevailing party shall be entitled to recover from the other party, as a part of the prevailing party’s costs, reasonable attorneys’ fees, the amount of which shall be fixed by the court and shall be made a part of any judgment rendered.

ARTICLE XXIV.

LESSEE’S FIXTURES.

SECTION 24.1. Right to Remove Certain Fixtures. Lessee, at any time when Lessee is not in default hereunder, may, and upon termination of this Lease if so requested in writing by Lessor shall, remove from the Leased Premises any fixtures or equipment installed thereon by Lessee, whether or not such fixtures are fastened to the Building or other improvements located upon the Leased Premises and regardless of the manner in which they are fastened, provided, however, that under no circumstances shall any fixtures be removed without Lessor’s written consent if (a) such fixtures or equipment are used in the operation of any building or improvement upon the Leased Premises, and (b) the removal thereof would result in impairing the structural strength of any building or improvement upon the Leased Premises. Lessee shall fully repair any damage occasioned by the removal of any such fixtures and shall leave the buildings and improvements in a good, clean and neat condition.

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ARTICLE XXV.

SHORT FORM OF LEASE.

SECTION 25.1. Record Short Form. This Lease shall not be recorded, but Lessor and Lessee agree to execute a Short Form Lease containing the name of the parties, the legal description of the land, and the term of the Lease.

ARTICLE XXVI.

TIME OF THE ESSENCE.

SECTION 26.1. Time of the Essence. Time is to be of the essence of this Lease and of each and every covenant, term, condition and provision thereof.

ARTICLE XXVII.

NOTICE.

SECTION 27.1. Method of Giving Notice. Any notice given under this Lease must be in writing and must be sent by registered or certified mail to the last address of the party to whom notice is deemed to have been given upon the date of mailing. Lessor designates its address as

	Director, Research Park Research Park Office 505 Wakara Way Salt Lake City, Utah 84108
Lessee hereby designates it address as	Director, Administrative Services NPS Pharmaceuticals, Inc. 420 Chipeta Way Salt Lake City, Utah 84108
With a copy to:	Office of General Counsel NPS Pharmaceuticals, Inc. 420 Chipeta Way Salt Lake City, Utah 84108

ARTICLE XXVIII.

REMEDIES CUMULATIVE.

SECTION 28.1. Lessor’s Remedies Cumulative. All remedies hereinbefore and hereinafter conferred upon Lessor shall be deemed cumulative and no one exclusive of the other, or of any other remedy conferred by law.

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ARTICLE XXIX.

LEASE CONSTRUED AS A WHOLE.

SECTION 29.1. Construction of Lease. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Lessor or Lessee.

ARTICLE XXX.

MEANING OF TERMS.

SECTION 30.1. Gender and Number. Whenever the context so requires, the neuter gender shall include the masculine and the feminine, and the singular number shall include the plural.

ARTICLE XXXI.

BENEFIT.

SECTION 31.1. Benefit. This Agreement shall be binding upon and inure to the benefit of the parties and their successors, assigns and legal representatives.

ARTICLE XXXII.

LIMITATION ON RECOURSE.

SECTION 32.1. Limitation on Recourse. Notwithstanding any other provision of this Lease, neither Lessee nor any of its permitted successors or assigns shall be personally liable in respect of the obligations of Lessee pursuant to this Lease and the sole recourse of Lessor shall be to the interest of Lessee in the Leased Premises and any improvements constructed on the Leased Premises. Lessor shall neither seek nor obtain any judgment or attachment against Lessee or its permitted successors and assigns which shall be enforceable against the separate assets of Lessee or its permitted successors or assigns.

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IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate as of the date first above written.

LESSOR:
UNIVERSITY OF UTAH
By:	/s/ Arnold B. Combe
	Arnold B. Combe, Vice President Administrative Services

LESSEE:
NPS PHARMACEUTICALS, INC.
By:	/s/ Hunter Jackson
	Hunter Jackson, President & CEO

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EXHIBIT A

LEGAL DESCRIPTION

Beginning at a point S65°11’09”E 66.35 feet and N54^O38’21”E 190.000 feet from the existing street monument at Tabby Lane and Colorow Drive and running thence N54^O42’57”W 573.288 feet; thence N35°21’39”W 61.714 feet; thence N54°38’21” E 589.38 feet; thence S35°21’40”E 602.601 feet; thence S54°38’21”W 399.379 feet to the Pont Of Beginning.

Contains 6.974 Acres

Also includes the following non-exclusive easements for purposes of access and landscaping to run concurrently with the Lease:

Beginning at a point S65°11’09”E 66.35 feet from the existing street monument at Tabby Lane and Colorow Drive and running thence N35°21’39”W 540.887 feet; thence S54°42’57”E 573.288 feet; thence S54°38’21”W 190.000 feet to the Point Of Beginning.

Contains 1.180 Acres

Beginning at a point S65°11’09”E 66.35 feet and N54°38’21”E 589.379 feet from the existing street monument at Tabby Lane and Colorow Drive and running thence N35°21’40”W 602.601 feet; thence S46°58’28”E 615.196 feet; thence S54°38’21”W 123.845 feet to the Point Of Beginning. Contains 0.857 Acres

The Basis Of Bearing for these parcels is the record bearing of N35°21’39”W along the center line of Colorow Drive between the existing street monuments at Tabby Lane and Wakara Drive.

EXHIBIT “B”

OPTION TO PURCHASE

NPS Pharmaceuticals, Inc. – University of Utah

Sale/Lease Back Terms

1. Executive Summary: This term sheet summarizes the terms of an Option for Sale and Lease Back to be executed by NPS Pharmaceuticals, Inc. and the University of Utah Research Foundation (Foundation) in connection with a Ground Lease of property in Research Park and owned by the University of Utah.

NPS will grant to the Foundation an option to purchase and lease back the NPS Building to be constructed on the ground, which is the subject of the Ground Lease. The Option will contain the following provisions and such other provisions as are usual and customary and as may be negotiated and agreed upon by the parties upon the advice of counsel.

2. Option Grant: NPS hereby grants to the Foundation an option to purchase the NPS Building on the terms and conditions and at the price specified herein.

3. Purchase Price: The Option Purchase Price will be the total of (i) 80 percent of the NPS Building Project Cost, plus (ii) $480,000.00, representing 80 percent of the estimated construction financing and internal administrative costs to NPS associated with construction of the NPS Building.

4. Report to the Foundation of the NPS Building Project Cost: On or about June 30, 2004, NPS will deliver to the Foundation a written statement of the NPS Building Project Cost. This number will be a firm number and will not change for purposes hereof notwithstanding that the construction has not yet been completed or that NPS has not received a certificate of occupancy.

5. Exercise of the Option: Within 60 days of receipt by the Foundation of the statement from NPS containing the NPS Building Project Cost, the Foundation may exercise the option by informing NPS in writing that it has chosen to do so.

5.1. The notice of exercise of the Option will include a statement of that amount that the Foundation will pay in cash at closing of the Sale and Lease Back. This amount must be at least $5.0 million and such additional amount (in increments of $500,000) as the Foundation may elect, up to the full amount of the Purchase Price.

5.2 The balance of the Purchase Price will be payable in quarterly installments of $500,000 per calendar quarter plus interest at the rate of seven percent per annum (7%) on the unpaid balance, payable until the full Purchase Price has been paid. The payment obligation for the balance of the Purchase Price will be evidenced by delivery of a negotiable promissory note, secured by an appropriate interest in the NPS Building.

6. Closing: In the event the Foundation exercises its Option, the closing will take place within 90 days after the date of notice of exercise of the Option.

7. Lease Back: If the Foundation exercises the Option, the parties will execute a Lease Back Agreement simultaneously with the closing of the purchase of the NPS Building by the Foundation. The Lease Back Agreement will replace the Ground Lease, and will provide that the Foundation will lease the NPS Building and the underlying ground identified in the Ground Lease to NPS for a term of 10 years subject to the following terms and conditions:

7.1 Under the Lease Back Agreement, NPS will pay (i) a monthly rental amount, in equal monthly payments, necessary to fully amortize an amount equal to the Purchase Price over a 30-year period using an interest rate of seven percent per annum (7%); and (ii) an amount to be determined by the parties attributed to the underlying ground.

7.2 The Lease Back Agreement will be a standard triple-net Lease, with NPS responsible to pay all taxes, maintenance, and insurance as is customary under such leases throughout the lease term. In the event that NPS should surrender or vacate any part of the NPS Building prior to the end of the term of the Lease Back Agreement as permitted herein, then the triple-net portion of the Lease will be prorated based on the percentage of square footage occupied by NPS.

7.3 At any time starting on the first day that is more than 36 full months after the effective date of the Lease Back Agreement, NPS may give to the Foundation at least 1-year written notice that NPS intends to vacate all or part of the administrative offices portion(s) of the NPS Building. On the effective date of such notice, the Lease Back Agreement will be deemed amended to remove the prorated portion of the payments associated with the square footage of the portion of the NPS Building that NPS has vacated and returned to the Foundation, and thereafter NPS will be responsible only to pay the prorated monthly payment based on square footage occupied. In no event, however, may NPS exercise this right to vacate net leasable space in the NPS Building amounting to more than fifty percent (50%) of the net leaseable space.

7.4 In the event that NPS exercises its right to withdraw and vacate all or part of the administrative space in the NPS Building, NPS will be responsible at its own expense, for providing reasonably convenient and secure access, consistent with occupancy and fire codes in all respects, for ingress and egress to the returned space suitable for occupancy by up to two other building tenants. Costs associated with any additional tenants will be borne solely by the Foundation.

8. Covenants: NPS covenants that it has sufficient cash and other resources to construct the building and that it will diligently pursue the construction of the NPS Building to a timely completion and occupancy with an intended occupancy date of not later than December 31, 2004.

9. Existing lease at 420 Chipeta Way: NPS intends to occupy its existing space at 420 Chipeta Way in Research Park until it can vacate those premises in favor of the NPS Building. The parties agree that upon NPS vacating those premises, the University will use its “good faith effort” to assume the lease or sublease of the space at a lease rate equal to the then current rental rate for the full remaining term of the existing NPS lease. The Parties agree to use reasonable good faith efforts to secure an assignment or otherwise to secure the right to sublet the space to the University, and NPS agrees to cooperate with the University to exercise any options to extend the NPS existing lease as may be requested by the University. Should the University not be able to assume

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responsibility for the space, the Building Project Cost shall be increased by 5% before the Purchase Price is determined as described in paragraph 3.

10. Definitions: The following terms, shown with an Initial Capital Letter, have the meaning shown here.

10.1 NPS means NPS Pharmaceuticals, Inc., a Delaware corporation with a current place of business at 420 Chipeta Way, Salt Lake City, Utah.

10.2 University means the University of Utah.

10.3 The Ground Lease means the long-term lease of specified land located on Colorow Drive in Research Park, which land is more particularly described by the legal description in the Ground Lease.

10.4 Research Park means the University of Utah Research Park.

10.5 The NPS Building means the building to be constructed by NPS under the Ground Lease.

10.6 NPS Building Project Cost means the total estimated construction costs for construction of the NPS Building to be delivered by NPS and accepted by the University under the terms hereof. Such Cost will include all costs for construction, professional fees, permits, and tenant and leasehold improvements. Such Cost will not include amounts for trade fixtures, construction financing, or NPS’ general internal administration costs associated with the project.

10.7 Option means the Option for Sale and Leaseback described in this term sheet.

10.8 “Foundation” means the University of Utah Research Foundation.

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EX-10.16

EXHIBIT 10.16

AGREEMENT OF SUBLEASE, dated as of the              day of November, 2003, by and between HARRISON & STAR, INC. D/B/A HYPHEN SOLUTIONS, having offices c/o Omnicom Group Inc., 437 Madison Avenue, New York, New York 10022 (“Sublessor”), and NPS PHARMACEUTICALS, INC., a Delaware corporation, having offices at 420 Chipeta Way, Salt Lake City, Utah 84108 (“Sublessee”).

W I T N E S S E T H:

WHEREAS, Sublessor is a tenant of the entire third floor and a portion of the second floor (the “Premises”) in the building known as Morris Corporate Center I, 300 Interpace Parkway, Parsippany, New Jersey (the “Building”), and Sublessee is desirous of subletting a portion of the Premises consisting of the entirety of the 3^rd floor of the Building (the “demised premises”) from Sublessor upon the terms and conditions hereinafter set forth:

NOW, THEREFORE, in consideration of the rental payments to be made hereunder by Sublessee to Sublessor and the mutual terms, covenants, conditions, provisions and agreements hereinafter set forth, Sublessor does hereby sublet to Sublessee and Sublessee does hereby take and hire from Sublessor, the demised premises.

This Sublease shall be expressly subject and subordinate to all of the terms, covenants, conditions, provisions and agreements contained in that certain Agreement of Lease dated as of June 17, 1997, as amended by that certain First Amendment to Lease dated as of September 30, 1997, that certain Second Amendment to Lease dated as of December 31, 1997 and by that certain Third Amendment to Lease dated as of January 21, 1998 entered into between Morris Corporate Center, L.L.C., as landlord (“Underlying Landlord”), and Sublessor, as tenant therein (which lease, as amended, is hereinafter referred to as the “Underlying Lease”). A true copy of the Underlying Lease, with certain of the Excluded Provisions (as hereinafter defined) deleted or redacted, has been delivered to, and reviewed by, Sublessee and is annexed hereto and made a part hereof as Exhibit A. The provisions of the Underlying Lease are specifically incorporated herein by reference, except such terms, covenants, conditions, provisions and agreements as are specifically inconsistent with the terms hereof or are expressly set forth in Paragraph 20 below (the “Excluded Provisions”) and except that all references therein to “Landlord” shall mean Underlying Landlord, all references therein to “Tenant” shall mean Sublessee, all references to “Demised/Leased Premises” shall mean demised premises, and all references to “this Lease” shall mean this Sublease.

1. Term. The term of this Sublease shall commence (the “Commencement Date”) on the later to occur of (a) December 1, 2003 and (b) the date that the Underlying Landlord shall consent hereto in writing and shall end on September 29, 2007 (the “Expiration Date”). Notwithstanding anything to the contrary contained herein, this Sublease is contingent upon Sublessee receiving a Business Employment Incentive Program grant (the “BEIP Grant”) from the State of New Jersey no later than December 31, 2003 (the “Outside Date”), time being of the essence with respect thereto. In the event such approval is not secured by that date and such failure is not caused by any act or omission on the part of Sublessee or anyone claiming by, under or through Sublessee, then either Sublessor or Sublessee shall have the right to cancel this Sublease by giving written notice of cancellation to the other party within ten (10) days of the Outside Date, time being of the essence with respect thereto. If either Sublessor or Sublessee timely delivers the aforesaid cancellation notice, this Sublease shall terminate five (5) days after the date of such notice, unless Sublessee receives the BEIP Grant within such five (5) day period, in which case the cancellation notice shall be void and this Sublease shall continue in full force and effect. Failure by either party to exercise such right to cancel this Sublease within such ten (10) day period shall constitute a waiver of such right, time being of the essence with respect thereto.

2. Fixed Rent. A. Sublessee shall pay to Sublessor, during the term of this Sublease, the annual rental (“fixed rent”), which shall be inclusive of Sublessee’s electric charges, of: commencing on the Commencement Date and continuing through and including the Expiration Date, at the rate of Five Hundred Five Thousand Seven Hundred Sixty One Dollars ($505,761.00) per annum payable in equal monthly installments of $42,146.75. Each monthly installment of fixed rent shall be paid on the first day of each and every calendar month during the term, except the first full monthly installment of fixed rent shall be paid upon execution of this Sublease. The fixed rent for any month of the term of this Sublease which does not begin or end on the first or last day of a calendar month shall be prorated on a daily basis in accordance with the fixed rent due for the calendar month. Since the installment for the first full month’s fixed rent is being paid by Sublessee upon the execution of this Sublease regardless of whether the term shall have commenced on the first day of a calendar month, any adjustment to which Sublessee is entitled on account of the immediately preceding sentence shall be made to the monthly installment of fixed rent due on the first day of the calendar month next following the month in which the Commencement Date occurs. All fixed rent, additional rent and other sums and charges due to Sublessor under this Sublease shall be paid by Sublessee at the office of Sublessor set forth above, or at such other place as Sublessor may designate, without any notice, setoff or deduction whatsoever. Sublessee’s obligation to make such payments shall survive the Expiration Date or sooner termination of this Sublease.

B. All other costs and expenses which Sublessee assumes or agrees to pay pursuant to this Sublease shall be deemed additional rent and, in the event of non-payment, Sublessor shall have all the rights and remedies herein provided for in case of non-payment of base rent and additional rent as per Section 1.5 of the Underlying Lease. The payment of any late charge shall be in addition to all other rights and remedies available to Sublessor in the case of non-payment of fixed rent.

C. In the event Sublessor incurs any costs or expenses with respect to the demised premises and which are directly attributable to services or utilities furnished to the demised premises at the request of or on behalf of Sublessee or attributable to repairs made in the demised premises at the request of or on behalf of Sublessee, whether they are considered additional rent under the Lease or not, then Sublessee shall pay Sublessor upon demand the amount of such costs and expenses incurred by Sublessor.

3. Electricity Charge. Sublessee’s annual electrical charges of $79,857.00 are included in the fixed rent. Sublessor shall not be liable in any way to Sublessee for any failure or defect in supply or character of electric current furnished to the demised premises. Sublessee covenants and agrees that, at all times, its connected electrical load shall not cause a default under the Underlying Lease. Any sums due and payable to Sublessor under this paragraph shall be deemed to be, and collectible as, additional rent. In no event shall the charge payable by Sublessee for electrical charges for the demised premises be less than $79,857.00 per annum.

4. Additional Rent. Sublessee shall pay to Sublessor, as additional rent, 50% of all amounts payable by Sublessor to Underlying Landlord pursuant to Article 5 of the Underlying Lease, which are applicable to the term of this Sublease, except that for purposes of determining the amounts payable by Sublessee pursuant to this paragraph, the Base Year shall mean calendar year 2004. The additional rent payable by Sublessee shall be paid to Sublessor in the manner and five (5) days before each such date as Sublessor shall be required to pay its corresponding share of such additional rent pursuant to the Underlying Lease. Payments for the first and last years of the term hereof shall be equitably prorated. In the event that the demised premises increase or decrease during the term of this Sublease or the premises demised pursuant to the Underlying Lease increase or decrease, then Sublessee’s proportionate share of amounts payable pursuant to this paragraph shall be equitably adjusted.

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5. Use. Sublessee shall use the demised premises only for the uses specified in the Underlying Lease. Sublessee shall use and occupy the demised premises in a manner consistent with the terms of the Underlying Lease.

6. Compliance with Underlying Lease. Sublessee covenants and agrees to observe and perform all of the terms, covenants, conditions, provisions and agreements to be performed by Sublessor, as tenant pursuant to the Underlying Lease, except for any Excluded Provisions, and further covenants and agrees not to do or suffer or permit anything to be done which would violate the Underlying Lease or result in a default under or cause the Underlying Lease to be terminated. All grace periods specified in the Underlying Lease shall, for purposes of determining compliance by Sublessee with the provisions hereof, be each reduced by five (5) days.

7. Non-Liability, Indemnity. Sublessee shall and hereby does indemnify, defend and hold Sublessor harmless from and against any and all actions, claims, demands, damages, liabilities and expenses (including, without limitation, reasonable attorneys’ fees and disbursements) asserted against, imposed upon or incurred by Sublessor by reason of (a) any violation caused, suffered or permitted by Sublessee, its agents, contractors, servants, licensees, employees or invitees, of any of the terms, covenants, conditions, provisions or agreements of the Underlying Lease, (b) any damage or injury to persons or property occurring upon or in connection with the use or occupancy of the demised premises by Sublessee or anyone claiming by, under or through Sublessee, (c) the use or maintenance of the demised premises or any business therein or any work or thing whatsoever done, or any condition created in or about the demised premises during the term (or any time prior to the Commencement Date that Sublessee may have been given access to the demised premises), (d) any negligent or otherwise wrongful act or omission of Sublessee or any of its agents, contractors, servants, licensees, employees or invitees, (e) any failure of Sublessee to perform or comply with all of the provisions of this Sublease hereof that are applicable to Sublessee, and (f) any obligation Sublessor may have to indemnify Underlying Landlord under the Underlying Lease, to the extent related to the use of the demised premises by Sublessee or anyone claiming by, under or through Sublessee. Neither Sublessor nor any agent, contractor, servant, licensee, employee or invitee of Sublessor shall be liable to Sublessee for any death of or injury or damage to Sublessee or any other person or for any damage to or loss (by theft or otherwise) of any property of Sublessee or any other person, except to the extent caused by or due to the gross negligence or willful act of Sublessor. In case any action or proceeding be brought against Sublessor or any agent, contractor, servant, licensee, employee or invitee of Sublessor by reason of any of the foregoing, Sublessee, upon notice from Sublessor, shall defend such action or proceeding by counsel chosen by Sublessee, who shall be reasonably satisfactory to Sublessor. Sublessee or its counsel shall keep Sublessor fully apprised at all times of the status of such defense and shall not settle same without the written consent of Sublessor, which consent shall not be unreasonably withheld.

8. Performance by Underlying Landlord. Sublessor does not assume any obligation to perform the terms, covenants, conditions, provisions and agreements contained in the Underlying Lease on the part of Underlying Landlord to be performed. In the event Underlying Landlord shall fail to perform any of the terms, covenants, conditions, provisions and agreements contained in the Underlying Lease on its part to be performed, Sublessor shall be under no obligation or liability whatsoever to Sublessee. Sublessor shall cooperate with Sublessee, at no cost to Sublessor, in seeking to obtain the performance of Underlying Landlord under the Underlying Lease. Sublessee shall not be allowed any abatement or diminution of fixed rent or additional rent under this Sublease because of Underlying Landlord’s failure to perform any of its obligations under the Underlying Lease. Notwithstanding the foregoing, in the event that Sublessor receives an abatement or diminution of fixed rent or additional rent from Underlying Landlord that relates to the demised premises and the term of this Sublease, Sublessee shall be entitled to an abatement or diminution of fixed rent or additional rent equal to the amount thereof.

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9. Repairs: cleaning. Sublessee shall take good care of the demised premises and shall assume the entire responsibility for cleaning and janitorial services and for repairs which may be required under the Underlying Lease or as otherwise necessary during the term of this Sublease, excepting only those services and repairs, if any, which Underlying Landlord may be obligated to provide and to make under the terms, covenants, conditions, provisions and agreements of the Underlying Lease.

10. Alterations. Sublessee shall not make any changes, alterations, additions or improvements to the demised premises without first obtaining the written consent of the Underlying Landlord and Sublessor. Sublessor’s consent shall not be unreasonably withheld if the written consent of the Underlying Landlord is first obtained and no restoration is required of Sublessor pursuant to the Underlying Lease on the Expiration Date. Simultaneously with the submission of documents regarding alterations to the Underlying Landlord, Sublessee shall send copies of all such documents regarding alterations to Sublessor. Sublessee shall pay all costs and expenses relating to any changes, alterations, additions or improvements and shall cause same to be completed in accordance with law and the terms, covenants, conditions, provisions and agreements of the Underlying Lease. Sublessee hereby agrees to indemnify, defend and hold Sublessor harmless from any and all loss, cost, and expense (including, without limitation, reasonable attorneys fees) incurred by Sublessor as a result of Sublessee’s failure to comply with the aforesaid terms, covenants, conditions, provisions or agreements.

11. Initial Occupancy. Sublessee represents that it has inspected the demised premises and agrees to take the same in their present condition, and Sublessee acknowledges that no representations with respect to the condition thereof have been made. Any work required by Sublessee to prepare the demised premises for its occupancy shall be made and paid for by Sublessee and shall be subject to all of the terms, covenants, conditions, provisions and agreements set forth in the Underlying Lease.

12. Assignment and Subletting. (a) Sublessee shall not assign this Sublease or sublet the demised premises or otherwise transfer, mortgage or encumber this Sublease, the demised premises or any part thereof or permit the use thereof without first complying with the provisions of the Underlying Lease and obtaining Sublessor’s consent thereto. Sublessor’s consent shall not be unreasonably withheld if the written consent of the Underlying Landlord is first obtained. Sublessor shall not be required to consent to any such assignment or further subletting if Sublessee is then in default under the Sublease or if such further subletting or assignment would cause Sublessor to be in default under the Underlying Lease. No such consent shall relieve Sublessee from the obligation to seek consent to a further subletting or assignment, and Sublessor may withhold its consent to same in its sole and absolute discretion. Copies of all materials required by the Underlying Lease shall be delivered simultaneously to Sublessor, together with Sublessee’s request for consent. No Sublessor consent to an assignment of this Sublease or a sublease of all or a portion of the demised premises shall be deemed to be a release of Sublessee from the performance of Sublessee’s covenants hereunder, and in all such cases Sublessee shall remain fully liable for its obligations under this Sublease. If Underlying Landlord and Sublessor shall give their consent to any assignment of this Sublease or any subsublease, Sublessee shall, in consideration therefor, pay to Sublessor, as additional rent:

(i) In the case of an assignment, an amount equal to 50% of all sums and other consideration paid to Sublessee by the assignee for or by reason of such assignment.

(ii) In the case of a subsublease, 50% of any rents, additional rents or other consideration payable under the subsublease or otherwise to Sublessee by the subsubtenant which are in excess of the fixed annual rent and additional rent accruing during the term of this Sublease in respect of the subsubleased space (at the rate per square foot payable by Sublessee hereunder) pursuant to the terms hereof.

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The sums payable under this paragraph shall be paid to Sublessor as and when paid by the assignee or by the subsubtenant, as the case may be.

(b) Notwithstanding anything to the contrary contained herein, Sublessee may, without Sublessor’s prior written consent, but upon prior written notice to Sublessor (and provided further that Sublessee obtains Underlying Landlord’s consent pursuant to the terms and provisions of the Underlying Lease) assign this Sublease or subsublease all or a portion of the demised premises to an entity controlled by, under common control with or controlling Sublessee, subject, however, to compliance with Sublessee’s obligations under this Sublease and provided further that Sublessee shall not be in default in the performance of any of its obligations under this Sublease beyond any applicable notice and cure period. . For the purposes hereof, “control” shall be deemed to mean ownership of not less than 50% of all of the ownership interests of the corporation or other business entity in question. Neither such subletting or assignment shall relieve, release, impair or discharge any of Sublessee’s obligations hereunder (it being understood and agreed that Sublessee shall continue to remain liable for the performance of all obligations under this Sublease, including, without limitation, the payment of fixed rent and additional rent due hereunder throughout the term of this Sublease).

(c) If this Sublease be assigned, or if the demised premises or any portion thereof be underlet or occupied by anybody other than Sublessee, Sublessor may, after default by Sublessee, collect rent from the assignee, undertenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, undertenant or occupant as tenant, or a release of Sublessee from the further performance by Sublessee of the covenants on the part of Sublessee herein contained.

13. Insurance. A. During the term of this Sublease, Sublessee, at its sole cost and expense, shall provide and maintain comprehensive public liability and property damage insurance in conformity with the provisions of the Underlying Lease which shall include, without limitation, coverage of replacement value of any and all now or hereafter existing leasehold improvements, which replacement value coverage shall, as of the Commencement Date, be in the amount of 1,000,000.00. Sublessee shall cause Sublessor and Underlying Landlord to be included as additional insureds in said policy or policies which shall contain provisions, if and to the extent available, that it or they will not be cancellable except upon at least twenty (20) days prior notice to all insureds and additional insured and that the act or omission of one insured or additional insured will not invalidate the policy as to the other insureds. Sublessee shall furnish to Sublessor reasonably satisfactory evidence that such insurance is in effect at or before the Commencement Date and, on request, at reasonable intervals thereafter.

B. Sublessee shall include in all of its insurance policies a waiver of the insurer’s right of subrogation against Underlying Landlord, Sublessor and others required by the Underlying Lease, if any. If such waiver shall not be, or shall cease to be, obtainable (a) without additional charge, or (b) at all, then Sublessee shall so notify Sublessor promptly after learning thereof. In case such waiver can only be obtained at additional charge, if Sublessor shall so elect and shall pay the insurer’s additional charge therefor, such waiver, agreement or permission shall be included in the policy. Provided that Sublessee’s right of full recovery under the aforesaid policy or policies are not adversely affected or prejudiced thereby, Sublessee hereby waives any and all right of recovery it might otherwise have against Underlying Landlord, Sublessor and others, if any, required by the Underlying Lease, their respective agents, contractors, servants, licensees, employees and invitees, for loss or damage to Sublessee’s property, notwithstanding that such loss or damage may result from the negligence or fault of Underlying Landlord, Sublessor or such others as aforementioned, or their respective agents, contractors, servants, licensees, employees or invitees. If, notwithstanding the recovery of insurance proceeds by Sublessee for loss, damage or destruction of its property, Sublessor is liable to Sublessee with respect to such loss, damage or destruction or is obligated under this Sublease to make replacement, repair or restoration or payment for such loss, damage or destruction then, provided Sublessee’s right of full recovery under its insurance policies is not thereby prejudiced or otherwise adversely affected, the amount of the net

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proceeds of Sublessee’s insurance against such loss, damage or destruction shall be offset against Sublessor’s liability to Sublessee therefor, or shall be made available to Sublessor to pay for replacement, repair or restoration, as the case may be.

14. Default. In the event Sublessee defaults in the performance of any of the terms, covenants, conditions, provisions and agreements of this Sublease or of the Underlying Lease, Sublessor shall be entitled to exercise any and all of the rights and remedies to which it is entitled by law and also any and all of the rights and remedies specifically provided for in the Underlying Lease, which are hereby incorporated herein and made a part hereof with the same force and effect as if herein specifically set forth in full, and that wherever in the Underlying Lease rights and remedies are given to Underlying Landlord, the same shall be deemed to refer to Sublessor.

15. Sublease Consent. This Sublease shall become fully effective only if the written consent hereto of Underlying Landlord is obtained. If such written consent is not obtained within thirty (30) days of the date hereof, then, at Sublessor’s option, this Sublease shall be automatically void and of no force or effect and Sublessor shall return to Sublessee the first month’s rent and the security deposit, and thereupon neither party shall have any further obligation to the other.

16. Notice. Any notice to be given under this Sublease shall be in writing and shall be sent by registered or certified mail, return receipt requested, by nationally-recognized overnight courier or by hand (against receipt therefor), addressed to (i) Sublessor at its address herein stated, Attention: CFO, with a copy of the same to Omnicom Group Inc., 437 Madison Avenue, New York, New York 10022, Attention: Legal Department, and (ii) Sublessee at its address herein stated prior to the Commencement Date and at the demised premises after the Commencement Date, Attention: Legal Department. Each party shall have the right to change, by notice in writing, the address to which such party’s notice is to be sent. Any notice to be given by Sublessor may be given by the attorneys for Sublessor. Notices shall be deemed given upon receipt or refusal thereof.

17. Quiet Enjoyment. Sublessor covenants that Sublessee, on paying the fixed rent and additional rent and performing all the terms, covenants, conditions, provisions and agreements aforesaid, shall and may peacefully and quietly have, hold and enjoy the demised premises for the term aforesaid, free from any interference or hindrance by Sublessor, but subject to the exceptions, reservations and conditions hereof.

18. Surrender of demised premises. On the date upon which the term hereof shall expire and come to an end, whether on the Expiration Date, by lapse of time or otherwise, Sublessee, at Sublessee’s sole cost and expense, shall quit and surrender the demised premises to Sublessor in the same good order and condition as Sublessor is delivering them to Sublessee, subject to the provisions of the Underlying Lease.

19. Brokers. Sublessee represents to Sublessor that Cushman & Wakefield of New Jersey Inc., CB Richard Ellis Inc. and WF Realty LLC (collectively, the “Brokers”) are the only brokers with whom Sublessee dealt in relation to this transaction and that Sublessee has had no dealings, either direct or indirect, with any other real estate agent or broker in connection with this transaction. Sublessee agrees to indemnify, defend and hold Sublessor harmless from any loss, liability and expense incurred by Sublessor as a result of any claim made against Sublessor which is based upon a breach of said representation by Sublessee. Sublessee’s indemnification obligation hereunder shall survive the Expiration Date or sooner termination of this Sublease. Sublessor hereby agrees to pay the Brokers a commission pursuant to separate agreements.

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20. Excluded Provisions. The following provisions of the Underlying Lease are deemed to be Excluded Provisions: Sections 1.3 (iii) and 1.4, Article 2, Section 5.3, Articles 33, 34 and 35, Exhibit B and Exhibit F; and Paragraph 7 of the Third Amendment to Lease.

21. Successors and Assigns. This Sublease shall be binding upon and, except as prohibited by this Sublease or the Underlying Lease, inure to the benefit of the parties hereto and their respective successors and permitted assigns, if any. Nothing herein, however, shall be construed as permitting an assignment of this Sublease.

22. No Modifications. This Sublease may not be modified except by written agreement signed by Sublessor and Sublessee.

23. Security Deposit. A. Subject to subparagraph (B) below, Sublessee has deposited with Sublessor, the sum of $106,476.00 to be held in a non-interest bearing account by Sublessor as security for the faithful performance and observance by Sublessee of the terms, covenants, conditions, provisions and agreements of this Sublease. It is agreed that in the event Sublessee defaults in respect of any of the terms, covenants, conditions, provisions and agreements of this Sublease, including, but not limited to, the payment of fixed rent and additional rent, Sublessor may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any fixed rent and additional rent or any other sum as to which Sublessee is in default or for any sum which Sublessor may expend or may be required to expend by reason of Sublessee’s default in respect of any of the terms, covenants, conditions, provisions and agreements of this Sublease, including but not limited to, any damages or deficiency in the reletting of the demised premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Sublessor. If Sublessor so applies or retains any part of the security, Sublessee shall, upon demand, promptly deposit with Sublessor the amount so applied or retained so that Sublessor shall have the full deposit on hand at all times during the term of this Sublease. In the event that Sublessee shall fully and faithfully comply with all of the terms, covenants, conditions, provisions and agreements of this Sublease, the security shall be returned to Sublessee after the Expiration Date and after delivery of the possession of the demised premises to Sublessor. In the event of an assignment by Sublessor of its interest under the Underlying Lease, Sublessor shall have the right to transfer the security and Sublessee agrees to look to the new Sublessor solely for the return of said security and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Sublessor. Sublessee further covenants that it shall not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Sublessor nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance.

B. In lieu of the cash security deposit referred to in subsection (A) above, Sublessee may deliver to Sublessor, and shall maintain in effect at all times during the term following delivery thereof, a clean, unconditional and irrevocable letter of credit, in form and substance satisfactory to Sublessor in the amount of $106,476.00, issued by a banking corporation (“Bank”) reasonably satisfactory to Sublessor and having its principal place of business or its duly licensed branch in the City and County of New Jersey at which the letter of credit may be presented for payment. Such letter of credit shall have an expiration date no earlier than the first anniversary of the date of issuance thereof and shall provide that it shall be automatically renewed from year to year unless terminated by the Bank by notice to Sublessor given not less than ninety (90) days prior to the then expiration date therefor. It is agreed that in the event Sublessee defaults in respect of any of the terms, covenants, conditions, provisions or agreements of this Sublease, including, but not limited to, the payment of fixed rent and additional rent, or if the letter of credit is terminated pursuant to the preceding sentence and is not replaced within thirty (30) days prior to its expiration date, then (i) Sublessor shall have the right to require the Bank to make payment to Sublessor of so much of the entire proceeds of the letter of credit as shall be reasonably necessary to cure the default, or to make payment of the entire proceeds of the letter of credit if it has not been replaced within said 30-day period, and (ii) Sublessor may apply said sum so

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paid to it by the Bank to the extent required for the payment of any fixed rent or additional rent or any other sum as to which Sublessee is in default or for any sum which Sublessor may expend or may be required to expend by reason of Sublessee’s default in respect of any of the terms, covenants, conditions, provisions and agreements of this Sublease, including, but not limited to, any damages or deficiency in the reletting of the demised premises, whether such damages or deficiency accrues before or after summary proceedings or other re-entry by Sublessor, without thereby waiving any other rights or remedies of Sublessor with respect to such default. Sublessor agrees to give Sublessee notice if it applies any portion of the proceeds of the letter of credit, which notice may be given after such application. If Sublessor applies any part of the proceeds of the letter of credit, Sublessee, upon demand, shall promptly deposit with Sublessor, the amount so applied or retained so that the Sublessor shall have the full deposit on hand at all times during the term of this Sublease. If Sublessee shall fully and faithfully comply with all of the terms, covenants, conditions, provisions and agreements of this Sublease, any letter of credit, or any remaining portion of any sum collected by Sublessor hereunder from the Bank, together with any other portion or sum held by Sublessor as security, shall be returned to Sublessee within sixty (60) days after the Expiration Date and after delivery of the entire possession of the demised premises to Sublessor in the condition required by the Underlying Lease. In the event Sublessee exercises said right of substitution, the letter of credit held by Sublessor prior to said substitution shall be promptly returned to Sublessee. In the event of an assignment by Sublessor of its interest under the Underlying Lease and this Sublease, Sublessor shall have the right to transfer the security to the assignee, and Sublessee agrees to look to the new Sublessor solely for the return of said security and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Sublessor, provided the new Sublessor shall assume the obligations of the Sublessor hereunder. Sublessee shall have the right to substitute one letter of credit for another, provided that, at all times, the letter of credit shall meet the requirements of this paragraph.

24. Signage. Sublessor agrees to request that Underlying Landlord add Sublessee’s name on the entrance doors and floor lobby, as well as on the Building lobby directory or provide Sublessee with Sublessor’s existing directory lines.

25. Inability to Perform, Delays. If Sublessee shall be delayed in obtaining possession of the demised premises because of delays in obtaining consent or for any other reason beyond the reasonable control of Sublessor, Sublessor shall not be subject to any liability, the effectiveness of this Sublease shall not be affected and the term hereof shall not be extended, but the fixed rent shall be abated (provided Sublessee is not responsible for the delay in obtaining consent or possession and provided the delay is not due to delays in obtaining consent to, work required or permitted to be performed by Sublessee) until possession shall have been made available to Sublessee.

26. Notice of Accidents. Sublessee shall give Sublessor and Underlying Landlord notice of any fire, casualty or accident in or about the demised premises promptly after Sublessee becomes aware of such event.

27. Destruction by Fire or Other Cause. If the demised premises shall be partially or totally damaged or destroyed by fire, casualty or other cause as a consequence of which Sublessor shall, pursuant to the Underlying Lease, receive an abatement of rent with respect to the demised premises, there shall be a corresponding abatement of the fixed rent payable hereunder. This Sublease shall not be terminated as a consequence of any damage to, or destruction of the demised premises, unless, as a result thereof, the Underlying Lease is terminated in accordance with its terms.

28. Bankruptcy. In the event Sublessee becomes the subject of proceedings involving bankruptcy, insolvency or reorganization of Sublessee, or if Sublessee makes an assignment for the benefit of creditors, or petitions for, or enters into an arrangement with creditors, Sublessor shall have the same rights as to Sublessee as are afforded Underlying Landlord under the Underlying Lease under similar circumstances involving Sublessor.

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29. No Waiver, etc. No agreement to accept a surrender of this Sublease shall be valid unless in writing and signed by Sublessor. The failure of Sublessor or Sublessee to enforce any terms, covenants, conditions, provisions or agreements of this Sublease shall not prevent the later enforcement thereof or a subsequent act which would have constituted a violation from having all the force and effect of an original violation. The receipt by Sublessor or payment by Sublessee of fixed rent or other rent or charges with knowledge of the breach of any covenant of this Sublease shall not be deemed a waiver of such breach. The parties hereto, to the fullest extent permitted by law, waive trial by jury in any action or proceeding relating hereto and consent to the jurisdiction of the New York State court system. Sublessee hereby waives any right to interpose any counterclaim in any action brought by Sublessor in connection herewith. The foregoing shall not be deemed a waiver by Sublessee of the right to interpose any counterclaim to the extent that the failure to interpose same would prohibit Sublessee from bringing the claim, which is the basis thereof, in a separate action.

30. Occupancy Tax. If applicable, Sublessee shall pay directly to the City of Parsippany all occupancy and rent taxes which may be payable by Sublessee to the City of Parsippany in respect of the rent reserved by this Sublease and will pay all other taxes, the payment of which shall be imposed directly upon any occupant of the demised premises.

31. Miscellaneous. Paragraph headings are for ease of reference only and are not part of the agreement of the parties. This Sublease shall be governed by New Jersey law without giving affect to its conflict of laws rules. This Sublease may not be changed or terminated, or any provision hereof waived, orally. The rights and remedies of Sublessor hereunder shall survive the expiration of the term or sooner termination hereof. The submission of this Sublease for examination or for signature is not intended to nor shall it create or evidence an offer to, or any other right by, Sublessee with respect to the demised premises or otherwise; it being expressly agreed that this Sublease shall not be effective, and Sublessor shall not be bound hereby, until it is executed and delivered by each party hereto.

32. Furniture. Sublessee shall have the right to use the furniture set forth on Exhibit B attached hereto during the term of this Sublease. Sublessee shall keep and maintain such furniture in good condition and return the furniture to Sublessor on the Expiration Date in the same condition as it existed on the Commencement Date, reasonable wear and tear excepted.

33. Parking. Sublessee shall be entitled to Sublessee’s proportionate share (i.e., 50%) of Sublessor’s reserved and unreserved parking spaces pursuant to Section 1.2 of the Underlying Lease.

34. Right of First Offer. (a) If at any time during the term of this Sublease prior to the last 18 months of the term, Sublessor proposes to sublease any portion of the Premises which is not initially leased to Sublessee hereunder (the “Offered Space”) and such space shall be Available (as hereinafter defined), Sublessor shall deliver notice thereof to Sublessee (an “Offered Space Notice”), which Offered Space Notice shall set forth the fixed rent for such Offered Space, the rentable square footage of the Offered Space, Sublessee’s proportionate share in respect of the rentable square feet comprising such Offered Space, and the date Sublessor anticipates that such Offered Space will become Available for leasing. Provided that all of the conditions precedent set forth in this Paragraph are fully satisfied by Sublessee, Sublessee shall have a one time option (an “Offered Space Option”), exercisable by Sublessee delivering irrevocable notice to Sublessor (an “Acceptance Notice”) within seven (7) days of the giving by Sublessor of such Offered Space Notice, to lease all (but not less than all) of such Offered Space, upon the terms and conditions set forth in this Paragraph, and this Sublease shall thereupon be modified as provided in subsection (e) of this Paragraph.

(b) Time shall be of the essence as to Sublessee’s giving of any Acceptance Notice. If Sublessee fails to timely give any Acceptance Notice, Sublessor shall have no further obligation to Sublessee, and Sublessee shall have no further rights, with respect to the Offered Space in question, and

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Sublessor shall be free to lease such Offered Space to any third party or to otherwise dispose of such Offered Space. Notwithstanding anything to the contrary contained herein, the terms and provisions of this Paragraph are subject to the Underlying Landlord’s consent to be given following Sublessee’s Acceptance Notice.

(c) “Available” shall mean that at the time in question (i) no person or entity leases or occupies the Offered Space in question or any portion thereof, whether pursuant to a lease or other agreement, and (ii) no person or entity holds any option or right to lease or occupy such Offered Space or to renew its lease or right of occupancy thereof. So long as a tenant or other occupant leases or occupies Offered Space or any portion thereof and has a right to renew its lease or other agreement, Sublessor shall be free to extend any such tenancy or occupancy, whether or not pursuant to the precise terms of such right and such space shall not be deemed to be Available.

(d) Sublessee shall have no right to exercise any Offered Space Option unless all of the following conditions have been satisfied on the date the applicable Acceptance Notice is delivered to Sublessor and on the applicable Offered Space Commencement Date:

(i) No event of default beyond the expiration of all applicable notice and cure periods shall have occurred and then be continuing hereunder;

(ii) Sublessee shall be in occupancy of the entire Premises; and

(iii) There shall not have occurred any material adverse change in the financial condition of Sublessee from the condition described on the financial statements submitted by Sublessee to Sublessor in connection with this Sublease.

(e) Effective as of the date on which Sublessor delivers vacant possession of the Offered Space in question to Sublessee (an “Offered Space Commencement Date”):

(i) the fixed rent for such Offered Space shall be equal to the greater of (a) the then rental rate per square foot as set forth in Paragraph 2 of this Sublease with respect to the demised premises initially leased by Sublessee hereunder multiplied by the number of rentable square feet contained in such Offered Space and (b) the “Offered Space Fair Market Value”, which shall mean the fair market annual rental value of the Offered Space in question as determined by Sublessor at the commencement of the leasing of such Offered Space for a term commencing on the Offered Space Commencement Date applicable to such Offered Space and ending on the Expiration Date, taking into consideration all relevant factors and with (i) such Offered Space considered as vacant and in the “as is” condition which same shall be in on such Offered Space Commencement Date and (ii) the Base Year being the calendar year in which such Offered Space Commencement Date occurs;

(ii) Sublessee shall make additional payments on account of additional rent with respect to such Offered Space in accordance with Paragraph 4 of this Sublease;

(iii) The Offered Space shall be delivered in its “as is” condition, and Sublessor shall not be obligated to perform any work with respect thereto or make any contribution to Sublessee to prepare the Offered Space for Sublessee’s occupancy. The leasing of any furniture existing in the Offered Space to Sublessee shall be determined pursuant to the terms and provisions of a separate agreement mutually acceptable to Sublessor and Sublessee;

(iv) The security deposit amount shall be increased by an amount equal to (x) the then existing amount of the security deposit required by Paragraph 23 of this Sublease, divided by the number of rentable square feet then contained in the demised premises, multiplied by (y) the number of rentable square feet contained in such Offered Space; and

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(v) Such Offered Space shall be added to and be deemed to be a part of the demised premises for all purposes of this Sublease (except as otherwise provided in this Paragraph).

(f) In no event shall Sublessor be subject to any liability and this Sublease shall not be impaired if Sublessor shall be unable to deliver possession of any Offered Space to Sublessee on any particular date or if Underlying Landlord does not provide its consent thereto.

(g) Upon request by Sublessor made on or following any Offered Space Commencement Date, Sublessee will execute, acknowledge and deliver to Sublessor an amendment to this Sublease setting forth such Offered Space Commencement Date and reflecting the incorporation of such Offered Space into the demised premises, and the modifications to this Sublease resulting therefrom, as provided in this Paragraph. The failure of either party to execute and deliver such an amendment shall not affect the rights of the parties under this Sublease.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement of Sublease as of the day and year first above written.

HARRISON & STAR, INC.
By:	/s/
	Name: Title:

	NPS PHARMACEUTICALS, INC.
	By:	/s/
Federal Identification Number		Name: Title:

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EX-10.17

EXHIBIT 10.17

TERM SHEET

This term sheet (the “Offer”) sets out and confirms the agreement between MaRS Discovery District (“Landlord”) and NPS Pharmaceuticals, Inc. (“Tenant”) with respect to the lease of space within part of the Building municipally known as 101 College Street (South Tower) in the City of Toronto, Province of Ontario (the “Building”), on the terms and conditions hereinafter set forth.

1. Premises

Approximately 52,000 square feet of Rentable Area within the Building (the “Premises”). Premises to be located on the whole of the 7th and 8th floors and either all or part of the 6th floor, which are typical floors of approximately 21,000 square feet each. Final estimated location and area of Premises to be mutually agreed to by the Landlord and Tenant (subject to Tenant’s final space plan) prior to January 31, 2004. The Tenant shall, subject to the Landlord’s reasonable security restrictions and rules and regulations, have a non-exclusive right to use the common facilities of the complex in which the Building is located, 24 hours a day and seven days a week, including the right to use the shipping and receiving docks and any other such common facilities required by the Tenant for the operation of the Tenant’s business.

2. Basic Terms of Lease

 (a) Term: ten (10) years and eight (8) months

(b)    Commencement Date: The Commencement Date of the Lease shall be the later of: (i) five (5) days following substantial completion of the Landlord’s Work in the Premises for the purpose of permitting the Tenant to commence the Tenant’s Work; and (ii) the date on which the Tenant obtains all building permits necessary for the purpose of permitting the Tenant to commence the Tenant’s Work, provided that in any event such date shall be no later than thirty (30) days following substantial completion of the Landlord’s Work in the Premises. The Tenant undertakes to use reasonable commercial efforts to obtain in a timely manner all building permits necessary for the purpose of permitting the Tenant to commence the Tenant’s Work in the Premises.

The Landlord represents and warrants to the Tenant that the ongoing work by the Landlord in respect of completing construction of the Building will not impair the ability of the Tenant to commence the Tenant’s Work or to obtain a building permit therefor to permit Tenant’s Work to commence on the Commencement Date.

(c) Anticipated date of delivery of possession of the Premises to Tenant (with substantial completion of Landlord’s Work) and subject to any events of force majeure:

November 1, 2004

(d) Rent Free Fixturing Period: First eight (8) months of the Term. The Fixturing Period shall be subject to extension for any delays in the carrying out of the Tenant’s Work caused by events of force majeure, provided that in no event shall the rent free Fixturing Period extend beyond ten (10) months from the Commencement Date. For certainty, assuming the Commencement Date occurs on November 1, 2004 the Tenant agrees that Base Rent shall commence in any event or circumstance no later than September 1, 2005. During the Fixturing Period, and subject to the foregoing, the Tenant shall be responsible only for the cost of utilities consumed, Tenant’s insurance coverage in accordance with the Lease, insurance premiums incurred by the Landlord in connection with the Tenant’s occupancy of the Premises during the Fixturing Period, and any special operating costs i.e. security, waste disposal, etc. that may be requested in writing by the Tenant or otherwise incurred by the Landlord as a result of the Tenant’s occupancy of the Premises during the Fixturing Period. The Landlord agrees that the Tenant can operate its business during the Fixturing Period if it completes its Tenant’s Work prior to the end of the Fixturing Period.

(e) Rentable Area of the Premises: approximately 52,000 sq. ft. to be measured by the Landlord’s Architect, no later than the Commencement Date, in accordance with BOMA (‘96) standards used in the Building.

(f) Base Rent:

Period of Term	Annual Base Rent	Monthly Base Rent	Annual Base Rent per Square Foot
Years One to Five	CAD $ 1,092,000.00	CAD $ 91,000.00	CAD $ 21.00 sq.ft.
Years Six to Ten	CAD $ 1,144,000.00	CAD $ 95,333.33	CAD $ 22.00 sq.ft.

Base Rent and Additional Rent to be paid without set-off, abatement or deduction, in advance in twelve (12) equal monthly installments on the first day of each and every month of the Term, together with all taxes (including, without limitation, Goods and Services Tax, GST) based on the Landlord’s Lease form and as applicable thereon. The Tenant acknowledges and agrees that the Landlord is not providing any leasehold improvement allowance or other inducement except for the Rent Free Fixturing Period described above.

(g) Deposit:

The Tenant agrees to pay to the Landlord upon execution of this Offer the sum of Ninety-One Thousand Dollars ($91,000.00), plus GST, to be applied on account of the first month’s base rent payable under the Lease.

(h) Net Lease:

The Lease shall be completely net to the Landlord, except as otherwise expressly provided herein, and the Tenant shall pay, in addition to Base Rent and without duplication, its proportionate share of all costs, charges, expenses and outlays of any nature whatsoever arising from or relating to the management, maintenance, operation and repair of the Common Areas and Facilities of the Building (collectively “Additional Rent”), including without limitation and without duplication, the following items (all as may be more fully detailed in the Lease): costs incurred by the Landlord in respect of the operation, maintenance, repair and replacement of the Common Areas and Facilities of the Building; utility charges; property management/administration; and depreciation or amortization of any costs of a capital nature (in accordance with GAAP ) incurred by the Landlord in the repair, maintenance and replacement of the Common Areas and Facilities, together with interest on the unamortized portion thereof at the Landlord’s cost of borrowing. Except as otherwise provided herein, Additional Rent shall also include Landlord’s insurance costs in respect of the Building and Common Areas and Facilities and the Tenant’s Proportionate Share (as hereinafter defined) of all real property taxes in respect of the Building and Common Areas and Facilities as provided in Section 4 hereof. The Tenant’s Proportionate Share (as hereinafter defined) of all such costs, charges and expenses shall be determined as if the rentable areas in the Building are 100% occupied. The Landlord shall provide a reasonable estimate of the amount of Additional Rent, prior to the Commencement Date and on each anniversary of the Commencement Date in each successive year of the Term.

Notwithstanding any other provision of this Offer or the Lease arising therefrom (the “Lease”), the Tenant shall not be liable to pay Additional Rent arising from or in respect of:

(i) costs for any other rentable space in the Building, including janitorial and HVAC costs, of the type for which the Tenant is responsible in respect of the Premises; for certainty, this includes the Landlord’s expenses arising from or in respect of rentable space occupied by the Landlord in the Building; and

(ii) costs related to the initial cost of constructing or any costs refurbishing or upgrading the Building (although costs of replacements shall be included in Additional Rent as specified in the Lease).

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Property management and administration fees and costs shall be limited to 15% of Additional Rent (excluding real property taxes and insurance premiums).

The Tenant shall not be responsible for paying Additional Rent or outlays of any nature whatsoever arising from or relating to the management, maintenance, operation or repairs of any parking garage.

The Tenant’s proportionate share (“Proportionate Share”) shall be determined by using a formula the numerator of which is the rentable area of the Premises and the denominator of which is the total rentable area of the Building. All rentable areas to be determined in accordance with BOMA (‘96) standards.

3. Repairs

Save and except for structural repairs to the base building and exterior wall and window repairs or replacements, the Tenant shall, at its sole cost and expense, at all times during the term of the Lease and any renewal(s)/extension(s) thereof, keep and maintain the whole of the Premises in good order, repair and condition, reasonable wear and tear excepted, provided that the cumulative effect of such wear and tear does not result in a state of disrepair.

4. Taxes

The Tenant shall be solely responsible for and shall promptly pay without duplication throughout the Term its Proportionate Share of all realty taxes, local improvements and business taxes with respect to the Building. The Landlord will pay or cause to be paid all such taxes on the Building.

5. Utilities

The Tenant shall be solely responsible for and shall promptly pay without duplication its Proportionate Share of all charges for water, gas, electricity, telephone and other public and private utilities and services used or consumed in respect of the Common Areas and Facilities of the Building. The Premises shall be separately metered wherever possible and the Tenant shall be responsible for payment of all charges for all utilities consumed within the Premises.

6. Insurance

(a) The Landlord shall take out and keep in force the following insurance coverage:

(i) “All Risks” insurance with 100% replacement cost coverage of the Building, machinery, boilers and equipment contained therein;

(ii) general liability and property damage insurance, including personal liability, contractual liability, non-owned automobile liability. Such policies shall be written on a comprehensive basis with coverage for any one occurrence or claim of not less than $5,000,000.00; and

(iii) loss of rental income coverage.

(b) The Tenant shall take out and keep in force such insurance coverage as may be reasonably required by the Landlord from time to time, including without limitation:

(i) “All Risks” property insurance on leasehold improvements and fixtures owned by the Tenant on a replacement cost basis with a reasonable deductible (the Tenant shall be entitled to self-insure in respect of chattels and trade fixtures); and

(ii) general liability and property damage insurance, for occurrences within the Premises, including personal liability, contractual liability. Such policies shall be written on a comprehensive basis with coverage for any one occurrence or claim of not less than $5,000,000.00. The said policy shall name the Landlord as additional insured.

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(c) Each policy of insurance taken out by the parties in accordance with this Offer and each of such policies shall contain a release and waiver by the insurer of any rights of subrogation or indemnity or any other claim over, to which such insurer might otherwise be entitled against the Landlord or the Tenant, their agents, employees or those for whom they are in law responsible.

(d) All policies referred to in Section 6(b) shall be taken out with insurers reasonably acceptable to the Landlord, be in a form reasonably satisfactory to the Landlord, shall be non-contributing with and shall apply only as primary and not as excess to any other insurance available to the Landlord and shall contain an undertaking by the insurers to notify the Landlord not less than thirty (30) days prior to any material change, cancellation or termination. The Tenant shall provide the Landlord prior to the commencement of the fixturing period with a certificate of such insurance and each year on the anniversary date thereof shall provide the Landlord with a further certificate confirming that the Tenant has arranged all of the insurance required to be maintained by it under Section 6(b) hereof.

7. Permitted Use

The Premises shall be used only for the purposes of a medical and related sciences research facility, which shall include performing all forms of laboratory research, testing and experimenting including conducting chemical synthesis research and experiments, biological and genetic research and experiments, human tissue research and experiments and experiments and tests on live animals as well as other research, experiments and tests tied to medical and related science research, and related office uses, and for no other purpose and provided that the Premises shall at all times be used and maintained by the Tenant in compliance with all applicable laws. The Tenant shall be permitted to conduct all aspects of its business permitted hereunder and have uninterrupted access to the Premises twenty-four (24) hours a day seven days a week. For the purpose of conducting its research, tests and experiments the Tenant shall be permitted to use and store on the Premises hazardous materials and compounds and radioactive materials provided such use and storage is and shall be in full compliance with all applicable laws related thereto and sound industry practices. The Landlord represents that the above are permitted uses of the Premises. The Tenant shall be responsible at its sole cost and expense for obtaining any permits and/or licenses required or associated with its use and occupancy of the Premises. The Tenant shall operate its business as aforesaid in the Premises in compliance with all applicable laws. The Lease shall contain no continuous occupancy requirement.

8. Assignment and Subletting

Save as otherwise provided herein the Tenant shall not assign this Offer or the Lease or sublet all or part of the Premises without having first obtained the prior written consent of the Landlord which consent may not be unreasonably withheld and in accordance with and subject to the provisions with respect to assignments and subleases in the Landlord’s standard form lease for the Building which shall be negotiated between the parties as set out in Section 19 hereof. Notwithstanding any such assignment, the Tenant shall not be released from and shall continue to be responsible for all of its obligations under the Lease. The Landlord agrees that the assignment and sublease clause in the Lease shall not contain a termination option in favour of the Landlord in the event of an assignment or sublease by the Tenant.

Notwithstanding any other provisions of this Offer or the Lease, so long as the Tenant or any permitted transferee or assignee (“Permitted Assignee”) is not in default under the terms of the Lease, the Tenant shall not require the Landlord’s consent (but in each case shall provide the Landlord with notice at the time thereof or as soon as reasonably possible thereafter) for any of the following transfers:

(a) an assignment to any corporation which is an affiliate (within the meaning of the Canada Business Corporations Act) of the Tenant or any Permitted Assignee (“Affiliate”);

(b) an assignment to a corporation formed as a result of a merger or amalgamation (within the meaning of the Canada Business Corporations Act) of the Tenant or Permitted Assignee with another corporation or corporations; or

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(c) where the Tenant proposes to transfer, or issue by sale, assignment, bequest, inheritance, operation of law, or other disposition, or by subscription, any part or all of the corporate shares of the Tenant, so as to result in any change in the effective voting control of the Tenant by the party or parties holding such voting control and such transaction shall not be deemed to be an assignment of this Offer or the Lease; or

(d) an assignment arising out of the sale (by assets or shares) of the business of the Tenant being conducted in the Premises; or

(e) a licence of a portion of the Premises to an affiliated entity, in connection with the business being conducted therein.

The Tenant agrees that an assignee of the Lease, where the assignee is not a Permitted Assignee, or a subtenant each shall not have the benefit of this no consent provision if it has been in material default on more then two (2) occasions during the Term.

9. Alterations

The Tenant shall not make any repairs, alterations, replacements, decorations or improvements to any part of the structural or exterior portion of the Premises or any of the Building’s base building systems (including without limitation the mechanical, electrical, plumbing or HVAC systems of the base Building but excluding such systems which have been installed by the Tenant in the Premises which do not affect the Landlord’s base building systems or other tenants’ systems) without first obtaining the Landlord’s prior written approval, which approval shall not be unreasonably withheld. So long as repairs, alterations, replacements, decorations or improvements do not affect the structural or exterior portion of the base building or any of the Building’s base building systems (including without limitation the mechanical, electrical, plumbing or HVAC systems of the base Building) the Tenant shall be permitted to make all reasonable repairs, alterations, replacements, decorations, reconfigurations or improvements to, on and at the Premises.

If a request is made by the Tenant with respect to structural or exterior matters or matters which affect the base Building outside the Premises or the capacities thereof, or any of the Building’s base building systems (including without limitation the mechanical, electrical, plumbing or HVAC systems of the Building) which is approved by the Landlord, the Landlord may require that such work be designed by consultants acceptable to the Landlord, acting reasonably, and that the work be performed by contractors acceptable to the Landlord, acting reasonably.

The Tenant acknowledges that any repairs, alterations, replacements or improvements of a structural nature to the Building, or any repairs, alterations, replacements or improvements which may materially affect the mechanical and/or other base systems within the Building, including without limitation, heating, ventilating and air conditioning, plumbing and electrical systems, require the written approval (not to be unreasonably withheld or delayed) of the Landlord.

The Tenant agrees that, on or before the expiry of the fifth (5) month following execution of this Term Sheet by both parties, it shall provide the Landlord with the following preliminary plans, drawings and specifications for the approval of the Landlord and the Landlord (where required) in accordance with the foregoing, namely:

• Architectural;

• Structural (if any);

• Electrical;

• Mechanical, including plumbing, heating, air conditioning, sprinklers, ventilation and instrumentation

(collectively the “Tenant’s Plans”)

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The Landlord shall have a period of thirty (30) days following submission of the Tenant’s Plans to the Landlord within which to approve same, such approval not to be unreasonably withheld. If the Tenant’s Plans are not approved or acting reasonably disapproved by the Landlord within thirty (30) days following the submission thereof to the Landlord for its approval, the Tenant shall have a period of five (5) business days thereafter to terminate this Offer and the Lease without penalty. In the event the Tenant elects to terminate, this Offer and the Lease shall be null and void and of no further force or effect. If within five (5) business days following the expiry of the thirty (30) day period for the approval of the Tenant’s Plans by the Landlord the Tenant does not elect to terminate this Offer and the Lease by written notice to the Landlord this Offer and the Lease shall remain in full force and effect in accordance with its terms.

10. Environmental

The Tenant agrees to maintain the Premises and conduct its business and operations therein at all times in strict compliance with all applicable environmental laws and sound industry practice. The Tenant shall be responsible for and shall indemnify the Landlord against any and all environmental damage or contamination on the Premises and/or the surrounding lands caused or contributed to by the Tenant or those for whom it is responsible in law.

11. Fixtures and Improvements

All alterations, additions, fixtures and improvements installed or made by the Tenant or installed or made by the Landlord on the Tenant’s behalf shall not merge with the leasehold and shall remain the property of the Tenant. When not in default under the Lease, the Tenant may remove such alterations, additions, improvements or fixtures from the Premises either during or at the expiration of the Term or sooner determination of the Lease provided that the Tenant shall make good any damage caused to the Premises by its installation and removal of any such alteration, addition, improvement or fixtures, so long as the Premises remain in the condition that they are required to be maintained during the Term. For greater certainty, at the end of the Term or sooner determination of the Lease, the Tenant shall not be required to remove any alterations, additions, fixtures and improvements in the Premises.

12. Subordination

At the time of and as a condition precedent to the execution of the Lease, the Landlord shall obtain from any mortgagee or other party with a security interest in the Premises which is prior to this Offer or the Lease, a Non-Disturbance Agreement in form and substance acceptable to the Tenant, acting reasonably. At the request of the Landlord or its mortgagee, this Offer and the Lease may be subordinated to any charge or charges from time to time created or granted by the Landlord with respect to the Premises provided a Non-Disturbance Agreement is obtained, as aforesaid. The Landlord represents that it is the registered and beneficial owner of the Building and has the authority to enter into this Offer without the necessity of having any third party consents.

13. Landlord’s Conditions

INTENTIONALLY DELETED

14. Tenant’s Conditions

INTENTIONALLY DELETED

15. Landlord’s Work

The Landlord shall construct the Building of which the Premises forms part, in accordance with plans and specifications as follows: Architectural: November 20, 2003, Mechanical/Electrical: November 8, 2003, Structural: November 19, 2003, Security: November 10, 2003 which have been provided to the Tenant (the “Landlord’s Work”). No later than February 20, 2004, the Landlord will provide the Tenant with an updated and current set of plans and specifications in respect of the Landlord’s Work (the “Final Plans”). If the Tenant is not satisfied with the scope of Landlord’s Work or the Landlord elects not to implement any modifications reasonably required by the

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Tenant in order to efficiently operate its business, the Tenant will not be permitted to insist upon the modifications not so implemented but, in lieu thereof, the Tenant may elect to terminate the agreement arising out of this Offer provided such election to terminate is exercised by notice in writing to the Landlord on or before February 27, 2004. No changes may be made to the Final Plans which materially adversely affect (i) the Tenant’s Work, (ii) the cost of completing Tenant’s Work or (iii) the efficient operation of the Tenant’s business without the consent of the Tenant. For the purposes of this Offer and the Lease the condition of the Building as delivered to the Tenant on completion of the Landlord’s Work shall be deemed to be the base building condition. Subject to events of force majeure, the Landlord’s Work shall be completed by no later than November 1, 2004. Should the Landlord’s Work not be completed by December 1, 2004 as a result of a default by the Landlord that is not an event of force majeure, the Tenant shall be entitled to two (2) days’ free basic rent, prorated based on a 30 day month, for each day after December 1, 2004 that the Landlord’s Work is not substantially completed and the Tenant has not been delivered possession of the Premises. The Fixturing Period shall commence on the Commencement Date of the Lease specified in Section 2(b) hereof. The Landlord undertakes to use reasonable commercial efforts to provide the Tenant with as much advance written notice as is reasonably possible as to the anticipated date of Substantial Completion of the Landlord’s Work in the Premises, which in any event shall be at least five (5) days advance notice. The parties agree that two (2) days’ free basic rent for each day after December 1, 2004 that the Landlord’s Work is not substantially performed and the Tenant has not been delivered possession of the Premises is a representation of the true damages that the Tenant will suffer as a result of any delay in the substantial completion of the Landlord’s Work and the Landlord’s failure to deliver possession of the Premises and is not a penalty. Should the Tenant not be delivered possession of the Premises by November 1, 2005, for any reason whatsoever, then at the Tenant’s sole option and discretion the Tenant may terminate the Offer and the Lease, and damages will be calculated in their usual manner.

During the Fixturing Period the Tenant shall be responsible for all work within the Premises, in addition to the Landlord’s Work, which may be necessary to operate the Tenant’s business therein (the “Tenant’s Work”). Prior to the commencement of the Fixturing Period, the Tenant shall provide a copy of its plans and specifications for the Tenant’s Work to the Landlord for its prior written approval prior to commencing construction, not to be unreasonably withheld or delayed.

16. Control by the Landlord

The Landlord acknowledges and agrees that the Tenant’s business and work is of a highly confidential nature and requires additional precautions to be taken with respect to access to and from the Premises. Save and except as otherwise provided, the Landlord, and/or any agent, employee or other person acting on behalf of the Landlord shall not have access to the Premises, except in the event of an emergency, without reasonable grounds for believing that the Tenant is in breach of its obligations under the Lease and providing no less than twenty-four (24) hours’ prior written notice to the Tenant. Notwithstanding the foregoing, the Landlord and/or any agent, employee or other person acting on behalf of the Landlord shall be permitted to conduct periodic inspections of the Premises on providing a minimum of twenty-four (24) hours’ prior written notice to the Tenant. Any party requiring access shall take such reasonable precautions as to ensure the safety and security of the Premises and property of the Tenant and where required by the Tenant will be escorted by a representative of the Tenant during such access.

Save as otherwise provided, unless the Tenant is in default of its obligations under the Lease, and such default continues for five (5) business days after receiving notice thereof from the Landlord, the Landlord, and/or any agent, employee or other person acting on behalf of any of these parties shall not have access to the Premises for any other purpose except as necessary to:

(a) subject to the Tenant’s obligations under this Offer and the Lease, construct, maintain, repair, replace and operate lighting facilities and heating, ventilating and air conditioning systems servicing the Premises or the Building to the extent existing within the Premises; and

(b) provide supervision and policing services for the Building.

The Tenant acknowledges and agrees that the foregoing covenants shall not apply during the last six (6) months of the Term of the Lease and that during such period, the Landlord shall be entitled to show the Premises to potential tenants on at least seventy-two (72) hours’ prior written notice to the Tenant and subject to the Tenant’s reasonable

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security requirements and supervision. The Landlord acknowledges that the Tenant may prohibit access to certain areas of the Premises to the extent that access thereto will interrupt the Tenant’s business in the Premises. The Landlord acknowledges that, whenever the Landlord enters the Premises for any purpose, including in the event of an emergency, the Landlord shall respect the confidentiality of the Tenant’s business and the sensitive and proprietary nature of the Tenant’s operations and shall use its reasonable commercial efforts not to disrupt, impair or interfere with any of the activities the Tenant is carrying on in the Premises.

17. Refuse

The Tenant shall be responsible to ensure that all medical waste and similar refuse is handled, stored and disposed of at all times in strict compliance with all applicable laws and sound environmental practice.

18. Signs

The Tenant shall be permitted to paint, fix, display, or cause to be painted, fixed or displayed, any sign, picture, awning, canopy, advertisement, notice, lettering or decoration on any part of the interior of the Premises without, in each instance, the prior written approval of the Landlord. The Tenant shall remove all such signs etc. at the expiration or earlier termination of the Term and shall repair all damage caused by the installation and/or removal thereof.

19. Lease Form

The parties agree to execute a lease in a mutually acceptable form, based on the Landlord’s standard form lease, incorporating the terms of this Offer modified as requested by the Tenant and agreed to by the Landlord, both parties acting reasonably and in good faith, within fifteen (15) business days of Tenant initially receiving same. The Tenant acknowledges and agrees that the Commencement Date may not occur and the Tenant shall not be permitted access to the Premises for any purpose whatsoever including carrying out any of the Tenant’s Work until the Tenant and Landlord have executed the agreed upon form of Lease. However, if each of the Landlord and the Tenant has agreed upon the form of lease and the Landlord has executed the same and delivered it to the Tenant, the Commencement Date shall occur but the Tenant will not be permitted access to the Premises for any purpose whatsoever until the Tenant has executed the Lease and delivered a copy thereof to the Landlord.

No relocation of all or any portion of the Premises by the Landlord will be permitted.

The parties acknowledge and agree that the Lease shall deal in greater detail than this Offer in that certain clauses in the Offer may be expanded upon in the Lease and the Lease contains clauses in addition to those in this Offer. If there is any conflict between this Offer and the standard form lease, this Offer shall govern until the Lease is executed and once executed the Lease shall govern.

The Landlord and Tenant agree that the Lease shall include the following provisions:

(a) a provision to the effect that, as between the Landlord and the Tenant, all leasehold improvements constructed by the Tenant as part of the Landlord’s Work and at any time or times during the Term shall, during the Term of the Lease, shall remain the property of the Tenant and shall be removable by the Tenant at its election at the end of the Term unless the Term expires or the Lease is terminated by reason of the default of the Tenant, and provided that the Tenant repairs and makes good any damage caused to the Premises by the installation and removal of any such leasehold improvements;

(b) permit the Tenant to register notice of the Lease which may include all key provisions of the Lease which the Tenant requires be registered, including the provisions of subclause (a) hereof. The Tenant shall not register such notice of lease (or any other instrument) without the prior written consent of the Landlord, such consent not to be unreasonably withheld.

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20. Entire Agreement

The parties acknowledge and agree that this Offer contains all the covenants, promises, agreements, conditions and understandings between the Landlord and the Tenant concerning the Premises and there are no covenants, promises, agreements, conditions, understandings, warranties or representations, either oral or written, between them or relied upon by the Tenant to induce it to enter into this Offer, other than are herein set forth.

21. Option to Renew

The Tenant, provided it is not then in default under the terms of the Lease beyond any applicable permitted cure period, shall have the right to renew the term of the Lease for two further periods of 5 years, upon the same terms and conditions contained in the Lease save as to further rights of renewal, save and except that there shall be no rent-free fixturing period or Landlord’s Work, and save and except as to the Base Rent payable during such renewal term, which shall be at the then current fair market rate for similar unimproved premises in the Building, provided that if the Landlord and Tenant cannot agree as to the Base Rent payable in a renewal term by sixty (60) days prior to the commencement of such term, then such Base Rent shall be determined by a single arbitrator pursuant to the Arbitrations Act, 1991. The Tenant shall notify the Landlord in writing of its intent to renew the lease in accordance with the foregoing by no later than one hundred and eighty (180) days prior to the expiration of the original term or any renewal term, as applicable.

22. Right of First Offer

Provided the Tenant is not then in default beyond any cure period set out in this Lease, the Tenant shall benefit from a right of first offer on any unleased vacant space on the 5^th and any space not initially leased by it on the 6^th floors in the Building (South Tower) (the “Vacant Space”). For certainty, Vacant Space shall not include any space leased by the Landlord to any other tenant and which is offered by such tenant for sub-leasing. This right of first offer shall not apply until the Commencement Date of the Term has occurred and the Tenant has taken occupancy of the Premises. Accordingly, if during the Term, any part of the Vacant Space becomes or shall become available for rent, the Landlord shall offer the Vacant Space to the Tenant, in writing, on the same terms and conditions as this Lease, with the exception of the following:

(a) the term for the Vacant Space shall terminate at the same time as the Term;

(b) the Base Rent which shall be the fair market rent for the Vacant Space; and

(c) any Rent Free Fixturing Period shall not exceed six (6) months

The Tenant undertakes to advise the Landlord of its acceptance or refusal of the Landlord’s offer for all or a portion of the Vacant Space within 5 business days following its receipt of same. If the Tenant decides to accept the Landlord’s offer for all or a portion of the Vacant Space, the parties shall sign an amendment to the Lease within 30 days following the Tenant’s acceptance of the offer. If the Tenant does not accept the offer or if the Tenant does not respond to same within the prescribed time limit, the Landlord may lease the Vacant Space to a third party on terms and conditions no more favourable to the third party than those offered to the Tenant. Notwithstanding the foregoing provisions of this paragraph, any acceptance by the Tenant to lease a portion only of the Vacant Space shall be subject to the Landlord’s approval as to the size, configuration and location thereof, which approval shall be granted unless all or some portion of the Vacant Space included in the Landlord’s offer and not included within the portion accepted by the Tenant is not reasonably able to be leased by the Landlord to a third party or parties.

23. Damage or Destruction

In respect of substantial damage or destruction of the Building or the Premises, which materially affects the Tenant’s ability to conduct its business within the Premises, neither party shall have the ability to terminate the Lease unless the damage is not able to be repaired within 180 days.

24. Other Provisions

The Landlord agrees to waive in the Lease its remedy of distress in the event of a default by the Tenant under the Lease. The Landlord further agrees that the Lease shall not provide for a security interest in favour of the Landlord.

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25. Irrevocable Date

This Offer is irrevocable by the Tenant and shall remain open for acceptance until 5:00 p.m. on             , 200    , after which this Offer shall become null and void.

The Tenant represents and warrants that the undersigned have authority to bind the Tenant to the terms of the within Offer.

SIGNED AND DATED at                      this                      day of         , 2004.

NPS PHARMACEUTICALS, INC. (Tenant)
Per:	/s/ HUNTER JACKSON
Name:
Per:	/s/ JAMES U. JENSEN
Name:
I/We have authority to bind the Corporation.

The Landlord hereby accepts this Offer to Lease and agrees to be bound by the terms and conditions contained herein.

SIGNED AND DATED at Toronto this 23 day of January         , 2004.

MARS DISCOVERY DISTRICT (Landlord)
Per:	/s/ JOHN A. COOK
Name:	John A. Cook
Per:	/s/ NINA GAZZOLA
Name:	Nina Gazzola
I/We have authority to bind the Corporation.

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EX-12.1

EXHIBIT 12.1

NPS PHARMACEUTICALS, INC.

COMPUTATION OF RATIO OF EARNINGS AVAILABLE

TO COVER FIXED CHARGES

(in thousands)

	Fiscal Year Ended December 31,
	1999			2000			2001			2002			2003
Earnings (Loss)
Pre-tax loss before adjustments for income from equity investees and cumulative effect on prior years of change in accounting principle	$	(35,654	)	$	(31,612	)	$	(51,329	)	$	(87,127	)	$	(172,925	)
Total fixed charges		302			463			399			381			4,134
Distributed income of equity investees		—			—			1,661			193			—
Total losses before fixed charges	$	(35,352	)	$	(31,149	)	$	(49,269	)	$	(86,553	)	$	(168,791	)
Fixed Charges
Interest expense	$	4		$	96		$	5			—		$	3,718
Assumed interest attributable to rentals		298			367			394			381			416
Total fixed charges	$	302		$	463		$	399		$	381		$	4,134
Deficiency of earnings available to cover fixed charges	$	(35,654	)	$	(31,612	)	$	(49,668	)	$	(86,934	)	$	(172,925	)
Ratio of earnings available to cover fixed charges		—			—			—			—			—

For the years ended December 31, 1999, 2000, 2001, 2002 and 2003, our earnings were insufficient to cover fixed charges for those periods by $35,654, $31,612, $49,668, $86,934 and $172,925, respectively. In calculating the ratio of earnings available to cover fixed charges, “earnings” consist of pre-tax income (loss) before adjustments for income from equity investees, plus fixed charges and distributed income from equity investees. Fixed charges consist of interest expense and estimated interest included in rental expense.

EX-21.1

EXHIBIT 21.1

LIST OF SUBSIDIARIES

OF

NPS PHARMACEUTICALS, INC.

• NPS Services, L.C.

(Nevada limited liability company)

• NPS Holdings Company

(incorporated in the Province of Nova Scotia, Canada)

• NPS Allelix Inc.

(incorporated in the Province of Nova Scotia, Canada)

• NPS Allelix Corp.

(incorporated in the Province of Ontario, Canada)

EX-23.1

EXHIBIT 23.1

Consent of Independent Auditors

The Board of Directors and Stockholders

NPS Pharmaceuticals, Inc.

We consent to incorporation by reference in the registration statements (Nos. 33-79622, 333-17521, and 333-94269) on Forms S-8 and (Nos. 333-41758, 333-106770 and 333-108612) on Forms S-3 of NPS Pharmaceuticals, Inc. of our report dated February 9, 2004, relating to the consolidated balance sheets of NPS Pharmaceuticals, Inc. and subsidiaries (a development stage enterprise) as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2003, and for the period from October 22, 1986 (inception) to December 31, 2003, which report appears in the December 31, 2003 annual report on Form 10-K of NPS Pharmaceuticals, Inc.

Our report refers to a change in the method of amortizing goodwill and intangible assets in 2002.

/s/ KPMG LLP

Salt Lake City, Utah

February 9, 2004

EX-31.1

EXHIBIT 31.1

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, Hunter Jackson, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 10, 2004	/s/ Hunter Jackson
	Hunter Jackson, President, CEO and Chairman of the Board

EX-31.2

EXHIBIT 31.2

SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, Gerard J. Michel, certify that:

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

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

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

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 10, 2004	/s/ Gerard J. Michel
	Gerard J. Michel, Vice President and Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

AND CHIEF FINANCIAL OFFICER

Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

Solely for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we the undersigned Chief Executive Officer and Chief Financial Officer of NPS Pharmaceuticals, Inc. certify that the Annual Report of NPS Pharmaceuticals, Inc. on Form 10-K for the fiscal year ended December 31, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects, the financial condition and results of operations of NPS Pharmaceuticals, Inc.

Date: February 10, 2004	/s/ Hunter Jackson
	Hunter Jackson, President, CEO and Chairman of the Board

Date: February 10, 2004	/s/ Gerard J. Michel
	Gerard J. Michel, Vice President and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document.

A signed original of this written statement required by Section 906 has been provided to NPS Pharmaceuticals, Inc. and will be retained by NPS Pharmaceuticals, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.