** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-KSB**

 
| **ý****ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                  |
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| **For the Fiscal Year Ended December 31, 2003**                                                                                                                                       |
|                                                                                                                                                                                       |   |
| **o****TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                   |
|                                                                                                                                                                                       |   |
| **For  the Transition Period From               to              ** |

 

**Commission File No. 0-23553**

 

**IMCOR PHARMACEUTICAL CO.**

(Exact name of Registrant as specified in its Charter)

 

**NEVADA**

(State or other jurisdiction of incorporation or organization)

 

**62-1742885**

(I.R.S. Employer Identification No.)

 

**6175 LUSK BOULEVARD****SAN DIEGO, CA 92121**

(Address of principal executive offices) (Zip Code)

 

**(858) 410-5601**

(Registrant’s telephone number, including area code)

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:  **common stock, par value $.001per share**

 

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý No  o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B is not contained in this form, and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. o

 

Theissuer’s revenues for its most recent fiscal year: $0

 

Theapproximate aggregate market value of voting and non-voting common stock heldby non-affiliates computed as of March 30, 2004, based upon the last saleprice of the common stock reported on the Nasdaq SmallCap Market wasapproximately $8,483,000 .  For purposes of this calculation only, theregistrant has assumed that its directors and executive officers, and any personknown to the issuer to hold 10% or more of the outstanding common stock, areaffiliates.

 

Thenumber of shares outstanding of each of the registrant’s classes of commonstock, as of March 30, 2004 was 21,541,476.

 

Documents Incorporated by Reference

 

Portionsof the registrant’s proxy statement to be filed with the Securities andExchange Commission in connection with its 2004 Annual Meeting are incorporatedinto Part III of this Report.

 

 

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**PARTI**

** **

IMCORPharmaceutical Co. and its 80.1% owned affiliate, Sentigen, Ltd., arecollectively referred to as “IMCOR,” the “company,” “we,” or “us.” Portions of the discussion in this Form 10-KSB contain forward-lookingstatements and are subject to the “Risk Factors” described below in Item 1.  On February 5, 2004, shareholders ofthe company approved a change in the company’s name from Photogen Technologies,Inc. to IMCOR Pharmanceutical Co.

 

InNovember, 2002, we effected a one-for-four reverse split of our common stockand split off our therapeutic line of business.  Unless otherwiseindicated, all data (including historical numbers) in this Form 10-KSB reflectthe impact of the reverse split and the split off of our therapeutic line ofbusiness.

 

**ITEM 1. DESCRIPTION OF BUSINESS.**

 

**INTRODUCTION**

** **

We are anemerging, development-stage specialty pharmaceutical company focused ondeveloping and marketing medical imaging pharmaceutical products.  We have one FDA approved product, *Imagent®* (perflexane lipid microspheres),**anultrasound imaging contrast agent thatwe acquired in June 2003, and two additional contrast agents indevelopment for use in computed tomography (CT) and x-ray imaging with potential applications (1) as a bloodpool agent, to diagnose diseased tissue in the cardiovascular system and otherorgans, which we call PH-50, and (2) to diagnose cancer metastasizing into thelymphatic system, which we call N1177. The product designations PH-50 and N1177 refer to the same chemicalentity.  We established the two names todistinguish commercialization rights between cardiovascular imaging (and allother indications) (PH-50) to which we retain rights, and the field oflymphography (N1177), which we licensed to our joint venture (Sentigen, Ltd.)with affiliates of Elan.  OnFebruary 5, 2004, we changed our name to IMCOR Pharmaceutical Co.,reflecting the changed nature of our business to imaging pharmaceuticals.

 

InDecember 2001, we announced positive preclinical results of PH-50.  Based on these studies, the extensivepreclinical toxicology and other study work, including the product’s use inapproximately 65 patients for lymphography, we shifted the strategic researchdirection of IMCOR to focus on the cardiovascular and lymphographyapplications.  We accomplished this shiftin focus also by splitting off our therapeutic line of business, and, inJune 2003 acquiring the medical imaging business (the “*Imagent* business”) of AlliancePharmaceutical Corp. (“Alliance”) led by *Imagent*® (perflexanelipid microspheres), an FDA approved diagnostic imaging agent.

 

Forthe two years up to the time of our acquisition of the *Imagent* business, substantially all of ourresearch and development efforts were focused on the preclinical testing ofPH-50.  During that period, we operatedwith a very small staff and conducted substantially all of our researchactivities through contracts with academic institutions and contract researchlaboratories.  In addition, we hadconducted research and development activities on the development of certain therapeuticphotodynamic therapy applications (namely a product we called PH-10 for thetreatment of certain dermatological conditions) and the development of amedical laser.  These operations weresplit off to our founding scientists as of November 12, 2002 and have beenrecorded as discontinued operations in our financial statements.

 

PH-50and N1177 are still in early stages of development.  Of these products, based on the availability of capital, weintend to focus our research efforts first on the continued development ofPH-50 and secondly, N1177.

 

Pharmaceuticalimaging agents are used with echocardiography, computed tomography (“CT”),nuclear medicine and magnetic resonance imaging (“MRI”) equipment in order toincrease the diagnostic capabilities of these techniques.  By enhancingthe contrast between different types of tissues, these intravenouslyadministered contrast agents provide critical anatomical and disease stateinformation that is not obtainable using the equipment alone.  There arenumerous potential applications for a contrast agent used in imaging parts orall of the cardiovascular system as well as other organs.  Our productshave the potential to enhance a physician’s ability to diagnose certaincardiovascular abnormalities and the spread of cancer in the lymphatic system.

 

IMCOR is based in San Diego, California.  We have approximately 30 full time employees and a 53,000 squarefoot cGMP (current Good Manufacturing Practices) manufacturing facility at ourSan Diego location.  Our personnel have expertise in sales,marketing and manufacturing, clinical development, clinical trial design andregulatory approval

 

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processes. We also work closely with consultants experienced in drug development andregulatory requirements.

 

*Our History*

 

InMay, 1997, IMCOR Pharmaceutical Co. (formerly known as Photogen Technologies,Inc., which was then known as M T Financial Group, Inc. (“M T Financial”)),acquired Photogen, Inc. through a subsidiary merger.  As a result,Photogen, Inc. became a wholly-owned subsidiary of M T Financial and then M TFinancial changed its name to Photogen Technologies, Inc. (thensubsequequently on February 5, 2004 to IMCOR Pharmaceutical Co.).   In November, 2002, we effected the splitoff of Photogen, Inc. and substantially all of the assets and all of theliabilities related to our therapeutic line of business, including a compoundknown as PH-10, to our five founding stockholders (Drs. Wachter, Dees, Fisherand Scott and Mr. Smolik, who are collectively referred to as the “TennesseeStockholders”) in exchange for and in cancellation of all of their stock inIMCOR (then known as Photogen Technologies, Inc. (5,137,109 shares)).  Atthat time, we also sold $9.0 million of our common stock to a group of institutionalinvestors at a price of $1.08 per share and effected a one-for-four reversesplit of our common stock.  In this offering, we received $6,500,000 incash and converted Tannebaum, LLC’s $2,500,000 credit facility into 2,314,815shares of common stock at $1.08 per share.  In December, 2002 and thebeginning of January, 2003, we sold an additional approximately $3.0 million ofour common stock at $1.08 per share to certain institutional investors andaccredited individual investors. See “Corporate Restructuring” below.

 

*Available Information*

 

Ourwebsite (www.imcorpharma.com) is under development and at this time you cannotobtain copies of our SEC filings on our website; however, you can obtain, freeof charge, a copy of our filed annual reports on Form 10-K or 10-KSB, ourquarterly reports on Form 10-Q or 10-QSB, our current reports on Form 8-K, andany amendments to those reports, our proxy statements and informationstatements, by sending a request for those documents to our corporatesecretary, Brooks Boveroux, at 6175 Lusk Boulevard, San Diego, CA 92121 orby calling (858) 410-5601.  Our filings are also available to thepublic from the SEC’s website at (www.sec.gov) or at the SEC’s Public ReferenceRooms in Washington D.C., New York, NY and Chicago, IL.  The PublicReference Room in Washington, D.C. is located at 450 Fifth Street N.W. Please call the SEC at 1-800-SEC-0330 for further information on the PublicReference Room.

 

**TECHNOLOGY**

 

OnJune 18, 2003, we acquired assets, including Purchased Technology, relatedto the diagnostic imaging business, including *Imagent*,an FDA-approved product, of Alliance.  *Imagent*is an intravenous contrast agent for use with ultrasound imaging equipment toimprove visualization of blood vessels for better diagnosis of disease andassessment of organ function.  *Imagent*consistsof perfluorochemical-based “microbubbles” that are highly echogenic (reflectultrasound signals strongly) in the bloodstream, thereby significantlyenhancing ultrasound images.  We alsoentered into a number of agreements related to that acquisition.  Included in the purchase were anFDA-approved manufacturing facility, the marketing, manufacturing andsupporting infrastructure for the product and an intellectual propertyportfolio of approximately thirty patents in the area of ultrasound imaging.

 

*Imagent* has beenapproved for marketing by the FDA for use in patients with sub optimalechocardiograms to opacify the left ventricle and thereby improve visualizationof the main pumping chamber of the heart, and to improve delineation of theendocardial borders of the heart.  As aresult, ultrasound with *Imagent* may better distinguish normal andabnormal heart structure and function - two critical indicators of cardiachealth.  Echocardiography is the mostwidely used imaging modality for the diagnosis of heart disease, the leadingcause of death in the U.S.  Theattractiveness of the ultrasound imaging market potential together with theacquisition of an approved product and an extensive intellectual property portfoliowere fundamental reasons for the acquisition and primary determinants of thepurchase price of approximately $16,572,000. We will manufacture *Imagent*at our facility in San Diego and plan to market *Imagent* through a sales relationship with units of CardinalHealth.  We are currently seekingadditional capital to operate the *Imagent*business and to continue our development programs.

 

In1999, we entered into an exclusive license for a group of proprietarymaterials, the lead compound of which was known

 

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asWN67722.  At that time, the product was being developed only for the fieldof lymphography.  We now call this product N1177 (for use in the field oflymphography) or PH-50 (when referring to cardiovascular and all otherindications).  The product designations PH-50 and N1177 refer to the samechemical compound.  These materials are very small particles designed totravel through the circulatory or lymphatic system (depending on how they areadministered) and are called “nanoparticulates.”  The compound is coveredby patents and patent applications filed in the U.S. and elsewhere.  Aspart of the initial acquisition of this product we also acquired patentedmethods for performing minimally invasive lymphography using x-ray, CT or MRI.

 

**Cardiacand vascular imaging**

** **

According to 1998 statisticsof the National Heart, Lung, and Blood Institute, ischemic heart disease is theleading cause of death in the U.S., accounting for one of every fivedeaths.  The American Heart Association (www.americanheart.org) estimatesthat approximately 1.1 million Americans suffer a myocardial infarction (“MI”)annually, and over 40 percent will not survive the event.  Atheroscleroticcoronary artery disease (“CAD”) is the underlying cause of most ischemiccardiac events and can result in MI, congestive heart failure, cardiacarrhythmias and sudden cardiac death.  Clinically significant CAD isuncommon in men under 40 and pre-menopausal women, but risk increases withadvancing age and in the presence of risk factors such as smoking,hypertension, diabetes, high cholesterol and family history of heartdisease.  Angina is the most common presenting symptom of myocardialischemia and underlying CAD, but in many persons the first evidence of CAD maybe MI or sudden death.  The American Heart Association estimates that 1-2million middle-aged men have asymptomatic but physiologically significantcoronary disease, also referred to as silent myocardial ischemia.  Over twomillion angiography procedures are conducted annually in the U.S. Although mortality from heart disease has declined steadily over the past threedecades in the U.S., the total burden of coronary disease is predicted toincrease substantially over the next 30 years due to the increasing size of theelderly population.

 

**Lymphography**

 

Lymphographyis a procedure used to determine if a patient’s cancer has spread to the lymphnodes.  The presence or absence of cancer in the lymph nodes is animportant indication of whether the disease has spread from the original tumorand the seriousness of the disease.  It also provides oncologists withcritical information to help determine the stage of the disease and theappropriate course of treatment.

 

Itis generally accepted that breast cancer and melanoma spread by way of thelymph system as do cancers of the lung, prostate and many other cancers. Clinical studies have demonstrated that patients with cervical cancer have anincreased survival rate if lymph nodes with cancerous tissue are removed. Effective treatment of these cancers can be aided by an early assessment of thepresence or absence of disease (micro-metastases) in the lymph nodes.

 

Patientsbelieved to have cancer currently are subjected to injections of blue dye orradioactive particles that track the materials to the general area of the lymphnode.  In some of these diseases, the location of the lymph node isdifficult to access.  In the case of breast cancer, oncologists may remove15-30 underarm lymph nodes for biopsy.  Additional treatment will berequired if cancer is discovered.  Approximately 80% of the patientsdiagnosed with breast cancer or melanoma who undergo these painful proceduresare found to have no sign of disease in their nodes.

 

Theparticular properties of N1177 enable it to travel through the lymph system tothe lymph nodes most likely to be affected if the cancer has spread.  Itis recognized by the body’s immune system as being a foreign body and thus isnormally ingested by macrophage (cells that engulph foreign material in thebody for eventual elimination).  It is a particular characteristic oftumors that they contain no or a minimal number of macrophage.  N1177 isnot penetrated by x-rays (“radiopaque”), and thus is seen on a CT scan as whiteareas. Tumors within a node, as they would not have retained N1177, are seen asdark areas.  The difference in contrast created by the presence or absenceof the imaging agent serves as the basis to determine the presence or absenceof disease.  We expect that N1177 would remain in the node to allow for aneffective imaging procedure with a good safety profile and acceptable clearancetimes.  A further benefit of these minimally invasive procedures is thatthey could be used multiple times and therefore provide a means to monitor theresults of cancer treatment and detect recurrence.

 

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### **Productsand Product Candidates**

### ** **

***Imagent*****– FDA Approved Product**

 

The*Imagent* business of Alliance weacquired included:

 

•      *Imagent,* an FDA-approved product;

 

•      an FDA-approved manufacturing facility;

 

•      the right to hire a 45-person operatingorganization; and

 

•      a portfolio of intellectual property inimaging technology and ultrasound imaging contrast agents, including over 30patents.

 

Aspart of the acquisition, we also assumed a worldwide development andcommercialization agreement for *Imagent*with Schering that was amended in February, 2002 to give Alliance exclusiverights to market the product in the U.S. until February, 2007, with Schering tobe paid a nominal royalty on such sales.  As part of the assumed agreementwe may also obtain exclusive rights to market the product internationally inexchange for the payment of additional royalties to Schering.  At theexpiration of the period, we have the right to pay all of any remaining royaltyobligation to Schering and thus retain all rights to the product on a worldwidebasis, or alternatively, to allow Schering the opportunity to obtainco-promotion rights along with us.

 

The FDA approved *Imagent* in May 2002 for use in imaging theheart via ultrasound (echocardiography) in patients who are difficult to imageusing standard non-contrast procedures due to obesity, lung disease, bodyhabitus, or other circumstances.  Follow-onindications include use for perfusion (measuring defects in the heart muscletissues), body imaging for detection of cancer in solid organs (liver, kidney,prostate, etc.), as well as for vascular diseases (carotid arteries, peripheralveins, etc.).  Additional clinicalstudies are planned to support routine use in both cardiology and body imagingapplications.  Currently, *Imagent*qualifies for reimbursement by the Centers for Medicare & Medicaid Servicesin all medical settings for cardiology.

 

We have assumed the rights and obligations of Alliance under the termsof a long-term supply agreement that Alliance had entered for the principal rawmaterial for *Imagent. *Although some raw materials for *Imagent* are currently qualified from onlyone source and we have some inventory, we will attempt to acquire additionalinventory of these materials and to negotiate long-term supplyarrangements.  Raw materials used in *Imagent*cannot be changed withoutequivalency testing of any new material by us and approval of the FDA. Our business could be materially and adversely affected if we are unableto obtain qualified raw materials on a timely basis and at a cost-effectiveprice.

 

In December 2003 weentered into a license agreement with Kyosei Pharmaceutical Co., Ltd., a unit of SakaiGroup, for the development and marketing of *Imagent*in Japan for allradiology and cardiology indications.  Terms of the agreement call for the payment to IMCOR of up to $10million in fees and development milestone payments plus royalties on commercialsales.  Kyosei will also pay IMCOR to manufacture *Imagent* for Kyosei’s clinical andcommercial requirements.

 

**Developmentof PH-50**

 

Weare developing PH-50 to extend the clinical utility of x-ray based imaging,chiefly CT.  The indications we envision for PH-50 include:  CTangiography (of the heart and peripheral blood vessels), assessment ofwhole-body disease burden of atherosclerosis, organ perfusion and cancerstaging.  PH-50 is a radiopaque contrast agent .  When injectedsystemically into the circulatory system (i.e., the blood stream), it remainswithin the system mixing with the blood and flowing throughout the circulatorysystem.  As the compound is radiopaque, a physician using a device such asa CT machine along with the contrast agent can create an image of the desiredarea.  In our preclinical studies we have obtained encouraging resultsthat have been demonstrated by imaging heart, liver and other organs withresults that are comparable or superior to those obtained by currentlyavailable products.  We believe that PH-50 could allow the imaging of thecardiovascular system (angiography) and other organs as a non-invasiveprocedure, at lower cost and with reduced risk

 

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andmorbidity.

 

Weare completing pre-clinical studies of PH-50 for potentially significant newapplications in cardiovascular imaging and have filed for additional patentprotection of the use of the compound for vascular and organ imagingapplications.  We plan to develop PH-50 as a blood pool contrast agent forseveral indications.  Based on considerable existing preclinical studiesand human clinical experience, we believe that we can commence further clinicalstudies in the near future.  Our initial development strategy will be toevaluate PH-50 as a contrast agent in Phase 1 studies for cardiovascular andblood pool imaging using advanced CT .  We plan to conduct Phase 1 trialsto assess safety and patient tolerance of PH-50 as a cardiovascular imagingagent through intravenous administration.  As part of the originalacquisition and our further research, we have a substantial body of safetyinformation in both animals and humans.  Pre-clinical toxicology andpharmacology data for PH-50/N1177 includes testing in multiple animal modelsincluding studies in several models utilizing intravenous administration, whichis the route of administration to be utilized in the cardiovascularindications.  In animal experiments, our investigators from StanfordUniversity have shown that PH-50 can be used as an effective imaging agent tovisualize cardiac structures after a single, low-dose intravenousinjection/infusion.  We have an open investigational new drug application(“IND”) with the FDA for the product in the lymphography indication and havefiled an amendment to this application for the intravenous administration ofPH-50 for use as a blood pool agent.

 

Scaled-upmanufacturing of PH-50/N1177 is performed for us by Elan through itsNanosystems division.  Nanosystems has undertaken substantial work tomanufacture PH-50 in compliance with the FDA’s current Good ManufacturingProcedures (“GMP”) regulations and in a scalable process sufficient to supportcommercial quantities.  Currently, Nanosystems is our sole supplier of theraw materials necessary to produce PH-50 and N1177.  There can be noassurance that Nanosystems will continue to supply us with the raw materials weneed on terms that are acceptable to us.

 

**Developmentof N1177**

 

Weare developing N1177 through a joint venture with affiliates of Elan.  Ourgoal is to demonstrate that the use of N1177 will enable physicians toprecisely locate tumorous nodes by first injecting the material in the vicinityof the tumor and then taking an image using a CT device.

 

Considerablepreclinical testing of N1177 has been conducted in multiple animalmodels.  The results of these studies suggest a favorable safety andefficacy profile for N1177.  Phase I clinical studies to evaluate thesafety of N1177 in a total of 65 patients have been completed.  Theresults of the Phase I study involving 45 subjects indicate the safety andpharmacokinetic data are consistent with safety, pharmacokinetic and metabolicdata obtained in previous nonclinical safety and disposition studies.  Inaddition, the number of nodes visualized showed a statistically significantdose effect (an increase in the number of nodes visualized as the doseincreased).

 

Weplan to commence Phase 2 clinical studies for detection of cancer metastasis inlymph nodes in patients with cervical cancer, subject to the availability ofsufficient capital.  In this patient population, studies document anincrease in survival when lymph nodes containing cancer are removed. Tumor identification by CT imaging will be correlated to the results of biopsyresults from patients undergoing surgery to demonstrate effectiveness inlocating nodes and identifying those with cancer in them.

 

**SentigenLtd. - Joint Venture with Elan Corporation**

 

InOctober, 1999, we entered into a joint venture with affiliates of Elan. The joint venture company, Sentigen Ltd., is developing N1177, ananoparticulate agent used to image lymph nodes to detect cancer.  We own80.1 percent of Sentigen with the balance being owned by affiliates of Elan. We licensed to Sentigen certain methods and other proprietary technology foruse in lymphography, and we sub-licensed to Sentigen proprietary compounds wehad obtained by license from Massachusetts General Hospital and Nycomed ImagingAS.  Elan, through its drug delivery division, Elan PharmaceuticalTechnologies, licensed to Sentigen its NanoCrystalTM stabilized nanoparticulateformulation technology to develop the diagnostic imaging agents.  Continued development of N1177 is subject tothe receipt of adequate capital to finance its operations.

 

Tofinance the initial capital requirements of Sentigen, including the licensingby Sentigen of certain technology, we sold to a unit of Elan $12,015,000 of ourSeries A Convertible Preferred Stock (the “Series A Preferred Stock”). For the first

 

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sixyears following issuance (i.e., through October 2005) Elan may exchangethe Series A Preferred Stock for a number of shares of Sentigen stock that willenable Elan to increase its ownership of Sentigen up to 50 percent. Alternatively, during that period Elan may convert the Series A Preferred Stockinto IMCOR common stock at a conversion price of $84.68 per share.

 

Aspart of the joint venture agreement, Elan provided us with a $4.8 millioncredit facility to fund our share of the then anticipated development costs ofthe joint venture.  On November 12, 2002, all of the then outstandingprincipal and interest ($3,082,487) was converted at a price of $24.00 pershare into 128,437 shares of our common stock and the line of credit wascancelled.

 

Ouragreement with Elan provides that Elan has the right to nominate a member toour Board of Directors until October, 2004 or as long as Elan owns 10% of ourcommon stock (Elan currently owns less than 10% of our common stock). Elan has not exercised this right with respect to our current board ofdirectors.

 

### **CORPORATERESTRUCTURING – November 2002**

### ** **

**SplitOff Transaction**

** **

Fromour inception, we were involved in two lines of business: diagnosis of diseasedtissue and the treatment of diseased tissue. In the past, our research and development efforts followed this dualfocus.  We worked to develop therapies to treat cancer, pre-cancerousconditions, psoriasis and other dermatological conditions, using ourproprietary multi-photon laser technologies, or using an agent called PH-10with a variety of energy sources in a regimen called photodynamic therapy, orthe activation of a substance by an energy source to achieve a therapeuticeffect.  We had also been developing products, N1177 and PH-50, todiagnose the spread of cancer to a patient’s lymph nodes and to diagnosecardiovascular disease, respectively.

 

Ourpursuit of both diagnostic and therapeutic lines of businesses led to a numberof challenges.  We found it increasingly difficult to raise capital withsuch a diverse product pipeline and to concentrate our efforts on a particularapplication from inception through development.  In order to attractcapital investment and to take advantage of what we perceived to be the bestmarket opportunities for our proposed products, we concluded that it wasnecessary to devote our efforts and resources to the development of our medicalimaging diagnostic technologies rather than the therapeutic technologies.

 

Weentered into a Separation Agreement with the Tennessee Stockholders in order toenhance our ability to secure additional financing and pursue marketopportunities, to enable the Tennessee Stockholders to focus on the developmentof therapeutic technologies arising from their inventions, and to resolve anydifferences of opinion with them as to how to allocate financial and managementresources.  We separated the therapeuticand diagnostic lines of business by first transferring substantially all assetsand liabilities associated with the diagnostic business to IMCOR and retainingsubstantially all assets and liabilities associated with the therapeuticbusiness in Photogen, Inc.  Then, IMCOR, Photogen, Inc. and the TennesseeStockholders engaged in a “split off” transaction in which the TennesseeStockholders transferred all of their common stock of IMCOR to the company forredemption in exchange for all of the common stock of Photogen, Inc.  TheTennessee Stockholders beneficially owned 5,137,109 shares of IMCOR (formerlyknown as Photogen Technologies, Inc.) common stock (approximately 52.9% of theoutstanding shares), and those shares were subsequently cancelled by thecompany.

 

Dr.Wachter, one of the Tennessee Stockholders, resigned as a director and officerof IMCOR upon the effectiveness of the split off transaction.  Dr. Scott,also a Tennessee stockholder, resigned as an officer of IMCOR upon theeffectiveness of the split off transaction.

 

**FinancingTransaction**

 

InNovember, 2002, we sold $9,000,000 of our common stock at a price of $1.08 pershare to a group of institutional investors which included Mi3, L.P. (“Mi3”),Oxford BioScience Partners IV L.P. and MRNA Fund II L.P. (collectively, the“Institutional Investors”).  In this offering, we received $6,500,000 incash and converted Tannebaum, LLC’s $2,500,000 credit facility into 2,314,815shares of common stock at $1.08 per share.  Tannebaum, LLC was at thattime controlled in part by Dr. Weinstein, then one of our directors. In December,2002, we consummated a second closing of

 

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thefinancing transaction and sold an additional 2,804,539 shares of our commonstock at $1.08 per share for an aggregate of $3,028,902 to a group ofinstitutional investors and individual accredited investors.  The finalclosing of the financing took place in January, 2003 at which time we sold anadditional 27,778 shares of our common stock at $1.08 per share for anaggregate of $30,000 to two individual accredited investors. As part of thefinancing transaction, we entered into a Registration Rights Agreementrequiring us to file a registration statement with the SEC within 45 days ofthe closing of the financing transaction to cover the Institutional Investors’sales of the shares.  The Institutional Investors in the financingtransaction have deferred the implementation of this requirement. As part ofthe financing transaction, the Institutional Investors entered into a Voting,Drag-Along and Right of First Refusal Agreement (“Voting Agreement”) with Dr.Weinstein, Stuart Levine (individually and as co-trustees of the TheodoreTannebaum Trust) and Tannebaum, LLC (collectively, the “ChicagoStockholders”).  The Voting Agreement provides, among other things, thateach of its parties will vote all shares of which it is the beneficial owner asfollows:

 

•      To maintain the total number of directors atseven (we currently have five directors).

 

•      To amend our Articles of Incorporation orBylaws in accordance with the recommendation of five of the seven directors.

 

•      For the election of the following directors:

 

•      One person nominated by Mi3;

 

•      One person nominated by the holders of 80% ofthe shares owned by the Institutional Investors;

 

•      One person nominated by the holders of 80% ofthe shares owned by the Chicago Stockholders;

 

•      One person appointed by our Board of Directorsas the Chief Executive Officer;

 

•      One person nominated by Elan InternationalServices, Ltd. (“EIS”) in accordance with and subject to our October 20,1999 Securities Purchase Agreement with EIS (EIS has not exercised this rightwith respect to our current board of directors); and

 

•      Two persons (or three if EIS’s right tonominate a director expires) with industry experience in the healthcare,biotech or pharmaceutical industries, as nominated by our Board of Directorsand approved by the holders of 80% of the shares beneficially owned by theInstitutional Investors.

 

•      To maintain an Audit Committee andCompensation Committee of the Board, each with three members, and to appointone director to serve on each Committee nominated by the holders of 80% of theshares owned by the Institutional Investors.

 

TheVoting Agreement also provides that none of its parties will sell, transfer,pledge, grant any option for, or otherwise dispose of any of their shares ofcompany stock except in compliance with the Voting Agreement.

 

Asconditions to the closing of the financing transaction:

 

•      All of our Series B Convertible PreferredStock (the “Series B Preferred Stock”) was converted into common stock at theinitial closing on November 12, 2002 of the financing transaction. In exchange for this conversion we agreed that the conversion ratio of theSeries B Preferred Stock would change from 1.44703 (the conversion ratio aftertaking into consideration all issuances of common stock before theinstitutional financing) to 4.25 (pre-reverse split).  The result was thatall of the Series B Preferred Stock was converted into a total of approximately422,316 shares of common stock; the Series B Preferred Stock is no longeroutstanding, nor is there any liquidation preference associated with the SeriesB Preferred Stock, and

 

•      All of the outstanding principal and accruedinterest under the Elan line of credit was converted into a total of 128,437shares of our common stock.

 

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**ElanAgreement with the Institutional Investors**

 

Weare parties to a joint venture with affiliates of Elan to develop lymphographytechnologies carried out through Sentigen, Ltd.  As part of the jointventure arrangements, among other things, we issued EIS (i) 115,385 shares ofour common stock and a warrant to acquire additional shares of common stock,(ii) 12,015 shares of our Series A Preferred Stock, and (iii) a convertiblenote in the original principal amount of $4,806,000.  After issuance, theSeries A Preferred Stock was transferred to Elan Pharmaceutical Investments II,Ltd. (“EPI”).  The principal and interest outstanding under the promissorynote ($3,082,487.30) were converted into 128,437 shares of our common stock inconnection with the November, 2002 financing.

 

TheCertificate of Designations, Rights and Preferences (the “Certificate ofDesignations”) of the Series A Preferred Stock provides that upon liquidation,dissolution or winding up of the company (whether voluntary or involuntary),the holder of the Series A Preferred Stock is entitled to a liquidationpreference (the “Series A Liquidation Preference”) of cash or other propertyout of funds legally available for distribution to our stockholders, before anydistribution is made to the holders of common stock or other securities rankingjunior to the Series A Preferred Stock.  The amount of the Series ALiquidation Preference is $1,000 per share.

 

Oneof the conditions to the closing of the November 2002 financingtransaction was that the holder of our Series A Preferred Stock amend theCertificate of Designations to eliminate the Series A LiquidationPreference.  As of November 12, 2002, the total Series A LiquidationPreference was $15,892,220.  Inconsideration of eliminating the Series A Liquidation Preference, the Series Aconversion price would have been lowered to $12.00 from $84.68 per share.

 

Immediatelybefore our 2002 annual meeting of stockholders, we were informed that theholder of the Series A Preferred Stock could not proceed with these amendmentsto the terms of the Series A Preferred Stock.  To induce the InstitutionalInvestors to proceed with the closing of the financing, on November 12,2002, Elan entered into an agreement (the “Elan Agreement”) with theInstitutional Investors.  The Elan Agreement provides that Elan will paythe Institutional Investors an amount in cash (or the fair market value ofother property) distributed to the holder of the Series A Preferred Stock onaccount of the Series A Liquidation Preference that, in the absence of theSeries A Liquidation Preference, would have been paid to thoseInstitutional Investors in accordance with applicable law, up to a maximum of$16,000,000.  Only the Institutional Investors are beneficiaries of theElan Agreement.  The Elan Agreement was ratified, adopted and approved bythe IMCOR common stockholders on January 24, 2003.  The Series ALiquidation Preference remains in effect and the conversion price for theSeries A Preferred Stock is still $84.68 per share.

 

**Amendment ofthe 2000 Long Term Incentive Compensation Plan**

 

Weadopted the 2000 Long Term Incentive Compensation Plan (the “2000 Plan”) at ourannual meeting of stockholders held in May, 2000.  As of July 15,2002, 500,000 shares were reserved for issuance under the 2000 Plan and optionscovering 133,750 of these shares of common stock had been granted.  OurBoard of Directors believed that the availability of additional options topurchase common stock was necessary to enable us to continue to provide our keyemployees with equity ownership as an incentive to contribute to oursuccess.  Also, increasing the number of shares subject to the 2000 Planwas a condition to the closing of the institutional financing required by theInstitutional Investors.  Thus, our Compensation Committee voted to amendthe 2000 Plan to increase the shares covered by the 2000 Plan by 4,068,750shares from 500,000 to 4,568,750; and to modify the definition of “cause” inthe 2000 Plan to coordinate with employment agreements.  The stockholdersapproved the amendment of the 2000 Plan to increase the aggregate number ofshares of common stock issuable under the 2000 Plan from 500,000 to 4,568,750and approved the amendment of the definition of the term “cause” at our annualmeeting of the stockholders held on October 31, 2002.  In addition,the Compensation Committed approved a reduction in the shares reserved underour Senior Executive Long Term Incentive Compensation Plan by 250,000 shares(the total number reserved is now capped at 1,000,000 shares which waseffective concurrently with the increase under the 2000 Plan).

 

**DEVELOPMENTAND COMMERCIALIZATION STRATEGY**

 

Ouroverall strategy is to leverage our proprietary technologies and to utilize thecompany as a platform for the acquisition and/or licensing of technologies inrelated fields using our internal organization supplemented by contractualcollaborations with third parties.  In particular (based upon the receiptof adequate capital resources), we plan to:

 

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•      Manufacture and, through our relationship withunits of Cardinal Health, market *Imagent*in the United States.  We expect to negotiateand, if successful, enter into relationships with third parties for thedevelopment and marketing of *Imagent*outside the U.S.

 

•      Conduct preclinical research studies of ourproducts using third party laboratories and/or clinicians to conduct preclinicaltrials.  We intend to use the expertise of these third party clinicians tocollect data necessary to obtain IND’s (an Investigational New Drug applicationwith the FDA) required to begin human trials.

 

•      Utilize our clinical development team and contractualcollaborative arrangements with third parties to access the skills andresources required to design, test, obtain regulatory approval and manufactureour products in development.

 

•      Market potential products through the use ofan internal sales force or strategic or distribution collaborations asdetermined by the specific characteristics of each product application.

 

We do not have internal marketing and salescapabilities. Our strategy is to establish contract relationships for themarketing, sales, and distribution services or use our collaborative partnersto market and sell any products that we develop successfully. Currently, *Imagent* will be marketed and distributedin the United States through agreements with Cardinal. Various Cardinal companieswill provide packaging, sales, and distribution services. To the extent that weenter into co-promotion or other licensing arrangements, any revenues receivedby us will be dependent on the efforts of third parties, and there can be noassurance that any such efforts will be successful. Further, there can be noassurance that we will be able to enter into future marketing relationships onacceptable terms. The termination of any marketing relationships may limit ourability to market our products, thereby materially adversely affecting ourbusiness.

 

Should we have to market andsell our products directly, we would need to develop a marketing and salesforce with technical expertise and distribution capability. The creation of aninfrastructure to commercialize pharmaceutical products is an expensive andtime-consuming process. There can be no assurance that we would be able toestablish the necessary marketing and sales capabilities or be successful ingaining market acceptance for our products.

 

*Imagent* is manufactured in San Diego at ourcommercial-scale facility. It is manufactured using a proprietary process toform dry, PFC vapor-containing microspheres that are reconstituted with anaqueous solution to form microbubbles just prior to use. We have a long-termsupply agreement for the principal raw material for *Imagent*.  Althoughsome raw materials for our products are currently qualified from only onesource, we attempt to acquire a substantial inventory of such materials and tonegotiate long-term supply arrangements. Raw materials used in our productscannot be changed without equivalency testing of any new material by us andapproval of the FDA. No assurances can be given that we can maintain long-termsupplies of these materials on terms acceptable to us. Our business could bematerially and adversely affected if we are unable to obtain qualified rawmaterials on a timely basis and at a cost-effective price.

 

Our ability to develop andmanufacture any product successfully is subject to numerous contingencies anduncertainties, including certain “Risk Factors” described below.  Ourobjectives, business strategy and product development efforts are subject tochange based on numerous factors, including the results of preclinical andclinical testing, the availability of suitable collaborative relationships, thenature of competition, regulatory requirements and the availability ofcapital.  The description of our business and business strategy containsforward-looking statements that should be read in conjunction with the “RiskFactors” described below.

 

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**PATENTS**

 

Weare continuing to pursue patent protection for our proprietary technologieswith the U.S. Patent and Trademark Office and in various foreign jurisdictions. We plan to prosecute, assert and defend our patent rights wheneverappropriate.  However, securing patent protection does not necessarilyassure us of competitive success.  See “Risk Factors - If we do not obtain and maintain patent orother protection of our core technologies (namely *Imagent* and PH-50for cardiovascular imaging and N1177 for our lymphography materials andmethods), we may have difficultycommercializing products using these technologies,” below.

 

We have several issued U.S. patents and patent applications related to *Imagent*. The issued patents and pendingapplications contain claims directed to the composition, manufacture, and useof novel stabilized microbubble compositions based on the discovery that PFC(perfluorocarbon) gases, in combination with appropriate surfactants or othernon-PFC gases, can stabilize microbubbles for use in ultrasonic imaging.Foreign applications directed to the same subject matter are also granted orpending. We also have five issued U.S. patents covering the use of variouscontrast agents, including *Imagent*,in harmonic imaging.

 

On June 18, 2003, we filed a complaintagainst Amersham Health, Inc. and two other Amersham affiliates alleging thatcertain Amersham products infringe on claims in our patents covering *Imagent*.   The case is captioned as PhotogenTechnologies, Inc. and Alliance Pharmaceutical Corp. v. Amersham Health Inc.et. al., Civil Action No. 03CV2853(SRC), in the United States DistrictCourt for the District of New Jersey. Our complaint alleges that principally through their Optison® product,Amersham Health Inc. and related Amersham entities infringe on seven patentsowned by us.  We are also seeking adeclaration that the claims of fourteen Amersham patents are invalid and are notinfringed by our *Imagent*product.  Alliance, the party from whomwe recently acquired the *Imagent*product, is also a plaintiff in the suit. We are seeking damages, an injunction against Amersham, a declaratoryjudgment and other relief.

 

Amershamfiled an answer dated July 18, 2003 denying the material allegations ofour claims and asserting certain affirmative defenses and counterclaims.  Amersham’s counterclaims against us includeclaims of patent infringement, breach of contract, breach of good faith andfair dealing, and tortuous interference with contract.  We are studying Amersham’s answer, defensesand counterclaims in consultation with our counsel.

 

Intellectual property disputes are often settled through licensingarrangements that could be costly to us. In any intellectual property litigation, it is possible that licensesnecessary to settle the dispute would not be available on commerciallyreasonable terms or that we would not be able to redesign our technologies toavoid any claimed infringement thus resulting in our inability to sell theproduct.

 

On July 29, 2003, the European Patent Office revoked Amersham’sEuropean Patent (EP) No. 620744 with claims directed to contrastagents.  We had brought the oppositionproceeding against the EP ‘744 patent in the European Patent Office.  The EP ‘744 is a counterpart to the patentsthat are the subject of our suit against Amersham in the United Statesdescribed above.  See“Risk Factors — We filed a suitagainst Amersham for patent infringement, which, if resolved unfavorably, couldimpede our ability to utilize our patents for *Imagent*,” below.

 

Wealso own two U.S. patents related to N1177 and we currently have two patentapplications pending in the U.S. and one application filed under the Patent CooperationTreaty (“PCT”) which are directed to the use of nanoparticulates includingPH-50 for cardiovascular imaging and for delivery of pharmacologically activesubstances.

 

Wehave an exclusive license (subject to certain limitations) from Massachusetts GeneralHospital and Nycomed Imaging AS for the world-wide right to make, market,distribute and sell products using (i) the subject matter covered in pendingU.S. and foreign patent applications relating to the research, development,manufacture and commercialization of diagnostic imaging agents for medicallocation, treatment and diagnosis of tumors and other diseased tissues or othermaterial and (ii) the patent rights related to N1177 in the research,development, manufacture and commercialization of human ethical pharmaceuticalproducts containing the diagnostic imaging compound N1177.

 

Inaddition, through our joint venture with affiliates of Elan, we have grantedSentigen a license of certain methods we had previously acquired from Allianceand a sublicense of our MGH/Nycomed license for use in the research,development, manufacture and commercialization of nanoparticulate x-ray, CTand/or MRI diagnostic imaging agents using radio-opaque molecules containingiodine that passively target lymph nodes involved in a diseased state followingparenteral administration to a mammal to locate, diagnose and/or treat cancerand/or other diseases.

 

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Weare continuing to pursue patent protection for our other proprietarytechnologies with the U.S. Patent and Trademark Office, under the PatentCooperation Treaty and in various foreign jurisdictions.

 

  Aside from our issued patents, no assurance can be giventhat any of these applications will result in issued U.S. or foreign patents.Although patents are issued with a presumption of validity and require achallenge with a high degree of proof to establish invalidity, no assurance canbe given that any issued patents would survive such a challenge and would bevalid and enforceable.

 

Some of our patented or licensed technology arose from research thatwas partially funded by the U.S. Government (“Government”).  As with otherentities whose research is sponsored in any manner by the Government, certainpatents that we own or license are subject to Confirmatory Licenses in favor ofthe Government, as required by applicable federal regulations.  Theseregulations require us or the patent owner to agree to convey to theGovernment, upon the Government’s request, rights in the technology if wedecide not to continue prosecution of the patent applications or if the patentowner does not wish to retain title to the inventions covered in thepatents.  The Government also retains certain “march in rights” thatpermit the Government to use the technology under certain circumstances,including if that action is necessary because we or the patent owner have nottaken or are not expected to take effective steps to achieve practicalapplication of the inventions; it is necessary to alleviate health or safetyneeds not being met by us or the patent owner; or to meet the requirements forpublic use specified in certain federal regulations and those requirements arenot being met by us or the patent owner.  We intend to prosecute patent applicationsand in other respects develop patents we own so that the Government will notexercise its rights under these Confirmatory Licenses.

 

Wealso attempt to protect our proprietary products, processes and otherinformation by relying on trade secret laws and non-disclosure andconfidentiality agreements with our employees, consultants, and certain otherpersons who have access to such products, processes and information. Theagreements affirm that all inventions conceived by employees are the exclusiveproperty of the Company.  Nevertheless,there can be no assurance that these agreements will afford significantprotection against or adequate compensation for misappropriation orunauthorized disclosure of our trade secrets.

 

“IMCOR”is a trademark and *Imagent*âis a registered trademark of IMCOR. We have filed an application for registration of the mark IMCOR in theU.S.  This application is pending.  All other trademarks or tradenames used in this Form 10-KSB are trademarks or trade names of their respectiveowners.

 

**GOVERNMENTREGULATIONS**

 

Allof the products we currently contemplate developing require approval by the FDAprior to sales being made within the U.S. and by comparable foreign agenciesprior to sales being made outside the U.S.  The FDA and comparableregulatory agencies impose substantial requirements on the manufacturing andmarketing of pharmaceutical products and medical devices.  These agenciesand other entities extensively regulate, among other things, research anddevelopment activities and the testing, manufacturing, quality control, safety,effectiveness, labeling, storage, record keeping, approval, advertising andpromotion of our proposed products.  See “Risk Factors — Our proposedproducts are subject to extensive testing and government approval, and we maynot obtain or maintain the approvals necessary to sell our proposed products,”below.

 

Theregulatory process required by the FDA through which our products mustsuccessfully pass before they may be marketed in the U.S. generally involvesthe following:

 

•      Preclinical laboratory and animal testing;

 

•      Submission of an application that must becomeeffective before clinical trials may begin;

 

•      Adequate and well-controlled human clinicaltrials to establish the safety and efficacy of the product for its intendedindication; and

 

•      FDA approval of the application to market agiven product for a given indication.

 

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Forimaging and pharmaceutical products, preclinical tests include laboratoryevaluation of the product, its chemistry, formulation and stability, as well asanimal studies to assess the potential safety and efficacy of theproduct.  Where appropriate (for example, for human disease indicationsfor which there exist inadequate animal models), we will attempt to obtainpreliminary data concerning safety and efficacy of proposed products usingcarefully designed human pilot studies. We will require sponsored work to beconducted in compliance with pertinent local and international regulatoryrequirements, including those providing for Institutional Review Boardapproval, national governing agency approval and patient informed consent,using protocols consistent with ethical principles stated in the Declaration ofHelsinki and other internationally recognized standards.  We expect anypilot studies to be conducted outside the U.S.; but if any are conducted in theU.S., they will comply with applicable FDA regulations. Data obtained throughpilot studies will allow us to make more informed decisions concerning possibleexpansion into traditional FDA-regulated clinical trials.

 

Ifthe FDA is satisfied with the results and data from preclinical tests, it willauthorize human clinical trials.  Human clinical trials are typically conductedin three sequential phases, which may overlap.  Each of the three phasesinvolves testing and studying specific aspects of the effects of thepharmaceutical on human subjects, including testing for safety, dosagetolerance, side effects, absorption, metabolism, distribution, excretion andclinical efficacy.

 

Datafrom preclinical and clinical trials are submitted to the FDA in an NDA formarketing approval and to foreign regulatory authorities under applicablerequirements.  Preparing an NDA or foreign application involvesconsiderable data collection, verification, analyses and expense, and there canbe no assurance that the applicable regulatory authority will accept theapplication or grant an approval on a timely basis, if at all.  The marketingof pharmaceuticals in the U.S. may not begin without FDA approval.  Theapproval process is affected by a number of factors, including primarily thesafety and efficacy demonstrated in clinical trials and the severity of thedisease.  Regulatory authorities may deny an application in their solediscretion, if they determine that applicable regulatory criteria have not beensatisfied or if additional testing or information is required.  One of theconditions for initial marketing approval, as well as continued post-approvalmarketing, is that a prospective manufacturer’s quality control andmanufacturing procedures conform to the GMP regulations of the regulatoryauthority.  In complying with these regulations, a manufacturer mustcontinue to expend time, money and effort in the area of production, qualitycontrol and quality assurance to ensure full compliance.  Manufacturingestablishments, both foreign and domestic, also are subject to inspections byor under the authority of the FDA and by other federal, state, local or foreignagencies.  Discovery of previously unknown problems with a product ormanufacturer may result in restrictions on such product or manufacturer,including withdrawal of the product from the market.

 

Wehave established a core clinical development team and have been working withoutside regulatory consultants to assist us in developing product-specificdevelopment and approval strategies, preparing the required submittals, guidingus through the regulatory process, and providing input to the design and siteselection of human clinical studies.  The testing and approval processrequires substantial time, effort and financial resources, and we may notobtain FDA approval on a timely basis, if at all.  Success in preclinicalor early-stage clinical trials does not assure success in later stage clinicaltrials.  The FDA or the research institution sponsoring the trials maysuspend clinical trials or may not permit trials to advance from one phase toanother at any time on various grounds, including a finding that the subjectsor patients are being exposed to an unacceptable health risk.  Onceissued, the FDA may withdraw a product approval if we do not comply withpertinent regulatory requirements and standards or if problems occur after theproduct reaches the market.  If the FDA grants approval of a product, theapproval may impose limitations, including limits on the indicated uses forwhich we may market a product.  In addition, the FDA may requireadditional testing and surveillance programs to monitor the safety and/oreffectiveness of approved products that have been commercialized, and theagency has the power to prevent or limit further marketing of a product basedon the results of these post-marketing programs.  Further, later discoveryof previously unknown problems with a product may result in restrictions on theproduct, including its withdrawal from the market.  Marketing our productsabroad will require similar regulatory approvals by equivalent nationalauthorities and is subject to similar risks.

 

Inthe ordinary course of business, we must also comply with a variety of otherfederal and state governmental regulations.  These regulations impose,among other things, standards of conduct, record keeping, labeling andreporting.

 

Specificregulations affecting our current and proposed operations include:environmental-type discharge requirements, good laboratory practices governinganimal testing, good manufacturing practices regarding the manufacture of drugsand other FDA-regulated products, animal care and use regulations, laws andregulations relating to labor, and required

 

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generalbusiness practices.  We do not currently anticipate that the cost ofcompliance in these areas, other than obtaining FDA approval, will present amajor obstacle to achieving our goals.

 

Anotherarea of regulation that will impact our business is the recent developments inhealth care reimbursement and delivery practices as a means to better controlhealth care costs.  See “Risk Factors — Changes in health carereimbursement policies or legislation may make it difficult for patients to useor receive reimbursement for using our products, which could reduce ourrevenues,” below.

 

**COMPETITION**

 

Theindustry in which we operate is intensely competitive, and subject tosignificant change with respect to technology for the diagnosis and treatmentof disease.  Existing or future pharmaceutical and device companies,government entities and universities may create developments that accomplishsimilar functions to our technologies in ways that are less expensive, receivefaster regulatory approval or receive greater market acceptance than ourpotential products.  We expect that competition in the ultrasoundcontrast imaging agent field (and for our other potential products) will bebased primarily on each product’s safety profile, efficacy, stability, ease ofadministration, breadth of approved indications, and physician, healthcarepayor and patient acceptance.  See “Risk Factors — The markets for imagingproducts are extremely competitive, and many of our competitors have greaterresources and have products that are in more advanced stages of developmentthan we do, which may give them a competitive advantage over us,” below.

 

Ourcompetitors have, in general, been in existence for considerably longer than wehave, and may have greater capital resources and access to capital; greaterinternal resources for activities in research and development, clinical testingand trials, production and distribution; and existing collaborativerelationships with third parties.  See “Risk Factors — We have to rely onthird parties and collaborative relationships for the marketing, manufacturingand clinical testing of *Imagent*and our proposed products, and it may be difficult to implement our businessdevelopment plans without these collaborations,” below.

 

Theexisting market for radiopaque contrast agents is estimated by Frost &Sullivan to be approximately $3.4 billion worldwide.  The dominant uses ofmedia, totaling 86 percent, are those employed in conjunction with CT or x-rayscans.  Approximately half of the usage is in the U.S. Omnipaque®,marketed by a unit of Amersham, is believed to be the leading agent utilized incoronary angiography.  Other companies marketing contrast agents includeMallinckrodt, Inc. (a unit of Tyco International Ltd.), Berlex Laboratories,Inc. (a subsidiary of Schering) and Bracco.

 

Inaddition to CT or x-ray scans, other modalities, such as MRI and ultrasound,are also used by physicians to image internal vasculature and organs. These modalities, including CT imaging, each have particular attributes thatmay make their use applicable to any particular situation.

 

**Competitionfor *Imagent***

 

There are two competitive ultrasound contrast agents approved in theU.S. for use in cardiology:  *Optison*is sold by Amersham, and*Definity* is sold by Bristol-Myers SquibbMedical Imaging.*  Optison*consists of microspheres comprised of a perfluorocarbon gas surrounded by ashell of human serum albumin (HSA).  *Definity* is a perfluorocarbon gas in a liquidsolution that also must be kept refrigerated.

 

Wefiled a complaint against Amersham Health, Inc. and two other Amershamaffiliates alleging that certain Amersham products infringe on claims in ourpatents covering *Imagent*.  We also seek a declaration that our patentsdo not infringe on Amersham’s in this area, and other relief.  Alliance joined us as a plaintiff in thissuit.  Amersham filed an answer denyingthe material allegations of our claims and asserting certaincounterclaims.  If the suit is resolvedunfavorably to us, we may have difficulty utilizing the protections of ourpatents for *Imagent* and there maybe other complications that may make it difficult to implement ourcommercialization strategy for *Imagent*.

 

Intellectual property disputes are often settled through licensingarrangements that could be costly to us. In any intellectual property litigation, it is possible that licensesnecessary to settle the dispute would not be available on commerciallyreasonable terms or that we would not be able to redesign our technologies toavoid any claimed infringement thus resulting in our inability to sell theproduct.

 

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Bracco International has filed an NDA in the U.S. late in 2000 for *SonoVue*®, and the applicationis under review. The product is a dry powder of negatively charged liposomalmicrobubbles containing sulfur hexafluoride gas, to be reconstituted with salineprior to administration.

 

POINT Biomedical was scheduled to complete a 600–patient Phase 3myocardial perfusion study for *CardioSphere* at the end of 2003.  *CardioSphere*consists of a two-layer microspheres with one layer that contains humanalbumin.

 

Acusphere initiated a Phase 3 myocardial perfusion study inDecember 2003 with AI-700.  Theproduct is composed of a synthetic biodegradable polymer filled with aperfluorocarbon gas, and requires refrigeration.

 

### **Competition forPH-50**

### ** **

Theexisting market for radiopaque contrast agents is estimated to be approximately$3.4 billion worldwide.  The dominant uses of media, totaling 86 percent,are those employed in conjunction with CT or x-ray scans.  Approximatelyhalf of the usage is in the U.S.  We believe that Omnipaque®, marketed bya unit of Amersham, is the leading agent utilized in coronaryangiography.  Other companies marketing contrast agents includeMallinckrodt, Inc. (a unit of Tyco International Ltd.), Berlex Laboratories,Inc. (a subsidiary of Schering AG (“Schering”)) and Bracco.  Physiciansalso use other modalities, such as MRI and ultrasound, to image internalvasculature and organs.  These modalities, including CT imaging, each haveparticular attributes that may make their use applicable to any particularsituation.

 

**Competitionfor N1177**

 

Aswith PH-50, N1177 will be subject to competition with other companies marketingcontrast agents such as Amersham, Mallinckrodt, Inc. (a unit of TycoInternational Ltd.), Berlex Laboratories, Inc. (a subsidiary of Schering), andBracco, and with other methods of imaging, such as MRI and ultrasound.

 

**RISKFACTORS**

** **

ThisForm 10-KSB contains (and press releases and other public statements we mayissue from time to time may contain) a number of forward-looking statementsregarding our business and operations. Statements in this document that are not historical facts areforward-looking statements.  Suchforward-looking statements include those relating to:

 

•      our current business andproduct development plans,

 

•      our future business andproduct development plans,

 

•      the timing and results ofregulatory approval for proposed products, and

 

•      projected capital needs,working capital, liquidity, revenues, interest costs and income.

 

Examplesof forward-looking statements include predictive statements, statements thatdepend on or refer to future events or conditions, and statements that mayinclude words such as “expects,” “anticipates,” “intends,” “plans,” “believes,”“estimates,” “should,” “may,” or similar expressions, or statements that implyuncertainty or involve hypothetical events.

 

Forward-looking statements involve known and unknown risks anduncertainties that may cause our actual results in future periods to differmaterially from what is currently anticipated. We make cautionary statements in certain sections of this Form 10-KSB,including under “Risk Factors.”  Youshould read these cautionary statements as being applicable to all relatedforward-looking statements wherever they appear in this Form 10-KSB, in thematerials referred to in this Form 10-KSB, in the materials incorporated byreference into this Form 10-KSB, or in our press releases or other publicstatements.  In light of these risks,uncertainties and assumptions, the forward-looking events discussed in thisForm 10-KSB or other documents incorporated by reference might not occur.  No forward-looking statement is a guaranteeof future performance and you should not place undue reliance on any forward-lookingstatement. We donot undertake any obligation to release publicly any revisions to these forwardlooking statements, to reflect events or circumstances after the date of thisForm 10-KSB, or to reflect the occurrence of unanticipated events, except asmay be required under applicable securities laws.

 

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The following are the key risk factors that may affect our futureresults:

 

**We must raise additional financing in the future and ourinability to do so will prevent us from continuing as a going concern andimplementing our business development plan.**

 

Our cash and securities on hand at December 31, 2003, followingexpenditures incurred by our operations and the acquisition of the *Imagent* business, including the financingof that business pending its acquisition, was approximately $1,658,000.  We have expended all this cash and arecurrently funding our operations through the issuance of secured promissorynotes to one or more of our principal institutional investors.  We will need substantial additionalfinancing to continue operations including our manufacturing, marketing andproduct development programs.

 

We cannot accurately estimate the amount of additional financingrequired to develop our products.  Inparticular, we are currently seeking capital in one or more transactions tofund our immediate and longer-term capital needs through a private placement toaccredited investors.  Additional fundsmay not be available on acceptable terms, if at all, and existing stockholdersmay be diluted as a result of those offerings. The pricing of our common stock, or other securities convertible intocommon stock, in any such transaction may also result in an increase in thenumber of shares of common stock issuable upon exercise of warrants in accordancewith the anti-dilution provisions in the instruments governing thosesecurities.

 

We are currently in default under obligations to pay $775,000 tocreditors of Alliance Pharmaceutical Co. in connection with our acquisition of*Imagent*and we are in default under an equipmentlease and the lessor has demanded approximately $787,000 in remaining leasepayments and other fees.  We alsohave not registered the resale of shares we issued in connection with thatacquisition, which in some cases is a condition to the effectiveness ofagreements to release us from any claims by the Alliance creditor.

 

**Prior to our acquisition of the *Imagent* assets, we were a development stage company, we haveconducted only limited studies on our products in development and we do nothave any revenues from sales.**

 

Our company and our technologies, other than our recently acquired *Imagent* product, are in early stages ofdevelopment. We began our business as a biopharmaceutical company in 1997.  To date, we have not generated materialrevenues from sales or operations.  Weexpect to generate revenue from sales of *Imagent*,but there can be no assurance that we will be able to generate enough revenuefrom such sales to be profitable for at least several years, if at all.

 

The products we currently contemplate developing will require costlyand time-consuming research and development, preclinical and clinical testingand regulatory approval before they can be commercially sold.  We may not be able to develop our technologyinto marketable products or develop our technology so it is effective fordiagnosis or treatment of human diseases. As a result of changing economic considerations, market, clinical orregulatory conditions, or clinical trial results, we may shift our focus ordetermine not to continue one or more of the projects we are currentlypursuing.

 

**We have a history of losses and we may not achieve ormaintain profitability in the future or pay cash dividends.**

 

We have incurred losses since the beginning of our operations.  As of December 31, 2003, we haveincurred cumulative net losses (before dividends on preferred stock) ofapproximately $51,519,000.  We expectour losses to increase in the future as our financial resources are used formanufacturing, marketing, research and development, preclinical and clinicaltesting, regulatory activities, and other related expenses.  We may not be able to achieve or maintainprofitability in the future.  We havenever declared or paid any cash dividends to stockholders and do not expect todo so in the foreseeable future.

 

**The markets for imaging products are extremely competitive,and many of our competitors have greater resources and have products that arein more advanced stages of development than we do, which may give them acompetitive advantage over us.**

 

Inaddition to *Imagent,* there arecurrently two FDA approved ultrasound contrast agents being marketed in theU.S. for certain cardiology applications by Amersham Health, Inc. andBristol-Myers Squibb.  In addition,Bracco International

 

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hasfiled a New Drug Application with the FDA seeking approval to market itsproduct.  Two other companies (POINTBiomedical and Acusphere) are in advanced clinical trials for the use ofultrasound contrast agents for assessing certain organs and vascularstructures.  We expect that competitionin the ultrasound contrast imaging field will be based primarily on eachproduct’s safety profile, efficacy, stability, ease of administration, breadthof approved indications, and physician, healthcare payer and patientacceptance.  We are at the very earlystages of launching the *Imagent*product, and we cannot predict whether it will compete successfully with theseother products.

 

**We filed a suit against Amersham for patent infringement,which, if resolved unfavorably, could impede our ability to utilize our patentsfor *Imagent*.**

 

Wefiled a complaint against Amersham Health, Inc. and two other Amershamaffiliates alleging that certain Amersham products infringe on claims in ourpatents covering *Imagent*.  We also seek a declaration that our patentsdo not infringe on Amersham’s in this area, and other relief.  Alliance joined us as a plaintiff in thissuit.  Amersham filed an answer denyingthe material allegations of our claims and asserting certaincounterclaims.  If the suit is resolvedunfavorably to us, we may have difficulty utilizing the protections of ourpatents for *Imagent* and there maybe other complications that may make it difficult to implement ourcommercialization strategy for *Imagent*.

 

Intellectual property disputes are often settled through licensingarrangements that could be costly to us. In any intellectual property litigation, it is possible that licensesnecessary to settle the dispute would not be available on commerciallyreasonable terms or that we would not be able to redesign our technologies toavoid any claimed infringement thus resulting in our inability to sell theproduct.

 

**Our common stock could be delisted from the NASDAQ SmallCapMarket, which would make trading in our common stock more difficult.**

 

SinceNovember 1999, our common stock has been quoted in the Nasdaq SmallCapMarket.  Our shares could be delisted ifwe fail to meet the listing requirements of the Nasdaq SmallCap Market, whichwould force us to list our shares on the OTC Bulletin Board or some otherquotation medium, such as pink sheets, depending upon our ability to meet thespecific listing requirements of those quotation systems.  As a result, an investor might find it moredifficult to dispose of, or to obtain accurate price quotations for, ourshares.  Delisting might also reduce thevisibility, liquidity and price of our common stock.

 

On August 26, 2003, September 8, 2003, andJanuary 7, 2004 we received notices from Nasdaq that we did not meetspecified listing criteria.  We havecorrected the identified deficiencies to Nasdaq’s satisfaction and Nasdaq hasnotified us that it has withdrawn its delisting notice subject to our meetingthe shareholder meeting requirement and all other listing standards by mid-May2004.

 

Ifour common stock were delisted from the Nasdaq SmallCap Market and were nottraded on another national securities exchange, we could become subject topenny stock regulations that impose additional sales practice disclosure andmarket making requirements on broker/dealers who sell or make a market in ourstock.  The rules of the SEC generallydefine “penny stock” to be common stock that has a market price of less than$5.00 per share and is not traded on a national exchange.  If our stock became subject to penny stockregulations, it could adversely affect the ability and willingness ofbroker/dealers who sell or make a market in our common stock and of investorsto purchase or sell our stock in the secondary market.

 

**Our proposed products are subject to extensive testing andgovernment approval, and we may not obtain or maintain the approvals necessaryto sell our proposed products.**

 

Otherthan *Imagent*, none of ourproposed imaging products has received the FDA’s approval for commercialsales.  An extensive series of clinicaltrials and other associated requirements must be completed before our proposedproducts can be approved and sold in the U.S. or other countries.  Requirements for FDA approval of a productinclude preclinical and clinical testing for effective use and safety inanimals and humans, which can be extremely costly.  The time frame necessary to perform these tasks for anyindividual product is long and uncertain, and we may encounter problems ordelays that we cannot predict at this time. Even if testing is successful, our proposed products may not demonstratesufficient effectiveness or safety to warrant approval by the FDA or otherregulatory authorities.  Any regulatoryapproval

 

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maynot cover the clinical symptoms or indications that we may seek.  We must also obtain regulatory approvalscomparable to those required in the U.S. to market our products in othercountries.

 

Otherthan *Imagent*, our proposedtechnologies and products generally must complete preclinical tests in animalsand three phases of tests (also called clinical trials) in humans before we canmarket them for use.  Use of ourtechnology has been limited primarily to laboratory experiments and animaltesting; only N1177 has completed Phase 1 human clinical trials.  We have not yet conducted substantivestudies of our compounds in development on their effectiveness on human subjects.

 

Ourresults from early clinical trials may not predict results that we will obtainin large-scale clinical trials, as a number of companies have sufferedsignificant setbacks in advanced clinical trials, even after promising resultsin early trials.

 

Wemay not conduct additional Phase 2 or Phase 3 clinical trials for our productsand such trials, if begun, may not demonstrate any efficacy or may not becompleted successfully in a timely manner, if at all.

 

Therate of completion of our clinical trials depends upon, among other things, therate of patient enrollment.  Patientenrollment is a function of many factors, including the size of the patientpopulation for a particular indication, the nature of the clinical protocolunder which our products will be studied, the proximity of the patient to aclinical site and the eligibility criteria for the study.  Delays in planned patient enrollment mayresult in increased costs, regulatory filing delays, or both.

 

Furthermore,we, the FDA or other regulatory authorities may alter, suspend or terminateclinical trials at any time.  If we donot successfully complete clinical trials and obtain regulatory approval for aproduct, we will not be able to market that product.

 

**Any products approved by the FDA are subject to postmarketrequirements of the FDA.**

 

OurFDA approved product, *Imagent*, issubject to numerous postmarket requirements by regulatory authorities.  We will be subject to inspection andmarketing surveillance by the FDA to determine our compliance with regulatoryrequirements with respect to any approved products.  If the FDA finds that we have failed to comply, it can institutea wide variety of enforcement actions, ranging from a public warning letter tomore severe sanctions such as:

 

•      fines, injunctions and civil penalties;

 

•      recall or seizure of our products;

 

•      operating restrictions, partial suspension ortotal shutdown of production; and

 

•      criminal prosecution.

 

Anyenforcement action by the FDA may also affect our ability to commerciallydistribute our products in the U.S.

 

**Product liability claims could increase our costs andadversely affect our results of operations.**

 

Themarketing and clinical testing of *Imagent*and our product candidates may expose us to product liability claims, and wemay experience material product liability losses in the future.  We maintain certain levels of productliability insurance for the use of our products, but our coverage may notcontinue to be available on terms acceptable to us or adequate for liabilitieswe actually incur.  A successful claimbrought against us in excess of available insurance coverage, or any claim orproduct recall that results in significant adverse publicity against us, mayhave a material adverse effect on our business and results of operations.

 

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**If we do not obtain and maintain patent or other protectionof our core technologies (namely Imagent and PH-50 for cardiovascular imagingand N1177 for lymphography), we may have difficulty commercializing productsusing these technologies.**

 

Oursuccess depends in part on our ability to obtain, assert and defend ourpatents, protect trade secrets and operate without infringing the intellectualproperty of others.  Among the importantrisks in this area are that:

 

•      our patent applications may not result inissued patents.  Moreover, any issuedpatents may not provide us with adequate protection of our intellectualproperty or competitive advantages, and the law on the scope of patent coverageis continually changing.

 

•      various countries limit the subject matterthat can be patented and limit the ability of a patent owner to enforce patentsin the medical field.  This may limitour ability to obtain or utilize those patents internationally.

 

•      existing or future patents or patentapplications (and the products or methods they cover) of our competitors (orothers, such as research institutions or universities) may interfere,invalidate, conflict with or infringe our patents or patent applications.  Similarly, the use of the methods ortechnologies contained in our patents, patent applications and otherintellectual property may conflict with or infringe the rights of others.

 

•      if an advance is made that qualifies as ajoint invention, the joint inventor or his or her employer may have rights inthe invention.

 

Wewill be able to protect our proprietary rights from unauthorized use by thirdparties only to the extent that these rights are covered by valid andenforceable patents or effectively maintained as trade secrets.  We acquired an extensive patent portfoliorelated to *Imagent* as part of theacquisition of the *Imagent*business. We also own two patents in the U.S., and certain other patents inforeign countries including Australia, Canada, Japan and Germany that relate tomethods for performing lymphography.

 

Otherthan the patents and patent applications we acquired through the purchase ofthe *Imagent* Business, we havefiled patent applications in the U.S. and under the Patent Cooperation Treatycovering a number of foreign countries. These patent applications relate to the use of nanoparticulates,including PH-50, as cardiovascular imaging agents and to deliverpharmacologically active substances for treatment of various diseases.  We are also the exclusive licensee of agroup of patented proprietary compounds known as “nanoparticulates,” includingN1177 and PH-50 from Nycomed Imaging AS. We are the exclusive licensee of U.S. and foreign patent applicationsfrom Massachusetts General Hospital which relate to diagnostic imaging agentsand methods for using the diagnostic imaging agents for medical location,treatment and diagnosis of tumors and other diseased tissues.

 

Additionalpatents may never be issued on any of the patent applications we own or licensefrom third parties.  Furthermore, evenif such patents are issued, the validity of the patents might successfully bechallenged by a third party.  Thepatents might not provide protection against competitive products or otherwisebe commercially valuable, or the applications filed by others might result inpatents that would be infringed by the manufacture, use or sale of ourproducts.

 

Thepatent position of biopharmaceutical companies involves complex legal andfactual questions and therefore we cannot assure the enforceability of thesepatents.  Litigation over patents andother intellectual property rights occurs frequently in our industry and thereis a risk that we may not prevail in disputes over the ownership ofintellectual property.  Further, aninterference proceeding with the Patent and Trademark Office may be institutedover the rights to certain inventions and there is a risk that we may notprevail in such an interference proceeding. Those disputes can be expensive and time consuming, even if weprevail.  Intellectual property disputesare often settled through licensing arrangements that could be costly tous.  In any intellectual propertylitigation, it is possible that licenses necessary to settle the dispute wouldnot be available on commercially reasonable terms or that we would not be ableto redesign our technologies to avoid any claimed infringement thus resultingin our inability to sell the product.

 

Confidentialityagreements covering our intellectual property may be violated and we may nothave adequate remedies for any violation. Third parties may challenge our existing patents and seek to hold theminvalid or unenforceable.  Also, ourtrade secret intellectual property may in other ways become known or beindependently discovered by competitors.

 

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Tothe extent we use intellectual property through licenses or sub-licenses (as isthe case for some of our lymphography technology), our rights are subject to usperforming the terms of the license or sub-license agreement with thirdparties.  Our rights are also subject tothe actions of third parties we may not be able to control, such as oursub-licensor complying with the terms of its license with the patent owner andthe patent owner maintaining the patent.

 

Whereintellectual property results from a research project supported by governmentfunding, the government has limited rights to use the intellectual propertywithout paying us a royalty.

 

**We are highly dependent upon a small number of employees andconsultants who provide management expertise, and it may be difficult toimplement our business operations and development plans without this expertise.**

 

Theseindividuals have entered into employment or consulting agreements,confidentiality and/or non-competition agreements with us.  We could suffer competitive disadvantage,loss of intellectual property or other material adverse effects on our businessand results of operations if any employee or consultant violates or terminatesthese agreements or terminates his or her association with us.  Our growth and future success also dependsupon the continued involvement and contribution from these individuals, as wellas our ability to attract and retain highly qualified personnel now and in thefuture.

 

Wecurrently employ three senior executive officers: Dr. Williams (our ChiefExecutive Officer), Mr. Boveroux (our Chief Financial Officer) and Mr.DeFranco (our Sr. Vice President Marketing and Business Development).  We also have retained consultants to adviseus in regulatory affairs and product development matters.  If we lost the services of our executiveofficers or outside consultants, we could experience a delay in theimplementation of our business plan until we arranged for another individual orfirm to fulfill the role.

 

**The raw materials for *Imagent*are subject to a long-term supply contract with one supplier.  The raw materials necessary for themanufacture of PH-50 and N1177 are supplied by one supplier.  An interruption in availability of those materialsmay impair our ability to market or test those products.**

 

We have assumed the rights and obligations of Alliance under the termsof the long-term supply agreement that Alliance has entered for the principalraw material for *Imagent. *Although some raw materials for *Imagent* are currently qualified from onlyone source and we have some inventory, we will attempt to acquire additionalinventory of these materials and to negotiate long-term supplyarrangements.  Raw materials used in *Imagent*cannot be changed withoutequivalency testing of any new material by us and approval of the FDA.

 

Wecurrently rely on Nanosystems, a division of Élan, as the sole supplier of theraw nanoparticulates used to manufacture PH-50 and N1177.  There can be no assurance that Nanosystemswill continue to supply us with the raw materials that we need in a timelymanner on conditions that are acceptable to us.

 

**We may encounter difficulties starting or expandingour manufacturing operations.**

 

Weare leasing a single manufacturing facility located in San Diego,California.  This facility is subject toa variety of quality systems regulations, international quality standards andother regulatory requirements, including requirements for good manufacturingpractices, or current good manufacturing procedures.  We may encounter difficulties expanding our manufacturingoperations in compliance with these regulations and standards, which also couldresult in a delay or termination of manufacturing or an inability to meetproduct demand.

 

Wewill face risks inherent in operating a single facility for the manufacture of *Imagent.* At this time, we do not have alternative production plans in place oralternative facilities available should the San Diego manufacturing facilitycease to function.  These risks includeunforeseen plant shutdowns due to personnel, equipment or other factors, andthe resulting inability to meet customer orders on a timely basis.

 

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**We have to rely on third parties and collaborativerelationships for the marketing, manufacturing and clinical testing of *Imagent* and our proposed products, and itmay be difficult to implement our business development plans without thesecollaborations.**

 

Wecurrently have an agreement for sales and marketing of *Imagent* by Cardinal Health, Inc.  We have had and expect to continue in thefuture to have a variety of research agreements with universities and otherresearch institutions to investigate specific protocols.  We also contract and expect to continue tocontract with research organizations and other third parties to manage clinicaltrials of our products.  We must obtainand maintain collaborative relationships with third parties for research anddevelopment, preclinical and clinical testing, marketing and distribution ofour proposed products.

 

Weare currently involved in a joint venture with affiliates of Élan, calledSentigen, Ltd., to develop and commercialize materials in the field oflymphography.  Collaborativerelationships may limit or restrict our operations or may not result in anadequate supply of necessary resources. Our collaborative partner could also pursue alternative technologies asa means of developing or marketing products for the diseases targeted by ourcollaborative program.  If a third partywe are collaborating with fails to perform under its agreement or fails to meetregulatory standards, this could delay or prematurely terminate clinicaltesting of our proposed products.

 

**Our products may not be fully accepted by physicians,laboratories and health insurance providers, which would reduce our revenue andlimit our ability to raise capital.**

 

Ourgrowth and success will depend upon market acceptance by physicians,laboratories and health insurance providers of our products.  This requires acceptance of our products asclinically useful and cost-effective alternatives to other medical imagingmethods.  In addition, physicians may utilizeimaging techniques other than those for which our products are being developed(such as magnetic resonance imaging (MRI)) to image internal vasculature andorgans and therefore, our products may not be utilized.

 

**Changes in health care reimbursement policies or legislationmay make it difficult for patients to use or receive reimbursement for usingour products, which could reduce our revenues.**

 

Oursuccess will depend, in part, on the extent to which health insurers, managedcare entities and similar organizations provide coverage or reimbursement forusing the medical procedures we have and plan to develop.  These third-party payers are increasinglychallenging the price of medical procedures and services and establishingguidelines that may limit physicians’ selections of innovative products andprocedures.  We also cannot predict theeffect of any current or future legislation or regulations relating tothird-party coverage or reimbursement on our business.  We may not be able to achieve marketacceptance of our proposed products or maintain price levels sufficient toachieve or maintain any profits on our products if adequate reimbursementcoverage is not available.  Failure byphysicians, hospitals and other users of our products to obtain sufficientreimbursement from third-party payers for the procedures in which our productswould be used or adverse changes in governmental and private third-partypayers’ policies toward reimbursement for such procedures would have a materialadverse effect on our business.

 

**A small group of stockholders control IMCOR, which may makeit difficult for stockholders who are not in that group to influencemanagement.**

 

Asof December 31, 2003, a small group of stockholders control approximately55.4% of our outstanding common stock (including shares issuable, followingshareholder approval, related to the acquisition of the *Imagent* Business).  These stockholders are also parties to aVoting, Drag-Along and Right of First Refusal Agreement (the “votingagreement”) concerning the election of certain designees to the Board ofDirectors and certain other corporate actions. The Voting Agreement requires these stockholders to vote their sharesfor the election of certain individuals nominated by parties to the VotingAgreement.  This concentration ofownership and control may delay or prevent a change in control of IMCOR, andmay also result in a small supply of shares available for purchase in thepublic securities markets. These factors may affect the market and the marketprice for our common stock in ways that do not reflect the intrinsic value ofour common stock.

 

**The price and trading volume of our common stock fluctuatessignificantly, like that of many biopharmaceutical companies, which may make itdifficult for us or a stockholder to sell our common stock at a suitable priceand**

 

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**may cause dilution for existing stockholders when we issueadditional shares.**

 

Duringthe period from January 1, 2003 through December 31, 2003 the closingtrade price of our common stock ranged from $2.73 to $0.90****per share.  Daily trading volume ranged from zero shares to approximately42,900 shares during that period.

 

Themarket prices for securities of biopharmaceutical companies in general havebeen highly volatile and may continue to be highly volatile in the future.  The following factors may have an impact onthe price of our common stock:

 

•      Sales performance of *Imagent*

 

•      Announcements by us or others regardingscientific discoveries, technological innovations, commercial products, patentsor proprietary rights;

 

•      Announcements by us concerning the licensingor other transactions of our products or technologies;

 

•      Private sale of a significant block of ourcommon stock at a price below the then current market price of our common stockand the subsequent registration and sale of those shares;

 

•      The progress of preclinical or clinicaltesting;

 

•      Developments or outcome of litigationconcerning proprietary rights, including patents;

 

•      Changes in government regulation;

 

•      Public concern about the safety of devices ordrugs;

 

•      Limited coverage by securities analysts;

 

•      The occurrence of any of the risk factorsdescribed in this section;

 

•      Sales of large blocks of stock by anindividual or institution;

 

•      Changes in our financial performance fromperiod to period, securities analysts’ reports, and general market conditions;and

 

•      Economic and other external factors or adisaster or crisis.

 

**If stockholders holding substantial amounts of our commonstock should sell their stock in the public market, the price of our stockcould fall and it may be more costly for us to raise capital.**

 

Wehave reserved shares of common stock for future issuance upon grants ofoptions, or exercise or conversion of outstanding options and warrants andconvertible securities.  In addition,some of our shares are eligible for sale in the public market free ofrestriction under Rule 144 of the Securities Act.  Others shares of our common stock aresubject to agreements requiring us to permit the holders of the shares, undercertain circumstances, to join in a public offering of our stock or to demandthat we register their shares for resale. The sale of these shares could place downward pressure on the overallmarket price of our common stock.

 

Ifour options and warrants are all issued and exercised, investors may experiencesignificant dilution in the voting power of their common stock.  The sale of these shares could also placedownward pressure on the overall market price of our common stock.

 

**ITEM 2.  DESCRIPTIONOF PROPERTY.**

 

We are located in San Diego, California, in a leased facility ofapproximately 53,000 square feet. At this facility we

 

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maintains our executive offices, perform research and development, andmanufacture *Imagent*. We haveobtained regulatory approval to manufacture *Imagent*at this production facility. To our knowledge, the property and equipment is in good condition.

 

**ITEM 3.  LEGALPROCEEDINGS.**

 

On June 18, 2003, we filed a complaintagainst Amersham Health, Inc. and two other Amersham affiliates alleging thatcertain Amersham products infringe on claims in our patents covering *Imagent*.   The case is captioned as PhotogenTechnologies, Inc. and Alliance Pharmaceutical Corp. v. Amersham Health Inc.et. al., Civil Action No. 03CV2853(SRC), in the United States DistrictCourt for the District of New Jersey. Our complaint alleges that principally through their Optison® product,Amersham Health Inc. and related Amersham entities infringe on seven patentsowned by us.  We are also seeking adeclaration that the claims of fourteen Amersham patents are invalid and arenot infringed by our *Imagent*product.  Alliance, the party from whomwe recently acquired the *Imagent*product, is also a plaintiff in the suit. We are seeking damages, an injunction against Amersham, a declaratoryjudgment and other relief.

 

Amershamfiled an answer dated July 18, 2003 denying the material allegations ofour claims and asserting certain affirmative defenses and counterclaims.  Amersham’s counterclaims against us includeclaims of patent infringement, breach of contract, breach of good faith andfair dealing, and tortuous interference with contract.  We are studying Amersham’s answer, defensesand counterclaims in consultation with our counsel.

 

On July 29, 2003, the European Patent Office revoked Amersham’sEuropean Patent (EP) No. 620744 with claims directed to contrastagents.  We had brought the oppositionproceeding against the EP ‘744 patent in the European Patent Office.  The EP ‘744 is a counterpart to the patentsthat are the subject of our suit against Amersham in the United Statesdescribed above.  See“Risk Factors — We filed a suitagainst Amersham for patent infringement, which, if resolved unfavorably, couldimpede our ability to utilize our patents for *Imagent*,” above.

 

**ITEM 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS.**

 

None.

 

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***PART II.***

 

**ITEM 5.  MARKET FORCOMMON EQUITY,  RELATED STOCKHOLDERMATTERS, AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.**

 

Ourcommon stock is traded from time to time on the Nasdaq SmallCap Market underthe symbol “ICPHC.”  Upon the timelyholding of our 2004 annual shareholder meeting, we expect that our symbol willbecome “ICPH”.

 

**Common Stock**

 

Asof March 30, 2004, there were 21,541,476 shares of our common stockoutstanding and held by approximately 405 stockholders of record.  Holdersof our common stock are entitled to receive such dividends as may be declaredby the Board of Directors.  We have not declared or paid cash dividends onour common stock and we do not anticipate paying any cash dividends in theforeseeable future.

 

Thehigh and low trading prices (adjusted to reflect our one-for four reversesplit) for our common stock during each quarter of the last two fiscal yearsare set forth below.

 
|        |   | **Year Ended  December 31, 2002(Amounts in $ )** |   | **Year Ended  December 31, 2003  (Amounts in $ )** |   |
|-------------|--------|-------------------------------------------------------|--------|---------------------------------------------------------|--------|
|        |   | **High**                                              |   | **Low**                                                 |   | **High** |   | **Low** |   |
| 1st Quarter |   | 6.36                                                  |   | 2.52                                                    |   | 2.73 |   | 0.90 |   |
|        |   |                                                  |   |                                                    |   |   |   |   |   |
| 2nd Quarter |   | 5.20                                                  |   | 3.12                                                    |   | 2.60 |   | 1.50 |   |
|        |   |                                                  |   |                                                    |   |   |   |   |   |
| 3rd Quarter |   | 4.20                                                  |   | 1.32                                                    |   | 2.44 |   | 0.97 |   |
|        |   |                                                  |   |                                                    |   |   |   |   |   |
| 4th Quarter |   | 2.64                                                  |   | 1.00                                                    |   | 1.93 |   | 1.07 |   |

 

Forthe period January 1, 2004 through March 30, 2004, the high and lowtrading prices for our common stock were $1.95 and $1.10, respectively. Aggregate trading volume for the period January 1, 2004 throughMarch 30, 2004, was approximately 1,079,660 shares.  The foregoinginformation was obtained from the National Association of Securities Dealers asreported on the Nasdaq SmallCap Market.  The quotations generally reflectinter-dealer prices, without retail mark-up, mark-down or commission and maynot represent actual transactions.  The foregoing information reflectstrade prices, and not bid or ask prices and has been adjusted to reflect ourone-for-four reverse split that was effective November 22, 2002.  See“Risk Factors – A small group of stockholders control IMCOR, which may make itdifficult for stockholders who are not in that group to influence management”and “The price and trading volume of our common stock fluctuates significantly,like that of many biopharmaceutical companies, which may make it difficult forus or a stockholder to sell our common stock at a suitable price and may causedilution for existing stockholders when we issue additional shares,” above,regarding the possible effects of the concentrated ownership of our stock onthe market and price of the stock.

 

In2003, we granted qualified and non-qualified stock options pursuant to our 2000Plan to purchase an aggregate of 1,840,250 shares of common stock each at an exercise price of $1.25 pershare to employees joining the Company as part of the *Imagent* business acquisition and twooptions for 10,000 shares each granted at exercise prices of $0.93 and $2.05,respectively.  The options vest at various times up to four years from thedate of the grant.

 

InJuly 2003, we granted our Chief Executive Officer options to acquire1,050,000 shares of our common stock at an exercise price of $1.08 per share,subject to shareholder approval. Shareholders holding over 50% of our common stock have committed to votein favor of this option.

 

During2003, we made the following issuances of our common stock.  These securities were offered andsold by us in reliance upon exemptions from the registration requirementsprovided by Section 4(2) of the Securities Act and Regulation D under theSecurities Act relating to sales not involving any public offering:

 

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•      Pursuant to the terms of the Standstill andMake Whole Agreement dated as of December 30, 2002, in each of January,February and March 2003, we issued 250,000 shares (an aggregate of750,000 shares) to Xmark in exchange for Xmark’s agreement to forbear fromexercising its remedies as a creditor against Alliance.

 

•      Pursuant to the terms of a ConsultingAgreement dated as of January 30, 2003, we issued up to 75,000 shares ofour common stock to a consultant, subject to certain forfeiture provisions, inexchange for consulting services. Forfeiture provisions for 56,250 of these shares have expired throughDecember 31, 2003.

 

•      In January 2003 we sold 27,778 shares ofour common stock for cash at $1.08 per share to certain accredited investors.

 

•      On May 27, 2003, we issued an aggregate of11,250 shares to Xmark as a penalty for failing to register for resale theshares of common stock issued to Xmark.

 

•      In June 2003, we issued an aggregate of10,000 shares of our common stock pursuant to cashless exercise of options.

 

•      In connectionwith the acquisition of the *Imagent*business, we issued an aggregate of 2,198,137 shares of our common stock tovarious creditors of Alliance (who qualify as accredited investors) onJune 18, 2003.  These shares wereissued without registration under the Securities Act at prices ranging from$1.00 to $2.30 per share.  An additional1,987,500 shares (pursuant to this transaction) are issuable at $2.00 to $2.30per share to certain accredited investors following approval by our shareholders.  This approval was obtained at ourshareholder meeting of February 5, 2004, and the shares have subsequentlybeen issued.

 

•      In July 2003 we issued 27,216 shares ofour common stock as a cashless exercise of certain warrants.

 

•      In July 2003 we issued 82,977 shares ofour common stock to Xmark for interest and penalty for failing to timelyregister shares of common stock issued to Xmark.

 

•      In September 2003 we issued 26,248shares of our common stock to Xmark as a penalty for failing to timely registershares of common stock issued to Xmark.

 

InJune 2003 we recorded the issuance of 124,627 shares of our common stockthat had previously been subject to rescission.

 

In addition, in May and June, 2003, we issued revolving convertiblesenior secured promissory notes to three of our investors in an aggregateprincipal amount of $4,160,000 bearing interest at 7.25% annually, compoundedmonthly. In thesecond, third and fourth quarters of 2003 we issued senior secured promissorynotes, payable upon demand, to these investors in an aggregate principal amountof $7,257,000 bearing interest at 7.25% annually, compounded monthly.

 

Weare subject to six sets of registration rights agreements.  In theaggregate, these agreements cover approximately 15,028,000 shares of commonstock (including 2,050,000 shares of common stock issuable pursuant to stockoptions) and require us to register those shares under various terms andsubject to specific conditions in the agreements.

 

Pursuantto the terms of the Securities Purchase Agreement dated as of October 20,1999 between IMCOR and Elan International Services, Ltd. (“EIS”), EIS had theright to participate in any equity financing consummated by us in order tomaintain its pro rata interest in the company.  This right expired onOctober 20, 2003.

 

Asof March 30, 2004, approximately 19,056,000 shares of our common stock are“restricted stock” or are beneficially owned by persons who as ofMarch 30, 2004 were affiliates of the company as defined in Rule 144 underthe Securities Act.  This excludes approximately 128,437 shares of commonstock held by EIS, 115,360 shares of common stock held by Elan PharmaInternational Limited (“EPIL”) and 16,314 shares of Series A Preferred Stockissued or accrued to EPIL.  Although Elan has the right to elect onedirector, they have chosen not to place anyone on the current board ofdirectors at

 

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thistime.  For purposes of this calculation only (and the comparabledisclosure on the cover page of this Form 10-KSB) we have assumed thatofficers, directors, 10% stockholders and stockholders subject to the votingagreement dated as of November 12, 2002 are affiliates of the company thatstock held by Oxford Bioscience Partners IV L.P. and MRNA Fund II L.P. would bedeemed to be beneficially owned by Jonathan Fleming, and stock held by Mi3,L.P. would be deemed beneficially owned by William D. McPhee, each being one ofour directors (although both Mr. Fleming and Mr. McPhee disclaim beneficialownership of those respective shares for all other purposes), and that a personbeneficially owns stock subject to an option, warrant or convertible instrumentthat is exercisable or convertible within 60 days from March 15,2004.  A portion of those shares would be eligible for resale by companyaffiliates and others who have satisfied the requisite holding periods, subjectto the volume limitations and other provisions of Rule 144 and applicablelaw.  As of March 30, 2004, we had approximately 2,486,000 shareseligible for sale free of restriction under Rule 144.

 

###### **Equity Compensation PlanInformation**

###### ** **

SeePart III Item 11 for information regarding our equity compensation plans.

 

**SeriesA Convertible Preferred Stock**

** **

OnOctober 20, 1999, we issued 12,015 shares of Series A Preferred Stock toEIS, an affiliate of Elan, in conjunction with the formation of Sentigen Ltd.,our joint venture with Elan.  After issuance, the Series A Preferred Stockwas transferred to EPI.

 

Underthe Certificate of Designations, the holder of Series A Preferred Stock has aSeries A Liquidation Preference entitling it to the first $12,015,000 of fundsavailable for distribution to stockholders upon liquidation of the company andhas the right to convert shares of Series A Preferred Stock into common stockat any time after October 20, 2001 at a conversion price of $84.68 pershare.  The conversion price is subject to adjustment for certain dilutiveevents.  Alternatively, the holder of Series A Preferred Stock mayexchange shares of Series A Preferred Stock for common shares of Sentigen sothat the holder of Series A Preferred Stock owns 50% of the equity of Sentigen.

 

Elanentered into an Agreement dated November 12, 2002 with the InstitutionalInvestors in the financing which closed on November 12, 2002 whichprovides that Elan will pay the Institutional Investors an amount in cash (orthe fair market value of other property) distributed to the holder of theSeries A Preferred Stock on account of the Series A Liquidation Preferencethat, in the absence of the Series A Liquidation Preference would have beenpaid to those Institutional Investors in accordance with applicable law, up toa maximum of $16,000,000.

 

Eachshare of Series A Preferred Stock will be paid a mandatory payment-in-kinddividend equal to 7% (i.e., 0.07 additional shares of Series A PreferredStock).  The payment-in-kind dividend is cumulative, compounds on asemi-annual basis and is payable twice a year, beginning April 2000. Pursuant to this dividend requirement, approximately 1,159 shares of Series APreferred Stock accrued in 2003 and as of March 30, 2004, there wereapproximately 12,856 shares of Series A Preferred Stock issued and outstandingand 3,458 shares accrued as payment-in-kind dividends.  The holder ofSeries A Preferred Stock is only entitled to vote on matters that adverselyaffect or change the rights of holders of Series A Preferred Stock.  Theholder of Series A Preferred Stock does not have the right to vote on theelection of directors of the company.

 

**SeriesB Convertible Preferred Stock**

** **

InFebruary, 2000, we issued 327,240 shares of Series B Preferred Stock to 32accredited investors in a private placement, for a purchase price of $16.88 pershare and 9,816 shares to the placement agent in connection with servicesrendered in our private placement of Series B Preferred Stock.  InNovember, 2002, a majority of the holders of the Series B Preferred Stockconsented to the conversion of all of the issued and outstanding shares ofSeries B Preferred Stock into shares of common stock at the conversion ratio of4.25 (pre-reverse split) shares of common per share of Series B PreferredStock.  In November, 2002, an aggregate of 422,316 shares of common stockwere issued to the former holders of the Series B Preferred Stock and(available to common shareholders) the Series B Preferred Stock is no longeroutstanding.

 

**ITEM 6.  MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION.**

 

Portionsof the discussion in this item contain forward-looking statements and aresubject to the “Risk Factors” described

 

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above. References to the “Company,”“IMCOR,” “we” or “our” are to IMCOR Pharmaceutical Co. and, where appropriate,our 80.1% owned joint venture company, Sentigen, Ltd.  References to the “*Imagent*Business”, “Technology Purchase” or “Purchased Technology” are to the medicalimaging business of Alliance Pharmaceutical Corp. (“Alliance”) acquired by uson June 18, 2003.  *Imagent*® is a registeredtrademark owned by IMCOR.

 

Theaccompanying financial statements have been prepared assuming we are a goingconcern.  The company currently receivesfinancing through its use of demand notes payable to its major institutionalinvestor.  Without the continuation ofthe use of these notes or obtaining additional debt or equity financing we willnot be able to continue to fund operations. The 2003 financial statements do not include any adjustment to reflectthe possible future effects on the recoverability and classification of assetsor the amount and classification of liabilities that may result from thisuncertainty.

 

We are anemerging, development-stage specialty pharmaceutical company focused ondeveloping and marketing medical imaging pharmaceutical products.  We have one FDA approved product, *Imagent®* (perflexane lipid microspheres),**anultrasound imaging contrast agent thatwe acquired in June 2003, and two additional contrast agents indevelopment for use in computed tomography (CT) and x-ray imaging with potential applications (1) as a bloodpool agent, to diagnose diseased tissue in the cardiovascular system and otherorgans, which we call PH-50, and (2) to diagnose cancer metastasizing into thelymphatic system, which we call N1177. The product designations PH-50 and N1177 refer to the same chemicalentity.  We established the two names todistinguish commercialization rights between cardiovascular imaging (and allother indications) (PH-50) to which we retain rights, and the field oflymphography (N1177), which we licensed to our joint venture (Sentigen, Ltd.)with affiliates of Elan.  OnFebruary 5, 2004, we changed our name to IMCOR Pharmaceutical Co.,reflecting the changed nature of our business to imaging pharmaceuticals.

 

InDecember 2001, we announced positive preclinical results of PH-50.  Based on these studies, the extensivepreclinical toxicology and other study work, including the product’s use inapproximately 65 patients for lymphography, we shifted the strategic researchdirection of IMCOR to focus on the cardiovascular and lymphographyapplications.  We accomplished thisshift in focus also by splitting off our therapeutic line of business, and, inJune 2003 acquiring the medical imaging business (the “*Imagent* business”) of Alliance PharmaceuticalCorp. (“Alliance”) led by *Imagent*® (perflexanelipid microspheres), an FDA approved diagnostic imaging agent.

 

Forthe two years up to the time of our acquisition of the *Imagent* business, substantially all of ourresearch and development efforts were focused on the preclinical testing ofPH-50.  During that period, we operatedwith a very small staff and conducted substantially all of our researchactivities through contracts with academic institutions and contract researchlaboratories.  In addition, we hadconducted research and development activities on the development of certaintherapeutic photodynamic therapy applications (namely a product we called PH-10for the treatment of certain dermatological conditions) and the development ofa medical laser.  These operations weresplit off to our founding scientists as of November 12, 2002 and have beenrecorded as discontinued operations in our financial statements.

 

PH-50and N1177 are still in early stages of development.  Of these products, based on the availability of capital, weintend to focus our research efforts first on the continued development ofPH-50 and secondly, N1177.

 

Pharmaceuticalimaging agents are used with echocardiography, computed tomography (“CT”),nuclear medicine and magnetic resonance imaging (“MRI”) equipment in order toincrease the diagnostic capabilities of these techniques.  By enhancingthe contrast between different types of tissues, these intravenouslyadministered contrast agents provide critical anatomical and disease stateinformation that is not obtainable using the equipment alone.  There arenumerous potential applications for a contrast agent used in imaging parts orall of the cardiovascular system as well as other organs.  Our productshave the potential to enhance a physician’s ability to diagnose certaincardiovascular abnormalities and the spread of cancer in the lymphatic system.

 

IMCOR is based in San Diego, California.  We have approximately 30 full time employees and a 53,000 squarefoot cGMP (current Good Manufacturing Practices) manufacturing facility at ourSan Diego location.  Our personnel have expertise in sales,marketing and manufacturing, clinical development, clinical trial design andregulatory approval processes.  We also work closely with consultantsexperienced in drug development and regulatory requirements.

 

Asof April 8, 2002, we entered into a credit facility that provided us witha $2,500,000 revolving line of credit, bearing interest at 4.65%, for a periodof five years.  The loan was secured bya lien on all of our assets.  The amountoutstanding

 

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underthe credit facility ($2,500,000) was converted into our common stock at $1.08per share on November 12, 2002.  Inaggregate, from November 12, 2002 through January 2, 2003, weconsummated the closings of a financing in which we sold 11,165,651 shares ofour common stock to a group of institutional investors and individualaccredited investors at $1.08 per share, for an aggregate of $12,058,902,including the above conversion of $2.5 million of debt outstanding under therevolving credit line.

 

OnNovember 12, 2002, we split off our therapeutic business to certainfounding shareholders in exchange for all of their 52.9% ownership interest inIMCOR and recognized a gain on the disposition of approximately$11,780,000.  This gain was attributableto the value of the common stock held by the founding shareholders that wasexchanged for the therapeutic technology, which had been expensed.  Our therapeutic business had been focused onthe development of certain photodynamic therapy products.  Our remaining diagnostic business has beenfocused on the development of products for medical imaging, with particularemphasis on cardiovascular imaging.

 

OnJune 18, 2003, we acquired assets, including Purchased Technology, relatedto the diagnostic imaging business, including *Imagent*,an FDA-approved product, of Alliance. We also entered into a number of agreements related to thatacquisition.  Included in the purchasewere an FDA-approved manufacturing facility, the marketing, manufacturing andsupporting infrastructure for the product and an intellectual propertyportfolio of approximately thirty patents in the area of ultrasound imaging.

 

*Imagent* has beenapproved for marketing by the FDA for use in patients with sub optimalechocardiograms to opacify the left ventricle and thereby improve visualizationof the main pumping chamber of the heart, and to improve delineation of theendocardial borders of the heart.  As aresult, ultrasound with *Imagent* may better distinguish normal andabnormal heart structure and function - two critical indicators of cardiachealth.  Echocardiography is the mostwidely used imaging modality for the diagnosis of heart disease, the leadingcause of death in the U.S.  Theattractiveness of the ultrasound imaging market potential together with theacquisition of an approved product and an extensive intellectual propertyportfolio were fundamental reasons for the acquisition and primary determinantsof the purchase price of approximately $16,572,000.  The financial statements include the operating impact of thisacquisition from June 18, 2003 through the end of the reporting period.  We are currently seeking additional capitalto operate the *Imagent* businessand to continue our development programs.

 

Atthe closing of the *Imagent*business acquisition, we paid approximately $669,000 in cash and delivered2,198,137 shares of our common stock. At the direction of Alliance, we delivered the cash and stock tocreditors, employees and vendors of Alliance. In addition to bridge financing we provided to Alliance before theclosing, our purchase of a $1,250,000 interest in Alliance’s obligations to twoof its creditors, Xmark Fund, Ltd. and Xmark Fund, L.P. (collectively “Xmark”),and our assumption of specified Alliance operating liabilities related to *Imagent*, we are obligated to payadditional amounts to Alliance secured and unsecured creditors after theclosing (including Xmark, discussed below, and others).  At various times between 90 and 365 daysafter the closing, we must pay, subject to reaching satisfactory agreementswith certain Alliance secured and unsecured creditors, an aggregate amount ofup to approximately $3,400,000 to creditors other than Xmark and (subject tostockholder approval, which we received on February 5, 2004) deliver anaggregate of approximately 2,054,000 shares of our common stock.  The amount of consideration was determinedthrough arms-length negotiations.

 

Inaddition, after the closing and through 2010, we must pay Alliance furtherconsideration in the form of an earn out based on *Imagent* revenue we invoice (subject to certainreductions).  This earn out equals, foreach year of the earn out:  7.5% of *Imagent* revenue up to $20,000,000; 10% of *Imagent* revenue between $20,000,000 and$30,000,000; 15% of *Imagent*revenue between $30,000,000 and $40,000,000; and 20% of *Imagent* revenue above $40,000,000.  The earn out will be reduced by amounts wepay pursuant to a license agreement with Schering Aktiengesellschaft(“Schering”), net of payments we receive from Schering under the license, andamounts of any indemnification claims we have against Alliance.  The earn out is subject to three additionaloffsets (which are to be applied in the manner described in the Asset PurchaseAgreement dated as of June 10, 2003 with Alliance) that entitle us toretain portions of the earn out otherwise payable to Alliance:

 

•      Up to approximately $1,600,000 for a fixedprice offset, depending on the satisfaction of certain conditions;

 

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•      The amount of any payments not committed toat closing that we make after the closing to Alliance’s creditors plus up to$1,000,000 of litigation expenses for certain patent and other litigation; and

 

•      Between $4,000,000 and $5,000,000, which isthe principal and accrued interest under our bridge loans to Alliance,depending on the satisfaction of certain conditions.

 

As the amount of the earn out cannot be estimated, it has not beenreflected in the purchase price. Amounts paid will be expensed as incurred.

 

As part of the acquisition of the *Imagent*business, we issued shares of our common stock to two companies, CardinalHealth and inChord, that had been providing services to the *Imagent* business when it had been owned byAlliance and that were creditors of Alliance. As settlement of the Alliance obligations, we issued Cardinal Health1,100,000 shares and inChord Communications 429,000 shares of our common stock,respectively.  As part of thedevelopment plan for *Imagent*, weexpect to continue to use the services of Cardinal and inChord.  Currently, *Imagent*will be marketed and distributed in the United States through agreements withCardinal. Various Cardinal companies will also provide packaging, salessupport, and distribution services. InChord will provide advertising, medical education and similarservices. We also entered into a series of agreements with Xmark.  Pursuant to a Standstill and Make WholeAgreement dated as of December 30, 2002, we issued 750,000 shares of ourcommon stock in the first quarter 2003 to Xmark, who agreed to not exercise anyrights against Alliance as a creditor for the period of the standstill.  On May 2, 2003, we entered into a GoingForward Agreement pursuant to which Xmark agreed to extend the period duringwhich Xmark had refrained from exercising its rights as a creditor againstAlliance to permit us to complete the acquisition.  On that date, we also purchased a $1,250,000 interest inAlliance’s obligations to Xmark.

 

Atthe closing of our acquisition of the *Imagent*Business, pursuant to the Going Forward Agreement, we delivered to Xmark ourpromissory notes in the total principal amount of $2,500,000.  These notes were payable in two equalinstallments on August 5, 2003 and November 3, 2003 or (if sooner) atthe time we complete a financing resulting in at least $18,000,000 of grossproceeds to us and bear interest at 3% over the prime rate (payable in sharesof our common stock).  At the closing ofthe *Imagent* acquisition, we alsoissued Xmark an additional 1,056,144 shares that represented payment ofinterest that was due to Xmark by Alliance through the closing date of theacquisition.  The value of these additional1,056,144 shares has been treated as part of the purchase price of the *Imagent* business.

 

Our obligations to Xmark are secured by a first priority securityinterest on the *Imagent* relatedtangible and intangible assets.  Xmarkwould be entitled to foreclose on its lien covering these assets if we defaulton our obligations to Xmark, if we lose FDA approval for *Imagent*, if we fail to pay other debts, orif we file for bankruptcy protection or similar matters.

 

We defaulted on the principal payment due on August 5, 2003 andXmark delivered a notice to us stating that it was accelerating all amounts dueunder the notes.  We negotiated a newagreement with Xmark dated August 18, 2003 (the “Letter Agreement”)pursuant to which we agreed to make an immediate payment of $1,250,000 andXmark agreed to rescind the default notice. The other key terms of the Letter Agreement are as follows:

 

•      We remain obligated to makea second principal payment of $1,250,000 on the earlier to occur of (i)November 3, 2003 or (ii) the consummation of one or more institutionalfinancings resulting in aggregate gross proceeds to us of at least$18,000,000.  We will have the right toextend the November 3rd due date monthly until April 3,2004 for a fee (and not as a reduction of any amounts due and owing under thepromissory notes) ranging from $50,000 to $100,000 per month.  We have been exercising our right to extendthe November 3, 2003 due date.

 

•      Within twenty days of theexecution of the Letter Agreement we will pay to Xmark, in cash or in shares ofour common stock (valued at $1.00 per share, subject to certain adjustments),$26,248 for failure to timely register the shares of our common stock issued toXmark for resale, which payment has been made with shares of our common stock.

 

•      Our obligation to registerthe shares of common stock issued to Xmark for resale under the terms of theGoing Forward Agreement was terminated and no further penalty payments orshares will be due to Xmark as a result of our failure to register the sharesof our common stock held by Xmark.  Inlieu of the demand

 

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registration rights Xmark previously had, the Letter Agreement providesthat Xmark will have piggyback registration rights.

 

•      The definition of “Event ofDefault” in the security agreements securing our obligations to Xmark wasamended.  The provision that an Event ofDefault included any default by us in the payment of borrowed moneyindebtedness was eliminated.  Instead,we agreed that it would be an Event of Default if we made repayments ofborrowed money indebtedness.

 

•      With regard to payments tocertain specified institutions, we agreed that, when paid, we would also make apro rata payment to Xmark.

 

Except as specifically amended by the Letter Agreement, the terms ofthe Going Forward Agreement and the other agreements governing our obligationsto Xmark remain in effect, including Xmark’s put right with respect to ourcommon stock that Xmark owns.

 

Xmark’s put right, as set forth in the Going Forward Agreement,requires us to repurchase at $1.00 per share up to 750,000 shares of commonstock we issued under the Standstill and Make Whole Agreement and alladditional shares we issue to Xmark under the Going Forward Agreement.  The put right is fully exercisable beginningon the earlier of 13 months after the closing of the acquisition of the *Imagent* assets or the date on which weclose a financing for $20,000,000 or more. Before that time, Xmark can exercise the put right in quarterlyinstallments beginning 90 days after the closing of our acquisition of the *Imagent* assets.  In connection with these quarterly installments, we can elect todefer repurchasing the shares if we lack adequate cash to satisfy our operatingand working capital requirements for the subsequent 18-month period based on anoperating plan approved by our Board. We agreed to use our reasonable efforts to have sufficient cash to meetour operating plan.  If we do notrepurchase these shares, Xmark is entitled to a payment of 1.5% of the value ofthe shares not repurchased for any 30-day period or pro rata portion thereofduring which such failure is continuing.

 

Weissued 82,977 shares of our common stock to Xmark on July 31, 2003 forinterest and various penalties, including the failure to register the shares ofour common stock held by Xmark by that date. We issued 26,248 shares of our common stock to Xmark onSeptember 2, 2003, pursuant to the Letter Agreement, for failure toregister shares of our common stock held by Xmark as of August 18,2003.  An additional 19,888 shares ofour common stock are issuable to Xmark in payment of interest.

 

Inconnection with the closing of the acquisition of the *Imagent* assets, we issued approximately18% of our outstanding common stock. Nasdaq rules applicable under these circumstances require us to obtainprior stockholder approval before issuing more than 20% of our stock.  We held a meeting of stockholders onFebruary 5, 2004 and at that meeting obtained approval to issue an additional1,985,522 shares in connection with the acquisition.  In our financial statements, the value of these shares has beenincluded in our equity as “Common Stock to be Issued”.

 

Weare currently funding our operations through the use of demand notes we issuedto our major institutional investor.  Although we are aggressively seeking additional equity or debtfinancing, we are currently dependant upon the sale of these notes to financeour current operations.  Withoutadditional financing we will not have sufficient cash resources to meet ourcurrent commitments.  We will needsubstantial additional financing for our research, clinical testing, productdevelopment and marketing programs.  Wecannot accurately estimate the amount of additional financing required;however, the amount could be an additional $30 million or more over the nextseveral years.  In particular, we arecurrently seeking to raise additional capital through the sale of stock toaccredited investors.  See “Risk Factors— We must raise additional financing in the future and our inability to do sowill prevent us from continuing as a going concern and implementing ourbusiness development plan,” above.

 

Weoperate with a staff of approximately 30 people in manufacturing, research anddevelopment, regulatory affairs and administraton.  We contract with third party consultants having expertise inclinical development and regulatory matters to supplement our internalcapabilities.  We also contract with third party research laboratories, contractresearch organizations and manufacturers for clinical material supplies and themanagement of clinical trials.  We also contract with academic and otherinstitutions to conduct specified research projects.

 

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Weexpect that our quarterly and annual results of operations will fluctuate basedon several factors including, our ability to raise additional capital toimplement our sales, marketing and manufacturing programs, the results of ourlitigation against Amersham, the timing and amount of expenses involved inmarketing and manufacturing *Imagent*,conducting our research programs, particularly the conduct of clinical trials,the cost of clinical material used in those trials and required for compliancewith FDA regulations and the amount, if any, of fees, milestone payments andresearch support payments received from potential strategic partners.

 

Weconsider the valuation of our investment in the purchased technology of *Imagent* to be a significant estimate.  The carrying value of this purchasedtechnology at December 31, 2003 is approximately $14,980,000.  The assumptions underlying the financialforecast have been based on currently available information including estimatesof market size and penetration, pricing, competitive threats and generaloperating expenses.  We have alsoinstituted litigation against Amersham, and Amersham has responded withcounter-claims.  Should we lose thislitigation, our business and the value of the Purchased Technology would bematerially and adversely affected. These estimates may change and such changes may impact future estimatesof carrying value.

 

Wealso consider our investment in the joint venture with affiliates of ÉlanCorporation, plc (“Élan”) to be subject to a significant estimate.  The carrying value of our 80.1% equityinterest in Sentigen, Ltd., the joint venture entity, plus advances toSentigen, Ltd., at December 31, 2003 totaled $2,803,000.  Members of Sentigen’s management reviewedits financial projections and have concluded that given delays in thedevelopment of N1177, resulting from capital constraints, the carrying value ofthe intangible assets in the joint venture should be reduced by $2,500,000 in2002.  In addition, in the secondquarter of 2003, based on the re-prioritization of the development of N1177 andas the development plans are being further delayed pending the acquisition ofsufficient capital to allocate to the development of N1177, Sentigen recordedan additional impairment provision of $5,750,000.  The assumptions underlying the financial forecasts were based oncurrently available information, including estimates of development costs,pricing, operating expenses and market sizes and penetration.  These estimates may change and any suchchanges may impact future estimates of appropriate carrying values.

 

**Results of Operations**

 

Prior to our acquisition of the *Imagent*business in June, 2003, our efforts were focused on the development andclinical testing of diagnostic products, specifically PH-50, being developed asa cardiovascular imaging agent, and N1177, being developed for lymphography,the diagnosis of cancer metastasizing to lymph nodes.  Todate, we have not generated revenues from the sale of any proposed diagnosticproducts or other operations.  Net loss applicable to common shareholders(after preferred dividends) was $12,666,771, $1,649,604 and $23,839,784 for theyears ended December 31, 2001, 2002 and 2003, respectively, and ourcumulative losses since inception, including “in-kind” preferred stock andbeneficial conversion dividends totaling $8,712,509, are approximately$60,231,207.

 

Sinceinception, IMCOR had been developing products for both therapeutic and medicalimaging applications.  As one of a series of transactions onNovember 12, 2002, we split off our therapeutic business to certainfounding shareholders.  Accordingly, the expenses associated with thatbusiness have been reclassified as discontinued operations.

 

Withthe acquisition of the *Imagent*business, we hired approximately 35 employees related to this business.  These employees were formerly associatedwith Alliance and bring capabilities in manufacturing, marketing and additionalcapabilities in research and related administrative infrastructure.  We also continue to contract with thirdparty consultants having expertise in clinical development and regulatorymatters to supplement our internal capabilities.  In addition, we contract with third party research laboratories,contract research organizations and manufacturers for clinical materialsupplies and the management of clinical trials, and with academic and otherinstitutions to conduct specified research projects.

 

During2003 we have conducted limited test marketing of *Imagent* to certain hospitals and physicians.  In December 2003 we entered into alicense agreement with KyoseiPharmaceutical Co., Ltd. (“Kyosei”), a unit of Sakai Group, for thedevelopment and marketing of *Imagent*in Japan for allradiology and cardiology indications.  Terms of the agreement call for the payment to IMCOR of up to $10million in fees and development milestone payments plus royalties on commercialsales.  Kyosei will also pay IMCOR to manufacture *Imagent* for Kyosei’s clinical andcommercial

 

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requirements.  At the closing, we received a gross paymentof $2 million from Kyosei.  Recognitionof this payment will be made ratably over the anticipated life of the agreement.

 

Researchand development expenses for the years ended December 31, 2001, 2002 and2003 were $437,958, $1,227,897, and $2,529,679 respectively.  Theseexpenses include personnel costs, fees and other compensation paid to outsideconsultants, and costs associated with conducting preclinical and clinical studiesand manufacturing product to be used in these studies.

 

Researchexpenses (from continuing operations) in 2002 increased by $789,939 to$1,227,897 primarily due to the shift in research spending from N1177 to thedevelopment of *Imagent* and PH-50,a product having greater market potential than N1177.

 

Substantially all of the $2,529,679 in research expenses in 2003 wereoriented to the preclinical development of PH-50, and, since the acquisition ofthe *Imagent* Business, expensesassociated with regulatory compliance and continued development of *Imagent* for new indications.  We expect our development priorities, basedon the availability of sufficient capital, to focus first on the development ofnew indications for Imagent and the continued development of PH-50 and then tothe further development of N1177.  Expenses associated with the development ofN1177 are charged to our joint venture, and expenses associated with thedevelopment of our other products are borne completely by us.

 

Selling,general and administrative expenses were $3,220,584, $4,030,083 and $14,241,767for the years ended December 31, 2001, 2002, and 2003, respectively. These expenses include (in 2002 and 2003) costs associated with ouracquisition of the *Imagent*business prior to firmly committing to the acquisition (costs incurredfollowing our firm commitment to acquire the *Imagent*business have been capitalized as part of the acquisition cost), and for all years costs associated withobtaining patent protection for our intellectual property, costs associatedwith sales and marketing programs, administrative personnel and corporate management, the amortization ofoptions granted to our employees, legal and related expenses and facilitiesexpenses.

 

In2002, selling, general and administrative expenses increased by $809,499 to$4,030,083.  As part of the November,2002 restructuring and financing, stock options were granted to the remainingemployees of IMCOR with an exercise price equal to the price at which commonstock was sold to the new institutional investors.  As the exercise pricewas below the closing price of the company’s common stock at the date of grant,we recorded an expense of approximately $988,000 reflecting the differentialbetween those two prices.

 

In2003, selling, general and administrative expenses increased by $10,211,684 to$14,241,767.  The primary reasons forthe increase were related to our acquisition of the *Imagent* business from Alliance including,(i) provisions we have taken against advances we had made to Alliance andshares of our common stock we had issued to Xmark pursuant to a standstillagreement with Xmark, (ii) costs of conducting due diligence and otheractivities related to the acquisition of the *Imagent*business, (iii) costs incurred by us to operate the *Imagent* business following itsacquisition, (iv) depreciation, and (v) amortization of the purchasedtechnology.

 

Aspart of the November, 2002 restructuring and financing, stock options weregranted to our remaining employees with an exercise price equal to the price atwhich common stock was sold to the new institutional investors.  As part of the acquisition of the *Imagent* business and the related hiring ofemployees from Alliance in June 2003, we granted these new employees anaggregate of 1,865,750 stock options with an exercise price of $1.25 pershare.  Pursuant to an agreement inJuly 2003 with Dr. Taffy Williams, our Chief Executive Officer, anaggregate of 1,050,000 stock options were granted to Dr. Williams, subject toshareholder approval (shareholders representing an excess of 50% of ouroutstanding common stock have indicated their commitment to vote in favor ofapproving these options).  As theexercise prices were below the closing price of our common stock at the datesof grant, we recorded an expense of approximately $1,236,566 in 2003 reflectingthe differentials between those respective two prices.

 

InSeptember, 2000, we initiated a restructuring of our clinical developmentoperations. We closed our Westborough, Massachusetts office and deliverednotices of material breaches and/or dissatisfaction pursuant to the employmentagreements with three employees who worked there at that time.  Clinicaldevelopment activities formerly carried on in Westborough were assumed byoutside consultants and other company employees.  We initially took acharge against earnings of $597,025 for termination of our office lease andassociated expenses and termination costs associated with the

 

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employeesat that location.  During 2002, we recorded an additional charge of$807,483 all of which was related to the valuation of certain stock optionsgranted to one of the Westborough employees as part of a settlement of certainlitigation.  At December 31, 2002, none of this charge was remaining.

 

Inthe fourth quarter of 1999, we entered into a joint venture with affiliates ofElan for the development of N1177, a potential product to identify and diagnoselymph nodes for the presence of cancer. We own 80.1% of the joint ventureentity, Sentigen, Ltd., with the balance owned by Elan.  During 2001, 2002and 2003 we recorded losses from the joint venture of $1,952,758, $3,452,837,and $5,389,338, respectively.  In 2001 and 2002 theselosses resulted from our share of development expenses incurred in the jointventure by the two participants, including personnel expenses and costsassociated with developing a manufacturing process, including the purchase ofdrug substance and other materials.  As there have been delays,principally due to capital constraints, on the development of N1177, Sentigenrecorded in 2002 a $2.5 million charge, of which our 80.1% share isapproximately $2.0 million, as an impairment to the carrying value of theSentigen license.  In 2003, theselosses were substantially the result of the amortization of the licensepurchased from Élan and a $4,605,000 charge for further impairment of thelicense value as, due to the lower priority of the development of N1177 andcapital constraints, limited development work was being conducted.

 

Investmentincome for the years ended December 31, 2001, 2002 and 2003 was $110,741,$1,563, and $7,394, respectively.  Investment income is generated by theamount of capital in our investment portfolio prior to it being used to fundour operations and the rate of interest earned on that capital.  We investfunds in the investment portfolio in U.S. Government obligations.  In thefirst half of 2001, we received a total of $1,068,723in net proceeds of commonstock sold under our shelf registration statement that was declared effectivein February, 2001.** **Investmentincome declined in 2001 due primarily to the decline in the average balances ofour investment portfolio as funds were used to support operations and, to a lesserextent, the general decline in short term interest rates.  In 2002,investment income declined to $1,563 as the entire portfolio was used tosupport operating expenses.   In2003 investment income increased to $7,394 reflecting earnings on the investmentportfolio following our capital raising efforts in late 2002. ** **Weexpect investment income to continue to fluctuate both as the size of theinvestment portfolio decreases or increases and as the rate of interest earnedby the portfolio varies due to shifts in short term interest rates.

 

Since inception and through November 12, 2002, we had beendeveloping products for both therapeutic and medical imaging applications.  As one of a series of transactions on November 12, 2002, we splitoff our therapeutic business to certain founding shareholders. Accordingly, the expenses associated with that business have been reclassifiedas discontinued operations.  Our therapeutic business had been focused onthe development of certain photodynamic therapy products, in particular acompound we called PH-10.  In the years ended December 31, 2001 and2002, we incurred losses related to these operations of $2,909,820 and$1,496,430, respectively.  On November 12, 2002 this business wassplit off to certain founding shareholders in exchange for all of their 52.9%ownership interest in IMCOR resulting in a gain from the split off of$11,779,752 based upon the market value of our common stock on that date, netof the net assets that were split off.

 

Purchasesof equipment and leasehold improvements, other than the June 18, 2003acquisition of the *Imagent*Business including the assumption of the lease of a manufacturing facilitylocated in San Diego, for the years ended December 31, 2001, 2002 and 2003were $45,938, $0 and $0, respectively.  These purchases were primarily forthe acquisition of laboratory and other equipment necessary to conductpre-clinical and clinical studies and leasehold improvements in the Knoxvilleand Westborough offices that we maintained at that time.  During the nexttwelve months, assuming that we obtain sufficient capital,  we expect capital expenditures for equipmentto be less than $500,000.

 

During2001, as a result of the closing of the Westborough facility and the shift inthe research priorities, we determined that certain equipment we were leasingwould no longer be useful in our research.  Accordingly, we recordedprovisions for future lease payments totaling $1,264,208 representing theremaining lease obligations.  While we will pursue opportunities tosublease or otherwise mitigate these obligations, there can be no assurance ofany success in this regard.  We are indefault under the lease and have received a demand letter from the lessor forpayment of $787,000 for remaining unpaid lease obligations and other fees.  We are attempting to negotiate a resolutionwith the lessor but there can be no assurances that we will be successful inthis regard.

 

Wehave issued two series of convertible preferred stock: Series A, issued inOctober 1999 and which remains outstanding and Series B PreferredStock, issued in February 2000 and which was retired inNovember 2002.  The holder of Series A

 

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PreferredStock is entitled to a mandatory, cumulative, semi-annual payment-in-kinddividend of 7% (i.e., 0.07 additional shares of Series A PreferredStock).  On November 12, 2002, the holders of Series B PreferredStock converted all of their issued and outstanding shares (including accruedand unpaid dividends) for shares of our common stock at an exchange rate of4.25 (pre-reverse split) shares of common for each share of Series B PreferredStock.  Additionally, the terms of the Series A Preferred Stock and theSeries B Preferred Stock create additional preferred returns for theholders.  The Series A Preferred Stock was issued with detachablewarrants. The value allocated to those warrants caused the preferredshareholders to receive an additional return. That additional return has beenamortized over the period from issuance through October 2001, when thestock was first convertible.  The additional return related to the SeriesA Preferred Stock recorded was $345,199 in 2001.  The Series B Preferredcontained beneficial conversion features.  Emerging Issues Task ForceIssue 98-5, “Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Ratios,” requires the issuer toassume that the holder will not convert the instrument until the time of themost beneficial conversion which would occur after January 1, 2002. Usingthe conversion ratio at January 1, 2002 of 1.4 shares of common stock andthe stock price at the date of issuance, the maximum beneficial conversionamount was $2,322,316. This amount was recorded as additional preferred stockdividends over the period from issuance until January 1, 2002.  As aresult of the combination of the mandatory dividends, the preferential valueamortization and, in 2002, deemed dividends for our Series B Preferred Stockassociated with the beneficial conversion rates offered to holders of theseinstruments as part of our November 12, 2002 financing, we recordedpreferred stock dividends of $2,943,755, $1,997,723 and $1,066,280 in 2001,2002 and 2003 for Series A Preferred Stock and (for the years 2001 and 2002)Series B Preferred Stock.

 

Asa result of the above factors, the net loss applicable to common stockholders(after preferred dividends) was $12,666,771, $1,649,604 and $23,839,784 for theyears ended December 31, 2001, 2002 and 2003 respectively.  Basic anddiluted loss per common share was $1.33, $0.16 and $1.24, respectively, forthese periods.

 

**Liquidity; Capital Resources**

 

AtDecember 31, 2003, we had cash and cash equivalents totaling approximately$1,658,000.  Since thatdate, we have expended all those funds and, as described above, are currentlyfunding our operations through borrowings from two of our principalinstitutional investors, as cash is required for operations.  These investors have continued to providefunding to us, but there can be no assurance that they will continue to providefunding to us.

 

Ourability to conduct operations is entirely dependent on our ability to obtainadditional capital.  Without additional financing we will not havesufficient cash resources for our entire fiscal year ending December 31,2004.  We have been financing ouroperations with the proceeds of the financing we closed in November andDecember 2002 and January 2003, the initial payment that we receivedfrom Kyosei (net of taxes and expenses) and currently through borrowings,evidenced by secured promissory notes, payable upon demand, from our principalinstitutional investors.  We will needsubstantial additional financing for our manufacturing and marketing operationsas well as research, clinical testing and product development programs.  We cannot accurately estimate the amount ofadditional financing required; however, the amount could be an additional****$30 million or more over the nextseveral years.  If we raise additionalfunds by issuing equity securities, substantial dilution to existingstockholders may result.  However, therecan be no assurance that such capital will be available under acceptable terms,if at all.  See “Risk Factors—We must raise additional financingin the future and our inability to do so will prevent us from continuing as agoing concern and implementing our business development plan,” above.

 

OnApril 8, 2002, we entered into a credit facility that provided us with a$2,500,000 revolving line of credit, bearing interest at 4.65%, for a period offive years.  The loan was secured by a lien on all of our assets.  Inconnection with our agreement to sell shares of our common stock to a group ofinstitutional investors, both the amount outstanding, including accrued andunpaid interest, under the Elan credit line ($3,082,487 converted at a rate of$24.00 per share) and the $2,500,000 credit facility (at a conversion rate of$1.08 per share) were converted into shares of our common stock on November 12,2002 and the respective lines of credit were cancelled.

 

OnJune 18, 2003, we closed the acquisition of the *Imagent* Business from Alliance.  At the closing, we paid approximately $669,000 in cash anddelivered 2,198,137 shares of our common stock.  At the direction of Alliance, we delivered the cash and stock tocreditors, employees and vendors of Alliance. In addition to bridge financing we provided to Alliance before theclosing, our purchase of a $1,250,000 interest in Alliance’s obligations to Xmarkand our

 

33

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assumptionof specified Alliance operating liabilities related to *Imagent*, we are obligated to payadditional amounts to Alliance secured and unsecured creditors at various timesbetween 90 and 365 days after the closing, (i) an aggregate of $2,500,000 toXmark, (ii) subject to reaching satisfactory agreements with certain Alliancesecured and unsecured creditors, an aggregate amount of up to approximately$3,000,000 to creditors other than Xmark, (iii) pay certain royalties basedupon sales of *Imagent*throughJune 2010, subject to certain offsets, and (iv) subject to stockholderapproval (which approval was obtained on February 5, 2004) deliver anaggregate of approximately 2,054,000 shares of our common stock.

 

We are currently in default under obligations to pay $775,000 tocreditors of Alliance Pharmaceutical Co. in connection with our acquisition of*Imagent*and we are in default under an equipmentlease and the lessor has demanded approximately $787,000.  We also have not registered the resale ofshares we issued in connection with that acquisition, which in some cases is acondition to the effectiveness of agreements to release us from any claims bythe Alliance creditor.

 

Wealso entered into a series of agreements with Xmark.  Prior to our acquisition of the *Imagent*Business, pursuant to a Standstill and Make Whole Agreement with Xmark, weissued a total of 761,250 shares (including 11,250 shares as a penalty for thefailure to register those shares by April, 2003) of our common stock to Xmarkand Xmark agreed to not exercise any rights against Alliance as acreditor.  On May 2, 2003, we enteredinto a Going Forward Agreement pursuant to which Xmark agreed to extend theperiod during which Xmark had refrained from exercising its rights as acreditor against Alliance to permit us to complete the acquisition.

 

Atthe closing of the *Imagent*acquisition, we issued Xmark an additional 1,056,144 shares that representedpayment of interest that was due to Xmark by Alliance through the closing dateof the acquisition.  The value of theseadditional 1,056,144 shares has been treated as part of the purchase price ofthe *Imagent* business.

 

Also at the closing of our acquisition of the *Imagent* assets, pursuant to the GoingForward Agreement, we delivered to Xmark our promissory notes in the totalprincipal amount of $2,500,000.  Thesenotes are payable in two equal installments on August 5, 2003 and November 3,2003 or (if sooner) at the time we complete a financing resulting in at least$18,000,000 of gross proceeds to us and bear interest at 3% over the primerate.  The interest on the notes ispayable in shares of our common stock. Our obligations to Xmark are secured bya first priority security interest on the *Imagent*related tangible and intangible assets. Xmark would be entitled to foreclose on its lien covering these assetsif we default on our obligations to Xmark, if we lose FDA approval for *Imagent*, if we fail to pay other debts, orif we file for bankruptcy protection or similar matters.

 

We defaulted on the principal payment due on August 5, 2003 andXmark delivered a notice to us stating that it was accelerating all amounts dueunder the notes.  We negotiated a newagreement with Xmark dated August 18, 2003 (the “Letter Agreement”)pursuant to which we agreed to make an immediate payment of $1,250,000 andXmark agreed to rescind the default notice. The other key terms of the Letter Agreement are as follows:

 

•      We remain obligated to makea second principal payment of $1,250,000 on the earlier to occur of (i)November 3, 2003 or (ii) the consummation of one or more institutionalfinancings resulting in aggregate gross proceeds to us of at least $18,000,000.  We will have the right to extend theNovember 3rd due date monthly until April 3, 2004 for afee (and not as a reduction of any amounts due and owing under the promissorynotes) ranging from $50,000 to $100,000 per month.  We have exercised our right to extend the November 3, 2003due date by one month.

 

•      Within twenty days of theexecution of the Letter Agreement we will pay to Xmark, in cash or in shares ofour common stock (valued at $1.00 per share, subject to certain adjustments),$26,248 for failure to timely register the shares of our common stock issued toXmark for resale, which payment has been made with shares of our common stock.

 

•      Our obligation to registerthe shares of common stock issued to Xmark for resale under the terms of theGoing Forward Agreement was terminated and no further penalty payments orshares will be due to Xmark as a result of our failure to register the sharesof our common stock held by Xmark.  Inlieu of the demand registration rights Xmark previously had, the LetterAgreement provides that Xmark will have piggyback

 

34

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registration rights.

 

•      The definition of “Event ofDefault” in the security agreements securing our obligations to Xmark wasamended.  The provision that an Event ofDefault included any default by us in the payment of borrowed moneyindebtedness was eliminated.  Instead,we agreed that it would be an Event of Default if we made repayments ofborrowed money indebtedness.

 

•      With regard to payments tocertain specified institutions, we agreed that, when paid, we would also make apro rata payment to Xmark.

 

Except as specifically amended by the Letter Agreement, the terms ofthe Going Forward Agreement and the other agreements governing our obligationsto Xmark remain in effect, including Xmark’s put right with respect to ourcommon stock that Xmark owns.

 

Xmark’s put right, as set forth in the Going Forward Agreement,requires us to repurchase at $1.00 per share up to 750,000 shares of commonstock we issued under the Standstill and Make Whole Agreement and alladditional shares we issue to Xmark under the Going Forward Agreement.  The put right is fully exercisable beginningon the earlier of 13 months after the closing of the acquisition of the *Imagent* assets or the date on which weclose a financing for $20,000,000 or more. Before that time, Xmark can exercise the put right in quarterlyinstallments beginning 90 days after the closing of our acquisition of the *Imagent* assets.  In connection with these quarterly installments, we can elect todefer repurchasing the shares if we lack adequate cash to satisfy our operatingand working capital requirements for the subsequent 18-month period based on anoperating plan approved by our Board. We agreed to use our reasonable efforts to have sufficient cash to meetour operating plan.  If we do notrepurchase these shares, Xmark is entitled to a payment of 1.5% of the value ofthe shares not repurchased for any 30-day period or pro rata portion thereofduring which such failure is continuing.

 

Three of our existing institutional investors have provided capital tous in exchange for our Promissory Notes in an aggregate principal amount of upto $11,417,000 (at December 31, 2003). The notes bear interest at a rate of 7.25% per annum, compoundedmonthly.  A total of $4,160,000 of thesenotes are convertible into our common stock. Unless converted into common stock, amounts due under the notes werepayable on the earlier of August 5, 2003 or the date that we commitvarious defaults or become subject to bankruptcy or similar proceedings.  We defaulted on the payment of $4,160,000 ofthese notes on August 5, 2003; however while under no obligation to do so,these investors continue to loan us capital under demand notes which bearinterest at the rate of 7.25% per annum, compounded monthly.

 

The entire principal and interest outstanding under our convertiblenotes to these investors automatically converts into shares of our common stockon the same terms and at the same price as the shares issued in a financing foradditional long-term capital.  To securethe obligations under our notes to these investors, we granted them a securityinterest in all of our tangible and intangible assets, including intellectualproperty.  This lien covers our *Imagent*-related assets, but as to theseassets the investors’ lien is subordinate to the security interest held byXmark.

 

In2003, excluding the 1,926,619 shares of our common stock issued to Xmark andthe 1,141,993 shares issued to other creditors of Alliance pursuant to the *Imagent* Business acquisition, we issued anaggregate of 139,994 shares of our common stock pursuant to several factorsincluding cash, compensation for services and the cashless exercise of stockoptions.

 

Inthe second quarter of 2003, we recognized the issuance of 124,627 shares of ourcommon stock that previously had been subject to rescission.

 

Wehave used, and expect to use capital available from sales of common stock, forgeneral corporate purposes, including activities related to manufacturing andmarketing *Imagent*, preparing forand conducting clinical trials, purchase and preparation of clinical material,conduct of preclinical studies, administrative expenses to support ouroperating activities, capital expenditures and to meet working capital needs.

 

We are currently seeking to raise capital in one or more transactionsto fund our immediate and longer-term capital needs through the privateplacement of securities to accredited investors.  Inaddition, we expect to evaluate from time to time

 

35

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theacquisition or license of businesses, technologies or products.  The purchase of any such licenses ortechnologies would be funded by a portion of any net proceeds of futureofferings or the issuance of debt or equity securities specifically for thatpurpose.  We expect our use of capital to increase as we build thecommercial presence of *Imagent*and conduct further clinical trials of our products in development.

 

Atthe time of the acquisition of the *Imagent*business, we entered into a lease agreement with a unit of Baxter Internationalfor certain equipment used for the manufacture of *Imagent*.  Our annualcost for this lease is approximately $126,000. Our other long-term commitments that are not recorded on our financialstatements are for our office space in San Diego, California.  Annual rent for the California lease, whichexpires in 2008, is approximately $792,000. In addition, we have provided for the remaining lease payments ofcertain laboratory equipment that is no longer useful to our operations.  The lease expires in 2004.  We are in default under the equipment leaseand have received a demand letter from the lessor for payment of $787,000 forremaining unpaid lease obligations and other fees.  We are attempting to negotiate a resolution with the lessor butthere can be no assurances that we will be successful in this regard.

 

**Planof Operation**

** **

Managementbelieves it lacks sufficient working capital to fund operations****for the entire fiscal year endingDecember 31, 2004.  Therefore,substantial additional capital resources will be required to fund the ongoingoperations related to our marketing and manufacturing of *Imagent* and our research and businessdevelopment activities.  Our financialcondition raises substantial doubt about our ability to continue as a goingconcern.  We believe there are a numberof potential alternatives available to meet the continuing capital requirementssuch as public or private financings or collaborative agreements.  We are taking continuing actions to reduceour ongoing expenses.  If adequate fundsare not available, we will be required to significantly curtail our operatingplans and may have to sell or license out significant portions of ourtechnology or potential products.  The2002 and 2003 financial statements, including those contained in this Form10-KSB, do not include any adjustment to reflect the possible future effects onthe recoverability and classification of assets or the amount andclassification of liabilities that may result from the outcome of thisuncertainty.

 

Duringthe next twelve months we will focus our efforts primarily on exploring variousoptions concerning our businesses, including securing additional financing,joint ventures, licensing or selling all or a portion of our technology andother possible strategic transactions. Our ability to commercialize *Imagent*and develop PH-50 and N1177 depends on the successful implementation of one ormore of these transactions.  InJuly 2003, given our change into an operating company with the acquisitionof *Imagent*, we entered into anagreement with Taffy Williams, our Chief Executive Officer.  Our agreement with Dr. Williams provided,among other things, that we would begin a search for a chief executive officerwith greater experience in managing operating companies.  Since that time, we have also been workingwith consultants who have advised us on operational and management issues.  In light of the various options for thefuture of our business currently under consideration - including that if wesell *Imagent* we would return tobeing focused on development rather than operations - the Company isreevaluating its agreement with Dr. Williams and may seek to extend Dr.Williams’ tenure with the Company and amend other provisions of thatagreement.  We have not selected a newChief Executive Officer at this time and Dr. Williams will continue in thatrole until we do.

 

Dependingon the availability of capital and whether or not we pursue a sale or licensingstrategy for *Imagent*, we will focusour operating efforts on the sales and marketing of *Imagent*.  Ifadditional capital becomes available, we also expect to conduct preclinical andhuman clinical studies of our products in development.  Subject to the availability of sufficientcapital, we expect to continue to incur increasing losses for at least the nextthree years as we intensify research and development, preclinical and clinicaltesting and associated regulatory approval activities and engage in or providefor the manufacture and/or sale of any products that we may develop.

 

Greatercapital resources would enable us to quicken and expand our marketing andresearch and development activities, and our failure to raise additionalcapital will (absent a suitable collaborative agreement providing for a thirdparty to take over these functions) significantly impair or curtail our abilityto conduct further activities.  In anyevent, complete development and commercialization of our technology will requiresubstantial additional funds.  See “RiskFactors—We must raise additional financing in the future and our inability todo so will prevent us from continuing as a going concern and implementing ourbusiness development plan,” above.  Weare seeking to raise capital through the sale of our common stock or othersecurities in a private placement to fund our immediate and longer-term capitalneeds.

 

36

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As of December 31, 2003, we expect to paythe following contractual obligations and commitments:

 
|                            |   | **Payments  due by Year** |      |
|---------------------------------|--------|---------------------------|-----------|
|                            |   | **2004**                  |      | **2005-2006** |   | **2007-2008** |   | **Beyond  2008** |   | **Total** |   |
| **Recorded Liabilities**        |   |                      |      |   |   |   |   |   |   |   |   |
| Long term debt                  |   | $                         | —    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| *Imagent*  purchase obligations |   | 3,763,991                 |      | — |   | — |   | — |   | 3,763,991 |   |
| **Commitments**                 |   |                      |      |   |   |   |   |   |   |   |   |
| Operating Lease Commitments     |   | 1,455,180                 |      | 1,900,569 |   | 1,024,595 |   | — |   | 4,380,344 |   |
|                            |   |                      |      |   |   |   |   |   |   |   |   |
| Total Contractual Obligations   |   | $                         | 5,219,171 |   | $ | 1,900,569 |   | $ | 1,024,595 |   | $ | — |   | $ | 8,144,335 |   |

 

**Recent Accounting Pronouncements**

 

In May 2003, the Financial Accounting Standards Board(“FASB”) issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity,” effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective as of July 1, 2003. The adoption of SFASNo. 150 did not have a material impact on the results of operations or thefinancial position of the Company.

 

In May 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and HedgingActivities,” effective for contracts entered into or modified afterJune 30, 2003 and for hedging relationships designated after June 30,2003. The adoption of SFAS No. 149 did not have an impact on the resultsof operations or the financial position of the Company.

 

In December 2002, the FASB issued SFASNo. 148, “Accounting for Stock-Based Compensation — Transition andDisclosure”, effective for fiscal years ending after December 15, 2002.This rule amends SFAS No. 123 to provide several alternatives for adoptingthe stock option expense provisions of SFAS No. 123, as well as additionalrequired interim financial statement disclosures. SFAS No. 148 does notrequire companies to expense stock options in current earnings. The Company hasnot adopted the provisions of SFAS No. 123 for expensing stock basedcompensation (see “— Employee stock option and stock purchase plans”);however, the Company has adopted the additional interim disclosure provisionsof the statement. The impact of the adoption of SFAS No. 148 did not havea material impact on the results of operations or the financial position of theCompany.

 

In July 2002, the FASB issued SFAS No. 146, *“Accounting for Costs Associated with Exit or DisposalActivities.”* SFAS No. 146 eliminates Emerging Issues Task Force, orEITF, Issue No. 94-3 *“Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(Including Certain Costs Incurred in a Restructuring).”* Under SFASNo. 146, liabilities for costs associated with an exit or disposal activity arerecognized when the liabilities are incurred, as opposed to being recognized atthe date of entity’s commitment to an exit plan under EITF No. 94-3.  Examples of costs covered by the standardinclude lease termination cost and certain employee severance costs that areassociated with a restructuring; discontinued operation, plant closing or otherexit or disposal activity.  Furthermore,SFAS No. 146 establishes that fair value is the objective for initialmeasurement of the liabilities. This Statement is effective for exit ordisposal activities that are initiated after December 31, 2002.  During 2003 the Company recognized $136,947of restructuring costs for lease termination and restructuring associated withthe closure of its Pennsylvania facility and move to the Alliance facility inSan Diego, CA.

 

In January 2003, the FASB issued FASBInterpretation No. (“FIN”) 46, “Consolidation of Variable Interest Entities,”which was originally effective on July 1, 2003. In December 2003, theFASB deferred the effective date for applying the provisions of FIN 46 toMarch 31, 2004 for interests held by public companies in variable interestentities or potential variable interest entities created beforeFebruary 1, 2003. The Company has completed its evaluation of theprovisions of FIN 46 and does not have any significant interests invariable interest entities. Accordingly, the adoption of FIN 46 did not have amaterial impact on the results of operations or the financial position of theCompany.

 

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In November 2002, the FASB issued Interpretation No. (FIN) 45, *“Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others.”*Interpretation No. 45 requires a guarantor to include disclosure of certainobligations, and if applicable, at the inception of the guarantee, recognize aliability for the fair value of other certain obligations undertaken in issuinga guarantee. The recognition requirement is effective for guarantees issued ormodified after December 31, 2002 and did not have a material impact on theCompany.

 

**ITEM 7.  FINANCIALSTATEMENTS.**

 

**Report of Independent Certified Public Accountants**

 

Boardof Directors

IMCORPharmaceutical Co. (formerly Photogen Technologies, Inc.)

 

Wehave audited the accompanying consolidated balance sheet of IMCORPharmaceutical Co.(formerly Photogen Technologies, Inc.), a development stagecompany, as of December 31, 2003, and the related consolidated statementsof operations, shareholders’ equity and cash flows for the year thenended.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements based on our audit.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States.  Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of IMCORPharmaceutical Co. (formerly Photogen Technologies, Inc.) at December 31,2003, and the results of its operations and its cash flows for the year thenended , in conformity with accounting principles generally accepted in theUnited States.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern.  As discussed in Note 1 to the financialstatements, the Company has reported accumulated losses since inception of$51,518,697, which raises substantial doubt about its ability to continue as agoing concern.  Management’s plans in regard to these matters aredescribed in Note 1.  The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

 
| /s/  Moss Adams, LLP |   |
|----------------------|--------|
| San  Diego, CA       |
| March 31,  2004 |

 

F-1

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# **Report of Independent Certified Public Accountants**

# ** **

Board of Directors

Photogen Technologies, Inc.

New Hope, Pennsylvania

 

We have audited theaccompanying consolidated balance sheet of Photogen Technologies, Inc., adevelopment stage company, as of December 31, 2002, and the relatedconsolidated statements of operations, shareholders’ equity and cash flows forthe years ended December 31, 2001 and 2002. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Photogen Technologies, Inc. atDecember 31, 2002, and the results of its operations and its cash flows for theyears ended December 31, 2001 and 2002, in conformity with accountingprinciples generally accepted in the United States of America.

 

The accompanying financialstatements have been prepared assuming that the Company will continue as agoing concern.  As discussed in Note 1to the financial statements, the Company has reported accumulated losses$28,745,194 through December 31, 2002, which raises substantial doubt about itsability to continue as a going concern. Management’s plans in regard to these matters are also described in Note1.  The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

 
| /s/ BDO  Seidman, LLP |   |
|-----------------------|--------|
|                  |
|                  |
| Chicago,  Illinois    |
| March 7,  2003        |

 

F-2

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**IMCOR Pharmaceutical Co.**

**(A Development Stage Company)**

**Consolidated Balance Sheets**

 
| **December 31,**                                                                                     |   | **2002**  |       | **2003**       |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------|------------|----------------|--------|
|                                                                                                      |   |      |       |           |   |
| **Assets**                                                                                                |   |      |       |           |   |
|                                                                                                      |   |      |       |           |   |
| **Current Assets**                                                                                        |   |      |       |           |   |
| Cash and cash equivalents                                                                                 |   | $         | 6,090,904  |           | **$**  | **1,657,594** |   |
| Deposits                                                                                                  |   | 98,721    |       | **108,721**    |   |
| Prepaid expenses                                                                                          |   | 693,313   |       | **492,718**    |   |
|                                                                                                      |   |      |       |           |   |
| Total Current Assets                                                                                      |   | $         | 6,882,938  |           | **$**  | **2,259,033** |   |
|                                                                                                      |   |      |       |           |   |
| **Property, Plant and  Equipment,** less accumulated depreciation of $14,651  and $996,091, respectively. |   | 36,000    |       | **6,294,560**  |   |
|                                                                                                      |   |      |       |           |   |
| **Patent Costs,**  net of amortization of $142,359 and $183,854, respectively                             |   | 357,641   |       | **316,146**    |   |
|                                                                                                      |   |      |       |           |   |
| **Deposits**                                                                                              |   | 14,383    |       | **338,383**    |   |
|                                                                                                      |   |      |       |           |   |
| **Investment in  Alliance**                                                                               |   | 1,255,000 |       | **—**     |   |
|                                                                                                      |   |      |       |           |   |
| **Purchased  Technology,** net of amortization of $0 and $658,217,  respectively                          |   | —    |       | **14,979,929** |   |
|                                                                                                      |   |      |       |           |   |
| **Investment in and  Advances to Affiliate**                                                              |   | 8,192,452 |       | **2,803,114**  |   |
|                                                                                                      |   |      |       |           |   |
| **Total Assets**                                                                                          |   | $         | 16,738,414 |           | **$**  | **26,991,165** |   |

 

F-3

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| **December 31,**                                                                                                                            |   | **2002**    |       | **2003**        |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|-----------------|------------|
|                                                                                                                                             |   |        |       |            | ** ** |
| **Liabilities and  Shareholders’ Equity**                                                                                                   |   |        |       |            | ** ** |
|                                                                                                                                             |   |        |       |            | ** ** |
| **Current Liabilities**                                                                                                                          |   |        |       |            | ** ** |
| Accounts payable                                                                                                                                 |   | $           | 835,003    |            | **$**      | **1,884,791** | ** ** |
| Accrued expenses                                                                                                                                 |   | 34,132      |       | **3,281,792**   | ** ** |
| Accrued equipment lease                                                                                                                          |   | 401,664     |       | **586,052**     | ** ** |
| Lines of Credit                                                                                                                                  |   | —      |       | **12,064,716**  | ** ** |
| Notes Payable                                                                                                                                    |   | —      |       | **1,250,000**   | ** ** |
|                                                                                                                                             |   |        |       |            | ** ** |
| **Total Current  Liabilities**                                                                                                                   |   | 1,270,799   |       | **19,067,351**  | ** ** |
|                                                                                                                                             |   |        |       |            | ** ** |
| **Deferred contract  revenue**                                                                                                                   |   | —      |       | **2,000,000**   | ** ** |
|                                                                                                                                             |   |        |       |            | ** ** |
| **Accrued Equipment  Lease**                                                                                                                     |   | 401,664     |       | **133,888**     | ** ** |
|                                                                                                                                             |   |        |       |            | ** ** |
| **Shares Subject to  Rescission**                                                                                                                |   | 650,000     |       | **—**      | ** ** |
|                                                                                                                                             |   |        |       |            | ** ** |
| **Puttable Shares**                                                                                                                              |   | —      |       | **1,969,668**   | ** ** |
|                                                                                                                                             |   |        |       |            | ** ** |
| **Shareholders’  Equity**                                                                                                                   |   |        |       |            | ** ** |
| Preferred stock; par value $.01 per share;  5,000,000 shares authorized including:                                                               |   |        |       |            | ** ** |
| Series A Preferred Stock; 12,856 shares  authorized, issued and outstanding, liquidation preference $1,000 per share  (in aggregate $12,856,000) |   | 128         |       | **128**         | ** ** |
| Common stock; par value $.001 per share;  150,000,000 shares authorized; 16,137,465 and 19,464,548 shares issued and  outstanding, respectively  |   | 16,137      |       | **19,465**      | ** ** |
| Additional paid-in capital                                                                                                                       |   | 43,144,880  |       | **50,199,203**  | ** ** |
| Common Stock to be issued                                                                                                                        |   | —      |       | **5,120,159**   | ** ** |
| Deficit accumulated during the development  stage                                                                                                |   | (28,745,194 | )          | **(51,518,697** | **)**      |
| **Total Shareholders’  Equity**                                                                                                             |   | 14,415,951  |       | **3,820,258**   | ** ** |
|                                                                                                                                             |   |        |       |            | ** ** |
| **Total Liabilities  and Shareholders’ Equity**                                                                                             |   | $           | 16,738,414 |            | **$**      | **26,991,165** | ** ** |

 

*See accompanying notes to consolidated financialstatements.*

 

F-4

----

 

**IMCOR Pharmaceutical Co.**

 

**Consolidated Statements of Operations**

 
|                                                                               |   | **Year Ended  Dec 31, 2001** |        | **Year Ended  Dec 31, 2002** |   | **Year Ended  Dec 31, 2003** |       | **Cumulative  Amounts From  Nov 3, 1996  (Inception) to  Dec 31, 2003** |            |
|------------------------------------------------------------------------------------|--------|------------------------------|-------------|------------------------------|--------|------------------------------|------------|-------------------------------------------------------------------------|-----------------|
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Operating Expenses**                                                             |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| Research and development                                                           |   | $                            | 437,958     |                         | $      | 1,227,897                    |       | **$**                                                                   | **2,529,679**   | ** ** | $ | 6,886,316 |   |
| Sales, general and administrative                                                  |   | 3,220,584                    |        | 4,030,083                    |   | **14,241,767**               | ** ** | 30,889,289                                                              |            |
| Restructuring charges                                                              |   | —                       |        | 807,483                      |   | **136,947**                  | ** ** | 1,541,455                                                               |            |
| Provision for future lease payments                                                |   | 1,264,208                    |        | —                       |   | **—**                   | ** ** | 1,264,208                                                               |            |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| Total operating expenses                                                           |   | 4,922,750                    |        | 6,065,463                    |   | **16,908,393**               | ** ** | 40,581,268                                                              |            |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Loss From Joint  Venture**                                                       |   | (1,952,758                   | )           | (3,452,837                   | )      | **(5,389,338**               | **)**      | (12,304,354                                                             | )               |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Investment Income**                                                              |   | 110,741                      |        | 1,563                        |   | **7,394**                    | ** ** | 1,216,335                                                               |            |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Interest Expense**                                                               |   | (48,429                      | )           | (418,466                     | )      | **(483,167**                 | **)**      | (950,062                                                                | )               |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Loss from  continuing operations**                                               |   | (6,813,196                   | )           | (9,935,203                   | )      | **(22,773,504**              | **)**      | (52,619,349                                                             | )               |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Discontinued  Operations**                                                       |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| Loss from operations of discontinued  therapeutic business                         |   | (2,909,820                   | )           | (1,496,430                   | )      | **—**                   | ** ** | (10,679,101                                                             | )               |
| Gain from split-off of therapeutic business                                        |   | —                       |        | 11,779,752                   |   | **—**                   | ** ** | 11,779,752                                                              |            |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| Income (loss) from discontinued operations                                         |   | (2,909,820                   | )           | 10,283,322                   |   | **—**                   | ** ** | 1,100,651                                                               |            |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Net Income (Loss)**                                                              |   | (9,723,016                   | )           | 348,119                      |   | **(22,773,504**              | **)**      | $                                                                       | (51,518,698     | ) |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Dividends on  Preferred Stock**                                                  |   | (2,943,755                   | )           | (1,997,723                   | )      | **(1,066,280**               | **)**      |                                                                    |            |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Net Loss Applicable  to Common Shareholders**                                    |   | $                            | (12,666,771 | )                            | $      | (1,649,604                   | )          | **$**                                                                   | **(23,839,784** | **)** |   |   |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Basic and Diluted  Loss Per Common Share from Continuing Operations**            |   | $                            | (1.03       | )                            | $      | (1.17                        | )          | **$**                                                                   | **(1.24**       | **)** |   |   |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Basic and Diluted  Income (Loss) Per Common Share from Discontinued Operations** |   | $                            | (0.30       | )                            | $      | 1.01                         |       | **$**                                                                   | **—**      | ** ** |   |   |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Basic and Diluted  Loss Per Common Share**                                       |   | $                            | (1.33       | )                            | $      | (0.16                        | )          | **$**                                                                   | **(1.24**       | **)** |   |   |
|                                                                               |   |                         |        |                         |   |                         | ** ** |                                                                    |            |
| **Weighted Average  Number of Common Shares Outstanding – Basic and Diluted** |   | 9,507,693                    |        | 10,187,619                   |   | **19,265,599**               | ** ** |                                                                    |            |

 

***See accompanying notes toconsolidated financial statements.***

 

F-5

----

 

**IMCOR Pharmaceutical Co.**

 

**Consolidated Statement of Shareholders’ Equity**

 
|                                                                 |   |                 |   |         |   | **Members’  Capital** |   | **Common  Stock  To be  Issued** |   | **Additional  Paid-in  Capital** |   | **Deficit  Accumulated  Development  Stage** |   | **Total** |   |
|----------------------------------------------------------------------|--------|----------------------|--------|--------------|--------|----------------------------|--------|----------------------------------|--------|----------------------------------|--------|----------------------------------------------|--------|-----------|--------|
|                                                                 |   | **Preferred  Stock** |   |         |   |                       |   |                             |   |                             |
|                                                                 |   | **Series A**         |   | **Series B** |   | **Common  Stock**          |   |                             |   |                             |   |                                         |
|                                                                 |   | **Shares**           |   | **Amount**   |   | **Shares**                 |   | **Amount**                       |   | **Shares**                       |   | **Amount**                                   |   |      |   |   |   |   |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| Contribution of capital                                              |   | —               |   | $            | — |                       | — |                             | $      | —                           |   | —                                       |   | $         | — |   | $ | 7,268 |   | — |   | $ | — |   | $ | — |   | $ | 7,268 |   |
| Net loss for the period ended December 31,  1996                |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | (1,779    | )      | — |   | — |   | — |   | (1,779 | ) |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| **Balance,** at May 15, 1997                                         |   | —               |   | $            | — |                       | — |                             | $      | —                           |   | —                                       |   | $         | — |   | $ | 9,000 |   | — |   | $ | — |   | $ | (3,511 | ) | $ | 5,489 |   |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| Issuance of common stock                                             |   | —               |   | —       |   | —                     |   | —                           |   | 1,578,208                        |   | 1,578                                        |   | —    |   | — |   | 1,801,872 |   | — |   | 1,803,450 |   |
| Effect of recapitalization and merger                                |   | —               |   | —       |   | —                     |   | —                           |   | 7,421,792                        |   | 7,422                                        |   | (9,000    | )      | — |   | 1,203,765 |   | 1,732 |   | 1,203,919 |   |
| Cost associated with recapitalization and merger                     |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | (371,111 | ) | — |   | (371,111 | ) |
| Net loss for the period May 16, 1997 to  December 31, 1997      |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | — |   | (554,702 | ) | (554,702 | ) |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| **Balance,** at December 31, 1997                               |   | —               |   | —       |   | —                     |   | —                           |   | 9,000,000                        |   | 9,000                                        |   | —    |   | — |   | 2,634,526 |   | (556,481 | ) | 2,087,045 |   |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| Issuance of common stock                                             |   | —               |   | —       |   | —                     |   | —                           |   | 218,755                          |   | 219                                          |   | —    |   | — |   | 6,999,781 |   | — |   | 7,000,000 |   |
| Costs associated with common stock issuance                          |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | (50,000 | ) | — |   | (50,000 | ) |
| Options issued to consultants                                        |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | 45,446 |   | — |   | 45,446 |   |
| Net loss for the year ended December 31, 1998                   |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | — |   | (1,973,913 | ) | (1,973,913 | ) |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| **Balance,** at December 31, 1998                               |   | —               |   | —       |   | —                     |   | —                           |   | 9,218,755                        |   | 9,219                                        |   | —    |   | — |   | 9,629,753 |   | (2,530,394 | ) | 7,108,578 |   |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| Exercise of stock options                                            |   | —               |   | —       |   | —                     |   | —                           |   | 1,125                            |   | 1                                            |   | —    |   | — |   | 50,062 |   | — |   | 50,063 |   |
| Issuance of warrants and options                                     |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | 3,664,749 |   | — |   | 3,664,749 |   |
| Issuance of common stock                                             |   | —               |   | —       |   | —                     |   | —                           |   | 125,967                          |   | 126                                          |   | —    |   | — |   | 6,082,528 |   | — |   | 6,082,654 |   |
| Issuance of preferred stock                                          |   | 12,015               |   | 120          |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | 11,578,839 |   | — |   | 11,578,959 |   |
| Net loss for the year ended December 31, 1999                   |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | — |   | (6,052,841 | ) | (6,052,841 | ) |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| **Balance,** at December 31, 1999                               |   | 12,015               |   | 120          |   | —                     |   | —                           |   | 9,345,847                        |   | 9,346                                        |   | —    |   | — |   | 31,005,931 |   | (8,583,235 | ) | 22,432,162 |   |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| Stock option compensation                                            |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | 125,020 |   | — |   | 125,020 |   |
| Issuance of warrants and options                                     |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | 1,366,050 |   | — |   | 1,366,050 |   |
| Issuance of preferred stock dividend                                 |   | 841                  |   | 8            |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | (8 | ) | — |   | — |   |
| Issuance of preferred stock                                          |   | —               |   | —       |   | 337,056                    |   | 3,370                            |   | —                           |   | —                                       |   | —    |   | — |   | 5,272,970 |   | — |   | 5,276,340 |   |
| Net loss for the year ended December 31, 2000                   |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | — |   | (10,787,062 | ) | (10,787,062 | ) |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| **Balance,** at December 31, 2000                               |   | 12,856               |   | 128          |   | 337,056                    |   | 3,370                            |   | 9,345,847                        |   | 9,346                                        |   | —    |   | — |   | 37,769,963 |   | (19,370,297 | ) | 18,412,510 |   |
|                                                                 |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| Stock option compensation                                            |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | 64,729 |   | — |   | 64,729 |   |
| Issuance of common stock for cash                                    |   | —               |   | —       |   | —                     |   | —                           |   | 49,245                           |   | 49                                           |   | —    |   | — |   | 418,674 |   | — |   | 418,723 |   |
| Issuance of common stock in satisfaction Of anti-dilution  provision |   | —               |   | —       |   | —                     |   | —                           |   | 190,856                          |   | 191                                          |   | —    |   | — |   | (191 | ) | — |   | — |   |
| Issuance of preferred stock dividend                                 |   | —               |   | —       |   | 20,224                     |   | 202                              |   | —                           |   | —                                       |   | —    |   | — |   | (202 | ) | — |   | — |   |
| Net loss for the year ended December 31, 2001                   |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | — |   | (9,723,016 | ) | (9,723,016 | ) |

 

F-6

----

 
|                                                                                               |   |                 |       |         |       | **Members’  Capital** |       | **Common  Stock  To be  Issued** |       | **Additional  Paid-in  Capital** |       | **Deficit  Accumulated  Development  Stage** |       | **Total** |       |
|----------------------------------------------------------------------------------------------------|--------|----------------------|------------|--------------|------------|----------------------------|------------|----------------------------------|------------|----------------------------------|------------|----------------------------------------------|------------|-----------|------------|
|                                                                                               |   | **Preferred  Stock** |       |         |       |                       |       |                             |       |                             |
|                                                                                               |   | **Series A**         |       | **Series B** |       | **Common  Stock**          |       |                             |       |                             |       |                                         |
|                                                                                               |   | **Shares**           |       | **Amount**   |       | **Shares**                 |       | **Amount**                       |       | **Shares**                       |       | **Amount**                                   |       |      |       |   |   |   |
|                                                                                               |   |                 |       |         |       |                       |       |                             |       |                             |       |                                         |       |      |       |   |   |   |   |   |   |   |   |
| **Balance,** at December 31, 2001                                                             |   | 12,856               |       | 128          |       | 357,280                    |       | 3,572                            |       | 9,585,948                        |       | 9,586                                        |       | —    |       | — |   | 38,252,973 |   | (29,093,313 | ) | 9,172,946 |   |
|                                                                                               |   |                 |       |         |       |                       |       |                             |       |                             |       |                                         |       |      |       |   |   |   |   |   |   |   |   |
| Stock option compensation                                                                          |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | — |   | 73,870 |   | — |   | 73,870 |   |
| Issuance of warrants for service                                                                   |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | — |   | 322,000 |   | — |   | 322,000 |   |
| Issuance of options in settlement of lawsuit                                                       |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | — |   | 806,415 |   | — |   | 806,415 |   |
| Employee compensation from stock options                                                           |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | — |   | 988,184 |   | — |   | 988,184 |   |
| Issuance of preferred stock dividends                                                              |   | —               |       | —       |       | 40,194                     |       | 402                              |       | —                           |       | —                                       |       | —    |       | — |   | (402 | ) | — |   | — |   |
| Conversion of Series B to common stock                                                             |   | —               |       | —       |       | (397,474                   | )          | (3,974                           | )          | 422,316                          |       | 422                                          |       | —    |       | — |   | 3,552 |   | — |   | — |   |
| Beneficial inducement costs for convertible debt  converted                                        |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | — |   | 206,348 |   | — |   | 206,348 |   |
| Conversion of line of credit with Élan to common  stock                                       |   | —               |       | —       |       | —                     |       | —                           |       | 128,437                          |       | 128                                          |       | —    |       | — |   | 3,082,359 |   | — |   | 3,082,487 |   |
| Conversion of line of credit with entity  controlled by director of company to common stock        |   | —               |       | —       |       | —                     |       | —                           |       | 2,314,815                        |       | 2,315                                        |       | —    |       | — |   | — 2,497,685 |   | — |   | 2,500,000 |   |
| Retirement of common stock returned in shareholder  transaction                                    |   | —               |       | —       |       | —                     |       | —                           |       | (5,137,109                       | )          | (5,137                                       | )          | —    |       | — |   | (12,221,182 | ) | — |   | (12,226,319 | ) |
| Issuance of common stock for cash                                                                  |   | —               |       | —       |       | —                     |       | —                           |       | 8,823,058                        |       | 8,823                                        |       | —    |       | — |   | 9,133,078 |   | — |   | 9,141,901 |   |
| Net income for the year ended December 31,  2002                                              |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | — |   | — |   | 348,119 |   | 348,119 |   |
|                                                                                               |   |                 |       |         |       |                       |       |                             |       |                             |       |                                         |       |      |       |   |   |   |   |   |   |   |   |
| **Balance,** at December 31, 2002                                                             |   | 12,856               |       | $            | 128        |                       | —     |                             | $          | —                           |       | 16,137,465                                   |       | $         | 16,137     |   | $ | — |   | $ | — |   | $ | 43,144,880 |   | $ | (28,745,194 | ) | $ | 14,415,951 |   |
|                                                                                               |   |                 | ** ** |         | ** ** |                       | ** ** |                             | ** ** |                             | ** ** |                                         | ** ** |      | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Issuance of common stock for cash                                                                  |   | —               |       | —       |       | —                     |       | —                           |       | 27,778                           |       | 28                                           |       | —    |       | — |   | 29,972 |   | — |   | 30,000 |   |
| Issuance of common stock for standstill agreement                                                  |   | —               |       | —       |       | —                     |       | —                           |       | 750,000                          |       | 750                                          |       | —    |       | — |   | 1,173,000 |   | — |   | 1,173,750 |   |
| Conversion of Series B to common stock                                                             |   | —               |       | —       |       | —                     |       | —                           |       | 100                              |       | —                                       |       | —    |       | — |   | — |   | — |   | — |   |
| Options issued to consultants for services                                                         |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | — |   | 9,200 |   | — |   | 9,200 |   |
| Shares issued to consultant for services                                                           |   | —               |       | —       |       | —                     |       | —                           |       | 68,750                           |       | 69                                           |       | —    |       | — |   | 132,193 |   | — |   | 132,262 |   |
| Employee compensation from stock options                                                           |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | — |   | 1,236,566 |   | — |   | 1,236,566 |   |
| Shares issued in Technology Purchase                                                               |   | —               |       | —       |       | —                     |       | —                           |       | 2,198,137                        |       | 2,198                                        |       | —    |       | — |   | 5,581,070 |   | — |   | 5,583,268 |   |
| Shares to be issued in Technology Purchase                                                         |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | 5,043,226 |   | — |   | 5,043,226 | ** ** |   | ** ** |
| Shares previously subject to rescission                                                            |   | —               |       | —       |       | —                     |       | —                           |       | 124,627                          |       | 125                                          |       | —    |       | — |   | 649,875 |   | — |   | 650,000 |   |
| Shares issued to Xmark for penalties                                                               |   | —               |       | —       |       | —                     |       | —                           |       | 98,826                           |       | 99                                           |       | —    |       | — |   | 163,577 |   | — |   | 163,676 |   |
| Shares issued to Xmark for interest                                                                |   | —               |       | —       |       | —                     |       | —                           |       | 21,649                           |       | 22                                           |       | —    |       | — |   | 48,575 |   | — |   | 48,597 |   |
| Shares to be issued to Xmark  and other former Alliance creditors for  interest and penalties |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | 76,933 |   | — |   | — |   | 76,933 |   |
| Options exercised through cashless exercise                                                        |   | —               |       | —       |       | —                     |       | —                           |       | 37,216                           |       | 37                                           |       | —    |       | — |   | (37 | ) | — |   | — |   |
| Xmark puttable shares classified as mezzanine  equity                                              |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | — |   | (1,969,668 | ) | — |   | (1,969,668 | ) |
| Net loss for the year ended December 31, 2003                                                 |   | —               |       | —       |       | —                     |       | —                           |       | —                           |       | —                                       |       | —    |       | — |   | — |   | (22,773,504 | ) | (22,773,504 | ) |
|                                                                                               |   |                 |       |         |       |                       |       |                             |       |                             |       |                                         |       |      |       |   |   |   |   |   |   |   |   |
| **Balance,** at December 31, 2003                                                             |   | 12,856               |       | $            | 128        |                       | —     |                             | $          | —                           |       | 19,464,548                                   |       | $         | 19,465     |   | $ | — |   | $ | 5,120,159 |   | $ | 50,199,203 |   | $ | (51,518,698 | ) | $ | 3,820,257 |   |

 

*See accompanying notes to consolidated financialstatements.*

 

F-7

----

 

**IMCOR Pharmaceutical Co.**

 

**Consolidated Statements of Cash Flows**

 
|                                                              |   | **Year Ended  Dec 31, 2001** |       | **Year Ended  Dec 31, 2002** |   | **Year Ended  Dec 31, 2003** |   | **Cumulative  Amounts From  Nov 3, 1996  (Inception)  to Dec 31, 2003** |        |
|-------------------------------------------------------------------|--------|------------------------------|------------|------------------------------|--------|------------------------------|--------|-------------------------------------------------------------------------|-------------|
|                                                              |   |                         |       |                         |   |                         |   |                                                                    |        |
| **Cash Flows From  Operating Activities**                         |   |                         |       |                         |   |                         |   |                                                                    |        |
| Net income (loss)                                                 |   | $                            | (9,723,016 | )                            | $      | 348,119                      |   | $                                                                       | (22,773,504 | ) | $ | (51,518,698 | ) |
| Loss from discontinued operations                                 |   | 2,909,820                    |       | 1,496,430                    |   | —                       |   | 10,679,101                                                              |        |
| Depreciation and amortization                                     |   | 442,191                      |       | 371,319                      |   | 1,023,080                    |   | 2,700,984                                                               |        |
| Loss (gain) on disposal of equipment and  leasehold improvements  |   | (4,617                       | )          | —                       |   | —                       |   | 38,424                                                                  |        |
| Gain on sale of marketable securities                             |   | —                       |       | —                       |   | —                       |   | (18,503                                                                 | )           |
| United States Treasury Notes amortization                         |   | (1,029                       | )          | —                       |   | —                       |   | 12,586                                                                  |        |
| Gain on sale of therapeutic business                              |   | —                       |       | (11,779,752                  | )      | —                       |   | (11,779,752                                                             | )           |
| Allowance for notes receivable                                    |   | —                       |       | —                       |   | 658,217                      |   | 658,217                                                                 |        |
| Stock option compensation                                         |   | 64,729                       |       | 1,062,054                    |   | 1,245,768                    |   | 2,924,338                                                               |        |
| Accrued interest on line of credit                                |   | —                       |       | —                       |   | 318,035                      |   | 318,035                                                                 |        |
| Note payable for services rendered                                |   | —                       |       | —                       |   | 329,681                      |   | 329,681                                                                 |        |
| Beneficial inducement costs for convertible  notes                |   | —                       |       | 206,348                      |   | —                       |   | 206,348                                                                 |        |
| Issuance of warrants in exchange for  services rendered           |   | 760,363                      |       | 322,000                      |   | —                       |   | 4,317,091                                                               |        |
| Issuance of stock options in settlement of  lawsuit               |   | —                       |       | 806,415                      |   | —                       |   | 806,415                                                                 |        |
| Issuance of stock for standstill agreement                        |   | —                       |       | —                       |   | 1,337,426                    |   | 1,337,426                                                               |        |
| Issuance of stock for services rendered                           |   | —                       |       | —                       |   | 132,262                      |   | 132,262                                                                 |        |
| Issuance of stock for interest payments and  penalties            |   | —                       |       | —                       |   | 125,530                      |   | 125,530                                                                 |        |
| Loss from investment in affiliate                                 |   | 1,952,758                    |       | 3,452,837                    |   | 5,389,338                    |   | 12,304,354                                                              |        |
| Changes in operating assets and liabilities                       |   |                         |       |                         |   |                         |   |                                                                    |        |
| Prepaid expenses                                                  |   | 152,340                      |       | (663,538                     | )      | 200,595                      |   | (492,718                                                                | )           |
| Interest receivable                                               |   | 93,219                       |       | —                       |   | —                       |   | —                                                                  |        |
| Receipt of deferred contract revenue                              |   | —                       |       | —                       |   | 2,000,000                    |   | 2,000,000                                                               |        |
| Accounts payable                                                  |   | (267,945                     | )          | 531,229                      |   | 1,049,787                    |   | 1,954,790                                                               |        |
| Accrued expenses                                                  |   | (11,278                      | )          | (298,465                     | )      | (174,375                     | )      | 95,334                                                                  |        |
| Accrued equipment lease                                           |   | 1,123,740                    |       | 10,237                       |   | (83,388                      | )      | 1,050,589                                                               |        |
|                                                              |   |                         |       |                         |   |                         |   |                                                                    |        |
| Net cash used in continuing operating  activities                 |   | (2,508,725                   | )          | (4,134,767                   | )      | (9,221,549                   | )      | (21,818,167                                                             | )           |
| Net cash used in discontinued operations                          |   | (2,909,820                   | )          | (1,496,430                   | )      | —                       |   | (10,679,101                                                             | )           |
|                                                              |   |                         |       |                         |   |                         |   |                                                                    |        |
| **Cash Flows From  Investing Activities**                         |   |                         |       |                         |   |                         |   |                                                                    |        |
| Sale of marketable securities                                     |   | $                            | —     |                         | $      | —                       |   | $                                                                       | —      |   | $ | 2,164,464 |   |
| Purchases of marketable securities                                |   | —                       |       | —                       |   | —                       |   | (2,182,967                                                              | )           |
| Purchases of United States Treasury Notes                         |   | (4,870,000                   | )          | —                       |   | —                       |   | (38,656,973                                                             | )           |
| Sales of United States Treasury Notes                             |   | 9,815,000                    |       | —                       |   | —                       |   | 39,778,548                                                              |        |
| Purchase of equipment and leasehold  Improvements                 |   | (45,938                      | )          | —                       |   | —                       |   | (636,877                                                                | )           |
| Proceeds from sale of equipment                                   |   | 145,551                      |       | —                       |   | —                       |   | 145,551                                                                 |        |
| Costs to acquire patent                                           |   | —                       |       | —                       |   | —                       |   | (237,335                                                                | )           |
| Investment in and advances to affiliate                           |   | (2,245,948                   | )          | (650,609                     | )      | —                       |   | (15,107,468                                                             | )           |
| Increase in note receivable                                       |   | —                       |       | (1,255,000                   | )      | —                       |   | (1,255,000                                                              | )           |
| Decrease (increase) in deposit                                    |   | (14,383                      | )          | 100,000                      |   | (334,000                     | )      | (777,753                                                                | )           |
| Purchse of *Imagent*  business                                    |   | —                       |       | —                       |   | (5,074,761                   | )      | (5,074,761                                                              | )           |
| Principal payment on acquisition of debt                          |   | —                       |       | —                       |   | (1,250,000                   | )      | (1,250,000                                                              | )           |
|                                                              |   |                         |       |                         |   |                         |   |                                                                    |        |
| Net cash provided by (used in) investing  activities              |   | 2,784,282                    |       | (1,805,609                   | )      | (6,658,761                   | )      | (23,090,571                                                             | )           |
| Net cash used in investing activities of  discontinued operations |   | —                       |       | —                       |   | —                       |   | (1,306,676                                                              | )           |
|                                                              |   |                         |       |                         |   |                         |   |                                                                    |        |
| **Cash Flows From  Financing Activities**                         |   |                         |       |                         |   |                         |   |                                                                    |        |
| Principal payments on capital leases                              |   | $                            | (18,356    | )                            | $      | —                       |   | $                                                                       | —      |   | $ | (291,704 | ) |
| Net proceeds from issuance of equity                              |   | 1,068,723                    |       | 9,141,901                    |   | 30,000                       |   | 40,539,340                                                              |        |
| Proceeds from capital contributions by  shareholders              |   | —                       |       | —                       |   | —                       |   | 1,911,674                                                               |        |
| Proceeds from issuance of debt                                    |   | 2,314,005                    |       | 3,032,905                    |   | 11,417,000                   |   | 16,763,910                                                              |        |
| Cost of recapitalization                                          |   | —                       |       | —                       |   | —                       |   | (371,111                                                                | )           |
|                                                              |   |                         |       |                         |   |                         |   |                                                                    |        |
| Net cash provided by financing activities                         |   | 3,364,372                    |       | 12,174,806                   |   | 11,447,000                   |   | 58,552,109                                                              |        |
|                                                              |   |                         |       |                         |   |                         |   |                                                                    |        |
| **Net Increase  (Decrease) in Cash and Cash Equivalents**         |   | 730,109                      |       | 4,738,000                    |   | (4,433,310                   | )      | 1,657,594                                                               |        |
|                                                              |   |                         |       |                         |   |                         |   |                                                                    |        |
| **Cash and Cash  Equivalents, at beginning of year**              |   | 622,795                      |       | 1,352,904                    |   | 6,090,904                    |   | —                                                                  |        |
|                                                              |   |                         |       |                         |   |                         |   |                                                                    |        |
| **Cash and Cash  Equivalents, at end of year**                    |   | $                            | 1,352,904  |                         | $      | 6,090,904                    |   | $                                                                       | 1,657,594   |   | $ | 1,657,594 |   |

 

NoncashInvesting and Financing Activies (Notes 3, 4, 8, and 9)

 

F-8

----

 

**IMCOR Pharmaceutical Co.**

 

**Notes to Consolidated Financial Statements**

 

**1.****            ****Organization and SignificantAccounting Policies**

 

**Nature of Operations**

 

IMCOR Pharmaceutical Co. ((formerly Photogen Technologies, Inc.), the“Company”) is anemerging, development-stage specialty pharmaceutical company focused ondeveloping and marketing medical imaging pharmaceutical products.  The company has one FDA approved product, *Imagent®* (perflexane lipid microspheres),**anultrasound imaging contrast agent thatit acquired in June 2003, and two additional contrast agents indevelopment for use in computed tomography (CT) and x-ray imaging with potential applications (1) as a bloodpool agent, to diagnose diseased tissue in the cardiovascular system and otherorgans, which is called PH-50, and (2) to diagnose cancer metastasizing intothe lymphatic system, which is called N1177. The product designations PH-50 and N1177 refer to the same chemicalentity.  The two names distinguishcommercialization rights between cardiovascular imaging (and all otherindications) (PH-50) to which we retain rights, and the field of lymphography(N1177), which is licensed to our joint venture (Sentigen, Ltd.) withaffiliates of Elan.  OnFebruary 5, 2004, we changed our name to IMCOR Pharmaceutical Co.,reflecting the changed nature of our business to imaging pharmaceuticals.

 

In December 2001, we announced positive preclinical results ofPH-50.  Based on these studies, theextensive preclinical toxicology and other study work, including the product’suse in approximately 65 patients for lymphography, we shifted the strategicresearch direction of IMCOR to focus on the cardiovascular and lymphographyapplications.  We accomplished thisshift in focus also by splitting off our therapeutic line of business, and, inJune 2003 acquiring the medical imaging business (the “*Imagent* business”) of AlliancePharmaceutical Corp. (“Alliance”) led by *Imagent*®(perflexane lipid microspheres), an FDA approved diagnostic imagingagent.  Please see Note 3 “PurchasedTechnology” below.

 

For the two years up to the time of our acquisition of the *Imagent* business, substantially all of ourresearch and development efforts were focused on the preclinical testing ofPH-50.  During that period, we operatedwith a very small staff and conducted substantially all of our researchactivities through contracts with academic institutions and contract researchlaboratories.  In addition, we hadconducted research and development activities on the development of certaintherapeutic photodynamic therapy applications (namely a product we called PH-10for the treatment of certain dermatological conditions) and the development ofa medical laser.  These operations weresplit off to our founding scientists as of November 12, 2002 and have beenrecorded as discontinued operations in our financial statements.

 

PH-50and N1177 are still in early stages of development.  Of these products, based on the availability of capital, weintend to focus our research efforts first on the continued development ofPH-50 and secondly, N1177.

 

Pharmaceutical imaging agents are used with echocardiography, computedtomography (“CT”), nuclear medicine and magnetic resonance imaging (“MRI”)equipment in order to increase the diagnostic capabilities of thesetechniques.  By enhancing the contrast between different types of tissues,these intravenously administered contrast agents provide critical anatomicaland disease state information that is not obtainable using the equipmentalone.  There are numerous potential applications for a contrast agentused in imaging parts or all of the cardiovascular system as well as otherorgans.  Our products have the potential to enhance a physician’s abilityto diagnose certain cardiovascular abnormalities and the spread of cancer inthe lymphatic system.

 

IMCOR is based in San Diego, California.  We have approximately 30 full time employees and a 50,000 squarefoot cGMP (current Good Manufacturing Practices) manufacturing facility at ourSan Diego location.  Our personnel have expertise in sales,marketing and manufacturing, clinical development, clinical trial design andregulatory approval processes.  We also work closely with consultantsexperienced in drug development and regulatory requirements.

 

**Liquidity and Basis****of Presentation – GoingConcern**

 

Theaccompanying financial statements are prepared assuming the Company is a goingconcern.  The Company has

 

F-9

----

 

reportedaccumulated losses since inception of $51,518,697.  TheCompany believes it lacks sufficent working capital to fund operations for theentire fiscal year ending December 31, 2004.  Substantial additional capital resources will be required to fundits ongoing operations.  Managementbelieves there are a number of potential alternatives available to meet thecontinuing capital requirements such as public or private financings orcollaborative agreements.  The Companyis taking continuing actions to reduce its ongoing expenses.  If adequate funds are not availabe, theCompany will be required to significantly curtail its operating plans and myhave to sell or license out significant portions of the Company’s technology orpotential products.

 

OnDecember 16, 2003, we entered into a License Agreement (the “KyoseiAgreement”) with Kyosei Pharmaceutical Co. Ltd. (“Kyosei”), a subsidiary of theSakai Group.  The Kyosei Agreement givesKyosei an exclusive license to develop and market *Imagent* for all indications in Japan.  The terms of the Kyosei Agreement providefor the payment to IMCOR of up to $10 million in fees and development milestonepayments plus royalties on commercial sales. Kyosei will also pay IMCOR to manufacture *Imagent* for Kyosei’s clinical and commercialrequirements.  In December 2003 wereceived a payment of $2,000,000, less withholding taxes.  Additional payments are expected in 2004 andbeyond.  Please see Revenue Recognitionand Deferred Revenue, below.

 

Duringthe next twelve months we will focus our efforts primarily on exploring variousoptions concerning our business, including securing additional financing, jointventures, licensing or selling all or a portion of our technology and otherpossible strategic transactions.  Ourability to commercialize *Imagent*and develop PH-50 and N1177 depends on the successful implementation of one ormore of these transactions.

 

Dependingon the availability of capital and whether or not we pursue a sale or licensingstrategy for *Imagent*, wewill focus our operating efforts on the sales and marketing of *Imagent*. If additional capital becomes available, we also expect to conductpreclinical and human clinical studies of our products in development.  Subject to the availability of sufficientcapital, we expect to continue to incur losses for at least the next threeyears as we intensify research and development, preclinical and clinicaltesting and associated regulatory approval activities and engage in or providefor the manufacture and/or sale of any products that we have or may develop.

 

Greater capital resources would also enable us to quicken and expandour marketing and research and development activities, and our failure to raiseadditional capital will (absent a suitable collaborative agreement providingfor a third party to take over these functions) significantly impair or curtailour ability to conduct further activities. In any event, complete development and commercialization of ourtechnology will require substantial additional funds.  We are seeking to raise capital through the sale of our commonstock or other securities in a private placement to fund our immediate andlonger-term capital needs.

 

The financial statements do not include any adjustment to reflect thepossible future effects on the recoverability and classification of assets orthe amount and classification of liabilities that may result from the outcomeof this uncertainty.

 

###### **Estimates**

###### ** **

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements, as well as the reportedamounts of revenue and expenses during the reporting period.  Actualresults could differ materially from the estimates and assumptions that theCompany uses in the preparation of its financial statements.

 

###### **Cash Equivalents**

###### ** **

Highlyliquid investments with a maturity of three months or less when purchased areclassified as cash equivalents.

 

###### **Property, Plant and Equipment**

###### ** **

Property,plant and equipment and leasehold improvements are stated at cost. Depreciation and amortization of equipment are provided for using thestraight-line method over the estimated useful lives of the assets. Computers and laboratory equipment are being depreciated over three years, andfurniture and fixtures are being depreciated over seven years.  Leasehold improvements are being amortizedon a straight-line basis over the lives of the respective leases or the servicelives of the improvements, whichever is shorter.

 

F-10

----

 

###### **Long-Lived Assets**

###### ** **

TheCompany reviews the carrying values of its long-lived assets for possibleimpairment whenever an event or change in circumstances indicates that thecarrying amount of the assets may not be recoverable.  Any long-livedassets held for disposal are reported at the lower of their carrying amounts orfair value less cost to sell.

 

###### **Patent Costs**

###### ** **

Internalpatent costs are expensed in the period incurred.  Patents purchased arecapitalized and amortized over the remaining life of the patent.  Patent amortization expense was $41,666 foreach of 2001 2002, and 2003. Amortization of patent costs is expected to be $41,666 annually over theremaining life of the patent, approximately 7.5 years at December 31,2003.

 

### **PurchasedTechnology**

### ** **

On June 18, 2003, we closed on the acquisition of assets,including Purchased Technology, related to the diagnostic imaging business,including *Imagent*, an FDA-approvedproduct, of Alliance.  *Imagent*is an intravenous contrast agent for use with ultrasound imaging equipment toimprove visualization of blood vessels for better diagnosis of disease andassessment of organ function.  *Imagent*consistsof perfluorochemical-based “microbubbles” that are highly echogenic (reflectultrasound signals strongly) in the bloodstream, thereby significantlyenhancing ultrasound images.  We alsoentered into a number of agreements related to that acquisition.  Included in the purchase were anFDA-approved manufacturing facility, the marketing, manufacturing andsupporting infrastructure for the product and an intellectual propertyportfolio of approximately thirty patents in the area of ultrasound imaging.

 

Intangible assets resulting from the acquisition of the *Imagent* business are estimated bymanagement based on the fair value of the assets received.  These intangible assets consist entirely ofpurchased technology.  PurchasedTechnology related to the *Imagent*business is amortized on a straight-line basis over the estimated remaininglife equal to twelve years.  PurchasedTechnology is stated at cost, less accumulated amortization.

 

##### **Researchand Development**

##### ** **

Researchand development costs are charged to expense when incurred.

 

**Revenue Recognition and DeferredRevenue**

 

The company recognizes revenue from license agreements ratably over theperiod of the agreement.  Unamortizedrevenue is recorded as deferred revenue. Revenue from the Kyosei Agreement is beingrecognized over ten years.

 

##### **IncomeTaxes**

##### ** **

TheCompany recognizes deferred tax assets and liabilities for the expected futuretax consequences of temporary differences between the tax basis and financialreporting basis of certain assets and liabilities based upon currently enacted taxrates expected to be in effect when such amounts are realized or settled.

 

##### **Basicand Diluted Loss Per Common Share**

##### ** **

Basic and diluted loss per common share is computed based on theweighted average number of common shares outstanding.  Loss per share excludesthe impact of outstanding options, warrants and convertible preferred stock asthey are antidilutive. Potential common shares excluded from thecalculation at December 31, 2001 are 6,519,000 options, 1,149,724warrants, 1,124,268 shares issuable upon the conversion of Series A and BPreferred Stock and 130,162 shares issuable upon conversion of long-termdebt.  Potential common shares excludedfrom the calculation at December 31, 2002 are 4,535,481 options, 237,431warrants and 151,819 shares issuable upon the conversion of Series A PreferredStock.  Potential common shares excludedfrom the calculation at December 31, 2003 are 7,210,280 options, 377,431warrants and 193,378 shares issuable upon the conversion of Series A Preferred Stock. Basic and diluted loss per common share in 2003 includes 1,985,522shares to be issued upon shareholder approval (see Note 3).

 

##### **Financial Instruments**

##### ** **

Thecarrying amounts reported in the consolidated balance sheets for cash, accountspayable and accrued expenses

 

F-11

----

 

approximatefair value because of the short-term nature of these amounts.  TheCompany’s note payable and lines of credit approximate fair value based oninstruments with similar terms.

 

##### **StockOptions**

##### ** **

In December 2002, SFAS No. 148, *Accountingfor Stock-Based Compensation - Transition and Disclosure – an amendment to FASBStatement No. 123*was issued. SFAS No. 148 provides alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation from the intrinsic value-based method of accounting prescribed byAccounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued toEmployees (APB No. 25). *Inaddition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123, *Accountingfor Stock Based Compensation.* The company adopted the disclosure requirments of SFAS No. 123 effectiveDecember 31, 2002.  As allowed bySFAS 123, the Company has elected to continue to apply the intrinsicvalue-based method of accounting proscribed in APB No. 25 and, accordingly,does not recognize compensation expense for stock option grants made toemployees at an exercise price equal to or in excess of the fair value of thestock a the date of grant.

 

Ifthe Company had elected to recognize compensation expense based on the fairvalue at the grant dates, consistent with the method prescribed by SFAS No.123, net loss per basic and diluted share would have been changed to the proforma amount indicated below:

 
|                                                                                                               |   | **2001**    |        | **2002**   |   | **2003**   |   |
|--------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|------------|--------|------------|--------|
|                                                                                                               |   |        |        |       |   |       |   |
| Net loss, as reported                                                                                              |   | $           | (12,666,771 | )          | $      | (1,649,604 | )      | $ | (22,773,504 | ) |
|                                                                                                               |   |        |        |       |   |       |   |
| Add stock based employee compensation  expense included in reported net loss                                       |   | —      |        | 988,184    |   | 1,245,768  |   |
|                                                                                                               |   |        |        |       |   |       |   |
| Less total stock-based employee  compensation expense determined under the fair value based method for all  awards |   | (11,314,458 | )           | (6,084,842 | )      | (5,771,226 | )      |
|                                                                                                               |   |        |        |       |   |       |   |
| Pro forma net loss                                                                                                 |   | $           | (23,981,229 | )          | $      | (6,746,262 | )      | $ | (27,298,962 | ) |
|                                                                                                               |   |        |        |       |   |       |   |
| Basic and diluted loss per common share, as  reported                                                              |   | $           | (1.33       | )          | $      | (0.16      | )      | $ | (1.24 | ) |
|                                                                                                               |   |        |        |       |   |       |   |
| Basis and diluted loss per common share,  pro forma                                                                |   | $           | (2.52       | )          | $      | (0.66      | )      | $ | (1.42 | ) |

 

TheCompany expenses the fair value of stock options granted to nonemployees.  During 2002 and 2003, the Company issuedstock options to employees withan exercise price less than the market price on the date of grant. Accordingly, compensation expense of $1,245,768 has been recorded in 2003 and $988,184 was recorded in2002.

 

Thepro forma information regarding net loss is required by SFAS No. 123, and hasbeen determined as if the Copmany has accounted for its stock-basedcompensation under the fair value method prescribed in SFAS No. 123.  The fair value of the options was estimatedat the date of grant using the Black-Scholes pricing model with the followingassumptions:

 
|                                             |   | **2001** |   | **2002** |   | **2003** |       |
|--------------------------------------------------|--------|----------|--------|----------|--------|----------|------------|
|                                             |   |     |   |     |   |     |       |
| Weighted average fair value per options  granted |   | $        | 3.64   |     | $      | 1.31     |       | **$** | **1.82** | ** ** |
|                                             |   |     |   |     |   |     | ** ** |
| Significant assumptions (weighted average)       |   |     |   |     |   |     | ** ** |
| Risk-free interest rate at grant date            |   | 4.8      | %      | 2.8      | %      | **2.56** | **%**      |
| Expected stock price volatility                  |   | 95.5     | %      | 98.0     | %      | **98**   | **%**      |
| Expected option life (years)                     |   | 5        |   | 5        |   | **5**    | ** ** |
|                                                  |        |          |        |          |        |          |            |  |  |  |

 

F-12

----

 

**Recent Accounting Pronouncements**

 

 In May 2003, the Financial Accounting Standards Board(“FASB”) issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity,” effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective as of July 1, 2003. The adoption of SFASNo. 150 did not have a material impact on the results of operations or thefinancial position of the Company.

 

 In May 2003, the FASB issued SFAS No. 149, “Amendmentof Statement 133 on Derivative Instruments and Hedging Activities,”effective for contracts entered into or modified after June 30, 2003 andfor hedging relationships designated after June 30, 2003. The adoption ofSFAS No. 149 did not have an impact on the results of operations or thefinancial position of the Company.

 

 In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation — Transition and Disclosure”,effective for fiscal years ending after December 15, 2002. This ruleamends SFAS No. 123 to provide several alternatives for adopting the stockoption expense provisions of SFAS No. 123, as well as additional requiredinterim financial statement disclosures. SFAS No. 148 does not requirecompanies to expense stock options in current earnings. The Company has notadopted the provisions of SFAS No. 123 for expensing stock basedcompensation (see “— Employee stock option and stock purchase plans”);however, the Company has adopted the additional interim disclosure provisionsof the statement. The impact of the adoption of SFAS No. 148 did not havea material impact on the results of operations or the financial position of theCompany.

 

InJuly 2002, the FASB issued SFAS No. 146, *“Accountingfor Costs Associated with Exit or Disposal Activities.”* SFAS No. 146eliminates Emerging Issues Task Force, or EITF, Issue No. 94-3 *“Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (Including CertainCosts Incurred in a Restructuring).”* Under SFAS No. 146, liabilitiesfor costs associated with an exit or disposal activity are recognized when theliabilities are incurred, as opposed to being recognized at the date ofentity’s commitment to an exit plan under EITF No. 94-3.  Examples of costs covered by the standardinclude lease termination cost and certain employee severance costs that areassociated with a restructuring; discontinued operation, plant closing or otherexit or disposal activity.  Furthermore,SFAS No. 146 establishes that fair value is the objective for initialmeasurement of the liabilities. This Statement is effective for exit ordisposal activities that are initiated after December 31, 2002.  During 2003 the Company recognized $136,947of restructuring costs for lease termination and restructuring associated withthe closure of its Pennsylvania facility and move to the Alliance facility inSan Diego, CA.

 

InJanuary 2003, the FASB issued FASB Interpretation No. (“FIN”) 46,“Consolidation of Variable Interest Entities,” which was originally effectiveon July 1, 2003. In December 2003, the FASB deferred the effectivedate for applying the provisions of FIN 46 to March 31, 2004 forinterests held by public companies in variable interest entities or potentialvariable interest entities created before February 1, 2003. The Companyhas completed its evaluation of the provisions of FIN 46 and does not haveany significant interests in variable interest entities. Accordingly, theadoption of FIN 46 did not have a material impact on the results of operationsor the financial position of the Company.

 

InNovember 2002, the FASB issued Interpretation No. (FIN) 45, *“Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others.”*Interpretation No. 45 requires a guarantor to include disclosure of certainobligations, and if applicable, at the inception of the guarantee, recognize aliability for the fair value of other certain obligations undertaken in issuinga guarantee. The recognition requirement is effective for guarantees issued ormodified after December 31, 2002 and did not have a material impact on theCompany.

 

**2.**             **Recapitalization and Merger**

 

OnMay 16, 1997, MT Financial Group, Inc. (an inactive public company), throughits wholly owned subsidiary, effected a reverse merger with Photogen, Inc.(“Photogen”), successor to Photogen, L.L.C.  Photogen, L.L.C. was formedon September 10, 1996 and commenced operations November 3,1996.  Photogen, L.L.C. was formed to develop proprietary laser-basedtechnologies related to photodynamic therapy.  Legally, Photogen was awholly owned subsidiary of Photogen Technologies, Inc. (formerly known as MTFinancial Group, Inc.), which is, as of February 5, 2004, now known asIMCOR Pharmaceutical Co.

 

F-13

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Forfinancial reporting purposes, Photogen was deemed to be the acquiringentity.  The transaction has been reflected in the accompanying financialstatements as (1) a recapitalization of Photogen (consisting of a48,000-for-one stock split and change in par value) and (2) an issuance ofshares by Photogen in exchange for all of the outstanding shares of MTFinancial Group, Inc.

 

 Aspart of the recapitalization, the Company sold 1,578,208 shares of common stockfor a total purchase price of approximately $1,803,450.  Legal andbrokerage fees of approximately $371,000 were charged to additional paid-incapital as costs of the recapitalization and merger.  Included in thepaid-in capital is the net cash of approximately $109,000 from MT FinancialGroup, Inc.

 

**3.****            ****PurchasedTechnology**

 

On June 18, 2003, the Company acquired the medical imagingbusiness including *Imagent*â(perflexane lipid microspheres), an FDA-approved product, of AlliancePharmaceutical Corp.  The Company’s financial statements includethe results of operations for the Purchased Technology from the closing date ofthe transaction, June 18, 2003, through the end of the reporting period

 

Included in the purchase were an FDA-approved manufacturing facility, the marketing, manufacturingand supporting infrastructure for the product, and an intellectual propertyportfolio of approximately thirty patents in the area of ultrasoundimaging.  *Imagent* has been approvedfor marketing by the FDA for use in patients with sub optimal echocardiogramsto opacify the left ventricle and thereby improve visualization of the mainpumping chamber of the heart, and to improve delineation of the endocardialborders of the heart.  As a result,ultrasound with *Imagent* may better distinguish normal and abnormal heartstructure and function - two critical indicators of cardiac health.  Echocardiography is the most widely usedimaging modality for the diagnosis of heart disease, the leading cause of deathin the U.S.  The attractiveness of theultrasound imaging market potential together with the acquisition of anapproved product and an extensive intellectual property portfolio werefundamental reasons for the acquisition and primary determinants of thepurchase price.

 

The Purchased Technology acquisition costs and allocation to the assetsacquired and liabilities assumed including adjustments in the third and fourthquarters 2003 is as follows:

 
| Summary of Purchase Transaction:                               |                               |       |      |
|----------------------------------------------------------------|------------------------------------|------------|-----------|
| Fair value of common stock issued                              |                               | $          | 5,583,268 |   |
| Fair value of common stock to be issued                        |                               | 5,043,226  |      |
| Cash advances in prior year applied                            |                               | 1,255,000  |      |
| Net current year cash advances applied                         |                               | 2,763,052  |      |
| Cash paid at closing                                           |                               | 669,117    |      |
| Direct current year payments to vendors on  behalf of Alliance |                               | 388,387    |      |
| Acquisition costs                                              |                               | 1,254,205  |      |
|                                                           | **Purchase Price**                 |       | **$**     | **16,956,255** | ** ** |
|                                                           |                               |       |      |
| Fair Value of Assets Acquired and  Liabilities Assumed:        |                               |       |      |
| Property, plant & equipment                                |                               | $          | 7,240,145 |   |
| Purchased technology                                           |                               | 15,638,146 |      |
| Assumption of debt to Xmark                                    |                               | (2,500,000 | )         |
| Assumption of certain Alliance liabilities                     |                               | (3,422,036 | )         |
|                                                           | **Fair Value of  Assets Acquired** |       | $         | **16,956,255** | ** ** |
|                                                                |                                    |            |           |  |  |  |

 

At the closing, the Company paid approximately $669,000 in cash anddelivered 2,198,137 shares of its common stock.  In addition to bridge financing the Company provided to Alliancebefore the closing, its purchase of a $1,250,000 interest in Alliance’sobligations to two of its creditors, Xmark Fund, Ltd. and Xmark Fund, L.P.(collectively “Xmark”), and its assumption of specified Alliance operatingliabilities related to *Imagent*,the Company is obligated to pay, at various times between 90 and 365 days afterthe closing, (i) an aggregate of $2,500,000 to Xmark, (ii) subject to reachingsatisfactory agreements with certain Alliance secured and unsecured creditors,an aggregate amount of up to $3,304,793 to creditors

 

F-14

----

 

other than Xmark and (iii) subject to stockholder approval, deliver anaggregate of approximately 1,985,522 shares of its common stock.  On February 5, 2004, the shareholdersapproved the issuance of the additional shares of common stock.

 

Weare currently in default under obligations to pay $775,000 to creditors ofAlliance Pharmaceutical Co. in connection with our acquisition of*Imagent*and we are in default under an equipmentlease and the lessor has demanded approximately $787,000.  We also have not registered the resale ofshares we issued in connection with that acquisition, which in some cases is acondition to the effectiveness of agreements to release us from any claims bythe Alliance creditor.

 

The Company must also pay Alliance further consideration in the form ofan earn out based on *Imagent*revenue, subject to certain reductions, after the closing and throughJune 2010.  This earn out equals,for each year of the earn out:  7.5% of *Imagent* revenue up to $20,000,000; 10% of *Imagent* revenue between $20,000,000 and$30,000,000; 15% of *Imagent*revenue between $30,000,000 and $40,000,000; and 20% of *Imagent* revenue above $40,000,000.  The earn out will be reduced by amounts theCompany pays pursuant to a license agreement with Schering Aktiengesellschaft(“Schering”), net of payments received from Schering under the license, andamounts of any indemnification claims the Company has against Alliance.  The earn out is subject to three additionaloffsets (which are to be applied in the manner described in the Asset PurchaseAgreement dated as of June 10, 2003 with Alliance) that entitle theCompany to retain portions of the earn out otherwise payable to Alliance.  Due to the absence of current or expectedrevenue from Imagent, management is not able to, and has not, included thepresent value of future estimated earn out payments in determination of theconsideration paid in the acquisition. Future royalty obligations will be expensed in the period reasonablyestimatable.

 

Intangible assets resulting from the acquisition of the *Imagent* business are estimated bymanagement based on the fair value of the assets received.  These intangible assets consist entirely ofpurchased technology.  PurchasedTechnology related to the *Imagent*business is amortized on a straight-line basis over the estimated remaininglife equal to twelve years.  PurchasedTechnology is stated at cost, less accumulated amortization.

 

Following is summarized statements of revenues and direct expenses forthe Purchased Technology for the year ended December 31, 2002 and theapproximate six-month period ended June 18, 2003 (date of purchase):

 
|                              |   | **Year ended  12/31/02** |       | **Six-Month  period ended  6/18/03** |       | **Total for  Periods** |       |
|-----------------------------------|--------|--------------------------|------------|--------------------------------------|------------|------------------------|------------|
| Expenses:                         |   |                     | ** ** |                                 | ** ** |                   | ** ** |
|                              |   |                     |       |                                 |       |                   |       |
| Research & development        |   | $                        | 12,775,041 |                                 | $          | 4,501,299              |       | $ | **17,276,341** |   |
| Sales, general and administrative |   | 5,080,021                |       | 1,363,973                            |       | 6,443,995              |       |
|                              |   |                     |       |                                 |       |                   |       |
| Total Expenses                    |   | $                        | 17,855,062 |                                 | $          | 5,865,272              |       | $ | **23,720,336** |   |

 

Below is supplemental unaudited pro forma information that disclosesthe results of operations for the Purchased Technology for the current threeand twelve month periods ending December 31, 2003, as well as the correspondingperiods for the preceding year ending December 31, 2002.  The pro forma information is as if theacquisition had been completed as of the beginning of the periods presented.  The unaudited pro forma information giveeffect to actual operating results prior to the acquisition, adjusted toinclude the unaudited pro forma effect of amortization of intangibles andweighted shares outstanding:

 
|                                                                           |   | **Pro Forma**                       |        |                                |       |
|--------------------------------------------------------------------------------|--------|-------------------------------------|-------------|-------------------------------------|------------|
|                                                                           |   | **12 Months  ended  Dec 31,  2003** |        | **12 Months  ended  Dec 31,  2002** |       |
| Expenses:                                                                      |   |                                | ** **  |                                | ** ** |
| Research & development                                                     |   | $                                   | 7,030,978   |                                | $          | 14,002,984 |   |
| Sales, general and administrative                                              |   | 16,387,260                          |        | 10,399,159                          |       |
| Restructuring charge                                                           |   | —                              |        | 807,483                             |       |
| Total Expenses                                                                 |   | 23,418,238                          |        | 25,209,626                          |       |
| Loss from joint venture                                                        |   | (5,389,338                          | )           | (3,452,837                          | )          |
| Investment income                                                              |   | 7,394                               |        | 1,563                               |       |
| Interest expense                                                               |   | (483,167                            | )           | (418,466                            | )          |
| Loss from continuing operations                                                |   | (29,283,349                         | )           | (29,079,366                         | )          |
| Discontinued operations – net                                             |   | —                              |        | 10,283,322                          |       |
| Net income (Loss)                                                              |   | $                                   | (29,283,349 | )                                   | $          | (18,796,044 | ) |
| Dividends on Preferred Stock                                                   |   | (1,066,280                          | )           | (1,997,723                          | )          |
| Net income (loss) applicable to common  shareholder                            |   | (30,349,629                         | )           | (20,793,767                         | )          |
| Pro forma net income (loss) per share                                          |   | $                                   | (1.58       | )                                   | $          | (1.45 | ) |
| Weighted average number of common shares  outstanding – basic and diluted |   | 19,265,599                          |        | 14,371,265                          |       |

 

F-15

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This unauditted pro forma information is notnecessarily indicative of the actual results that would have been achieved hadthe Purchased Technology been acquired the first day of the Company’s twelve-monthperiods, nor is it necessarily indicative of future results.

 

**4.**             **Joint Venture/Investment inAffiliate**

 

OnOctober 7, 1999, the Company formed a joint venture with ElanInternational Services, Ltd. (“Elan”) to develop and commercialize nanoparticulatediagnostic imaging agents for the detection and treatment of cancer throughlymphography.

 

SentigenLtd. (“Sentigen”) was formed to hold the operations, assets and liabilities ofthe joint venture.  Elan purchased 2,980 shares of Sentigen nonvotingconvertible preferred stock for $2,985,000 representing a 19.9% ownershipinterest.  Elan also purchased 12,015 shares of the Company’s Series Aconvertible exchangeable preferred stock for $12,015,000.  In connectionwith the issuance of the preferred stock to Elan, the Company granted warrantsto Elan to purchase 100,000 shares of the Company’s common stock at $84.68 pershare which was valued at $678,000.  As a result, a preferred stockdividend of $436,041 was recorded for the accretion of the preferred stock toits face value of $12,015,000 over the period until it is firstconvertible.  Beginning in 2000, in accordance with EITF 00-27, theCompany recorded an additional preferred stock dividend to represent thebeneficial conversion feature associated with the intrinsic value of the SeriesA Preferred conversion option.  As a result, an additional preferred stockdividend of $436,041 was recorded over the period until it is firstconvertible.  As of December 31, 2001, the beneficial conversionfeature was fully recorded.

 

TheCompany purchased 12,000 shares of Sentigen’s common stock for $12,015,000representing an 80.1% ownership interest.

 

Sentigenused the $15,000,000 received from the Company and Elan to purchase from Elan aworldwide license to certain patented Elan technology related to the jointventure.  Expenses incurred by the Company and Elan, which relate to thedevelopment of the diagnostic imaging agents, are charged to Sentigen.

 

Elangranted the Company a line of credit of $4,806,000 to be used by the Company tofund its portion of Sentigen’s research and development.  Principal andinterest under the line of credit, if any, become due and payable in 2005 or,at the option of Elan, can be converted into the Company’s common stock at$72.60 per share.  Any borrowings under the line of credit would bearinterest at 8%.  At December 31, 2001, borrowings on this line ofcredit were $2,314,005 and accrued interest was $48,429.  During 2002, theCompany borrowed an additional $532,905 and incurred additional accruedinterest of $187,148.  On November 12, 2002, the total borrowings of$2,846,910 and accrued interest of $235,577 were converted to common stock at aconversion price of $24 per share and the line of credit was cancelled.  Abeneficial conversion amount of $206,348 was recorded as a result of thedecrease in the original conversion price.

 

Inconnection with the joint venture agreement, Elan also purchased 115,385 sharesof the Company’s common stock for $6,000,000.  The total cash proceedsfrom the equity issuance to Elan of $18,015,000 were allocated to the commonstock, preferred stock and the warrants. If in the Company's next third-party offering after the issuance of theSeries A Preferred, it sells common stock at a price less than $52 per share,the Company must issue additional shares to Elan so that Elan's overall pricefor its common stock equals the effective price in that third-partyoffering.  During 2001, the Companyissued 190,857 shares of common stock to satisfy this requirement.  Additionally, proceeds received under theline of credit amounting to $4,806,000 was allocated to common stock uponconversion.

 

Elanhas substantive participating rights in Sentigen, including the requirement forapproval of the business plan and budgets and equal representation on themanagement committee which decides all day-to-day functions.  As a result,the Company’s investment in Sentigen is recorded under the equity method.

 

F-16

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Followingis summarized unaudited financial information for Sentigen at December 31,2002 and 2003 and for the years then ended:

 
|                                                                                                        |   | **2002**   |       | **2003**      |       |
|-------------------------------------------------------------------------------------------------------------|--------|------------|------------|---------------|------------|
|                                                                                                        |   |       |       |          | ** ** |
| Cash                                                                                                        |   | $          | 410        |          | **$**      | **410** | ** ** |
| License purchased from Elan, net of  amortization and impairment of $4,701,693 and $11,429,357 respectively |   | 10,298,907 |       | **3,570,643** | ** ** |
|                                                                                                        |   |       |       |          | ** ** |
| Total assets                                                                                                |   | $          | 10,299,317 |          | **$**      | **3,571,053** | ** ** |
|                                                                                                        |   |       |       |          | ** ** |
| Due to affiliates                                                                                           |   | $          | 378,099    |          | **$**      | **378,099** | ** ** |
|                                                                                                        |   |       |       |          | ** ** |
| Total shareholders’ equity                                                                             |   | 9,921,218  |       | **3,192,954** | ** ** |
|                                                                                                        |   |       |       |          | ** ** |
| Total liabilities and equity                                                                                |   | $          | 10,299,317 |          | **$**      | **3,571,053** | ** ** |
|                                                                                                        |   |       |       |          | ** ** |
| Research and development expense                                                                            |   | $          | 823,409    |          | **$**      | **—** | ** ** |
| General and administrative expense                                                                          |   | 18,329     |       | **—**    | ** ** |
| Amortization of license                                                                                     |   | 978,264    |       | **978,264**   | ** ** |
| Impairment of license                                                                                       |   | 2,500,000  |       | **5,750,000** | ** ** |
|                                                                                                        |   |       |       |          | ** ** |
| Net loss                                                                                                    |   | $          | (4,320,002 | )             | **$**      | **(6,728,264** | **)** |

 

Weare developing N1177 with affiliates of Elan through a joint venture calledSentigen, Ltd..  Our goal is to demonstrate that the use of N1177 willenable physicians to precisely locate tumorous nodes by first injecting the materialin the vicinity of the tumor and then taking an image (picture) using a CTdevice.

 

Weplan to commence Phase 2 clinical studies for detection of cancer metastasis inlymph nodes in patients with cervical cancer, subject to the availability ofsufficient capital.  In this patient population, studies document anincrease in survival when lymph nodes containing cancer are removed. Tumor identification by CT imaging will be correlated to the results of biopsyresults from patients undergoing surgery to demonstrate effectiveness inlocating nodes and identifying those with cancer in them.

 

**5.****        ****Property, Plant and Equipment**

 

Property, plant and equipment consist of thefollowing at December 31, 2002 and 2003:

 

| **December 31,**                     |   | **2002** |   | **2003**      |       |
|-------------------------------------------|--------|----------|--------|---------------|------------|
|                                      |   |     |   |          | ** ** |
| Leasehold improvements                    |   | $        | 33,131 |          | **$**      | **5,527,738** | ** ** |
| Furniture, fixtures and equipment         |   | 17,520   |   | **1,762,913** | ** ** |
| Total                                     |   | 50,651   |   | **7,290,651** | ** ** |
| Accumulated depreciation and amortization |   | (14,651  | )      | **(996,091**  | **)**      |
| Property, plant and equipment, net        |   | $        | 36,000 |          | **$**      | **6,294,560** | ** ** |

 

Maintenance and repairs are charged to operations as incurred.  When assets are sold, or otherwise disposedof, the cost and related accumulated depreciation are removed from the accountsand any gain or loss is included in operations.

 

Depreciation and amortization expense on property, plant and equipmentamounted to $400,525, $329,653, and $981,440 during 2001, 2002 and 2003,respectively and $2,517,130 for the period from inception to December 31,2003.

 

**6.**         **Accruals**

 

Accrued expenses consist of the following:

 

F-17

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| **December 31,**                          |   | **2002** |   | **2003**    |   |
|------------------------------------------------|--------|----------|--------|-------------|--------|
|                                           |   |     |   |        |   |
| Alliance liabilities assumed from  acquisition |   | $        | — |        | **$**  | **2,530,434** |   |
| New Hope office abandonment provision          |   | —   |   | **136,947** |   |
| Accrued general trade payables                 |   | —   |   | **291,908** |   |
| Payroll liabilities                            |   | 34,132   |   | **322,503** |   |
|                                           |   |     |   |        |   |
|                                           |   | $        | 34,132 |        | **$**  | **3,281,792** |   |

 

**7.****            ****Commitments and Contingencies**

 

*** Leases:*** The Company has leased its facilities andcertain equipment under non-cancelable operating leases, which expire atvarious times through 2008.  The leasesrequire the Company to pay for all maintenance, insurance and property taxes.

 

On August 31, 2003, the Company closed its Pennsylvania corporateheadquarters and transferred its headquarters to its *Imagent* facility in San Diego, California.    At December 31, 2003, the remainingobligation under the lease amounts to $136,947.

 

The Company also has an operating lease forlaboratory equipment which expires during 2004.  During 2001, the Company determined that equipment leased by theCompany under this operating lease would no longer be used by the Company inits research.  As a result, in 2001, theCompany recorded a provision for all future lease payments of $1,264,208.  At December 31, 2003, $786,884 remainsto be paid.  Minimum future rentalpayments under these leases are as follows:

 
| **Year  ending December 31,** |   | **Operating Leases** |          |
|-----------------------------------------|--------|----------------------|---------------|
| 2004                                    |   | $                    | 1,455,180     |   |
| 2005                                    |   | 979,944              |          |
| 2006                                    |   | 920,625              |          |
| 2007                                    |   | 877,514              |          |
| 2008                                    |   | 147,081              |          |
| **Total minimum lease payments**        |   | **$**                | **4,380,344** | ** ** |

 

Totalrental expense charged to operations for the years ended December 31,2001, 2002, and 2003 aggregated approximately $358,000, $227,000, and $984,945,respectively.

 

 

*** License Agreements:***In September 1997, Alliance entered into the Schering License Agreement,which provided Schering with worldwide exclusive marketing and manufacturingrights, drug compositions, and medical devices and systems related toperfluorocarbon ultrasound imaging products, including *Imagent*. In February 2002, the agreement with Schering was modified to giveAlliance exclusive rights to market the product in the U.S. for cardiologyindications for a five-year period, with Schering to be paid a nominal royaltyon such sales.  At the expiration of thefive-year period, Alliance had the option to acquire all of Schering’s rightsto the product on a worldwide basis or, alternatively, to allow Schering theopportunity to obtain co-promotion rights along with Alliance.  The rights Alliance had under the ScheringLicense Agreement were transferred to IMCOR at the consummation of itsacquisition of the *Imagent*Business.

 

Concurrent with the restructuring of the Schering agreement in 2002,Alliance entered into a five-year exclusive agreement with Cardinal Health,Inc. (“Cardinal”) to assist the marketing of *Imagent*.  Under the agreement, Cardinal will performcertain packaging, distribution, and sales services for Alliance under afee-for-service arrangement.  IMCORassumed the Cardinal agreement from Alliance at the consummation of the *Imagent* acquisition.

 

***Litigation:***On June 18, 2003, we filed acomplaint against Amersham Health, Inc. and two other Amersham affiliatesalleging that certain Amersham products infringe on claims in our patentscovering *Imagent*.   The case is captioned as Photogen Technologies,Inc. and Alliance Pharmaceutical Corp. v. Amersham Health Inc. et. al.,Civil Action No. 03CV2853(SRC), in the United States District Court for theDistrict of New Jersey.  Our complaintalleges that principally through their Optison® product, Amersham Health Inc.and related Amersham entities infringe on seven patents owned by us.  We are also seeking a declaration that theclaims of fourteen Amersham patents are invalid and are

 

F-18

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not infringed by our *Imagent*product.  Alliance, the party from whomwe recently acquired the *Imagent*product, is also a plaintiff in the suit. We are seeking damages, an injunction against Amersham, a declaratoryjudgment and other relief.

 

Amersham filed an answer dated July 18, 2003 denying the materialallegations of our claims and asserting certain affirmative defenses andcounterclaims.  Amersham’s counterclaimsagainst us include claims of patent infringement, breach of contract, breach ofgood faith and fair dealing, and tortuous interference with contract.  We are studying Amersham’s answer, defensesand counterclaims in consultation with our counsel.

 

**8.****            ****Secured Debt**

 

Notes payable – At the closing of theTechnology Purchase, the Company issued to Xmark promissory notes in the totalprincipal amount of $2,500,000.  Thenotes were payable in two equal installments on August 5 andNovember 3, 2003 or (if sooner) at the time the Company completed afinancing of at least $18,000,000 of gross proceeds and bear interest at 3%over the prime rate.  Interest ispayable in shares of common stock.

 

Obligations to Xmark (including obligations under the put right) aresecured by a first priority security interest on the *Imagent* related tangible and intangible assets.

 

The Company defaulted on the principal payment due to Xmark onAugust 5, 2003 and Xmark delivered a notice stating that it wasaccelerating all amounts due under the notes. On August 18, 2003, the Company and Xmark executed a LetterAgreement pursuant to which the Company made an immediate payment of $1,250,000and Xmark rescinded the default notice. In addition, as part of the Letter Agreement:

 

•      TheCompany has the right to extend the November 3, 2003 payment due datemonthly until April 3, 2004 for a fee (and not as a reduction of anyamounts due and owing under the promissory notes) ranging from $50,000 to$100,000 per month.  The Company hasbeen exercising its right to extend the November 3, 2003 payment.

 

•      Thedemand registration rights held by Xmark became piggyback registration rights.

 

•      The definition of “Event of Default” wasamended.  The provision that an Event ofDefault included any default by the Company in the payment of borrowed moneyindebtedness was eliminated.  Instead,the Company agreed that it would be an Event of Default if it made any repayments of borrowed money indebtedness.

 

•      Ifthe Company makes payments to certain institutions, it will make a pro-ratapayment to Xmark.

 

Lines of Credit – To obtain funds foroperations and certain cash payments related to the Technology Purchase, theCompany issued $11,417,000 in notes, of which $4,160,000 are RevolvingConvertible Senior Secured Promissory Notes (“Revolving Notes”) and thebalances are non-convertible (“Demand Notes”) (collectively, the “PromissoryNotes”) to three institutional investors (“Investors”).  The Promissory Notes are secured by a firstpriority security interest on all the Company’s assets (but as to the lien on *Imagent* related assets, the lien issubordinate to the security interest held by Xmark see Notes 3, 8 and 9), bearinterest at 7.25% per annum, compounded monthly, and were due on the earlier ofAugust 5, 2003 (in the case of the Revolving Notes) or are due upon demand(in the case of the Demand Notes) or are due upon the occurrence of an“acceleration event” (in the case of all Promissory Notes).  All principal and interest under theRevolving Notes was to convert into the Company’s common stock upon completionof a qualified financing that closes before August 5, 2003 at the sameprice and on the same terms as are in effect for the other investors in thequalified financing; and the Investors will have the same rights, benefits andobligations as other investors in that financing.  No such financing had occurred as of August 5, 2003.  The acceleration events include a breach ofthe Company’s obligations or representations under a security agreement infavor of the Investors; if the Company files for bankruptcy protection orsimilar events occur indicating insolvency; if the Company liquidates, or ifthe Company incurs any debt senior or pari passu to the debt of the Investors.

 

The Company defaulted on $4,160,000 of its Revolving Notes due to theInvestors on August 5, 2003.  TheInvestors have not asserted any of their rights under the default provisions ofthe Revolving Notes and (although under no obligation to do so) have continuedto advance capital, pursuant to the Demand Notes, to the Company.  All other terms and conditions of theseRevolving Notes remain unchanged.

 

F-19

----

 

**9.****            ****Stockholders’ EquityTransactions and Puttable Shares**

 

(a)  The Company applies the recognitionprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and applies the fair value-baseed method ofaccounting for stockoptions issued to nonemployees, .  The Company has issued options andwarrants in exchange for consulting services rendered.  The Company issued10,000 options in 1998, 2,500 options and 125,500 warrants in 1999, 5,250options and 128,750 warrants in 2000, 7,500 options in 2001, 200,000 warrantsin 2002 and 10,000 options in 2003 to nonemployees.   During 2002 the Company issued190,000 warrants to vest upon achievement of certain milestones.  As of December 31, 2003 the warrantsare unvested and no expense has been recognized.   As the fair market value of these services was not readilydeterminable, these services were valued based on the fair market value of theoptions and warrants issued, determined using the Black-Scholes option pricingmodel (see Note 1).   Fair market value for options and warrantsissued for consulting services were determined to be $3.08 in 2001, $1.01 to$1.81 in 2002 and $1.60 in 2003.  Consulting costs charged to operationswere $825,092 in 2001, $395,870 in 2002 and $16,521 in 2003.  In 2002, theCompany also issued 390,556 options in settlement of a lawsuit associated withrestructuring costs.  The value of these options under the Black-Scholesoption pricing model was $806,415 which was recorded as restructuring chargesin 2002.

 

(b)  Series A Preferred Stock – InOctober 1999 the Company issued 12,015 shares of preferred stock as SeriesA Preferred Stock (“Series A Preferred”).  For the first six years fromissuance, the preferred stock has a mandatory dividend of 7%.  Suchdividends are cumulative and compound on a semiannual basis and are payablesemiannually solely by the issuance of additional preferred Series Astock.  The Company has a deficit and, as a result, the dividends havebeen recorded against paid-in capital.    In accordance with theprovisions of the agreement, the Company issued additional preferred shares of841 in 2000 in settlement of dividend requirements.  Therefore, atDecember 31, 2003, there were 12,856 shares of Series A Preferredoutstanding.  The Company has accrued and will issue 193,378 preferredshares in fulfillment of the 2001, 2002 and 2003 dividend requirements. The Series A Preferred shall rank senior to any future series of preferred stockunless the majority of the Series A shareholders agree to rank *pari passu* with any futureissuances.  The liquidation preference is $1,000 per share.  TheSeries A Preferred is convertible, after two years but before six years fromissuance, into common stock of the Company with an   initialconversion price of $84.68.  The conversion price is subject to adjustmentfor certain dilutive events.  Alternatively, the holder of the Series APreferred can elect to exchange the Series A preferred shares for the number ofshares in Sentigen which would allow the Series A holder to then own a total of50% of Sentigen.  The Series A holder iscurrently the minority shareholder in Sentigen.  The exchange right is notavailable for any shares which have been converted to common stock.  Theexchange right terminates six years from the issuance of the Series APreferred.

 

Theholder of Series A Preferred is only entitled to vote on matters that adverselyaffect or change the rights of holders of Series A Preferred and does not havethe right to vote on the election of directors of the Company. The holder ofSeries A Preferred also had a preemptive right until October 2003 toparticipate in any offering of the Company.

 

(c)  Series B Preferred Stock - InFebruary 2000, the Company completed a private placement of its Series BConvertible Preferred Stock (“Series B Preferred”). The Company received cashproceeds, net of related expenses, of $5,276,340 in exchange for 337,056 sharesof the Series B Preferred. The Series B Preferred had an annual dividend rateof 6%. In accordance with the provisions of the agreement, the Company issuedadditional preferred shares of 20,224 in 2001 and 40,194 in 2002 in settlementof dividend requirements.

 

Inconjunction with the financing on November 12, 2002 all of the Series BPreferred was converted into common stock.  In exchange for thisconversion, the then conversion ratio of 0.36175 was changed to 1.0625. As a result, the Series B Preferred was converted into 422,316 shares of commonstock and a beneficial conversion amount of $668,464 has been recorded. The Series B Preferred is no longer outstanding, nor is there any liquidationpreference associated with the Series B Preferred.

 

(d)  Common Stock - The Companyis subject to six sets of registration rights agreements covering an aggregateof approximately 15,028,000 shares of the Company’s common stock, options andwarrants that have vested covering the Company’s common stock, its common stockissued/issuable pursuant to the acquisition of the Imagent Business (includingshares issued/issuable to Xmark) and common stock issuable upon conversion ofthe Company’s Series A Preferred. Excluded from this total are shares of commonstock issuable pursuant to the Company’s Revolving Convertible Senior SecuredPromissory Notes as this conversion rate is dependant upon the pricing of theCompany’s next Qualified Equity Financing, as defined in the terms of thenotes.   All of the agreements containpiggyback registration rights and two contain demand registration rights uponthe occurrence of certain events and subject to various terms and

 

F-20

----

 

conditions. Of the 15,028,000 shares, 4,502,000 shares are entitled topiggyback registration only, 50,000 shares are entitled to both demand andpiggyback registration and 10,244,000 shares will be registered by the Companywithin the time frames set forth in the respective registrationagreements.  Warrants that have vestedcovering 187,431 shares of the Company’s common stock have weighted averageanti-dilution rights.

 

OnMarch 13, 1998, the Company completed a private placement of 218,755shares of common stock for $32 per share to a number of accreditedinvestors.  The Company received $6,950,000, net of related expenses ofapproximately $50,000 from this offering.

 

OnFebruary 9, 2001, the Company’s shelf registration on Form S-3 wasdeclared effective.  Under the shelf registration, the Company could haveissued up to $40,000,000 of common stock.  As of December 31, 2002,173,872 shares had been issued under the shelf registration for cash proceedsof $1,068,723, net of related expenses of $56,252.  The Company’sregistration statement is no longer effective.

 

Asof April 2, 2001, the Company no longer met the eligibility requirementsto continue selling shares under the S-3.  Prior to realizing it wasineligible to continue using the S-3, the Company sold 124,627 shares of commonstock for $650,000.  Through June 2003, this amount had been reclassifiedfrom permanent equity to mezzanine equity as the Company could be required torepay a portion of this amount to the purchaser.  In the second quarter of 2003 the Company recognized in permanentequity the issuance of these shares.

 

OnNovember 12, 2002, the Company completed a private placement of 8,333,334shares of common stock for $1.08 per share to a number of accreditedinvestors.  The Company received proceeds of $8,677,000, net of relatedexpenses of $387,000.  Proceeds included cash of $6,113,000 and the conversionof a credit facility with an entity controlled by a then director of theCompany with borrowings of $2,500,000 which converted into 2,314,815 shares ofcommon stock.

 

InDecember 2002, the Company completed a second closing of theNovember 12, 2002 private placement in which 2,804,539 shares of commonstock were sold for $1.08 per share for gross proceeds of $3,028,902.

 

OnNovember 12, 2002, the Company also effected the split-off of Photogen,Inc. and the assets and liabilities related to the Company’s therapeutic lineof business to the five founding stockholders of the Company (the “TennesseeStockholders”) in exchange for all of their common stock in the Company. The Tennessee Stockholders owned 5,137,109 shares of the Company and thoseshares were cancelled prior to December 31, 2002.  The market valueof the 5,137,109 shares on the date of the split-off was $12,226,319.

 

Inconjunction with the November 12, 2002 transactions, the Companyimplemented a one-for-four reverse split of its common stock.  All amountshave been retroactively stated to reflect this reverse stock split.

 

Pursuant to a Standstill and Make Whole Agreement dated as ofDecember 30, 2002 with Xmark, secured creditors of Alliance, the Companyissued a total of 750,000 shares to Xmark in January throughMarch 2003.  Xmark agreed to notexercise any rights against Alliance as a creditor.  The value of these shares was treated as an expense at fairmarket value amounting to $1,173,750.

 

On May 2, 2003, the Company executed a Going Forward Agreement withXmark that provided, among other things, for the issuance of shares of theCompany’s common stock upon the acquisition of the Purchased Technology aspayment for interest owed by Alliance to Xmark.  On June 18, 2003, the Company issued 2,198,137 shares of itscommon stock to certain creditors of Alliance, including 1,056,144 shares toXmark pursuant to the Going Forward Agreement, as partial consideration for theTechnology Purchase.  Following approvalby shareholders, the Company will issue an additional approximately 1,985,522shares to certain other creditors as part of the Purchased Technology.  The value of these shares was treated asacquisition consideration at fair market value (see Note 3).  Such approval was obtained at the Company’sshareholder meeting held on February 5, 2004.

 

On May 27, 2003 the Company issued 11,250 shares of its Common Stock toXmark as a penalty for failure to timely register certain shares held by Xmark.The value of these shares was treated as an expense at fair market valueamounting to $25,200.

 

F-21

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On July 31, 2003 the Company issued 82,977 shares of its CommonStock to Xmark for interest and penalties, including the failure to timelyregister certain shares of its Common Stock held by Xmark as of that date.  The value of these shares was treated as anexpense at fair market value amounting to $158,987.

 

On September 2, 2003, pursuant to a Letter Agreement dated as ofAugust 18, 2003 with Xmark, the Company issued 26,248 shares of its CommonStock to Xmark for the failure to timely register certain shares of its CommonStock held by Xmark as of that date. The value of these shares was treated as an expense at fair market valueamounting to $28,085.

 

Total shares issued to Xmark as a result of the agreements noted aboveare 1,926,619.  In addition, anaggregate of 43,048 shares of the Company’s Common Stock are issuable to Xmarkfor payment of accrued interest.  Xmarkhas a put right for all these shares that would, under certain circumstances,require the Company to purchase the shares from Xmark at a price of $1.00 pershare.  As a result, $1,969,668 has beenclassified as mezzanine equity at December 31, 2003.

 

During 2003, in addition to the above issuances, the Company issued anaggregate of 140,094 shares pursuant to several factors including cash,compensation for service and cashless exercise of stock options.

 

**10.**          **Stock Incentive Plans andWarrants**

 

TheCompany maintains three long-term incentive compensation plans, which aredescribed as follows:

 

•    The 1998 Long-Term Incentive CompensationPlan, which provides for the granting of up to 500,000 stock options to keyemployees, directors and consultants;

 

•    The 2000 Long-Term Incentive CompensationPlan, which provides for the granting of up to 4,568,750 stock options to keyemployees, directors and consultants;

 

•    The 2000 Senior Executive Long-Term IncentiveCompensation Plan, which provides for the granting of up to 1,000,000 stockoptions to senior executives.  Optionsexercised under this plan contain certain registration rights.

 

Optionsgranted under these plans may be either “incentive stock options” within themeaning of Section 422A of the Internal Revenue Code, or nonqualifiedoptions.  In 2003, 1,050,000 optionswere issued outside of the option plans in a grant to an executive officersubject to the approval of shareholders. Shareholders representing more than fifty percent of the Company’soutstanding stock have agreed to approve this option grant.  In 2002, the Company issued 358,000 optionsoutside of the option plans as settlement of certain obligations; these werefully expensed in 2002.

 

 The stock options are exercisable over aperiod determined by the Board of Directors (through its CompensationCommittee), but generally no longer than 10 years after the date they aregranted.

 

Informationwith respect to the plans follows:

 
| **Year  ended December 31,**    |   | **2001**  |         | **2002**  |   | **2003**    |   |
|-------------------------------------------|--------|-----------|--------------|-----------|--------|-------------|--------|
|                                      |   |      |         |      |   |        |   |
| Options outstanding at beginning of year  |   | 1,411,000 |         | 1,629,750 |   | 4,535,481   |   |
| Options granted                           |   | 218,750   |         | 2,914,356 |   | 2,930,250   |   |
| Options forfeited                         |   | —    |         | (8,625    | )      | (255,451    | )      |
|                                      |   |      |         |      |   |        |   |
| Options outstanding at end of year        |   | 1,629,750 |         | 4,535,481 |   | 7,210,280   |   |
|                                      |   |      |         |      |   |        |   |
| Option prices per share granted           |   | $         | 4.56 - 21.24 |      | $      | 1.08 - 4.20 |   | $ | 0.93 - $2.05 |   |
|                                      |   |      |         |      |   |        |   |
| Weighted average exercise price           |   |      |         |      |   |        |   |
| Options granted                           |   | $         | 8.12         |      | $      | 1.14        |   | $ | 1.19 |   |
| Options granted at less than market price |   | —    |         | 1.08      |   | 1.19        |   |
| Options granted at the market price       |   | 8.12      |         | 1.55      |   | 1.21        |   |
| Options forfeited                         |   | —    |         | 18.41     |   | 0.93        |   |
| Options outstanding at end of year        |   | 37.16     |         | 14.05     |   | 9.72        |   |
| Options exercisable at end of year        |   | 43.04     |         | 19.85     |   | 19.74       |   |
| Number of shares exercisable              |   | 458,333   |         | 2,057,208 |   | 3,077,577   |   |

 

F-22

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In2003 all stock options granted, except for 40,000 options granted to directorsand a consultant, were granted to employees at an exercise price less than themarket value at grant date.  Theweighted average fair value of the options issued below market is $1.83.

 
| **Options  Outstanding**     |   | **Options  Exercisable**                 |       |
|------------------------------|--------|------------------------------------------|------------|
| **Range of  Exercise Price** |   | **Number  Outstanding at  Dec 31, 2003** |       | **Weighted  Average  Exercise Price** |   | **Weighted  Average  Remaining  Contractual  Life (Years)** |   | **Number  Outstanding at  Dec 31, 2003** |   | **Weighted  Average  Exercise Price** |   |
|                         |   |                                     |       |   |   |   |   |   |   |   |   |
| $0.93 - $1.08                |   | 3,354,597                                |       | $ | 1.08 |   | 8.32 |   | 1,212,425 |   | $ | 1.08 |   |
| $1.09 - $4.56                |   | 2,281,431                                |       | $ | 1.36 |   | 9.24 |   | 433,057 |   | $ | 1.79 |   |
| $4.57 - $11.00               |   | 539,128                                  |       | $ | 10.17 |   | 5.56 |   | 397,471 |   | $ | 10.18 |   |
| $11.01 - $27.50              |   | 13,125                                   |       | $ | 23.04 |   | 2.87 |   | 13,125 |   | $ | 23.04 |   |
| $27.51 - $53.00              |   | 269,499                                  |       | $ | 34.13 |   | 6.45 |   | 268,999 |   | $ | 34.10 |   |
| $53.01 - $60.25              |   | 752,500                                  |       | $ | 60.00 |   | 6.38 |   | 752,500 |   | $ | 60.00 |   |
| **Total**                    |   | **7,210,280**                            | ** ** | **$** | **9.27** | ** ** | **8.12** | ** ** | **3,077,577** | ** ** | **$** | **19.74** | ** ** |

 

Informationwith respect to the warrants follows:

 
| **Year ended December 31,**          |   | **2001** |        | **2002** |   | **2003**   |   |
|-------------------------------------------|--------|----------|-------------|----------|--------|------------|--------|
|                                      |   |     |        |     |   |       |   |
| Warrants outstanding at beginning of year |   | 287,431  |        | 287,431  |   | 427,431    |   |
| Warrants granted                          |   | —   |        | 390,000  |   | —     |   |
| Warrants exercised                        |   | —   |        | —   |   | (50,000    | )      |
| Warrants forfeited                        |   | —   |        | (250,000 | )      | —     |   |
|                                      |   |     |        |     |   |       |   |
|                                      |   |     |        |     |   |       |   |
| Warrants outstanding at end of year       |   | 287,431  |        | 427,431  |   | 377,431    |   |
|                                      |   |     |        |     |   |       |   |
| Warrant prices per share outstanding      |   | $        | 37.80-84.68 |     | $      | 1.08-84.68 |   | $ | 1.08-84.68 |   |
|                                      |   |     |        |     |   |       |   |
| Weighted average exercise price           |   |     |        |     |   |       |   |
| Warrants granted                          |   | $        | —      |     | $      | 1.78       |   | $ | — |   |
| Warrants forfeited                        |   | $        | —      |     | $      | 37.80      |   | $ | — |   |
| Warrants outstanding at end of year       |   | $        | 43.08       |     | $      | 7.94       |   | $ | 8.84 |   |
| Warrants exercisable at end of year       |   | $        | 43.08       |     | $      | 12.27      |   | $ | 15.25 |   |
| Number of warrants exercisable            |   | 287,431  |        | 237,431  |   | 187,431    |   |

 
|                         |   | **Warrants  Outstanding**                 |   | **Warrants  Exercisable**             |   |
|------------------------------|--------|-------------------------------------------|--------|---------------------------------------|--------|
| **Range of Exercise  Price** |   | **Number  Outstanding  at Dec 31,  2003** |   | **Weighted  Average  Exercise Price** |   | **Weighted  Average  Remaining  Contractual  Life (Years)** |   | **Number  Outstanding at  Dec 31, 2003** |   | **Weighted  Average  Exercise Price** |   |
|                         |   |                                      |   |                                  |   |   |   |   |   |   |   |
| $1.08 - 2.52                 |   | 340,000                                   |   | $                                     | 1.78   |   | 4.5 |   | 150,000 |   | $ | 1.08 |   |
| $44.20 - 47.78               |   | 12,431                                    |   | $                                     | 46.67  |   | 3.8 |   | 12,431 |   | $ | 46.67 |   |
| $84.68                       |   | 25,000                                    |   | $                                     | 84.68  |   | 1.7 |   | 25,000 |   | $ | 84.68 |   |

 

As of December 31, 2003, the 1998 Long-Term Incentive CompensationPlan had options outstanding for 490,500 shares with 9,500 shares remainingavailable, under the 2000 Long-Term Incentive Compensation Plan, options wereoutstanding for 4,299,220 shares with 269,530 shares remaining available, andunder the 2000 Senior Executive Long-Term Incentive Compensation Plan optionswere outstanding for 1,000,000 shares with zero shares remaining available.

 

**11.****         ****Dividends**

 

Dividendsare comprised of the following:

 
| **Year ended December 31,**                                                                         |   | **2001**  |      | **2002** |   | **2003**  |   |
|----------------------------------------------------------------------------------------------------------|--------|-----------|-----------|----------|--------|-----------|--------|
| Accrual of dividend on Series A Convertible  Preferred                                                   |   | $         | 930,090   |     | $      | 996,335   |   | $ | 1,066,280 |   |
| Deemed dividend associated with beneficial  conversion feature of Series A Convertible Preferred         |   | 391,154   |      | —   |   | —    |   |
| Accrual of dividend on Series B Convertible  Preferred                                                   |   | 359,292   |      | 332,924  |   | —    |   |
| Deemed dividend associated with beneficial  conversion feature of Series B Convertible Preferred         |   | 1,263,219 |      | —   |   | —    |   |
| Deemed dividend associated with beneficial  conversion of Series B Convertible Preferred to Common Stock |   | —    |      | 668,464  |   | —    |   |
| Total                                                                                                    |   | $         | 2,943,755 |     | $      | 1,997,723 |   | $ | 1,066,280 |   |

 

F-23

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**12.****         ****Restructuring**

 

In 2003, the Company closed its Pennsylvania corporate headquarters andtransferred its headquarters to its *Imagent*facility in San Diego, California. The Company recorded a charge of $244,459 in the third quarter ($199,529for remaining lease payments for the office , $12,103 for certain remainingequipment leases and $32,827 to write off certain leasehold improvements)related to the closing of the office. At December 31, 2003, the remaining obligation under the leaseamounts to $136,947.

 

In 2000, the Company recorded a restructuring charge of $597,025,included in operating expenses, relating to the closure of its operations inWestborough, Massachusetts.  Therestructuring charge includes accruals related to estimated lease terminationcosts and accruals related to employee severance and related expenses in connectionwith their termination.  All employeesat the Westborough facility were terminated. The activities previously performed at the Westborough facility werecontinued at other company locations or with outside consultants.  In 2002, the Company recorded an additionalrestructuring charge related to an additional termination costs for one of theWestborough employees.  As of December31, 2002, all restructuring costs have been settled.

 

**13.****         ****Income Taxes**

 

In2002, the Company had taxable income due to the gain from the split-off of thetherapeutic business.  This resulted in current income tax expense ofapproximately $2,300,000 which was completely off-set by net operating losses.

 

TheCompany has not recorded an income tax benefit for net operating lossesremaining of approximately $29,500,000 primarily expiring in 2018 through 2022,or for equity losses in affiliate of approximately $12,000,000.  TheCompany is in the development stage and realization of the losses is notconsidered more likely than not.  An income tax valuation allowance hasbeen provided for the deferred tax assets related to the net operating losscarryforwards and the losses in affiliate.

 

Aportion of the net operating loss carryforwards will not remain with theCompany as a result of the split-off of the therapeutic business. However, the amount of these net operating losses is not known.

 

Pursuant to Sections 382 and 383 of the Internal Revenue Code, annualuse of the Company’s net operating losses could be limited in the event of cumulativechanges in ownership of more than 50%. However, the Company does not believesuch limitation will have a material effect upon the Company’s ability toutilize the carryforwards.

 

**14.****         ****Selected QuarterlyFinancialData (Unaudited)**

 

Summarizedquarterly financial data for 2003 and 2002 is as follows:

 

|                                                         |   | **Quarter**    |          |
|--------------------------------------------------------------|--------|----------------|---------------|
| **2003**                                                     |   | **First**      |          | **Second** |   | **Third** |   | **Fourth** |   |
|                                                         |   |           |          |   |   |   |   |   |   |
| Operating expenses(a)                                        |   | **$**          | **4,749,521** | ** ** | **$** | **2,536,510** | ** ** | **$** | **4,868,947** | ** ** | **$** | **4,753,415** | ** ** |
| Loss from continuing operations(b)                           |   | **(4,940,896** | **)**         | **(7,389,855** | **)** | **(5,261,431** | **)** | **(5,181,322** | **)** |
| Net income (loss)                                            |   | **(4,940,896** | **)**         | **(7,389,855** | **)** | **(5,261,431** | **)** | **(5,181,322** | **)** |
| Basic and diluted loss per share from  continuing operations |   | **(0.30**      | **)**         | **(0.42** | **)** | **(0.25** | **)** | **(0.24** | **)** |
| Basic and diluted income (loss) per share                    |   | **(0.31**      | **)**         | **(0.44** | **)** | **(0.26** | **)** | **(0.25** | **)** |
|                                                              |        |                |               |  |  |  |  |  |  |  |  |  |  |

 

|                                                                    |   | **Quarter** |      |
|-------------------------------------------------------------------------|--------|-------------|-----------|
| **2002**                                                                |   | **First**   |      | **Second** |   | **Third** |   | **Fourth** |   |
|                                                                    |   |        |      |   |   |   |   |   |   |
| Operating expenses(a)                                                   |   | $           | 1,208,285 |   | $ | 906,957 |   | $ | 1,218,083 |   | $ | 2,732,138 |   |
| Loss from continuing operations(b)                                      |   | (1,813,246  | )         | (1,341,652 | ) | (1,594,897 | ) | (5,185,408 | ) |
| Income (loss) from discontinued  operations(c)                          |   | (502,449    | )         | (544,657 | ) | (244,719 | ) | 11,575,147 |   |
| Net income (loss)                                                       |   | (2,315,695  | )         | (1,886,309 | ) | (1,839,616 | ) | 6,389,739 |   |
| Basic and diluted loss per share from  continuing operations            |   | (0.23       | )         | (0.17 | ) | (0.20 | ) | (0.51 | ) |
| Basic and diluted income (loss) per share  from discontinued operations |   | (0.05       | )         | (0.06 | ) | (0.03 | ) | 0.96 |   |
| Basic and diluted income (loss) per share                               |   | (0.28       | )         | (0.23 | ) | (0.23 | ) | 0.45 |   |
|                                                                         |        |             |           |  |  |  |  |  |  |  |  |  |  |

 

----

(a)    Earnings (loss) per share calculations foreach of the quarters are based on the weighted average shares outstanding foreach period.  The sum of the quarters may not necessarily be equal to thefull year earnings per share amounts.

 

F-24

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**ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISKS.**

 

Theprimary market risk that could impact us is the fluctuation in interest ratesrelated to our investments in Government bonds, if any.  As our investments all have short-termmaturities, the investment return reflects the current market rates.  To date, we have not engaged in anyderivative or hedging activities.

 

F-25

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**ITEM 8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

 

On November 14, 2003 BDO Seidman, LLP informed IMCORthat they were declining to stand for re-election as IMCOR’s auditors.  IMCOR’s Board of Directors did not believethat it was necessary to take any action in response to BDO Seidman, LLP’sdecision not to stand for re-election and accordingly did not recommend orapprove this decision.

 

On November 18, 2003, IMCOR’s Board of Directors, uponrecommendation of the Audit Committee, engaged Moss Adams LLP as independentauditor, replacing BDO Seidman, LLP.

 

BDO Seidman, LLP’s reports on IMCOR’s financialstatements for the past two years did not contain an adverse opinion ordisclaimer of opinion, nor were they qualified or modified as to uncertainty,audit scope, or accounting principles other than a qualification related to theentity’s ability to continue as going concern.

 

During IMCOR’s two most recent fiscal years andthrough the date of BDO Seidman, LLP’s declination to stand for re-election,there were no disagreements with BDO Seidman, LLP on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedure which, if not resolved to BDO Seidman, LLP’s satisfaction, would havecaused BDO Seidman, LLP to make reference to the subject matter in connectionwith its report of the financial statements for such years; and there were noreportable events as defined in Item 304(a)(1)(v) of Regulation S-B.

 

BDO Seidman has stated its agreement with the abovestatements in its letter to IMCOR dated November 18, 2003.

 

**ITEM 8A. CONTROLS AND PROCEDURES.**

 

Disclosure controlsand procedures are defined by the SEC as those controls and other proceduresthat are designed to ensure that information required to be disclosed in thecompany’s filings under the Securities Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.  The company’s Chief Executive Officer and Chief FinancialOfficer have evaluated the company’s disclosure controls and procedures within90 days prior to the filing of this Annual Report on Form 10-KSB and havedetermined that such disclosure controls and procedures are effective.

 

Subsequent to the company’s evaluation, therewere no significant changes in internal controls or other factors that couldsignificantly affect internal controls, including any corrective actions withregard to significant deficiencies over financial reporting and materialweaknesses.

 

***PART III.***

 

**ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; AND COMPLIANCEWITH SECTION 16(A) OF THE EXCHANGE ACT.**

 

The information required by Item 9 isincorporated by reference to the information under the captions “Directors,Executive Officers, Promoters and Control Persons; and Compliance with Section16(a) of the Exchange Act” in our definitive proxy statement for the 2004annual meeting of stockholders.

 

As of December 31, 2003, we have not adopted aCode of Ethics for financial executives, which include our Company’s principalexecutive officer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions, as required by sections406 and 407 of the Sarbanes-Oxley Act of 2002.

 

We are in the infancy stages of our businessoperations and have not had resources available or all principal executives inplace to properly design and adopt a code of ethics.  In addition, during fiscal year 2003, our resources and operationswere substantially constrained due to the lack of operating capital. Wecurrently have approximately 30 employees, of which only three are either aprincipal executive or financial officer, and have reduced our overheadexpenses in order to operate within the constraints of our limited revenues andcapital.  Because of our small staff,the

 

38

----

 

involvement of management and the Board of Directorsin the business and operations of the Company, and the internal policies of theCompany, we have not adopted a separate code of ethics for principal executiveand financial officers.

 

We will revisit this issue in the future todetermine if adoption of a code of ethics is appropriate. In the meantime, ourmanagement intends to promote honest and ethical conduct, full and fairdisclosure in our reports to the SEC, and compliance with applicablegovernmental laws and regulations.

 

**ITEM 10. EXECUTIVE COMPENSATION.**

 

The information required by Item 10 isincorporated by reference to the information under the caption “ExecutiveCompensation” in our definitive proxy statement for the 2004 annual meeting ofstockholders.

 

**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

 

The information required by Item 11 is incorporatedby reference to the information under the caption “Security Ownership ofCertain Beneficial Owners and Management” in our definitive proxy statement forthe 2004 annual meeting of stockholders.

 

**ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

The information required by Item 12 isincorporated by reference to the information under the caption “CertainRelationships and Related Transactions” in our definitive proxy statement forthe 2004 annual meeting of stockholders.

 

**ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.**

 

**(a)           Exhibits**

 

Thefollowing is a list of exhibits filed as part of this Form 10-KSB. Exhibitsthat were previously filed are incorporated by reference.  For exhibitsincorporated by reference, the location of the exhibit in the previous filingsis indicated in parentheses.

 
| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                           |
| +2.1            |   | Asset Purchase Agreement dated as of June 10, 2003 by and between IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.) and Alliance Pharmaceutical Corp.  (Filed as Exhibit 2.1 to the company’s Form 8-K dated June 20, 2003 and  incorporated herein by reference.)            |
|            |   |                                                                                                                                                                                                                                                                                           |
| +3.1            |   | Articles  of Incorporation of IMCOR Pharmaceutical Co., as amended  (Filed as  Exhibit E to the company’s Proxy Statement on Form DEFM 14A dated September  12, 2002 and incorporated herein by reference.)                                                                          |
|            |   |                                                                                                                                                                                                                                                                                           |
| +3.2            |   | Amended  and Restated Certificate of Designations, Preferences and Rights of Series A  Preferred Stock.  (Filed as Exhibit 3.5 to the company’s Quarterly  Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)                    |
|            |   |                                                                                                                                                                                                                                                                                           |
| +3.3            |   | Amended  and Restated Bylaws of IMCOR Pharmaceutical Co. (Filed as Exhibit C to  the company’s Information Statement on Form DEF 14C dated December 23, 2002  and incorporated herein by reference.)                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                           |
| +4.1            |   | Form of Secured Promissory Note by and among IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Xmark  Fund, L.P., and Xmark Fund, Ltd. dated June 18, 2003.  (Filed as Exhibit 10.4 to the Company’s  8-K filed on June 20, 2003 and incorporated herein by reference.) |

 

39

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| +4.2   |   | Form of Revolving Convertible Senior Secured Promissory Note by and  between IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and each  of Oxford Bioscience Partners IV L.P., MRNA Fund II L.P. and Mi3 LP dated  June 18, 2003.  (Filed as Exhibit 10.7  to the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *4.3   |   | Form  of Secured Promissory Note by and between IMCOR Pharmaceutical Co. (f/k/a  Photogen Technologies, Inc.) and each of Oxford Bioscience Partners IV L.P.,  MRNA Fund II L.P. and Mi3 LP.                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.4   |   | Registration  Rights Agreement entered into as of November 12, 2002 by and among IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Mi3 L.P., Oxford Bioscience  Partners IV L.P., MRNA Fund II L.P. and Tannebaum, LLC.  (Filed as Exhibit D to the company’s Proxy  Statement on Form DEFM 14A dated September 12, 2002 and incorporated herein  by reference.)                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.5   |   | Form  of Registration Rights Agreement dated as of December 30, 2002 entered into  by and between IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.)  and each of Oxford Bioscience Partners IV  L.P., MRNA Fund II L.P., DMG Legacy Institutional Fund LLC, DMG Legacy Fund  LLC, and DMG Legacy International Ltd.   (Filed as Exhibit 10.7 to the company’s Annual Report on Form 10-K for  dated December 31, 2002 and incorporated herein by reference.) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.6   |   | Incentive  Stock Option Award Agreement entered into by and between IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.) and Taffy J. Williams, Ph.D. dated May 17,  2000.  (Filed as Exhibit 10.4 to the company’s Current Report on Form  8-K dated May 17, 2001 and incorporated herein by reference.)                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.7   |   | Incentive  Stock Option Award Agreement entered into by IMCOR Pharmaceutical Co. (f/k/a  Photogen Technologies, Inc.) and Brooks Boveroux dated August 1,  2000.  (Filed as Exhibit 10.13 to the company’s Annual Report on Form  10-K dated December 31, 2000 and incorporated herein by reference.)                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.8   |   | Amended  Warrant Certificates between IMCOR Pharmaceutical Co. (f/k/a Photogen  Technologies, Inc.)  and Farcap  Group LLC dated as of January 31, 2003. (Filed as Exhibit 10.15 to the  company’s Annual Report on Form 10-K for dated December 31, 2002 and  incorporated herein by reference.)                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.9   |   | Warrant  to Purchase Shares of Common Stock dated October 20, 1999 between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Elan  International Services, Ltd.  (Filed as Exhibit 10.9 to the company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.10  |   | Warrant  Agreement dated as of November 12, 2002 between Broadmark Capital LLC and  IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.).  (Filed as Exhibit 10.27 to the company’s  Annual Report on Form 10-K for dated December 31, 2002 and incorporated  herein by reference.)                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *4.11  |   | Non-Qualified Stock Option Award Agreement dated as of January 14,  2004 by and between IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies,  Inc.) and Taffy J. Williams, Ph.D.                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +9.1   |   | Voting,  Drag-Along and Right of First Refusal Agreement entered into as of November  12, 2002 by and among Robert J. Weinstein, M.D., Stuart P. Levine, Tannebaum,  LLC, Mi3 L.P., Oxford Bioscience Partners IV L.P. and MRNA Fund II L.P.  (Filed as Exhibit G to the company’s Proxy Statement on Form DEFM 14A dated  September 12, 2002 and incorporated herein by reference.)                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.1  |   | Letter  Agreement entered into as of August 29, 2002 by and between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Clinical  Regulatory Strategies, LLC (Filed as Exhibit 10.2                                                                                                                                                                                                                                                                                      |

 

40

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|   |   | to  the company’s quarterly report on Form 10-Q for the quarter ended September  30, 2002 and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.2  |   | Employment  Agreement entered into by and between the company and Brooks Boveroux, dated  October 28, 2002.(Filed as Exhibit 10.9 to the company’s Annual Report on  Form 10-K for dated December 31, 2002 and incorporated herein by reference.)                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.3  |   | Form  of Indemnification Agreement entered into by and between IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.)  and  each Director and Senior Vice President of the company. (Filed as Exhibit  10.13 to the company’s Annual Report on Form 10-K for dated December 31, 2002  and incorporated herein by reference.)                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.4  |   | Tufts  University Sponsored Research Agreement dated August 1, 1999 by and between  Photogen, Inc. and Tufts University, a/k/a Trustees of Tufts College.   (Filed as Exhibit 10.3 to the company’s Quarterly Report on Form 10-QSB for  the quarter ended September 30, 1999 and incorporated herein by  reference.)  Confidential portions of  this exhibit were redacted.                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.5  |   | License  Agreement effective as of September 30, 1999 between The General Hospital  Corporation and Photogen, Inc.  (Filed as Exhibit 10.7 to the company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)  Confidential portions of this  exhibit were redacted.                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.6  |   | Securities  Purchase Agreement dated as of October 20, 1999, among IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.) and Elan International Services, Ltd.   (Filed as Exhibit 10.8 to the company’s Quarterly Report on Form 10-QSB for  the quarter ended September 30, 1999 and incorporated herein by  reference.)  Confidential portions of this exhibit were redacted.                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.7  |   | License  Agreement dated October 20, 1999 between IMCOR Pharmaceutical Co. (f/k/a  Photogen Technologies, Inc.), Photogen Newco Ltd. and Elan Pharma  International Limited.  (Filed as Exhibit 10.13 to the company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)  Confidential portions of this  exhibit were redacted.                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.8  |   | License  Agreement dated October 20, 1999 between Elan Pharma International Limited,  Photogen Newco Ltd. and IMCOR Pharmaceutical Co. (f/k/a Photogen  Technologies, Inc.). (Filed as Exhibit 10.14 to the company’s Quarterly  Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)   Confidential portions of this exhibit were redacted.                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.9  |   | Subscription,  Joint Development and Operating Agreement dated October 20, 1999 between Elan  Pharma International Limited, Elan International Services, Ltd., IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.)  and Photogen Newco Ltd.  (Filed as  Exhibit 10.15 to the company’s Quarterly Report on Form 10-QSB for the  quarter ended September 30, 1999 and incorporated herein by reference.)  Confidential portions of this exhibit were redacted. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.10 |   | Equipment  Lease between Picker Financial Group, L.L.C. and Photogen, Inc. dated October  25, 1999. (Filed as Exhibit 10.37 to the company’s Annual Report on Form  10-KSB for the year ended December 31, 1999 and incorporated herein by  reference.)                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.11 |   | Going Forward Agreement dated as of May 2, 2003 by and among IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.), Xmark Fund, L.P., and Xmark Fund, Ltd.  (Filed as Exhibit 10.1 to the Company’s 8-K filed on June 20, 2003 and  incorporated herein by reference.)                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.12 |   | Security Agreement dated as of June 18, 2003 by and among IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.), Xmark Fund, L.P. and Xmark Fund,  Ltd.  (Filed as Exhibit 10.2 to the                                                                                                                                                                                                                                                                                    |

 

41

----

 
|   |   | Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)                                                                                                                                                                                                                                                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| +10.13 |   | Patent and Trademark Security Agreement dated as of June 18, 2003 by  and among IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Xmark  Fund, L.P., and Xmark Fund, Ltd.   (Filed as Exhibit 10.3 to the Company’s 8-K filed on June 20, 2003 and  incorporated herein by reference.)                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| +10.14 |   | Security Agreement dated as of June 18, 2003 by and among IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.), Oxford Bioscience Partners IV L.P.,  MRNA Fund II L.P. and Mi3 LP.  (Filed  as Exhibit 10.5 to the Company’s 8-K filed on June 20, 2003 and incorporated  herein by reference.)                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| +10.15 |   | Patent and Trademark Security Agreement dated as of as of June 18,  2003 by and among IMCOR Pharmaceutical Co. (f/k/a Photogen  Technologies, Inc.), Oxford Bioscience Partners IV L.P., MRNA Fund II  L.P. and Mi3 LP.  (Filed as Exhibit  10.6 to the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)            |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| +10.16 |   | Equipment Lease dated as of June 18, 2003 by and between IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.) and Baxter Healthcare Corporation.  (Filed as Exhibit 10.8 to the Company’s  8-K filed on June 20, 2003 and incorporated herein by reference.)                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| +10.17 |   | Letter Agreement dated as of August 18, 2003 by and among IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Xmark Fund, Ltd. and  Xmark Fund, L.P. (Filed as Exhibit 10.1 to the Company’s Form 8-K filed on  August 20, 2003 and incorporated herein by reference.)                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| *10.18 |   | Letter Agreement dated June  6, 2003 by and between IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies,  Inc.) and Jack DeFranco.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| +10.19 |   | Letter Agreement dated July 23, 2003 by and between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Taffy J. Williams,  Ph.D. (Filed as Exhibit 10.5 to the company’s Form 10-QSB for the quarter  ended September 30, 2003 and incorporated herein by reference).                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| *10.20 |   | Form of Letter Agreement by and between IMCOR Pharmaceutical Co.  (f/k/a Photogen Technologies, Inc.) and each outside director.                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| +10.21 |   | License Agreement dated December 16, 2003 by and between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Kyosei  Pharmaceutical Co. Ltd. (Filed as Exhibit 10.1 to the Company’s report on  Form 8-K filed on December 18, 2003 and incorporated herein by reference.)  Confidential portions of this exhibit were  redacted. |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| +21    |   | List of subsidiaries of the company   (Filed as Exhibit 21 to the Company’s Form 10-K for the year ended  December 31, 2002 and incorporated herein by reference.)                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| *31.1  |   | Certification of Principal Executive  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| *31.2  |   | Certification of Principal Financial  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| *32.1  |   | Certification of Principal Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                      |
| *32.2  |   | Certification of Principal Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant                                                                                                                                                                                                                                                     |

 

42

----

 
|   |   | to Section 906 of the Sarbanes-Oxley Act  of 2002. |
|--------|--------|----------------------------------------------------|

 

----

+ Incorporated byReference.

* Filed herewith.

 

**(b)           Reports OnForm 8-K**.

 

During the quarterended December 31, 2003 we filed the following reports on Form 8-K:

 

1.             On October 27, 2003 we filed aCurrent Report on Form 8-K with respect to disclosure of pro-forma financialinformation of the company’s acquisition of the medical imaging business ofAlliance Pharmaceutical Corp.

 

2.             On November 18, 2003 we filed aCurrent Report on Form 8-K with respect to the resignation of BDO Seidman as thecompany’s independent auditor and the appointment of Moss Adams LLP as thecompany’s independent auditor.

 

3.             On November 26, 2003 we filed aCurrent Report on Form 8-K amending the report of November 18, 2003 to includethat the Board of Directors did not believe that it was necessary to take anyaction in response to BDO Seidman, LLP’s decision not to stand for re-electionand accordingly did not recommend or approve this decision.

 

4.             On December 18, 2003 we filed aCurrent Report on Form 8-K announcing a License Agreement with KyoseiPharmaceutical Co. Ltd. (“Kyosei”), a subsidiary of the Sakai Group.  The Agreement gives Kyosei an exclusivelicense to develop and market *Imagent*®(perflexane lipid microspheres) for all indications in Japan

 

**ITEM 14.  PrincipalAccountant Fees and Services**.

 

The informationrequired by Item 14 is incorporated by reference to the information under thecaption “Independent Public Accountants” in our definitive proxy statement forthe 2004 annual meeting of shareholders.

 

43

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**SIGNATURES**

 

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| Date:  | April  13,  2004 | IMCOR  Pharmaceutical Co.              |
|--------|------------------|----------------------------------------|
|   |             |                                   |
|   |             | By:                                    | /s/  Taffy J. Williams |   |
|   |             | Taffy  J. Williams, Ph.D.              |
|   |             | President  and Chief Executive Officer |
|        |                  |                                        |  |  |  |

 

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 

 
| **Signature**             |                         | **Title**                                     |   | **Date**                                     |   |
|---------------------------|------------------------------|-----------------------------------------------|--------|----------------------------------------------|--------|
|                      |                         |                                          |   |                                         |   |
| By:                       | /s/  Taffy J. Williams  |                                          |   | President,  Chief Executive Officer and      |   | April  13,  2004 |   |
| Taffy  J. Williams, Ph.D. |                         | Director,  Chairman of the Board (principal   |   |                                         |   |
|                      |                         | executive  officer)                           |   |                                         |   |
|                      |                         |                                          |   |                                         |   |
| By:                       | /s/  Brooks Boveroux         |                                          |   | Senior  Vice President – Finance, Chief |   | April  13,  2004 |   |
| Brooks  Boveroux          |                         | Financial  Officer, Secretary and Treasurer   |   |                                         |   |
|                      |                         | (principal  financial and accounting officer) |   |                                         |   |
|                      |                         |                                          |   |                                         |   |
| By:                       | /s/  Alan D. Watson          |                                          |   | Director                                     |   | April  13,  2004 |   |
| Alan  D. Watson, Ph.D.    |                         |                                          |   |                                         |   |
|                      |                         |                                          |   |                                         |   |
| By:                       | /s/  Jonathan Fleming        |                                          |   | Director                                     |   | April  13,  2004 |   |
| Jonathan  Fleming         |                         |                                          |   |                                         |   |
|                      |                         |                                          |   |                                         |   |
| By:                       | /s/  Richard T. Dean         |                                          |   | Director                                     |   | April  13,  2004 |   |
| Richard  Dean, Ph.D.      |                         |                                          |   |                                         |   |
|                      |                         |                                          |   |                                         |   |
| By:                       | /s/  William D. McPhee       |                                          |   | Director                                     |   | April  13,  2004 |   |
| William  D. McPhee        |                         |                                          |   |                                         |   |

 

 

44

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**EXHIBIT INDEX**

 
| **EXHIBIT NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +2.1            |   | Asset Purchase Agreement dated as of June 10, 2003 by and between IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.) and Alliance Pharmaceutical Corp.  (Filed as Exhibit 2.1 to the company’s Form 8-K dated June 20, 2003 and  incorporated herein by reference.)                                                                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +3.1            |   | Articles  of Incorporation of IMCOR Pharmaceutical Co., as amended  (Filed as  Exhibit E to the company’s Proxy Statement on Form DEFM 14A dated September  12, 2002 and incorporated herein by reference.)                                                                                                                                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +3.2            |   | Amended  and Restated Certificate of Designations, Preferences and Rights of Series A  Preferred Stock.  (Filed as Exhibit 3.5 to the company’s Quarterly  Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +3.3            |   | Amended  and Restated Bylaws of IMCOR Pharmaceutical Co. (Filed as Exhibit C to  the company’s Information Statement on Form DEF 14C dated December 23, 2002  and incorporated herein by reference.)                                                                                                                                                                                                                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.1            |   | Form of Secured Promissory Note by and among IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Xmark  Fund, L.P., and Xmark Fund, Ltd. dated June 18, 2003.  (Filed as Exhibit 10.4 to the Company’s  8-K filed on June 20, 2003 and incorporated herein by reference.)                                                                                                                                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.2            |   | Form of Revolving Convertible Senior Secured Promissory Note by and  between IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and each  of Oxford Bioscience Partners IV L.P., MRNA Fund II L.P. and Mi3 LP dated  June 18, 2003.  (Filed as Exhibit 10.7  to the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *4.3            |   | Form  of Secured Promissory Note by and between IMCOR Pharmaceutical Co. (f/k/a  Photogen Technologies, Inc.) and each of Oxford Bioscience Partners IV L.P.,  MRNA Fund II L.P. and Mi3 LP.                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|  +4.4      |   | Registration  Rights Agreement entered into as of November 12, 2002 by and among IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Mi3 L.P., Oxford  Bioscience Partners IV L.P., MRNA Fund II L.P. and Tannebaum, LLC.  (Filed as Exhibit D to the company’s Proxy  Statement on Form DEFM 14A dated September 12, 2002 and incorporated herein  by reference.)                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.5            |   | Form  of Registration Rights Agreement dated as of December 30, 2002 entered into  by and between IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.)  and each of Oxford Bioscience Partners IV  L.P., MRNA Fund II L.P., DMG Legacy Institutional Fund LLC, DMG Legacy Fund  LLC, and DMG Legacy International Ltd.   (Filed as Exhibit 10.7 to the company’s Annual Report on Form 10-K for  dated December 31, 2002 and incorporated herein by reference.) |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.6            |   | Incentive  Stock Option Award Agreement entered into by and between IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.) and Taffy J. Williams, Ph.D. dated May 17,  2000.  (Filed as Exhibit 10.4 to the company’s Current Report on Form  8-K dated May 17, 2001 and incorporated herein by reference.)                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +4.7            |   | Incentive  Stock Option Award Agreement entered into by IMCOR Pharmaceutical Co. (f/k/a  Photogen Technologies, Inc.) and Brooks Boveroux dated August 1,  2000.  (Filed as Exhibit 10.13 to the company’s Annual Report on Form  10-K dated December 31, 2000 and incorporated herein by reference.)                                                                                                                                                                        |

 

45

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| +4.8   |   | Amended  Warrant Certificates between IMCOR Pharmaceutical Co. (f/k/a Photogen  Technologies, Inc.)  and Farcap  Group LLC dated as of January 31, 2003. (Filed as Exhibit 10.15 to the  company’s Annual Report on Form 10-K for dated December 31, 2002 and  incorporated herein by reference.)                                                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |
| +4.9   |   | Warrant  to Purchase Shares of Common Stock dated October 20, 1999 between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Elan  International Services, Ltd.  (Filed as Exhibit 10.9 to the company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |
| +4.10  |   | Warrant  Agreement dated as of November 12, 2002 between Broadmark Capital LLC and  IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.).  (Filed as Exhibit 10.27 to the company’s  Annual Report on Form 10-K for dated December 31, 2002 and incorporated  herein by reference.)                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |
| *4.11  |   | Non-Qualified Stock Option Award Agreement dated as of January 14,  2004 by and between IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies,  Inc.) and Taffy J. Williams, Ph.D.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |
| +9.1   |   | Voting,  Drag-Along and Right of First Refusal Agreement entered into as of November  12, 2002 by and among Robert J. Weinstein, M.D., Stuart P. Levine, Tannebaum,  LLC, Mi3 L.P., Oxford Bioscience Partners IV L.P. and MRNA Fund II L.P.  (Filed as Exhibit G to the company’s Proxy Statement on Form DEFM 14A dated  September 12, 2002 and incorporated herein by reference.)               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.1  |   | Letter  Agreement entered into as of August 29, 2002 by and between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Clinical  Regulatory Strategies, LLC (Filed as Exhibit 10.2 to the company’s quarterly  report on Form 10-Q for the quarter ended September 30, 2002 and incorporated  herein by reference.)                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.2  |   | Employment  Agreement entered into by and between the company and Brooks Boveroux, dated  October 28, 2002.   (Filed as Exhibit  10.9 to the company’s Annual Report on Form 10-K for dated December 31, 2002  and incorporated herein by reference.)                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.3  |   | Form  of Indemnification Agreement entered into by and between IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.)  and  each Director and Senior Vice President of the company. (Filed as Exhibit  10.13 to the company’s Annual Report on Form 10-K for dated December 31, 2002  and incorporated herein by reference.)                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |   |
| +10.4  |   | Tufts  University Sponsored Research Agreement dated August 1, 1999 by and between  Photogen, Inc. and Tufts University, a/k/a Trustees of Tufts College.   (Filed as Exhibit 10.3 to the company’s Quarterly Report on Form 10-QSB for  the quarter ended September 30, 1999 and incorporated herein by  reference.)  Confidential portions of  this exhibit were redacted.             |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |   |
| +10.5  |   | License  Agreement effective as of September 30, 1999 between The General Hospital  Corporation and Photogen, Inc.  (Filed as Exhibit 10.7 to the company’s  Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)  Confidential portions of this  exhibit were redacted.                                                     |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |   |
| +10.6  |   | Securities  Purchase Agreement dated as of October 20, 1999, among IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.) and Elan International Services, Ltd.   (Filed as Exhibit 10.8 to the company’s Quarterly Report on Form 10-QSB for  the quarter ended September 30, 1999 and incorporated herein by  reference.)  Confidential portions of this exhibit were redacted. |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                    |   |
| +10.7  |   | License  Agreement dated October 20, 1999 between IMCOR Pharmaceutical Co. (f/k/a  Photogen Technologies, Inc.), Photogen Newco Ltd. and Elan Pharma  International Limited.  (Filed as Exhibit 10.13                                                                                                                                                                                              |   |
|        |        |                                                                                                                                                                                                                                                                                                                                                                                                         |  |  |

 

46

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|   |   | to  the company’s Quarterly Report on Form 10-QSB for the quarter ended September  30, 1999 and incorporated herein by reference.)  Confidential portions  of this exhibit were redacted.                                                                                                                                                                                                                                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.8  |   | License  Agreement dated October 20, 1999 between Elan Pharma International Limited,  Photogen Newco Ltd. and IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies,  Inc.). (Filed as Exhibit 10.14 to the company’s Quarterly  Report on Form 10-QSB for the quarter ended September 30, 1999 and  incorporated herein by reference.)   Confidential portions of this exhibit were redacted.                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.9  |   | Subscription,  Joint Development and Operating Agreement dated October 20, 1999 between Elan  Pharma International Limited, Elan International Services, Ltd., IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.)  and Photogen Newco Ltd.  (Filed as  Exhibit 10.15 to the company’s Quarterly Report on Form 10-QSB for the  quarter ended September 30, 1999 and incorporated herein by reference.)  Confidential portions of this exhibit were redacted. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.10 |   | Equipment  Lease between Picker Financial Group, L.L.C. and Photogen, Inc. dated October  25, 1999. (Filed as Exhibit 10.37 to the company’s Annual Report on Form  10-KSB for the year ended December 31, 1999 and incorporated herein by  reference.)                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.11 |   | Going Forward Agreement dated as of May 2, 2003 by and among IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.), Xmark Fund, L.P., and Xmark Fund, Ltd.  (Filed as Exhibit 10.1 to the Company’s 8-K filed on June 20, 2003 and  incorporated herein by reference.)                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.12 |   | Security Agreement dated as of June 18, 2003 by and among IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.), Xmark Fund, L.P. and Xmark Fund,  Ltd.  (Filed as Exhibit 10.2 to the  Company’s 8-K filed on June 20, 2003 and incorporated herein by reference.)                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.13 |   | Patent and Trademark Security Agreement dated as of June 18, 2003 by  and among IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Xmark  Fund, L.P., and Xmark Fund, Ltd.   (Filed as Exhibit 10.3 to the Company’s 8-K filed on June 20, 2003 and  incorporated herein by reference.)                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.14 |   | Security Agreement dated as of June 18, 2003 by and among IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.), Oxford Bioscience Partners IV L.P.,  MRNA Fund II L.P. and Mi3 LP.  (Filed  as Exhibit 10.5 to the Company’s 8-K filed on June 20, 2003 and incorporated  herein by reference.)                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.15 |   | Patent and Trademark Security Agreement dated as of as of June 18,  2003 by and among IMCOR Pharmaceutical Co. (f/k/a Photogen  Technologies, Inc.), Oxford Bioscience Partners IV L.P., MRNA Fund II  L.P. and Mi3 LP.  (Filed as Exhibit  10.6 to the Company’s 8-K filed on June 20, 2003 and incorporated herein by  reference.)                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.16 |   | Equipment Lease dated as of June 18, 2003 by and between IMCOR Pharmaceutical  Co. (f/k/a Photogen Technologies, Inc.) and Baxter Healthcare Corporation.  (Filed as Exhibit 10.8 to the Company’s  8-K filed on June 20, 2003 and incorporated herein by reference.)                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.17 |   | Letter Agreement dated as of August 18, 2003 by and among IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Xmark Fund, Ltd. and  Xmark Fund, L.P. (Filed as Exhibit 10.1 to the Company’s Form 8-K filed on  August 20, 2003 and incorporated herein by reference.)                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *10.18 |   | Letter Agreement dated June  6, 2003 by and between IMCOR Pharmaceutical Co. (f/k/a Photogen Technologies,  Inc.) and Jack DeFranco.                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| +10.19 |   | Letter Agreement dated July 23, 2003 by and between IMCOR  Pharmaceutical Co. (f/k/a Photogen                                                                                                                                                                                                                                                                                                                                                                                          |

 

47

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|        |   | Technologies, Inc.) and Taffy J. Williams, Ph.D. (Filed as Exhibit 10.5  to the company’s Form 10-QSB for the quarter ended September 30, 2003 and  incorporated herein by reference).                                                                                                                                                                |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                       |
| *10.20      |   | Form of Letter Agreement by and between IMCOR Pharmaceutical Co.  (f/k/a Photogen Technologies, Inc.) and each outside director.                                                                                                                                                                                                                           |
|        |   |                                                                                                                                                                                                                                                                                                                                                       |
| +10.21      |   | License Agreement dated December 16, 2003 by and between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Kyosei  Pharmaceutical Co. Ltd. (Filed as Exhibit 10.1 to the Company’s report on  Form 8-K filed on December 18, 2003 and incorporated herein by  reference.)  Confidential portions of  this exhibit were redacted. |
|        |   |                                                                                                                                                                                                                                                                                                                                                       |
| +21         |   | List of subsidiaries of the company   (Filed as Exhibit 21 to the Company’s Form 10-K for the year ended  December 31, 2002 and incorporated herein by reference.)                                                                                                                                                                               |
|        |   |                                                                                                                                                                                                                                                                                                                                                       |
|  *31.1 |   | Certification of Principal Executive  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                                       |
| *31.2       |   | Certification of Principal Financial  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                                       |
| *32.1       |   | Certification of Principal Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                                       |
| *32.2       |   | Certification of Principal Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                   |

 

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*Filed herewith

+Incorporated hereinby reference

 

48

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