**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-QSB**

 
| **ý**                                                                                                                                                                                                                   |   | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                         |   |                                                                                         |
| **FOR THE QUARTERLY PERIOD ENDED  JUNE 30, 2004**                                                                                                                                                                       |
|                                                                                                                                                                                                                         |   |                                                                                         |
| **OR**                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                         |   |                                                                                         |
| **o**                                                                                                                                                                                                                        |   | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                         |   |                                                                                         |
| **FOR THE TRANSITION PERIOD FROM                   TO               ** |
|                                                                                                                                                                                                                         |   |                                                                                         |
| **Commission File Number 0-23553**                                                                                                                                                                                           |

 

**IMCOR PHARMACEUTICAL CO.**

(Exact name of small business issuer asspecified in its charter)

 
| **NEVADA**                                                      |   | **62-1742885**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification No.) |

 

**6175Lusk Boulevard****San Diego, CA 92121**

(Address of principal executiveoffices) (Zip Code)

 

**858/410-5601**

(Issuer’s telephone number,including area code)

 

Check whether 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 

 

State the number of shares outstanding of each of the issuer’s classesof common equity, as of the latest practicable date: 79,840,300 shares ofcommon stock, $.001 par value per share, issued and outstanding atAugust 15, 2004.

 

Transitional Small Business Disclosure Format (check one):

 

Yes     o    No    ý

 

 

----

 

**INDEX**

 
| PART I.  | FINANCIAL INFORMATION                                           |   |
|----------|-----------------------------------------------------------------|--------|
| ITEM 1.  | FINANCIAL STATEMENTS                                            |   |
| ITEM 2.  | MANAGEMENT’S DISCUSSION AND ANALYSIS OR  PLAN OF OPERATION |   |
| ITEM 3.  | CONTROLS AND PROCEDURES                                         |   |
| PART II. | OTHER INFORMATION                                               |   |
| ITEM 1.  | LEGAL PROCEEDINGS                                               |   |
| ITEM 2.  | CHANGES IN SECURITIES                                           |   |
| ITEM 3.  | DEFAULTS UPON SENIOR SECURITIES                                 |   |
| ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS            |   |
| ITEM 5.  | OTHER INFORMATION                                               |   |
| ITEM 6.  | EXHIBITS AND REPORTS ON FORM 8-K                                |   |

 

----

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

IMCOR Pharmaceutical Co.

(Formerly Photogen Technologies, Inc.)

(A Development Stage Company)

Consolidated Condensed Balance Sheets

All amounts in $

 
|                                                                                                                                                                                                                                                                                                                            |   | **June 30,  2004** |           | **Dec 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|----------------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                            |   | **(Unaudited)**         |           | **(Audited)**     |   |
| **Assets**                                                                                                                                                                                                                                                                                                                      |   |                    |           |              |   |
| **Current Assets**                                                                                                                                                                                                                                                                                                              |   |                    |           |              |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                       |   | **$**                   | **7,060,869**  |              | $      | 1,657,594 |   |
| Accounts receivable                                                                                                                                                                                                                                                                                                             |   | **15,855**              |           | —            |   |
| Deposits                                                                                                                                                                                                                                                                                                                        |   | **—**              |           | 108,721           |   |
| Prepaid expenses                                                                                                                                                                                                                                                                                                                |   | **510,102**             |           | 492,718           |   |
| **Total Current  Assets**                                                                                                                                                                                                                                                                                                       |   | **7,586,826**           |           | 2,259,033         |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    |           |              |   |
| **Property, Plant and  Equipment,** less accumulated depreciation of  $1,842,009 and $996,091 at June 30,  2004 and December 31, 2003, respectively                                                                                                                                                              |   | **5,400,761**           |           | 6,294,560         |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    |           |              |   |
| **Prepaid Royalty**                                                                                                                                                                                                                                                                                                             |   | **387,381**             |           | —            |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    |           |              |   |
| **Patent Costs,**  net of amortization of $211,632 and $183,854 at June 30, 2004  and December 31, 2003, respectively                                                                                                                                                                                            |   | **288,368**             |           | 316,146           |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    |           |              |   |
| **Deposits**                                                                                                                                                                                                                                                                                                                    |   | **348,383**             |           | 338,383           |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    |           |              |   |
| **Purchased  Technology,** net of amortization of $1,309,806 and  $658,217  at June 30, 2004 and  December 31, 2003, respectively                                                                                                                                                                                |   | **14,328,340**          |           | 14,979,929        |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    |           |              |   |
| **Technology License,**  net of amortization of $4,128 at June 30, 2004                                                                                                                                                                                                                                                    |   | **731,788**             |           | —            |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    |           |              |   |
| **Investment in and  Advances to Affiliate**                                                                                                                                                                                                                                                                                    |   | **—**              |           | 2,803,114         |   |
| Total Assets                                                                                                                                                                                                                                                                                                                    |   | **$**                   | **29,071,847** |              | $      | 26,991,165 |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    |           |              |   |
| **Liabilities and  Shareholders’ Equity/(Deficit)**                                                                                                                                                                                                                                                                        |   |                    |           |              |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    |           |              |   |
| **Current Liabilities**                                                                                                                                                                                                                                                                                                         |   |                    |           |              |   |
| Accounts payable                                                                                                                                                                                                                                                                                                                |   | **$**                   | **2,316,120**  |              | $      | 1,884,791 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                                                |   | **3,360,713**           |           | 3,281,792         |   |
| Obligations pursuant to equipment lease  settlement                                                                                                                                                                                                                                                                             |   | **567,984**             |           | 586,052           |   |
| Secured bridge loan                                                                                                                                                                                                                                                                                                             |   | **702,863**             |           | —            |   |
| Secured promissory notes                                                                                                                                                                                                                                                                                                        |   | **1,628,447**           |           | —            |   |
| Royalty liability                                                                                                                                                                                                                                                                                                               |   | **400,000**             |           | —            |   |
| Promissory notes                                                                                                                                                                                                                                                                                                                |   | **416,807**             |           | 329,679           |   |
| Secured lines of credit                                                                                                                                                                                                                                                                                                         |   | **—**              |           | 11,735,036        |   |
| Secured notes payable                                                                                                                                                                                                                                                                                                           |   | **—**              |           | 1,250,000         |   |
| **Total Current  Liabilities**                                                                                                                                                                                                                                                                                                  |   | **9,392,934**           |           | 19,067,351        |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    |           |              |   |
| **Deferred Contract  Revenue**                                                                                                                                                                                                                                                                                                  |   | **3,873,810**           | ** **     | 2,000,000         |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    | ** **     |              |   |
| **Accrued Equipment  Lease**                                                                                                                                                                                                                                                                                                    |   | —                  | ** **     | 133,888           |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    | ** **     |              |   |
| **Puttable Shares**                                                                                                                                                                                                                                                                                                             |   | —                  | ** **     | 1,969,668         |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    | ** **     |              |   |
| **Mezzanine Equity:**  Preferred stock; par value $.01 per share; 5,000,000 shares authorized  including Series A Preferred Stock; 0 and 12,015 shares authorized, issued  and outstanding at June 30, 2004 and December 31, 2003,  respectively; liquidation preference $1,000 per share (in aggregate  $12,015,000) |   | —                  | ** **     | 12,015,000        |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    | ** **     |              |   |
| **Shareholders’  Equity/(Deficit)**                                                                                                                                                                                                                                                                                        |   |                    | ** **     |              |   |
| Preferred stock; par value $.01 per share;  5,000,000 shares authorized including: Series A Preferred Stock; 0 and 841  shares authorized, issued and outstanding at June 30, 2004 and  December 31, 2003, respectively; liquidation preference $1,000 per  share (in aggregate $841,000)                        |   | —                  | ** **     | 8                 |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    | ** **     |              |   |
| Common stock; par value $.001 per share;  150,000,000 shares authorized, 79,840,300 and 19,464,548 shares issued  and outstanding at  June 30, 2004  and December 31, 2003, respectively                                                                                                                    |   | **79,840**              | ** **     | 19,465            |   |
|                                                                                                                                                                                                                                                                                                                            |   |                    | ** **     |              |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                      |   | **79,351,699**          | ** **     | 38,184,323        |   |
| Common stock to be issued                                                                                                                                                                                                                                                                                                       |   | **51,667**              | ** **     | 5,120,159         |   |
| Deficit accumulated during the development  stage                                                                                                                                                                                                                                                                               |   | **(63,678,103**         | **)**          | (51,518,697       | )      |
| **Total Shareholders’  Equity/(Deficit)**                                                                                                                                                                                                                                                                                  |   | **15,805,103**          | ** **     | (8,194,743        | )      |
| Total Liabilities and Shareholders’ Equity                                                                                                                                                                                                                                                                                 |   | **$**                   | **29,071,847** | ** **        | $      | 26,991,165 |   |

 

1

----

 

IMCOR Pharmaceutical Co.

(Formerly Photogen Technologies, Inc.)

(A Development Stage Company)

Consolidated Condensed Statements ofOperations

(Unaudited)

All amounts in $

 
|                                                                               |   | **Three  Months  Ended  June 30,  2004** |       | **Three Months  Ended  June 30,  2003** |   | **Six Months  Ended  June 30,  2004** |   | **Six Months  Ended  June 30,  2003** |        | **Cumulative  Amounts  From  November 3,  1996 (inception)  to  June 30, 2004** |   |
|------------------------------------------------------------------------------------|--------|-----------------------------------------------|------------|----------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|-------------|-------------------------------------------------------------------------------------------|--------|
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| **License Revenue**                                                                |   | $                                             | 84,523     |                                         | $      | —                                     |   | $                                          | 126,190     |                                                                                      | $      | — |   | $ | 126,190 |   |
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| **Operating Expenses**                                                             |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| Research and development                                                           |   | 926,076                                       |       | 266,279                                      |   | 1,886,907                                  |   | 820,442                                    |        | 8,773,223                                                                                 |   |
| Sales, general and administrative                                                  |   | 4,142,655                                     |       | 2,270,231                                    |   | 7,831,761                                  |   | 6,465,589                                  |        | 38,721,050                                                                                |   |
| Restructuring charges                                                              |   | —                                        |       | —                                       |   | —                                     |   | —                                     |        | 1,541,455                                                                                 |   |
| Provision for future lease payments                                                |   | —                                        |       | —                                       |   | —                                     |   | —                                     |        | 1,264,208                                                                                 |   |
| **Total Operating  Expenses**                                                      |   | 5,068,731                                     |       | 2,536,510                                    |   | 9,718,668                                  |   | 7,286,031                                  |        | 50,299,936                                                                                |   |
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| **Loss from Joint  Venture**                                                       |   | (2,017,749                                    | )          | (4,801,648                                   | )      | (2,213,646                                 | )      | (4,997,545                                 | )           | (14,518,000                                                                               | )      |
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| **Investment and  Other Income**                                                   |   | 19,236                                        |       | 2,291                                        |   | 243,472                                    |   | 6,813                                      |        | 1,459,807                                                                                 |   |
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| **Interest Expense**                                                               |   | (329,334                                      | )          | (53,988                                      | )      | (596,753                                   | )      | (53,988                                    | )           | (1,546,815                                                                                | )      |
| Loss from continuing operations                                                    |   | $                                             | (7,312,055 | )                                            | $      | (7,389,855                                 | )      | $                                          | (12,159,405 | )                                                                                         | $      | (12,330,751 | ) | $ | (64,778,754 | ) |
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| Discontinued Operations                                                            |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| Loss from operations of discontinued  therapeutic business                         |   | —                                        |       | —                                       |   | —                                     |   | —                                     |        | (10,679,101                                                                               | )      |
| Gain from split-off of therapeutic business                                        |   | —                                        |       | —                                       |   | —                                     |   | —                                     |        | 11,779,752                                                                                |   |
| Income (loss) from discontinued operations                                         |   | —                                        |       | —                                       |   | —                                     |   | —                                     |        | 1,100,651                                                                                 |   |
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| **Net Loss**                                                                       |   | $                                             | (7,312,055 | )                                            | $      | (7,389,855                                 | )      | $                                          | (12,159,405 | )                                                                                         | $      | (12,330,751 | ) | $ | (63,678,103 | ) |
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| **Dividends on  Preferred Stock**                                                  |   | (221,160                                      | )          | (265,504                                     | )      | (498,030                                   | )      | (523,970                                   | )           |                                                                                      |   |
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| **Net Loss Applicable  to Common Shareholders**                                    |   | $                                             | (7,533,215 | )                                            | $      | (7,655,359                                 | )      | $                                          | (12,657,435 | )                                                                                         | $      | (12,854,721 | ) |   |   |
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| **Basic and Diluted  Loss per Common Share**                                       |   | $                                             | **(0.27**  | )                                            | $      | (0.44                                      | )      | $                                          | **(0.51**   | )                                                                                         | $      | (0.75 | ) |   |   |
|                                                                               |   |                                          |       |                                         |   |                                       |   |                                       |        |                                                                                      |   |
| **Weighted Average  Number of Common Shares Outstanding – Basic and Diluted** |   | 28,138,446                                    |       | 17,532,111                                   |   | 24,808,999                                 |   | 17,105,467                                 |        |                                                                                      |   |

 

2

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IMCOR Pharmaceutical Co.

(Formerly Photogen Technologies, Inc.)

(A Development Stage Company)

Consolidated Condensed Statements ofShareholders’ Equity/(Deficit)

(Unaudited)

 
|                                                                                  |   | **Preferred  Stock** |   |         |   | **Members’  Capital** |   | **Common  Stock  To be  Issued** |   | **Additional  Paid-in  Capital** |   | **Deficit  Accumulated  Development  Stage** |   | **Total** |   |
|---------------------------------------------------------------------------------------|--------|----------------------|--------|--------------|--------|----------------------------|--------|----------------------------------|--------|----------------------------------|--------|----------------------------------------------|--------|-----------|--------|
|                                                                                  |   |                 |   |         |   |                       |   |                             |
|                                                                                  |   | **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 |   |
| Reclassification of Series A shares as mezzanine  equity in accordance with EITF D-98 |   | (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 (restated)                                    |   | —               |   | —       |   | —                     |   | —                           |   | 9,345,847                        |   | 9,346                                        |   | —    |   | — |   | 19,427,092 |   | (8,583,235 | ) | 10,853,203 |   |

 

3

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|                                                                      |   | **Preferred  Stock** |   |         |   | **Members’  Capital** |   | **Common  Stock  To be  Issued** |   | **Additional  Paid-in  Capital** |   | **Deficit  Accumulated  Development  Stage** |   | **Total** |   |
|---------------------------------------------------------------------------|--------|----------------------|--------|--------------|--------|----------------------------|--------|----------------------------------|--------|----------------------------------|--------|----------------------------------------------|--------|-----------|--------|
|                                                                      |   |                 |   |         |   |                       |   |                             |
|                                                                      |   | **Series A**         |   | **Series B** |   | **Common  Stock**          |   |                             |   |                             |   |                                         |
|                                                                      |   | **Shares**           |   | **Amount**   |   | **Shares**                 |   | **Amount**                       |   | **Shares**                       |   | **Amount**                                   |   |      |   |   |   |   |
|                                                                      |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| 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 |   |
| Beneficial accretion of Series A shares  reclassified as mezzanine equity |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | (240,464 | ) | — |   | (240,464 | ) |
| Net loss for the year ended  December 31, 2000                  |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | — |   | (10,787,062 | ) | (10,787,062 | ) |
|                                                                      |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| **Balance,** at  December 31, 2000 (restated)                        |   | 841                  |   | 8            |   | 337,056                    |   | 3,370                            |   | 9,345,847                        |   | 9,346                                        |   | —    |   | — |   | 25,950,660 |   | (19,370,297 | ) | 6,593,087 |   |
|                                                                      |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| 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 | ) | — |   | — |   |
| Beneficial accretion of Series A shares  reclassified as mezzanine equity |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | (195,577 | ) | — |   | (195,577 | ) |
| Net loss for the year ended  December 31, 2001                  |   | —               |   | —       |   | —                     |   | —                           |   | —                           |   | —                                       |   | —    |   | — |   | — |   | (9,723,016 | ) | (9,723,016 | ) |
|                                                                      |   |                 |   |         |   |                       |   |                             |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| **Balance,** at  December 31, 2001 (restated)                        |   | 841                  |   | 8            |   | 357,280                    |   | 3,572                            |   | 9,585,948                        |   | 9,586                                        |   | —    |   | — |   | 26,238,093 |   | (29,093,313 | ) | (2,842,054 | ) |

 

4

----

 
|                                                                                        |   | **Preferred Stock** |   |         |   | **Members’  Capital** |    | **Common Stock  To be  Issued** |   | **Additional  Paid-in  Capital** |   | **Deficit  Accumulated  Development  Stage** |   | **Total** |   |
|---------------------------------------------------------------------------------------------|--------|---------------------|--------|--------------|--------|----------------------------|---------|---------------------------------|--------|----------------------------------|--------|----------------------------------------------|--------|-----------|--------|
|                                                                                        |   |                |   |         |   |                       |    |                            |
|                                                                                        |   | **Series A**        |   | **Series B** |   | **Common Stock**           |    |                            |   |                             |   |                                         |
|                                                                                        |   | **Shares**          |   | **Amount**   |   | **Shares**                 |    | **Amount**                      |   | **Shares**                       |   | **Amount**                                   |   |      |   |   |   |   |
| **Balance,** at  December 31, 2001 (restated)                                          |   | 841                 |   | $            | 8      |                       | 357,280 |                            | $      | 3,572                            |   | 9,585,948                                    |   | $         | 9,586  |   | $ | — |   | $ | — |   | $ | 26,238,093 |   | $ | (29,093,313 | ) | $ | (2,842,054 | ) |
|                                                                                        |   |                |   |         |   |                       |    |                            |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| 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 (Note 6(f))                 |   | —              |   | —       |   | —                     |    | —                          |   | (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 loss for the year ended December 31, 2002                                          |   | —              |   | —       |   | —                     |    | —                          |   | —                           |   | —                                       |   | —    |   | — |   | — |   | 348,119 |   | 348,119 |   |
|                                                                                        |   |                |   |         |   |                       |    |                            |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| **Balance,** at  December 31, 2002 (restated)                                          |   | 841                 |   | $            | 8      |                       | —  |                            | $      | —                           |   | 16,137,465                                   |   | $         | 16,137 |   | $ | — |   | $ | — |   | $ | 31,130,000 |   | $ | (28,745,194 | ) | $ | 2,400,951 |   |
|                                                                                        |   |                |   |         |   |                       |    |                            |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| 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 *Imagent*  Business purchase                                               |   | —              |   | —       |   | —                     |    | —                          |   | 2,198,137                        |   | 2,198                                        |   | —    |   | — |   | 5,581,070 |   | — |   | 5,583,268 |   |
| Shares to be issued in *Imagent* Business purchase                                          |   | —              |   | —       |   | —                     |    | —                          |   | —                           |   | —                                       |   | —    |   | 5,043,226 |   | — |   | — |   | 5,043,226 |   |

 

5

----

 
|                                                                                         |   | **Preferred Stock** |   |         |   | **Members’  Capital** |   | **Common Stock  To be  Issued** |   | **Additional  Paid-in  Capital** |   | **Deficit  Accumulated  Development  Stage** |   | **Total** |   |
|----------------------------------------------------------------------------------------------|--------|---------------------|--------|--------------|--------|----------------------------|--------|---------------------------------|--------|----------------------------------|--------|----------------------------------------------|--------|-----------|--------|
|                                                                                         |   |                |   |         |   |                       |   |                            |
|                                                                                         |   | **Series A**        |   | **Series B** |   | **Common Stock**           |   |                            |   |                             |   |                                         |
|                                                                                         |   | **Shares**          |   | **Amount**   |   | **Shares**                 |   | **Amount**                      |   | **Shares**                       |   | **Amount**                                   |   |      |   |   |   |   |
| 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 (restated)                                           |   | 841                 |   | $            | 8      |                       | — |                            | $      | —                           |   | 19,464,548                                   |   | $         | 19,465 |   | $ | — |   | $ | 5,120,159 |   | $ | 38,184,323 |   | $ | (51,518,698 | ) | $ | (8,194,743 | ) |
|                                                                                         |   |                |   |         |   |                       |   |                            |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| Shares issued to consultant for services                                                     |   | —              |   | —       |   | —                     |   | —                          |   | 6,250                            |   | 6                                            |   | —    |   | — |   | 7,682 |   | — |   | 7,688 |   |
| Employee compensation from stock options                                                     |   | —              |   | —       |   | —                     |   | —                          |   | —                           |   | —                                       |   | —    |   | — |   | 662,129 |   | — |   | 662,129 |   |
| Shares issued in *Imagent*  Business purchase                                                |   | —              |   | —       |   | —                     |   | —                          |   | 1,985,522                        |   | 1,985                                        |   | —    |   | (5,043,226 | ) | 5,041,241 |   | — |   | — |   |
| Shares issued for penalties                                                                  |   | —              |   | —       |   | —                     |   | —                          |   | 68,455                           |   | 68                                           |   | —    |   | — |   | 136,888 |   | — |   | 136,956 |   |
| Shares to be issued for late stock registration  penalties                                   |   | —              |   | —       |   | —                     |   | —                          |   | —                           |   | —                                       |   | —    |   | 44,973 |   | — |   | — |   | 44,973 |   |
| Shares to be issued to Xmark and secured creditors  for interest and penalties               |   | —              |   | —       |   | —                     |   | —                          |   | —                           |   | —                                       |   | —    |   | 132,951 |   | — |   | — |   | 132,951 |   |
| Shares issued as payment for promissory notes                                                |   | —              |   | —       |   | —                     |   | —                          |   | 33,740,672                       |   | 33,741                                       |   | —    |   | — |   | 13,462,528 |   | — |   | 13,496,269 |   |
| Shares issued for cash, net                                                                  |   | —              |   | —       |   | —                     |   | —                          |   | 25,374,999                       |   | 25,375                                       |   | —    |   | — |   | 9,299,625 |   | — |   | 9,325,000 |   |
| Issuance of stock in settlement of lease                                                     |   | —              |   | —       |   | —                     |   | —                          |   | 616,580                          |   | 617                                          |   | —    |   | — |   | — |   | — |   | 617 |   |
| Xmark puttable shares issued from mezzanine equity                                           |   | —              |   | —       |   | —                     |   | —                          |   | —                           |   | —                                       |   | —    |   | — |   | 1,969,668 |   | — |   | 1,969,668 |   |
| Conversion of Series A to common stock                                                       |   | (841                | )      | (8           | )      | —                     |   | —                          |   | 195,263                          |   | 195                                          |   | —    |   | — |   | 12,161,260 |   | — |   | 12,161,447 |   |
| Retirement of puttable shares                                                                |   | —              |   | —       |   | —                     |   | —                          |   | (1,611,989                       | )      | (1,612                                       | )      | —    |   | (203,190 | ) | (1,573,645 | ) | — |   | (1,778,447 | ) |
| Net loss for the six months ended June30, 2004                                               |   | —              |   | —       |   | —                     |   | —                          |   | —                           |   | —                                       |   | —    |   | — |   | — |   | (12,159,405 | ) | (12,159,405 | ) |
|                                                                                         |   |                |   |         |   |                       |   |                            |   |                             |   |                                         |   |      |   |   |   |   |   |   |   |   |   |
| **Balance,** at  June 30, 2004                                                          |   | —              |   | $            | — |                       | — |                            | $      | —                           |   | 79,840,300                                   |   | $         | 79,840 |   | $ | — |   | $ | 51,667 |   | $ | 79,351,699 |   | $ | (63,678,103 | ) | $ | 15,805,103 |   |

 

6

----

 

IMCOR Pharmaceutical Co.

(Formerly Photogen Technologies, Inc.)

(A Development Stage Company)

Consolidated Condensed Statements of CashFlows

(Unaudited)

All amounts in $

 
|                                                              |   | **Six Months  Ended  June 30, 2004** |        | **Six Months  Ended  June 30, 2003** |   | **Cumulative  Amounts From  November 3, 1996  (Inception)** |   |
|-------------------------------------------------------------------|--------|-------------------------------------------|-------------|-------------------------------------------|--------|------------------------------------------------------------------|--------|
|                                                              |   |                                      |        |                                      |   |                                                             |   |
| **Cash Flows From  Operating Activities**                         |   |                                      |        |                                      |   |                                                             |   |
| Net loss                                                          |   | $                                         | (12,159,405 | )                                         | $      | (12,330,751                                                      | )      | $ | (63,678,103 | ) |
| Loss from discontinued operations                                 |   | —                                    |        | —                                    |   | 10,679,101                                                       |   |
| Depreciation and amortization                                     |   | 1,580,064                                 |        | 83,070                                    |   | 4,281,048                                                        |   |
| Prepaid Royalty expense                                           |   | 12,619                                    |        | —                                    |   | 12,619                                                           |   |
| (Gain) Loss on disposal of fixed assets                           |   | 2,200                                     |        | —                                    |   | 40,624                                                           |   |
| Gain on sale of marketable securities                             |   | —                                    |        | —                                    |   | (18,503                                                          | )      |
| United States Treasury Notes amortization                         |   |                                      |        | —                                    |   | 12,586                                                           |   |
| Gain on sale of therapeutic business                              |   |                                      |        | —                                    |   | (11,779,752                                                      | )      |
| Gain on equipment lease settlement                                |   | 126,257                                   |        | —                                    |   | 126,257                                                          |   |
| Allowance for notes receivable                                    |   |                                      |        | 1,491,500                                 |   | 658,217                                                          |   |
| Stock option compensation                                         |   | 662,129                                   |        | 538,470                                   |   | 3,586,467                                                        |   |
| Accrued interest on line of credit                                |   | 495,248                                   |        |                                      |   | 813,283                                                          |   |
| Note payable for services rendered                                |   | 53,299                                    |        |                                      |   | 382,980                                                          |   |
| Recognition of deferred contract revenue                          |   | (126,190                                  | )           |                                      |   | (126,190                                                         | )      |
| Issuance of stock for standstill agreement                        |   | —                                    |        | 1,198,950                                 |   | 1,337,426                                                        |   |
| Beneficial inducement costs for convertible  notes                |   | —                                    |        | —                                    |   | 206,348                                                          |   |
| Issuance of warrants in exchange for  services rendered           |   | —                                    |        | —                                    |   | 4,317,091                                                        |   |
| Issuance of stock options in settlement of  lawsuit               |   | —                                    |        | —                                    |   | 806,415                                                          |   |
| Issuance of stock for services rendered                           |   | 7,688                                     |        | 62,313                                    |   | 139,949                                                          |   |
| Additional fee per Xmark exchange agreement                       |   | 350,000                                   |        | —                                    |   | 350,000                                                          |   |
| Loss from investment in affiliate                                 |   | 2,213,646                                 |        | 4,997,545                                 |   | 14,518,000                                                       |   |
| Issuance of stock for interest payments and  penalties            |   | 314,879                                   |        | —                                    |   | 440,408                                                          |   |
| Issuance of common stock in equipment lease  settlement           |   | 617                                       |        | —                                    |   | 617                                                              |   |
| Changes in operating assets and  liabilities:                     |   |                                      |        |                                      |   |                                                             |   |
| Prepaid expenses                                                  |   | (17,384                                   | )           | (25,529                                   | )      | (510,102                                                         | )      |
| Interest receivable                                               |   | (15,855                                   | )           | —                                    |   | (15,855                                                          | )      |
| Accounts payable                                                  |   | 251,836                                   |        | (57,067                                   | )      | 2,206,627                                                        |   |
| Accrued expenses                                                  |   | 78,921                                    |        | 706,707                                   |   | 174,255                                                          |   |
| Accrued equipment lease                                           |   | —                                    |        | (200,832                                  | )      | 1,050,589                                                        |   |
| Deferred contract revenue                                         |   | 2,000,000                                 |        | —                                    |   | 4,000,000                                                        |   |
| Net cash used in operating activities  (continuing operations)    |   | (4,169,431                                | )           | (3,535,624                                | )      | (25,987,598                                                      | )      |
| Net cash used in discontinued operations                          |   | —                                    |        | —                                    |   | (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                         |   | —                                    |        | —                                    |   | (38,656,973                                                      | )      |
| Sales of United States Treasury Notes                             |   | —                                    |        | —                                    |   | 39,778,548                                                       |   |
| Purchase of capital assets                                        |   | (4,970                                    | )           | —                                    |   | (641,847                                                         | )      |
| Proceeds from sale of equipment                                   |   | —                                    |        | —                                    |   | 145,551                                                          |   |
| Costs to acquire patent                                           |   | —                                    |        | —                                    |   | (237,335                                                         | )      |
| Investment in and advances to affiliate                           |   | —                                    |        | —                                    |   | (15,107,468                                                      | )      |
| Increase in deposit                                               |   | —                                    |        | (10,000                                   | )      | (777,753                                                         | )      |
| Investment in Alliance Pharmaceutical Corp.                       |   | —                                    |        | —                                    |   | (1,255,000                                                       | )      |
| Purchase of*Imagent* business                                     |   | —                                    |        | (6,181,640                                | )      | (5,074,761                                                       | )      |
| Principal payment on promissory notes                             |   | (500,000                                  | )           | —                                    |   | (500,000                                                         | )      |
| Principal payment on acquisition debt                             |   | (1,350,000                                | )           | —                                    |   | (2,600,000                                                       | )      |
| Net cash used in investing activities                             |   | (1,854,970                                | )           | (6,191,640                                | )      | (24,945,541                                                      | )      |
| Net cash used in investing activities of  discontinued operations |   | —                                    |        | —                                    |   | (1,306,676                                                       | )      |
| **Cash Flows From  Financing Activities**                         |   |                                      |        |                                      |   |                                                             |   |
| Principal payments on capital leases                              |   | —                                    |        | —                                    |   | (291,704                                                         | )      |
| Net proceeds from issuance of equity                              |   | 9,325,000                                 |        | 30,000                                    |   | 49,864,340                                                       |   |
| Proceeds from capital contributions by  shareholders              |   | —                                    |        | —                                    |   | 1,911,674                                                        |   |
| Proceeds from issuance of debt                                    |   | 2,102,676                                 |        | 4,660,000                                 |   | 18,866,586                                                       |   |
| Cost of recapitalization                                          |   | —                                    |        | —                                    |   | (371,111                                                         | )      |
| Net cash provided by financing activities                         |   | 11,427,676                                |        | 4,690,000                                 |   | 69,979,785                                                       |   |
| Increase (decrease) in Cash and Cash  Equivalents                 |   | 5,403,275                                 |        | (5,037,264                                | )      | 7,060,869                                                        |   |
| **Cash and Cash  Equivalents,** at beginning of period            |   | 1,657,594                                 |        | 6,090,904                                 |   | —                                                           |   |
| **Cash and Cash  Equivalents,** at end of period                  |   | $                                         | 7,060,869   |                                      | $      | 1,053,640                                                        |   | $ | 7,060,869 |   |

 

7

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**Noncash Operating, Investing and FinancingActivities**

 

**2004**

In the quarter ended June 30,2004, the Company recorded accrued prepaid royalties of $400,000 which relateto deferred revenues received of $4,000,000 during 2003 and 2004.

 

In the quarter ended June 30,2004, the mezzanine equity value of $12,015,000 was reclassified intoshareholders’ equity upon the exchange of the Series A Preferred Stock for195,263 shares of common stock.

 

In the quarter ended June 30,2004, an additional increase in shareholders’ equity totaling $146,447,attributed to the above-referenced 195,263 shares of common stock recorded atfair market value (and which represented the 19.9% minority interest in theSentigen joint venture), together with the Company’s 80.1% majority interest inthe Sentigen joint venture, amounting to $589,469 (after reflecting anadditional charge off in the joint venture investment of $2,213,646, recordedas “Loss from Joint Venture”), were recorded and reclassified, respectively, as“Technology License” asset totaling $735,916, before amortization.

 

In the quarter ended June 30,2004, the Company issued promissory notes in part for $1,778,447 in exchangefor Xmark’s 1,611,989 puttable shares valued at $1,611,989 and the release fromadditional obligations to issue additional shares, valued at $166,458,representing accrued interest ($74,263) and late registration penalties($92,195).

 

In the quarter ended June 30,2004, the Company issued 33,740,672 common shares in settlement of $13,496,269in promissory notes and accrued interest previously due to Oxford BiosciencePartners IV L.P., MRNA Fund II L.P. and Mi3, L.P.

 

**2003**

In 2003, the Company assumed$3,422,036 in accrued expenses and $2,500,000 of notes payable from AlliancePharmaceutical Corp., issued stock valued at $5,583,268 to certain formercreditors of Alliance and agreed to issue stock valued at $5,043,226 to suchcreditors as part of the acquisition of the *Imagent*business.

 

**Cumulative**

The split-off of the therapeuticbusiness in 2002 included equipment and leasehold improvements of $516,567 andaccounts payable of $70,000 in exchange for the Company’s common stock valuedat $12,226,319.

 

In 2002, debt of $5,346,910 andaccrued interest of $235,577 were converted into common stock.

 

Payments due on the accruedequipment lease were made through a reduction in deposits due to the Company inthe amount of $330,649.

 

8

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**1. Basis of Presentation**

 

The accompanying unaudited financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialinformation pursuant to Regulation S-B.  Accordingly, they do notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinionof management, all adjustments (consisting of normal recurring accruals as wellas adjustments related to the acquisition of the medical imaging business (“*Imagent* Business*”*) of Alliance Pharmaceutical Corp. (“Alliance”)) considerednecessary for a fair presentation have been included.  Operating resultsfor the six months ended June 30, 2004 are not necessarily indicativeof the results that may be expected for the year ending December 31, 2004.

 

IMCOR Pharmaceutical Co. (formerly Photogen Technologies, Inc.) (the“Company”) is an emerging, development-stage pharmaceutical company focused ondeveloping and marketing medical imaging pharmaceutical products.  TheCompany has one FDA approved product, *Imagent®*(perflexane lipid microspheres),**anultrasound imaging contrast agent that it acquired in June 2003, and oneadditional contrast agent in development for use in computed tomography (CT)and x-ray imaging with two potential applications (1) as a blood pool agent, todiagnose diseased tissue in the cardiovascular system and other organs, whichis called PH-50, and (2) to diagnose cancer metastasizing into the lymphaticsystem, which is called N1177.  On February 5, 2004, the Companychanged its name to IMCOR Pharmaceutical Co., reflecting the changed nature ofits business to imaging pharmaceuticals.

 

For the two years up to the time of the Company’s acquisition of the *Imagent* Business, substantially all of itsresearch and development efforts were focused on the preclinical testing ofPH-50. PH-50 and N1177 are still in early stages of development.  Ofthese products, based on the availability of capital, the Company intends tofocus its research efforts first on the continued development of PH-50 and secondly,N1177.

 

As a result of the acquisition of the *Imagent*Business, IMCOR is now based in San Diego, California.  The Company hasapproximately 30 full time employees and leases a 53,000 square foot cGMP(current Good Manufacturing Practice) manufacturing facility at thislocation.  In addition to the Company’s development activities of PH-50and N1177, it also continues to develop *Imagent*for additional indications beyond the current FDA approval.

 

The Company has realized minimal revenues resulting from the licensingand sale of *Imagent* to date.* *Such sales are intermittent and represent selective marketefforts and are not necessarily indicative of future revenues or marketpenetration for current or prospective indications.  Currently, the Company’s core business focus remains on raisingadditional capital, securing extended payment terms with its current creditors,and the continued clinical development of its *Imagent*products (which will result in continued expenditures for productdevelopment).  These costs, as well asincreased costs associated with relevant sales and marketing activities, willbe incurred only as sufficient capital remains available.

 

The Company’s current manufacturing facility provides significantexcess capacity for all clinical development and scaled manufacturingactivities, now and for the foreseeable future.  Since the excess manufacturing facility capacity provides nosignificant direct benefit to the

 

9

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Company at the present time, the current costs associated with thisexcess capacity continue to be charged off against current operations,including a portion attributed to research and development.

 

Certain financial statement balances have been restated to conform tothe June 30, 2004 presentation. These reclassifications have no impact onreported the net losses or the related per share amounts.  Most notably, we have reclassified ourpresentation of our Series A preferred stock from permanent equity to mezzanineequity to conform to the requirements of EITF 98-5.

 

**2.****                                      Liquidityand****Basisof Presentation – Going Concern**

 

The accompanying financial statements are prepared assuming the Companyis a going concern.  The Company has reported accumulated losses sinceinception of $63,678,103.  The Company believes it lacks sufficientworking capital to fund planned operations for the entire fiscal year endingDecember 31, 2004.  Substantial additional capital resources will berequired to fund the Company’s ongoing operations.  Management believesthere are a number of potential alternatives available to meet the continuingcapital requirements such as public or private financings or collaborativeagreements.  The Company is taking continuing actions to reduce itsongoing expenses.  If adequate funds are not available, the Company willbe required to significantly curtail its operating plans and may have to sellor license significant portions of the Company’s technology or products. Thefinancial statements do not include any adjustment to reflect the possiblefuture effects on the recoverability and classification of assets or the amountand classification of liabilities that may result from the outcome of thisuncertainty.

 

OnApril 19 and June 30, 2004, the Company sold 25,374,999 shares ofcommon stock and 14,717,502 warrants, including 2,030,000 warrants issuedto its two placement agents, for approximately $10.15 million at a priceof $0.40 per share plus, for each share purchased, a warrant to purchase .5 ofan additional share exercisable at $.50 per share.  The net proceeds to the Company were approximately $9,325,000.Subsequent to June 30, 2004, the Company filed a registration statement,which is not yet effective, related to the aforementioned issued common stockand common stock underlying the warrants.

 

Inaddition, holders of an aggregate of approximately $12,719,500 principal amountof the Company’s Secured Promissory Notes and Revolving Convertible SeniorSecured Promissory Notes (“Notes”), including accrued interest, converted theseNotes into 33,740,672 shares of the Company’s common stock at $0.40 per share.

 

In June 2004, the Company entered into a bridge loan agreement forup to $750,000 with a bank.  The bankheld a security interest in substantially all the Company’s assets, other thanintellectual property, junior to the security interest of Xmark Fund, Ltd. andXmark Fund, L.P. (collectively “Xmark”) and senior to the security interest ofthe convertible and demand notes held by certain institutional investors.

 

On July 1, 2004, the Company repaid the entire outstanding bridgeloan plus accrued interest.  See“Subsequent Events,” below.

 

On December 16, 2003, the Company entered into a License Agreement(the “Kyosei Agreement”) with Kyosei Pharmaceutical Co. Ltd. (“Kyosei”), amember of the Sakai Group in Japan.  The Kyosei Agreement gives Kyosei anexclusive license to develop and market*Imagent* for all indications in Japan.  The terms of the KyoseiAgreement provide for the Company to receive up to $10 million in fees anddevelopment milestone payments plus royalties on commercial sales.  Kyoseiwill also pay the Company to manufacture*Imagent* for Kyosei’s clinical and commercial requirements and theCompany will

 

10

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receive royalties based on commercial sales.  In each ofDecember 2003 and April 2004, the Company received a payment of$2,000,000, less $400,000 in withholding taxes.  Additional payments areexpected in 2005 and beyond.  Future payments from Kyosei are based oncertain milestones of clinical development, including the commencement of andcompletion of clinical studies and approval for sale by Japanese regulatoryauthorities.  Commencement of clinicalstudies is not expected to be earlier than 2005, and the development program,including regulatory approval, is expected to take four or more years.  Accordingly, commercial sales, upon whichthe Company will earn royalties, are not expected to commence earlier than 2008.  While the Company believes that *Imagent* clinical studies will besuccessful, there can be no assurance that such studies conducted in Japan willbe successful or that the product will be approved for sale by Japaneseauthorities.  See “Note 5 - Licensing and Deferred Revenue and Related RoyaltyObligation Claim,” below.

 

The Company lacks sufficient working capital to fund planned operationsfor the entire fiscal year ending December 31, 2004.  The Companycannot accurately estimate the amount of additional financing required;however, the amount could be an additional $25 million or more byDecember 31, 2005.  Therefore,substantial additional capital resources will be required to fund the Company’splanned ongoing operations related to clinical development, marketing andmanufacturing of*Imagent*,research and business development activities and debt repayment.  TheCompany’s financial condition raises substantial doubt about its ability tocontinue as a going concern without adjustments to its current planned levelsof expenditures.  If the Company raises additional funds byissuing equity securities, substantial dilution to existing stockholders mayresult.  There can be no assurance thatsuch capital will be available under acceptable terms, if at all. See “RiskFactors - The Company must raise additional financing in the future and itsinability to do so will prevent the Company from continuing as a going concernand implementing its business plan,” below.

 

During the next twelve months the Company will focus its effortsprimarily on exploring various options concerning its business, includingsecuring additional financing, joint ventures, licensing or selling all or aportion of its technology and other possible strategic transactions.   The Company’s ability to commercialize*Imagent* and develop PH-50 and N1177depends on the successful implementation of one or more of these transactions.

 

Depending on the availability of capital and whether or not the Companywill pursue a sale or licensing strategy for*Imagent*,the Company will focus its operating efforts first on the additional clinicaldevelopment for the myocardial perfusion indication, sales and marketing of*Imagent,* the development of PH-50 andthen on the development of N1177.  Subject to the availability ofsufficient capital, the Company expects to continue to incur losses for atleast the next three years as the Company intensifies research and development,preclinical and clinical testing and associated regulatory approvalactivities and engage in or provide for the manufacture and/or sale of anyproducts that the Company has or may develop.

 

Greater capital resources would also enable the Company to quicken andexpand its sales, marketing and research and development activities, and itsfailure to raise additional capital will (absent a suitable collaborativeagreement providing for a third party to take over these functions)significantly impair or curtail its ability to conduct furtheractivities.  In any event, complete development and commercialization ofthe Company’s technology will require

 

11

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substantial additional funds.  The Company is seeking to raisecapital through the sale of its common stock or other securities to fund itsimmediate and longer-term capital needs.

 

**3.  Basicand Diluted Loss Per Common Share**

 

Basic and diluted loss per common share is computed based on theweighted average number of common shares outstanding.  Basic and dilutedloss per share excludes the impact of outstanding options, warrants and convertiblepreferred stock, as they are antidilutive.  Potential common sharesexcluded from the calculation at June 30, 2004 are 10,953,872 sharesreserved pursuant to granted options or contractual obligations to grantoptions and 15,453,366 shares reserved pursuant to warrants.

 

**4. Purchased Technology**

 

On June 18, 2003, the Company acquired the assets, includingpurchased technology (“Purchased Technology”), related to the medical imagingbusiness, including*Imagent*, anFDA-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*consists of perfluorochemical-based “microbubbles” that are highly echogenic(reflect ultrasound signals strongly) in the bloodstream, thereby significantlyenhancing ultrasound images.  The Company also entered into a number ofagreements related to that acquisition.  Included in the purchase was thelease of 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 ultrasound imaging.

 

Intangible assets resulting from the acquisition of the*Imagent* Business are estimated bymanagement based on the fair value of the assets received.  Theseintangible assets consist entirely of Purchased Technology.  PurchasedTechnology related to the*Imagent*Business is amortized on a straight-line basis over the estimated remaininglife equal to twelve years.  Purchased Technology is stated at cost, lessaccumulated amortization.

 

Below is supplemental unaudited pro forma information that disclosesthe results of operations for the Purchased Technology for the current three-and six-month periods ending June 30, 2004, as well as the correspondingthree- and six- month periods ended June 30, 2003.  The pro formainformation is presented as if the acquisition had been completed as of the beginningof the periods presented.  The unaudited pro forma information give effectto actual operating results prior to the acquisition, adjusted to include theunaudited pro forma effect of amortization of intangibles and weighted sharesoutstanding:

 

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|                                                                           |   | **Actual  Three  Months ended  June 30, 2004** |       | **Pro Forma  Three  months ended  June 30, 2003** |   | **Actual  Six Months  ended  June 30, 2004** |   | **Pro Forma  Six Months  ended  June 30, 2003** | ** **  |
|--------------------------------------------------------------------------------|--------|-----------------------------------------------------|------------|--------------------------------------------------------|--------|---------------------------------------------------|--------|------------------------------------------------------|-------------|
|                                                                           |   |                                                |       |                                                   |   |                                              |   |                                                 |        |
| License Revenue                                                                |   | $                                                   | 84,523     |                                                   | $      | —                                            |   | $                                                    | 126,190     |   | $ | — |   |
|                                                                           |   |                                                |       |                                                   |   |                                              |   |                                                 |        |
| Expenses:                                                                      |   |                                                |       |                                                   |   |                                              |   |                                                 |        |
| Research & development                                                     |   | 926,076                                             |       | 2,568,558                                              |   | 1,886,907                                         |   | 5,321,741                                            |        |
| Sales, general and administrative                                              |   | 4,142,655                                           |       | 2,900,300                                              |   | 7,831,761                                         |   | 8,460,240                                            |        |
|                                                                           |   |                                                |       |                                                   |   |                                              |   |                                                 |        |
| Restructuring charge                                                           |   | —                                              |       | —                                                 |   | —                                            |   | —                                               |        |
| Total Expenses                                                                 |   | 5,068,731                                           |       | 5,468,858                                              |   | 9,718,668                                         |   | 13,781,981                                           |        |
| Loss from joint venture                                                        |   | (2,017,749                                          | )          | (4,801,648                                             | )      | (2,213,646                                        | )      | (4,997,545                                           | )           |
| Investment and other income                                                    |   | 19,236                                              |       | 2,291                                                  |   | 243,472                                           |   | 6,813                                                |        |
| Interest expense                                                               |   | (329,334                                            | )          | (53,988                                                | )      | (596,753                                          | )      | (53,988                                              | )           |
| Loss from continuing operations                                                |   | (7,312,055                                          | )          | (10,322,203                                            | )      | (12,159,405                                       | )      | (18,826,701                                          | )           |
| Discontinued operations – net                                             |   | —                                              |       | —                                                 |   | —                                            |   | —                                               |        |
| Net income (loss)                                                              |   | $                                                   | (7,312,055 | )                                                      | $      | (10,322,203                                       | )      | $                                                    | (12,159,405 | ) | $ | (18,826,701 | ) |
| Dividends on preferred stock                                                   |   | (221,160                                            | )          | (265,504                                               | )      | (498,030                                          | )      | (523,970                                             | )           |
| Net income (loss) applicable to common  shareholder                            |   | (7,533,215                                          | )          | (10,587,707                                            | )      | (12,657,435                                       | )      | (19,350,671                                          | )           |
|                                                                           |   |                                                |       |                                                   |   |                                              |   |                                                 |        |
| Pro forma net income (loss) per share                                          |   | $                                                   | (0.27      | )                                                      | $      | (0.50                                             | )      | $                                                    | (0.51       | ) | $ | (0.92 | ) |
|                                                                           |   |                                                |       |                                                   |   |                                              |   |                                                 |        |
| Weighted average number of common shares  outstanding – basic and diluted |   | 28,138,446                                          |       | 21,157,948                                             |   | 24,808,999                                        |   | 21,010,215                                           |        |

 

The pro forma portions of the statement of revenues and expenses of the*Imagent* Business (including dataprior to June 18, 2003) are based upon an audit of that business as filedby the Company on Form 8-K/A on October 27, 2003.

 

As an integrated operation of Alliance, the *Imagent* Business did not, in the normal course ofoperations, prepare separate financial statements in accordance with accountingprinciples generally accepted in the United States. The accompanying financialstatements have been prepared in accordance with the rules and regulations ofthe Securities and Exchange Commission for presentation of less than fullfinancial statements and for inclusion in the Company’s Current Report on Form8-K. These financial statements are not intended to be a complete presentationof the *Imagent*Business’financial position and operating results. The Statement of Revenues and DirectExpenses include direct charges for expenses and indirect charges for othercommon expenses and corporate expenses. Common expenses include, but are notlimited to, shared services, such as human resources, accounting, informationtechnology, and legal services.  Commonand corporate expenses are charged to the business unit based on direct laborhours, which is deemed to be a practical and reasonable method. There was nodirect interest expense incurred by or allocated to the *Imagent* Business, therefore, no interestexpense has been reflected in these financial statements.  These financial statements are notnecessarily indicative of the results of operations that would have occurred ifthe Imagent Business had been an independent company.

 

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The pro forma portion of the data give effect to actual operatingresults prior to the acquisition, adjusted to include the pro forma effect of:

 

•                  Amortizationof intangibles (totaling $15,638,146) related to the Purchased Technology forthe three- and six-month periods ended June 30, 2004.  The estimated life of the PurchasedTechnology is twelve years.

 

•                  Theissuance of 4,183,659 shares of common stock related to the acquisition of the *Imagent* Business incorporated into thecalculation of weighted shares outstanding.

 

This unaudited pro forma information is not necessarily indicative ofthe actual results that would have been achieved had the *Imagent* Business been acquired the firstday of the Company’s three- and six month periods ended June 30, 2003, noris it necessarily indicative of future results.

 

**5. Licensing and Deferred Revenue and Related Royalty Obligation Claim**

 

In December 2003, the Company entered into a license agreementwith Kyosei Pharmaceutical Co., Ltd. (“Kyosei”), a unit of the Sakai Group inJapan, for the development and marketing of*Imagent* in Japan for all radiology and cardiology indications. Terms of the agreement call for the payment to the Company of up to $10 millionin fees and development milestone payments plus royalties on commercialsales.  Kyosei will also pay the Company to manufacture*Imagent* for Kyosei’s clinical andcommercial requirements.  At the closing, the Company received a grosspayment of $2 million and in April 2004, a second payment of $2 millionfrom Kyosei.

 

The Company recognizes revenue and related expenses from licenseagreements based on an evaluation of the period of the agreement over which itis earned.  Unamortized revenue is recorded as deferred revenue. Revenue from the first and second payments under the Kyosei Agreement are beingrecognized over the remaining life of *Imagent*patents, or approximately twelve years.  During the period endedJune 30, 2004, the Company recognized $126,190 of license revenue underthe Kyosei license agreement.

 

The Company has received a notice from Schering AG (“Schering”)asserting a royalty claim against a portion of the proceeds received fromKyosei.  The Company contests the assertion.  Nevertheless, theCompany has established a provision of $400,000, recorded as “Royaltyliability,” should its position not be sustained.  In conjunction with the Company’s revenue recognition policy, italso recognizes a pro rata portion of the “Prepaid Royalty” asset attributed tothe Schering royalty claim into expense, which totals $12,619 for the sixmonths ended June 30, 2004.

 

**6. Joint Venture/Investment in Affiliate**

 

On October 7, 1999, the Company formed a joint venture with ElanInternational Services, Ltd. (“Elan”) to develop and commercializenanoparticulate diagnostic imaging agents for the detection and treatment ofcancer through lymphography.  The goalwas to demonstrate that the use of N1177 would enable physicians to preciselylocate tumorous nodes by first injecting the material in the vicinity of thetumor and then taking an image (picture) using a computed tomography (“CT”)device.

 

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The joint venture planned to commence Phase 2 clinical studies fordetection of cancer metastasis in lymph nodes in patients with cervical cancer,subject to the availability of sufficient capital.  In this patient population, other studies document an increase insurvival when lymph nodes containing cancer are removed.  Tumor identification by CT imaging would becorrelated to the results of biopsy results from patients undergoing surgery todemonstrate effectiveness in locating nodes and identifying those with cancer inthem.  The lack of capital delayed commencementof these clinical studies.

 

Sentigen Ltd. (“Sentigen”) was formed to hold the operations, assetsand liabilities of the joint venture.  Elan purchased 2,980 shares ofSentigen nonvoting convertible preferred stock (“Series A Preferred Stock”) for$2,985,000 representing a 19.9% ownership interest.  Elan also purchased12,015 shares of the Company’s Series A convertible exchangeable preferredstock for $12,015,000.  The Series A Preferred Stock was exchangeable foradditional shares of Sentigen or convertible into common stock of theCompany.  The Company purchased 12,000shares of Sentigen’s common stock for $12,015,000 representing an 80.1%ownership interest.

 

Expenses incurred by the Company and Elan, which related to thedevelopment of the diagnostic imaging agents, have been charged to and expensedby Sentigen.

 

Elan had substantive participating rights in Sentigen, including therequirement for approval of the business plan and budgets and equalrepresentation on the management committee that decided all day-to-dayfunctions.  As a result, the Company’s investment in Sentigen throughJune 10, 2004 was recorded under the equity method.

 

On June 10, 2004, the Company and Elan terminated the jointventure.  As a result, Sentigen hasbecome a wholly owned subsidiary of the Company, the “investment and advancesto affiliate” was eliminated and the assets and liabilities of Sentigenconsolidated within the financial statements of the Company.

 

Separately, in June 2004 the holder of the Company’s Series APreferred Stock sold that instrument and the purchaser converted all Series APreferred Stock, including accrued and unpaid dividends, into 195,263 shares ofthe Company’s common stock at a conversion price of $84.68 per share.  See “Note 7 - Equity Transactions,” below;and “Management’s Discussion and Analysis and Plan of Operation - JointVenture,” below.  On the conversiondate, the value of the Company’s common stock was $0.75 per share, which wasdeemed to be the implicit factor to value the 19.9% of Sentigen that Elan soldto the Company at $146,447. Accordingly, the Company wrote down the carrying value of its 80.1%share of the related technology license then held by Sentigen to $589,469.  As part of the consolidation of Sentigen,the Company by June 30, 2004 recorded the entire value of the technologylicense, net of $4,128 of amortization, at $731,788.

 

**7. Equity Transactions**

 

In January 2004, the Company recognized the issuance of 6,250shares of its common stock as compensation for services provided by aconsultant.

 

 

On March 5, 2004, the Company issued 2,053,977 shares of theCompany’s common stock to certain creditors of Alliance upon approval by theCompany’s shareholders.  Of the total shares issued, 1,985,522 shares(valued at $5,043,226) were part of the acquisition consideration for the

 

15

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*Imagent* Businessand, at December 31, 2003, had been recorded as “Common Stock to beissued.”  The same value was correspondingly reclassified out of the“Common Stock to be issued” category upon the issuance of the stock onMarch 5, 2004.  The remaining68,455 shares, valued at $136,956, was a penalty incurred due to delays insecuring shareholder approval of the issuance of the shares to be issued inconjunction with the acquisition of the *Imagent*Business during 2003.

 

During the six months ended June 30, 2004, Xmark sold 314,630shares of common stock for which it held a put right.  Under certaincircumstances, the Company would have been required to purchase these puttableshares (“Puttable Shares”) from Xmark at a price of $1.00 per share.  In June 2004, the Company entered into an agreement with Xmark whereby theCompany exchanged all remaining1,611,989 puttable shares held by Xmark plus related obligations and fees foran aggregate of $2,128,447 of Secured Notes, that are payable on or beforeDecember 1, 2004.

 

The Company accrued 49,681 shares of the Company’s common stockissuable to certain entities for interest and late stock registration penalties.

 

InJune 2004, the holder of the Company’s Series A Preferred Stockconverted all shares, including accrued but unpaid dividends, for 195,263shares of the Company’s common stock. Accordingly, the $12,015,000 of Series APreferred Stock the Company had classified as mezzanine equity has now beenreclassified as permanent equity, and the liquidation preference totaling$16,534,840 attributable to the Series A Preferred Stock has been eliminated.

 

OnApril 19 and June 30, 2004, the Company sold 25,374,999 shares of itscommon stock for $.40 per share and 14,717,502 warrants exercisable for$.50 per share (including 2,030,000 warrants issued to its two placementagents), for approximately $10.15 million.  The net proceeds to the Company were approximately $9,325,000. Inaddition, holders of an aggregate of approximately $12,719,500 principal amountof the Company’s Secured Promissory Notes and Revolving Convertible SeniorSecured Promissory Notes (“Notes”), including accrued interest, converted theseNotes into 33,740,672 shares of the Company’s common stock at $0.40 pershare.

 

InJune 2004, the Company issued 616,580 shares of its common stock as apartial settlement of obligations under an equipment lease.  As part of the terms of the settlement, the Companyremains obligated to make an additional payment equal to the difference (ifany) between the net proceeds the lessor receives from sales of these shares ofstock during the 12 months after the Company registers the shares and $486,601(which represents the number of issued shares valued at $.76 per share).  Accordingly, the Company has recorded intoequity only that portion of the issued shares’ par value, or $617.  The remainder, or $467,984, together withtwo additional cash obligations totaling $100,000, were recorded as a currentliability — “Obligations pursuant to equipment lease settlement.”

 

**8. Stock Options**

 

The Company expenses the fair value of stock options granted tonon-employees based on the “intrinsic value” method.  In 2003, the Companyissued stock options in connection with the Imagent Business purchase with anexercise price less than the market price on the date of grant, which vest overfour years.  In 2004, the Company issued stock options to employees withan

 

16

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exercise price less than the market price on the date of grant, whichvest over four years.  Accordingly, compensation expense of $662,129 hasbeen recorded in the first six months of 2004.

 

For stock options granted to employees and directors during the firstsix months of 2004, the Company has estimated the fair value of each optiongranted using the Black-Scholes option-pricing model with the followingassumptions:

 
|                                             |   | **2004** |   |
|--------------------------------------------------|--------|----------|--------|
|                                             |   |     |   |
| Weighted average fair value per options  granted |   | $        | 0.58   |   |
| Significant assumptions (weighted average)       |   |     |   |
| Risk-free interest rate at grant date            |   | 3.57     | %      |
| Expected stock price volatility                  |   | 98       | %      |
| Expected option life (years)                     |   | 5        |   |
|                                                  |        |          |        |  |

 

If the Company had elected to recognize compensation expense based onthe fair value at the grant dates, consistent with the method prescribed bySFAS No. 123, net loss per share would have been changed to the pro formaamounts indicated below:

 
|                                                                                                                        |   | **Three  Months  Ended  June 30, 2004** |           | **Three  Months  Ended  June 30, 2003** |           | **Six Months  Ended  June 30, 2004** |       | **Six Months  Ended  June 30, 2003** |        |
|-----------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|----------------|----------------------------------------------|----------------|-------------------------------------------|------------|-------------------------------------------|-------------|
|                                                                                                                        |   |                                         |           |                                         |           |                                      |       |                                      |        |
| Net Loss Applicable to Common Shareholders,  as reported                                                                    |   | $                                            | **(7,533,215** | **)**                                        | **$**          | **(7,655,359**                            | **)**      | $                                         | (12,657,435 | ) | $ | (12,854,721 | ) |
|                                                                                                                        |   |                                         |           |                                         |           |                                      |       |                                      |        |
| Add stock based employee compensation  expense included in reported net income, based on “intrinsic value” method |   | **28,478**                                   | ** **     | **378,093**                                  |           | 662,129                                   |       | 529,270                                   |        |
|                                                                                                                        |   |                                         |           |                                         |           |                                      |       |                                      |        |
| Less total stock-based employee  compensation expense determined under the fair value based method for all  awards          |   | **(451,080**                                 | **)**          | **(1,045,607**                               | **)**          | **(983,632**                              | **)**      | **(1,604,829**                            | **)**       |
|                                                                                                                        |   |                                         |           |                                         |           |                                      |       |                                      |        |
| Pro forma net loss                                                                                                          |   | **(7,955,817**                               | **)**          | **$**                                        | **(8,322,873** | **)**                                     | $          | **(12,978,938**                           | **)**       | $ | **(13,930,280** | **)** |
|                                                                                                                        |   |                                         |           |                                         |           |                                      |       |                                      |        |
| Basic and diluted loss per common share, as  reported                                                                       |   | $                                            | **(0.27**      | **)**                                        | **$**          | **(0.44**                                 | **)**      | $                                         | **(0.51**   | **)** | $ | **(0.75** | **)** |
|                                                                                                                        |   |                                         | ** **     |                                         | ** **     |                                      | ** ** |                                      | ** **  |
| Basis and diluted loss per common share,  pro forma                                                                         |   | $                                            | **(0.28**      | **)**                                        | **$**          | **(0.47**                                 | **)**      | $                                         | **(0.52**   | **)** | $ | **(0.81** | **)** |

 

**9. Secured Debt**

 

Notes payable – The Company has entered into a series of agreements withXmark.   In May 2004 theCompany made the final principal payment of $1,250,000 under anobligation assumed in the acquisition of the*Imagent* Business.

 

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InJune 2004, the Company entered into an agreement with Xmark whereby theCompany exchanged all remaining Puttable Shares held by Xmark plus relatedobligations and additional fees for an aggregate of $2,128,447 of SecuredNotes, payable in installments on or before December 1, 2004.  As of June 30, 2004, the Company hadrepaid an aggregate of $500,000 of these notes.

 

The Company’s obligations to Xmark are secured by a first prioritysecurity interest on all of the Company’s tangible and intangible assets.  Xmark would be entitled to foreclose on itslien covering these assets if the Company defaults on its obligations to Xmark,if the Company loses FDA approval for Imagent, if the Company fails to payother debts, or if the Company files for bankruptcy protection or similarmatters.

 

Lines of Credit – Three of the Company’s institutional investors provided capital inexchange for Secured Promissory Notesand Revolving Convertible Senior Secured Promissory Notes (“Investor Notes”) inan aggregate principal amount of up to $12,719,500, which is included within“Lines of Credit.”  The Investor Notes bore interest at a rate of 7.25%per annum, compounded monthly.  A total of $4,160,000 of these InvestorNotes were convertible into common stock. As part of the Company’s $10.15 million financing, holders of theInvestor Notes, including accrued interest, converted the Investor Notes into33,740,672 shares of the Company’s common stock at $0.40 per share and thesecurity interest of these holders has been eliminated.  See “Note 11 - Commitments Related PartyAgreements,” below.

 

Bridge loan – In June 2004, the Company entered into a 60-daybridge loan agreement with a bank to provide up to $750,000.  The advances under the bridge loan agreementbore interest at a rate of 9.0% and were secured by a lien on substantially allthe Company’s assets except forintellectual property.  The securityinterest was senior to the liens held by the holders of Promissory Notes andsubordinate to the liens held by Xmark. The bridge loan was repaid on July 1, 2004.  See “Note 12 - Subsequent Events,” below.

 

**10. Accrued Expenses**

 

Accrued expenses consist of the following at June 30, 2004 andDecember 31, 2003:

 
|                                           |   | **June 30,  2004** |          | **December 31,  2003** |   |
|------------------------------------------------|--------|-------------------------|---------------|-----------------------------|--------|
|                                           |   |                    |          |                        |   |
| Alliance liabilities assumed from  acquisition |   | **$**                   | **2,155,425** |                        | $      | 2,530,434 |   |
| Payroll liabilities                            |   | **715,117**             |          | 322,503                     |   |
| Accrued general trade payables                 |   | **490,171**             |          | 291,908                     |   |
| New Hope office abandonment provision          |   | **—**              |          | 136,947                     |   |
|                                           |   |                    |          |                        |   |
|                                           |   | **$**                   | **3,360,713** |                        | $      | 3,281,792 |   |

 

**11. Commitments**

 

***Leases:*** The Company has leased its facilities and certain equipment undernon-cancelable operating leases, which expire at various times through2008.  The leases require the Company to pay for all maintenance,insurance and property taxes.

 

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Minimum future rental payments under these leases are as follows:

 
|                                        |   | **Operating  Leases** |          |
|---------------------------------------------|--------|-----------------------|---------------|
| Six months ending December 31, 2004    |   | $                     | 478,365       |   |
| Twelve months ending December 31, 2005 |   | 979,944               |          |
| Twelve months ending December 31, 2006 |   | 920,625               |          |
| Twelve months ending December 31, 2007 |   | 877,514               |          |
| Twelve months ending December 31, 2008 |   | 147,081               |          |
| **Total minimum lease  payments**           |   | **$**                 | **3,403,529** |   |

 

***License Agreements:*** In September 1997, Alliance entered into an agreement with Schering (the“Schering License Agreement”), that provided Schering with worldwide exclusivemarketing and manufacturing rights, drug compositions, and medical devices andsystems related to perfluorocarbon ultrasound imaging products, including*Imagent*.  In February 2002, theagreement with Schering was modified to give Alliance exclusive rights tomarket the product in the U.S. for cardiology indications for a five-yearperiod, with Schering to be paid a nominal royalty on such sales.  At theexpiration of the five-year period, Alliance had the option to acquire all ofSchering’s rights to the product on a worldwide basis for total considerationincluding royalties of $20,000,000 or, alternatively, to allow Schering theopportunity to obtain co-promotion rights along with Alliance.  The rightsAlliance had under the Schering License Agreement were transferred to theCompany at the consummation of the Company’s acquisition of the*Imagent* Business.  The Company has received a notice fromSchering asserting a royalty claim against a portion of the proceeds receivedfrom Kyosei.  The Company contests the assertion.  Nevertheless, theCompany has established a provision of $400,000, recorded as “Royaltyliability,” should its position not be sustained.  As of June 30, 2004, $12,619 has been recognized as royaltyexpense, which represents a proportionate writeoff of the corresponding “PrepaidRoyalty” asset.

 

***Related PartyAgreements:***  Concurrent with therestructuring of the Schering License Agreement in 2002, Alliance entered intoa five-year exclusive agreement with Cardinal Health, Inc. (“Cardinal”) toassist with the marketing of*Imagent*. Under this agreement, Cardinal performed certain packaging, distribution, andsales services for Alliance under a fee-for-service arrangement.  TheCompany assumed the Cardinal agreement from Alliance at the consummation of the*Imagent* acquisition.  AtJune 30, 2004, the Company owed Cardinal approximately $217,000 forcurrent services, which is included in accounts payable.

 

Three of theCompany’s institutional investors, Oxford Bioscience Partners IV L.P.and MRNA Fund II, L.P. (collectively, “Oxford,”) and Mi3, L.P., have providedcapital to the Company in exchange forInvestor Notes in an aggregate principal amount of up to $12,719,500,which was included in “Lines of Credit.” As part of the Company’s $10.15million financing, holders of the Investor Notes converted these notes,including accrued interest, into 33,740,672 shares of the Company’s commonstock at $0.40 per share.  In addition,as part of the recent equity financing, these institutional investors purchasedan aggregate of 5,762,500 shares of the Company’s common stock plus 2,881,251warrants.  Two directors of theCompany may be deemed to have a beneficial interest in these Investor Notes andthe purchase of the Company’s common stock and warrants due to their positionsas Managing Partner of Oxford and Managing General Partner of Mi3, L.P.,respectively.

 

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***Litigation:*** On June 18, 2003, the Company filed a complaint against AmershamHealth, Inc. and two other Amersham affiliates alleging that certain Amershamproducts infringe on claims in the Company’s patents covering*Imagent*.  The case is captioned asPhotogen Technologies, Inc. and Alliance Pharmaceutical Corp. v. AmershamHealth Inc. et. al., Civil Action No. 03CV2853(SRC), in the United StatesDistrict Court for the District of New Jersey.  The Company’s complaintalleges that principally through their*Optison*® product, Amersham Health Inc. and related Amersham entitiesinfringe on eight patents owned by the Company.  The Company is alsoseeking a declaration that the claims of fifteen Amersham patents are invalidand are not infringed by *Imagent*. Alliance, the party from whom the Company acquired *Imagent*, is also a plaintiff in the suit.  The Companyis seeking damages, an injunction against Amersham, a declaratory judgment andother relief.

 

Amersham filed an answer dated July 18, 2003 denying the materialallegations of the Company’s claims and asserting certain affirmative defensesand counterclaims.  Amersham’s counterclaims against the Company includeclaims of patent infringement, breach of contract, breach of good faith andfair dealing, and tortious interference with contract.  The parties areexchanging written discovery at this time.

 

It is not presently feasible to determine whether there is a reasonablepossibility that the assets have been impaired for purposes of Statement ofFinancial Accounting Standards No. 5, or the extent of damages or gain, if any,that might result depending on whether or not the Company prevails.  Such a determination will only be possibleafter the facts and circumstances of the litigation have been established and,potentially, litigated before a court of competent jurisdiction.  In any event, the Company will continue toincur litigation costs as it prosecutes its claims in the litigation.  Intellectual property disputes are oftensettled through licensing arrangements, which if resolved unfavorably, could becostly to the Company or ultimately make it unfeasible to market theproduct.  In any intellectual propertylitigation, it is possible that licenses necessary to settle the dispute wouldnot be available on commercially reasonable terms or that the Company would notbe able to redesign its technologies to avoid any claimed infringement thusresulting in the Company’s inability to sell the product.

 

On July 29, 2003, the European Patent Office revoked Amersham’sEuropean Patent (EP) No. 620744 with claims directed to contrast agents.  The Company 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 the suit against Amersham in the United Statesdescribed above.  See “Risk Factors -The Company filed a suit against Amersham for patent infringement, which, ifresolved unfavorably, could impede its ability to utilize its patents for *Imagent*,” below.

 

**12. Subsequent Events**

 

On July 1, 2004 the Company repaid the bridge loan in the amountof $702,843, including interest and related fees.  The associated security interest in the Company’s assets has beeneliminated.

 

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**ITEM 2.****                                                           MANAGEMENT’SDISCUSSION AND ANALYSIS AND PLAN OF OPERATION**

 

*Portions of the discussion in this Form10-QSB contain forward-looking statements and are subject to the “Risk Factors”described below.**All forward-looking statements included in this Form10-QSB**arebased on information available to the Company on the date hereof, and theCompany assumes no obligation to update any such forward-looking statements.The Company’s actual results could differ materially from those anticipated inthese forward-looking statements as a result of a number of factors, includingthose set forth in the section captioned “RISK FACTORS” and elsewhere inthis Form 10-QSB**. The following should be read in conjunction with the Company’sunaudited financial statements included above.*

 

References to the “Company,” “IMCOR,” “we” or “our” are to IMCORPharmaceutical Co. (formerly known as Photogen Technologies, Inc.) and, whereappropriate, our subsidiary, Sentigen, Ltd.  (“Sentigen”).  References to the “*Imagent* Business” are to the medicalimaging business of Alliance Pharmaceutical Corp. (“Alliance”) the Companyacquired on June 18, 2003. *Imagent*® (perflexane lipid microspheres)is a registered trademark owned by IMCOR.

 

The financial statements included herein have been prepared assumingthe Company is a going concern.  The Company had approximately $7,061,000in cash and securities and current liabilities of $9,393,000 at June 30,2004.  Without obtaining additional debtor equity financing the Company will not be able to continue to fund plannedoperations through the end of 2004.  The financial statements for thethree- and six-month periods ending June 30, 2004 do not include anyadjustment to reflect the possible future effects on the recoverability andclassification of assets or the amount and classification of liabilities thatmay result from this uncertainty.

 

**Company Background**

 

***General***

 

IMCOR is based in San Diego, California.  The Company hasapproximately 30 full time employees and leases a 53,000 square foot facilityin San Diego, a part of which is an FDA approved cGMP (current GoodManufacturing Practice) manufacturing plant sufficient for its current andprojected manufacturing needs of*Imagent*. The Company’s personnel have expertise in sales, marketing, manufacturing,research and clinical development, clinical trial design and regulatoryapproval processes.  To supplement its internal capabilities, the Companyworks closely with consultants experienced in drug development and regulatoryrequirements, third party research laboratories, contract researchorganizations and manufacturers for clinical material supplies and the managementof clinical trials and with academic and other institutions to conductspecified research projects.

 

TheCompany is an emerging, development-stage pharmaceutical company focused ondeveloping and marketing medical imaging pharmaceutical products. These imagingagents are used with echocardiography and computed tomography (“CT”) equipmentin order to increase the diagnostic capabilities of these techniques. Byenhancing the contrast between different types of tissues, these intravenouslyadministered agents provide critical anatomical and disease state

 

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informationthat is not obtainable using the equipment alone. The Company’s products havenumerous potential applications including the potential to enhance aphysician’s ability to diagnose certain cardiovascular abnormalities and thespread of cancer in the lymphatic system.

 

TheCompany has one FDA approved product, *Imagent*,an ultrasound imaging contrast agent that the Company acquired as part of the *Imagent* Business, and two additionalcontrast agents in development for use in computed tomography (CT) and x-rayimaging with potential applications, (1) as a blood pool agent to diagnosediseased tissue in the cardiovascular system and other organs, which theCompany calls “PH-50,” and (2) to diagnose cancer metastasizing into thelymphatic system, which the Company calls “N1177.”  The product designations PH-50 and N1177 refer to the sameformulation.  The Company maintains thetwo names to distinguish their applications between cardiovascular imaging andcertain other indications (PH-50), and the field of lymphography (N1177).

 

*Imagent* has been approved for marketing by the FDA for use in patients withsub-optimal echocardiograms to opacify the left ventricle and thereby improvevisualization of the main pumping chamber of the heart, and to improvedelineation of the endocardial borders of the heart. As a result, ultrasoundwith *Imagent* may betterdistinguish normal and abnormal heart structure and function - two criticalindicators of cardiac health. Echocardiography is the most widely used imagingmodality for the diagnosis of heart disease, the leading cause of death in theU.S. The attractiveness of the ultrasound imaging market potential together withthe acquisition of an approved product and an extensive intellectual propertyportfolio were fundamental reasons for the acquisition and primary determinantsof the purchase price of approximately $7,240,000 for plant, property andequipment and $15,638,000 for the purchased technology.

 

TheCompany is seeking to expand its label indication for *Imagent* for myocardial perfusion imagingfor the detection of coronary artery disease (CAD) using a novel techniquecalled Phasic Changes.  Phasic Changesis one of three ultrasound techniques being investigated in the industry formyocardial perfusion.  The advantage ofthe Phasic Changes technique is that it allows the patient to remain at restduring imaging (as opposed to stressing the patient in order to raise theirheart rate).  Our investigation ofPhasic Changes has progressed from early feasibility testing in animals to afeasibility study in humans.  TheCompany’s initial study enrolled 30 patients and the preliminary report showedthe Phasic Changes technique produced ultrasound results that were highlycorrelated with results produced from coronary angiography in that the degreeand location of a stenosis could be determined from the Phasic Changesresults.  Coronary angiography iscurrently the optimal standard of measuring the severity of CAD.

TheCompany believes that development of *Imagent*for the Phasic Changes technique will be important to the Company’s ability toattract capital and achieve future profitability.  There are a number of potential obstacles to these goals:

 

•                  TheCompany may not have sufficient capital to complete the clinical trials andother tasks necessary to obtain regulatory approval.

 

•                  Theresults of the preliminary report and the 30-patient study may not providesufficient data to predict *Imagent’s*potential for use with the Phasic Changes technique.

 

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•                  TheFDA may not approve the use of *Imagent*for the Phasic Changes technique.

 

•                  TheCompany has not completed an examination of whether it has sufficientintellectual property protection to use *Imagent*for the Phasic Changes technique.

 

•                  TheCompany may not attract capital or achieve profitability even if itsuccessfully introduces *Imagent*for the Phasic Changes technique.

 

Aspart of the growth plan for *Imagent*,the Company expects to continue to use the services of Cardinal Health, Inc.(“Cardinal”) and inChord Communications, Inc. (“inChord”) that had beenproviding services to Alliance. 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.  PH-50 and N1177 are still inearly stages of development. Of these products, based on the availability ofcapital, the Company intends to focus its research efforts first on thecontinued development of PH-50 and secondly, N1177.

 

Currently,a sole supplier supplies the raw materials necessary to produce N1177 andPH-50. The Company presently has limited supplies of these products onhand.  Although there are additionalsources for these materials, to make any significant change in themanufacturing process or change in suppliers, the Company must conduct certainequivalency studies and receive approval by the FDA. Considerable delays in theCompany’s research and development programs for these products could resultfrom having to change to a different supplier. While the Company has no reasonto believe that its supplier will be unable or unwilling to provide thenecessary supplies for its research, there can be no assurance that this willcontinue. As the Company continues to develop these products, the Company plansto identify and qualify additional suppliers of raw materials.

 

The Company expects that its quarterly and annual results of operationswill fluctuate based on several factors including, its ability to raiseadditional capital to implement its sales, marketing and manufacturingprograms, the results of its litigation against Amersham Health, Inc.(“Amersham”), the timing and amount of expenses involved in marketing andmanufacturing*Imagent*, conductingits research programs, particularly the conduct of clinical trials, the cost ofclinical material used in those trials and required for compliance with FDAregulations and the amount, if any, of fees, milestone payments and researchsupport payments received from current and potential strategic partners.

 

***Certain Developmentsin the Second Quarter***

 

During the quarter ended June 30, 2004, the Company completedseveral transactions that are described more fully in “Results of Operations”and “Liquidity; Capital Resources,” below. In particular, the Company:

 

**•****                 **Closed onthe sale of approximately $10.15 million of its common stock at a price of$0.40 per share plus a warrant for an additional .5 shares for each sharepurchased exercisable at $.50 per share, issuing approximately 25,374,999shares of common stock and 14,717,502 shares of common stock underlyingwarrants, including warrants issued to its two placement agents.  In addition, holders of an aggregate ofapproximately $12,719,500 principal amount of the Company’s Secured PromissoryNotes and Revolving Convertible Senior Secured Promissory Notes (collectively,the “Notes”), including accrued interest, converted these Notes into33,740,672 shares of the Company’s common stock at $0.40 per share.

 

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•                  Receiveda $2,000,000 gross payment from Kyosei Pharmaceutical Co. Ltd. (“Kyosei”)pursuant to the Company’s exclusive license granting Kyosei the right todevelop and market *Imagent* inJapan.  The Company expects to receiveadditional payments in 2005 and beyond from Kyosei from certain clinicaldevelopment milestones, as well as royalties from future sales (which we do notanticipate to begin earlier than 2008).

 

•                  Repaidto Xmark Fund, Ltd. and Xmark Fund, L.P. (collectively, “Xmark”) the lastSenior Secured Note in the principal amount of $1,250,000. In June 2004,the Company entered into an agreement with Xmark whereby the Company exchangedall remaining Puttable Shares held by Xmark, plus related obligations and fees,for an aggregate of $2,128,447 of Secured Notes payable before December 1,2004.

 

•                  Convertedall shares of its Series A convertible exchange preferred stock (“Series APreferred Stock”), including accrued but unpaid dividends, for 195,263 sharesof the Company’s common stock. Accordingly, $12,015,000 of Series A Preferred Stock the Company hadclassified as mezzanine equity has been reclassified as permanent equity, andthe Series A liquidation preference totaling $16,534,840 has beeneliminated.  In connection with theconversion of the Series A Preferred Stock, the Company terminated theSentigen joint venture with units of Elan International Services, Ltd. and itsaffiliates (“Elan”) through the purchase of Elan’s 19.9% interest for certainfuture royalties on two products: N1177 and PH-50.

 

•                  Entered into a 60-day bridge loanagreement in June 2004 with a bank to provide up to $750,000.  The advances under the bridge loan agreementbore interest at a rate of 9.0% and were secured by a lien on substantially allthe Company’s assets except forintellectual property.  The securityinterest was senior to the liens held by the holders of the Notes andsubordinate to the liens held by Xmark. The bridge loan was repaid on July 1, 2004.

 

•                  Settledthe demand by an equipment lessor of approximately $787,000 for certain leasepayments in exchange for two payments totaling $100,000 and the issuance of616,580 shares of the Company’s common stock. The Company will make anadditional payment equal to the difference (if any) between the net proceedsthe lessor receives from sales of the stock during the 12 months after theCompany registers the shares and $468,601.

 

***Acquisition ofImagent Business***

 

On June 18, 2003, the Company closed the acquisition of the*Imagent* Business.  The amount ofconsideration was approximately $7,240,000 for plant, property and equipmentand $15,638,000 for the purchased technology, plus future earn out paymentsbased upon*Imagent* revenue asdescribed in the purchase agreement.

 

Atthe closing of the *Imagent*Business acquisition, the Company paid approximately $669,000 in cash anddelivered 2,198,137 shares of its common stock. At the direction of Alliance,the Company delivered the cash and stock to creditors, employees and vendors ofAlliance. In

 

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additionto bridge financing the Company provided to Alliance before the closing, itspurchase of a $1,250,000 interest in Alliance’s obligations to two of itscreditors, Xmark, and its assumption of specified Alliance operatingliabilities related to *Imagent*,the Company was obligated to pay additional amounts to Alliance secured andunsecured creditors after the closing. At various times after the closing, theCompany was obligated to pay, subject to reaching satisfactory agreements withthese creditors, an aggregate amount of up to approximately $2,155,000 (as atJune 30, 2004) to creditors other than Xmark and deliver an aggregate ofapproximately 1,985,522 shares of its common stock. The amount of considerationwas determined through arms-length negotiations.

 

Aspart of the acquisition of the *Imagent*Business, the Company issued shares of its common stock to two companies,Cardinal Health, Inc. and inChord Communications, Inc., that had been providingservices to the *Imagent* Businesswhen it had been owned by Alliance and that were creditors of Alliance. Assettlement of the Alliance obligations, the Company issued Cardinal 1,100,000shares and inChord 429,000 shares of the Company’s common stock, respectively.As part of the development plan for *Imagent*,the Company expects to continue to use the services of Cardinal and inChord.Currently, *Imagent* will bemarketed and distributed in the United States through agreements with Cardinal.Various Cardinal companies will also provide packaging, sales support, anddistribution services.  inChord willprovide advertising, medical education and similar services.

 

Inaddition, after the closing and through 2010, the Company must pay Alliancefurther consideration in the form of an earn out based on *Imagent* revenue the Company invoiced(subject to certain reductions). This earn out equals, for each year of theearn out: 7.5% of *Imagent* revenueup 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 the Company pays pursuantto a license agreement with Schering AG (“Schering”), net of payments theCompany receives from Schering under the license, and amounts of anyindemnification claims the Company has against Alliance. The earn out issubject to three additional offsets (which are to be applied in the mannerdescribed in the Asset Purchase Agreement dated as of June 18, 2003 with Alliance)that entitle the Company to retain portions of the earn out otherwise payableto Alliance:

 

•                  Upto approximately $1,600,000 for a fixed price offset, depending on thesatisfaction of certain conditions;

 

•                  Theamount of any payments not committed to at closing that the Company makes afterthe closing to Alliance’s creditors plus up to $1,000,000 of litigationexpenses for certain patent and other litigation; and

 

•                  Approximately$4,800,000, which is the principal and accrued interest under its bridge loansto Alliance, depending on the satisfaction of certain conditions.

 

TheCompany may also use these offsets, or portions thereof, to acquire the commonstock of Alliance at certain predetermined prices, as of June 18, 2004.

 

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Becausethe amount of the earn out cannot be estimated, it has not been reflected inthe purchase price.  Amounts the Companypays for the earn out will be expensed as incurred.

 

***Joint Venture***

 

On October 7, 1999, the Company formed a joint venture with Elanto develop and commercialize nanoparticulate diagnostic imaging agents for thedetection and treatment of cancer through lymphography.  The goal was to demonstrate that the use ofN1177 would enable physicians to precisely locate tumorous nodes by firstinjecting the material in the vicinity of the tumor and then taking an image(picture) using a CT device.

 

The joint venture planned to commence Phase 2 clinical studies fordetection of cancer metastasis in lymph nodes in patients with cervical cancer,subject to the availability of sufficient capital.  In this patient population, other studies document an increase insurvival when lymph nodes containing cancer are removed.  Tumor identification by CT imaging would becorrelated to the results of biopsy results from patients undergoing surgery todemonstrate effectiveness in locating nodes and identifying those with cancerin them.  The lack of capital delayedthe commencement of these proposed clinical studies.

 

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 APreferred Stock for $12,015,000.  TheSeries A Preferred Stock was exchangeable for additional shares of Sentigen, orconvertible into common stock of the Company. The Company purchased 12,000 shares of Sentigen’s common stock for$12,015,000 representing an 80.1% ownership interest.

 

Expenses incurred by the Company and Elan, which related to thedevelopment of the diagnostic imaging agents, have been charged to and expensedby Sentigen.

 

Elan had substantive participating rights in Sentigen, including therequirement for approval of the business plan and budgets and equalrepresentation on the management committee that decided all day-to-dayfunctions.  As a result, the Company’s investment in Sentigen throughJune 10, 2004 was recorded under the equity method.

 

On June 10, 2004, the Company and Elan terminated the jointventure.  As a result, Sentigen hasbecome a wholly owned subsidiary of IMCOR, the “investment and advances toaffiliate” was eliminated and the assets and liabilities of Sentigenconsolidated within the financial statements of IMCOR.

 

Separately, in June 2004 the holder of the Company’s Series APreferred Stock sold that instrument and the purchaser converted all Series APreferred Stock, including accrued and unpaid dividends, into 195,263 shares ofcommon stock of IMCOR at a conversion price of $84.68 per share.  On the conversion date, the value of theCompany’s common stock was $0.75 per share, which was deemed to be the implicitfactor to value the 19.9% of Sentigen that Elan sold to IMCOR at $146,447.  Accordingly, the Company wrote down thecarrying value of its 80.1% share of the related technology license then heldby Sentigen to $589,469.  As part of the

 

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consolidation of Sentigen, the Company by June 30, 2004 recordedthe entire value of the technology license, net of $4,128 of amortization, at$731,788.

 

***SignificantEstimates***

 

The Company considers the valuation of its investment in the purchasedtechnology related to *Imagent*(“PurchasedTechnology”) to be a significant estimate.  The carrying value of thisPurchased Technology at June 30, 2004 is approximately $14,328,000, net ofaccumulated amortization.  The Company’s current valuation is based uponthe purchase price the Company paid for the acquisition from Alliance.  The Company intends to periodically evaluatethe valuation of Purchased Technology and make any necessary adjustments.  The Company’s valuation and negotiationassumptions have been based on currently available information includingestimates of market size and penetration, pricing, competitive threats andgeneral operating expenses.  These estimates may change and such changesmay impact future estimates of carrying value. The Company has instituted litigation against Amersham, and Amersham hasresponded with counter-claims.  Should the Company lose this litigation,its business and the value of the Purchased Technology would be materially andadversely affected.   See“Liquidity; Capital Resources,” below.

 

The Company also considers its investment in its technology license tobe a significant estimate.  InJune 2004, the Company and units of Elan terminated the joint venture thathad been formed to develop N1177 for lymphography.  Separately, the holder of the Company’s Series A Preferred Stocksold that instrument and the purchaser converted all Series A Preferred Stock,including accrued and unpaid dividends, into 195,263 shares of common stock ofIMCOR at a conversion price of $84.68 per share.  See “Note 7 – Equity Transactions,” above.  Among other factors, the Series A PreferredStock was exchangeable for additional shares of Sentigen.  See “Management’s Discussion and Analysisand Plan of Operation, Joint Venture,” above. On the conversion date, the value of the Company’s common stock was$0.75 per share, which was deemed to be the implicit factor to value the 19.9%of Sentigen that Elan sold to IMCOR at $146,447.  Accordingly, the Company wrote down the carrying value of its80.1% share of the related technology license then held by Sentigen to$589,469.  As part of the consolidationof Sentigen, the Company by June 30, 2004 recorded the entire value of thetechnology license, net of $4,128 of amortization, to be $731,788.

 

**Results of Operations**

 

The financial statements included herein present the results ofoperations of the *Imagent*Business following its acquisition on June 18, 2003.  See Note 4 tothe financial statements for a presentation of the pro-forma results ofoperations for all periods.  As one of aseries of transactions on November 12, 2002, the Company split off thetherapeutic business to certain founding shareholders.  Accordingly, theexpenses associated with that business have been reclassified as discontinuedoperations.

 

***Quarters endedJune 30, 2004 and 2003***

 

*Revenue*.  To date, the Company has not generatedsignificant product revenues due to capital constraints limiting itsproduction, sales and marketing capability.  In December 2003 the

 

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Company entered into a license agreement with Kyosei for thedevelopment and marketing of*Imagent*in Japan for all radiology and cardiology indications.  At the closing,the Company received a non-refundable gross payment of $2 million fromKyosei.  In April 2004, the Companyreceived an additional non-refundable gross payment of $2 million.  These are gross amounts; and a total of$200,000 for each payment was withheld at the source and charged off to expensein 2003 and 2004 as appropriate.  TheCompany is recognizing income from these gross payments ratably over theremaining expected life of the Kyosei agreement.  Accordingly, the Companyrecognized $84,523 as license revenue in the second quarter of 2004.

 

Additional payments from Kyosei are expected in 2005 and beyond withtotal set payments not to exceed $10 million, together with royaltiesbased upon future sales.  The futurepayments are based on certain milestones of clinical development, including thecommencement of and completion of clinical studies and approval for sale byJapanese regulatory authorities. Commencement of clinical studies is not expected to be earlier than2005, and the development program, including regulatory approval, is expectedto take four or more years.  Accordingly,the Company does not expect commercial sales, upon which the Company will earnroyalties, to commence earlier than 2008. While the Company believes that *Imagent*clinical studies will be successful, the Company cannot assure that suchstudies conducted in Japan will be successful or that the product will beapproved for sale by Japanese authorities.

 

*Research and Development*.  Research and development expenses for thequarters ended June 30, 2004 and June 30, 2003 were $926,076, and$266,279 respectively.  These expenses include personnel costs, fees andother compensation paid to outside consultants, and costs associated withconducting preclinical and clinical studies and manufacturing product to beused in these studies.

 

The Company’s current manufacturing facility provides significantexcess capacity for all clinical development and scaled manufacturingactivities, now and for the foreseeable future.  Since the excess manufacturing facility capacity provides nosignificant direct benefit to the Company at the present time, the currentcosts associated with this excess capacity continue to be charged off againstcurrent operations, including a portion attributed to research and development.

 

In the second quarter of 2003, research and development expenses weredirected primarily to the development of PH-50.  During this period, the Company maintained a small internalmanagement group and conducted research activities through contracts with thirdparty laboratories.  Following the *Imagent* Business acquisition, the Companygained internal research capabilities and infrastructure.  The increase in research expenses in thequarter ended June 30, 2004, compared to the comparable prior year period,was primarily due to the increase in the number of research personnel andsupporting laboratory spending. Substantially all of the research expenses in the second quarter 2004were for infrastructure and expenses associated with regulatory compliance andcontinued development of*Imagent*for new indications and the maintenance of the Company’s manufacturingcapability.

 

The Company is planning to initiate additional pre-clinical studies ofPH-50, as funds permit, for potentially significant new applications incardiovascular imaging and have filed for additional patent protection of theuse of the compound for vascular and organ imaging applications.  The

 

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Company have incurred a total of approximately $1,945,000 of expensesin connection with the development of PH-50.

 

The Company has been developing N1177 through a joint venture withaffiliates of Elan which was terminated as of June 10, 2004.  Research and development expenses for N1177have previously been charged to the joint venture.  The Company has incurred a total of approximately $3,130,000 ofexpenses in connection with the development of N1177.

 

The Company expects its development priorities, based on theavailability of sufficient capital, to focus on the continued development ofPH-50, compliance with regulatory obligations for*Imagent* and development of new indications for*Imagent*.  Expenses associated withthe development of N1177 were charged to its joint venture throughJune 10, 2004, and expenses associated with the development of its otherproducts are borne completely by the Company.

 

During the second quarter of 2004 and 2003, the Company hadinsignificant purchases of equipment and leasehold improvements other thanthose associated with the Purchased Technology.  The Company’s purchases,if any, are primarily for the acquisition of laboratory and other equipmentnecessary to conduct manufacturing operations and leasehold improvements at itsoffices in San Diego.  During the next twelve months, assuming that theCompany obtains sufficient capital, the Company expects capitalexpenditures for equipment to be less than $500,000.

 

*Selling, General and Administrative Expenses*.  Selling, general and administrative expensesfor the quarters ended June 30, 2004 and June 30, 2003 were$4,142,655 and $2,270,231, respectively.

 

In the second quarter of 2003, these expenses include costs associatedwith obtaining and asserting patent protection for the Company’s intellectualproperty, costs associated with administrative personnel and corporatemanagement, the amortization of certain options granted to the Company’semployees, legal and related expenses, facilities expenses at the Company’sPennsylvania offices, which have since been closed, and, following the *Imagent* Business acquisition, costs tooperate that business, including amortization of Purchased Technology.  The increase in expenses in the quarterended June 30, 2004, compared to the comparable prior quarter, was dueprimarily to the issuance of stock options at prices below the market price ofthe Company’s common stock pursuant to a contractual obligation to award abonus to the Company’s Chief Executive Officer, legal expenses associated withthe several financial transactions the Company completed during the quarter,and the full period impact of the *Imagent*Business organization, including salaries, facilities and utility costs andother expense.

 

In June 2004, the Company and Elan terminated the joint venture,and the Company purchased the 19.9% of Sentigen held by Elan.  As a result, Sentigen has become theCompany’s wholly owned subsidiary, the “investment and advances to affiliate”was eliminated and the assets and liabilities of Sentigen consolidated withinthe Company’s financial statements.  Atthe commencement of the joint venture, the Company sold the Series A PreferredStock to a unit of Elan.  Separately,the holder of the Company’s Series A Preferred Stock sold that instrument andthe purchaser converted all Series A Preferred Stock, including accrued andunpaid dividends, into 195,263 shares of common stock of IMCOR at an exchangerate of $84.68 per share.  See “Note 7 –Equity

 

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Transactions,” in the financial statements.  Among other factors, the Series A Preferred Stock was exchangeablefor additional shares of Sentigen.  See“Joint Venture,” above.  On theconversion date, the value of the Company’s common stock was $0.75 per share,which was deemed to be the implicit factor to value the 19.9% of Sentigen thatElan sold to IMCOR at $146,447. Accordingly, the Company wrote down the carrying value of its 80.1%share of the related technology license then held by Sentigen by $2,017,749 to$589,469.  As part of the consolidationof Sentigen, the Company by June 30, 2004 recorded the entire value of thetechnology license, net of $4,128 of amortization, to be $731,788.

 

Investment and other income for the quarters ended June 30, 2004and June 30, 2003 was $17,036 and $2,291, respectively.  Investmentincome is generated by the amount of capital in the Company’s investmentportfolio prior to it being used to fund its operations and the rate ofinterest earned on that capital.  In the 2004 quarter, investment andother income consisted primarily of sales of *Imagent*.

 

The Company expects investment and other income to fluctuate primarilyas a result of recording other income items and, to a lesser extent, as thesize of the investment portfolio decreases or increases and as the rate ofinterest earned by the portfolio varies due to shifts in short term interestrates.

 

Interest expense was $329,334 and $53,988 for the quarters endedJune 30, 2004 and 2003. Commencing in May 2003, the Company financed theoperations primarily through the use of Secured Promissory Notes and RevolvingConvertible Senior Secured Promissory Notes bearing interest at 7.5%,compounded monthly.  In addition, aspart of the *Imagent* Businessacquisition, the Company delivered to Xmark its promissory notes in the totalprincipal amount of $2,500,000. These notes bore interest at 3% over the primerate (payable in shares of the Company’s common stock).  See “Liquidity; Capital Resources,”below.  In the second quarter 2004, theCompany also accrued interest expense related to certain obligation associate with the acquisition.

 

TheCompany recorded preferred stock dividends (payable in additional shares ofSeries A Preferred Stock) of $221,160 and $265,504 in the quarters endedJune 30, 2004 and 2003 for Series A Preferred Stock.  On June 10, 2004, the entire Series APreferred Stock was converted into 195,263 shares of the Company’s commonstock.  See “Liquidity; CapitalResources,” below.

 

Net loss applicable to common shareholders (after preferred dividends)was $7,533,215, or $0.27 per share, and $7,655,359, or $0.44 per share, for thethree-month periods ended June 30, 2004 and 2003, respectively.  Weighted average shares utilized in thesecalculations were 28,138,446 and 17,532,111, respectively.  The increase in weighted shares outstandingwas due primarily to the timing of the Company’s financing, debt conversion andconversion of the Series A Preferred Stock. See “Liquidity; Capital Resources,” below.

 

***Six months endedJune 30, 2004 and 2003***

 

*Revenue*.  The Company recognized $126,190 as licenserevenue in the first half of 2004 pursuant to the amortization of deferredrevenue related to the Kyosei agreement. The Company had no revenue in the first quarter of 2003.

 

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*Research andDevelopment*. Research and development expenses for the six months ended June 30,2004 and 2003 were $1,886,907, and $820,442 respectively. The increase inexpenses for the first half of 2004 was due primarily to the additional costsincurred related to the*Imagent* Business.  Significant 2004 costs categorized asresearch and development expenditures (all numbers approximate) includepersonnel costs (research, development and manufacturing support) ($1,152,000),contract consulting services ($304,000), patent costs (209,000) and suppliesassociated with research and development activities ($138,000).

 

*Selling, General andAdministrative Expense*.  Selling, general and administrative expenses for the six monthsended June 30, 2004 and 2003 were $7,831,761 and $6,465,589 respectively.

 

These expenses in the first half of 2003 were comprised primarily ofcosts associated with the acquisition of the*Imagent* Business incurred prior to makinga firm commitment to the acquisition (costs incurred following its firmcommitment to acquire the*Imagent* Business have been capitalized aspart of the acquisition cost) including (i) provisions the Company hadtaken against advances the Company had made to Alliance and shares of thecommon stock the Company had issued to Xmark pursuant to a standstill agreementwith Xmark, (ii) costs of conducting due diligence and other activitiesrelated to the acquisition of the*Imagent* Business, and (iii) costsassociated with obtaining patent protection for its intellectual property,costs associated with administrative personnel and corporate management, theamortization of options granted to its employees, legal and related expensesand facilities expenses.

 

In 2004, the overall increase in expenses for the first half of 2004was due primarily to the additional costs incurred related to the*Imagent*Business, including costs of selling and marketing programs for*Imagent*and amortization of Purchased Technology related to the acquisition of the*Imagent*Business. More specifically, significant 2004 costs categorized as selling, generaland administrative expenses (all numbers approximate) include personnel costs($910,000), contract consultant costs ($1,076,000), recognition of the expenseof stock options granted at a price below the fair market value for our commonstock on the date of grant ($662,000), legal (including general corporate andlitigation support) and accounting ($908,000), special fees (primarily relatedto carrying costs associated with various Xmark obligations) ($954,000),facilities costs ($795,000) and depreciation and amortization ($1,571,000).

 

Investment and other income for the six months ended June 30, 2004and 2003 was $241,272 and $6,813, respectively.

 

In 2003, investment and other income primarily reflected earnings onthe investment portfolio following the Company’s capital raising efforts inlate 2002.

 

In 2004, investment and other income reflected:

 

•                  reversalof the remaining provision for the closing of the Company’s former offices inNew Hope, PA upon the landlord’s successful efforts in replacing the Company’slease;

 

•                  disgorgementof profits by a shareholder deemed to be an affiliate of the Company to theCompany resulting from certain sales of the Company’s common stock;

 

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•                  proceedsresulting from modest sales of *Imagent*;and

 

•                  earningson the investment portfolio.

 

TheCompany recorded preferred stock dividends (payable in additional shares ofSeries A Preferred Stock) of $498,030 and $523,970 in the six-monthperiods ended June 30, 2004 and 2003 for Series A Preferred Stock.

 

Net loss applicable to common shareholders (after preferred dividends)was $12,657,435, or $0.51 per share, and $12,854,721, or $0.75 per share, forthe six-month periods ended June 30, 2004 and 2003, respectively.  Weighted average shares utilized in thesecalculations were 24,808,999 and 17,105,467, respectively.  The increase in weighted shares outstandingwas due primarily to the timing of the Company’s financing, debt conversion andSeries A Preferred Stock conversion.

 

Interest expense was $596,753 and $53,988 for the six months endedJune 30, 2004 and 2003.

 

***Subsequent Events***

 

OnJuly 1, 2004 the Company repaid its secured bridge loan in the principalamount of $702,843 plus accrued interest and related fees.  Effective that date, the line of credit hasbeen cancelled, and the security interest in its assets has been extinguished.

 

**Liquidity; Capital Resources**

 

*Capital Resources and Requirements*.  At June 30, 2004, the Company had cashand cash equivalents totaling approximately $7,061,000 and current liabilitiesof approximately $9,393,000 including $1,628,447 (of an original $2,128,447)secured debt that is payable on or before December 1, 2004.  The security interest covers all Companyassets, including intellectual property. The Company’s ability to conduct operations is entirely dependent on itsability to obtain additional capital.  Without additional financing theCompany may not have sufficient capital resources for its entire fiscal yearending December 31, 2004.

 

At December 31, 2003, the Company had a net deficit position (itsliabilities, puttable share obligations and mezzanine equity exceeded itsassets) of $8,194,743.  During thequarter ended June 30, 2004, the following three transactions (more fullydescribed elsewhere in this Form 10-QSB) contributed to increased shareholders’equity, as follows:

 

•                  $10,150,000common stock financing, resulting in approximately $9,325,000 cash proceeds netof costs;

 

•                  conversionof various debt instruments with principal values aggregating $12,719,500 plusaccrued interest, into common stock for a total value of approximately$13,496,000; and

 

•                  reclassificationof the $12,015,000 mezzanine equity into shareholders’ equity upon theconversion of the Series A Preferred Stock into 195,263 shares of common stock.

 

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The above three transactions, taken together, resulted in grossincreases to shareholders’ equity totaling approximately $34,836,000 during thesix months ended June 30, 2004. The most significant reduction to shareholders’ equity during this sameperiod resulted from continuing net losses, totaling approximately$12,159,000.  Accordingly, the netshareholders’ deficit of $8,194,743 at December 31, 2003 was improved to apositive shareholders’ equity of $15,805,103 at June 30, 2004, primarilyas a result of the above described transactions and activities.

 

Shares outstanding have increased from 19,464,548 at December 31,2003 to 79,840,300 at June 30, 2004 (excluding warrants and options).  On June 10, 2004 the holder of its Series A Preferred Stockconverted all of those shares, including accrued but unpaid dividends, for195,263 shares of the Company’s common stock. Accordingly, $12,015,000 of Series A Preferred Stock the Company hadreclassified as mezzanine equity has by June 30, 2004 been classified aspermanent equity, and the Series A liquidation preference totaling $16,534,840has been eliminated.

 

The Company lacks sufficient working capital to fund planned operationsfor the entire fiscal year ending December 31, 2004.  The Companycannot accurately estimate the amount of additional financing required;however, the amount could be an additional $25 million or more byDecember 31, 2005.  Therefore, substantialadditional capital resources will be required to fund the Company’s plannedongoing operations related to clinical development, marketing and manufacturingof*Imagent*, research and businessdevelopment activities and debt repayment.  The Company’s financialcondition raises substantial doubt about its ability to continue as a goingconcern without adjustments to its current planned levels of expenditures.

 

The Company is currently in default under obligations to pay $923,000to creditors of Alliance in connection with its acquisition of*Imagent.* While there can be no assurance of success, the Company believes thatthe Company can resolve these defaults and that they do not give rise to areduction in the carrying value of Purchased Technology of the *Imagent* Business.  The Company also has not registered theresale of shares the Company issued in connection with that acquisition, whichin some cases is a condition to the effectiveness of agreements to release theCompany from any claims by the Alliance creditor.

 

The Company believes there are a number of potential alternativesavailable to meet the continuing capital requirements such as public or privatefinancings or collaborative agreements.  The Company is taking continuingactions to reduce the  ongoingexpenses.  If adequate funds are not available, the Company will berequired to significantly curtail its operating plans and may have to sell orlicense significant portions of its technology or potential products.  Itsfinancial statements, including those contained in this Form 10-QSB, do notinclude any adjustment to reflect the possible future effects on therecoverability and classification of assets or the amount and classification ofliabilities that may result from the outcome of this uncertainty.

 

If the Company raises additional funds by issuing equity securities,substantial dilution to existing stockholders may result.  However, therecan be no assurance that such capital will be available under acceptable terms,if at all.  See “Risk Factors - The Company must raise additionalfinancing in the future and its inability to do so will prevent the Companyfrom continuing as a going concern and implementing its business developmentplan,” below.

 

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In addition, the Company expects to evaluate from time to time theacquisition or license of businesses, technologies or products.  Thepurchase of any such licenses or technologies would be funded by a portion ofany net proceeds of future offerings or the issuance of debt or equitysecurities specifically for that purpose.  The Company expects its use ofcapital to increase as the Company builds the commercial presence of*Imagent* and conducts further clinicaltrials of its products in development.

 

***InstitutionalFinancing*.** In April and June 2004, the Company closed on the sale ofapproximately $10.15 million of its common stock at a price of $0.40 pershare plus a warrant to purchase .5 additional shares for each share acquiredfor cash exercisable at $.50 per share, issuing approximately 25,374,999 sharesof common stock and 14,717,502 shares of common stock underlying warrants,including warrants issued to its two placement agents.

 

The Company also converted an aggregate principal amount of $12,719,500of debt plus accrued interest in connection with this financing.  Notes evidencing this debt bore interest at7.25% per annum compounded monthly. This conversion resulted in the issuance of 33,740,672 shares of theCompany’s common stock at $.40 per share.

 

To secure the obligations under its notes to these investors, theCompany granted them a security interest in all of its tangible and intangibleassets, including intellectual property.  This lien has now been released.

 

The Company has used, and expects to use capital available from salesof common stock, for general corporate purposes, including activities relatedto the manufacturing and marketing of*Imagent*, preparing for and conducting clinical trials, purchase andpreparation of clinical material, conduct of preclinical studies,administrative expenses to support its operating activities, capitalexpenditures, debt repayment and to meet working capital needs.

 

***Transactions withXmark.***  TheCompany entered into a series of agreements with Xmark related to itsacquisition of the *Imagent*Business. The Company issued 750,000 shares of its common stock in the firstquarter 2003 to Xmark, who agreed to not exercise any rights against Allianceas a creditor for the period of the standstill. On May 2, 2003, the Companyentered into an agreement pursuant to which Xmark agreed to extend the periodduring which Xmark had refrained from exercising its rights as a creditoragainst Alliance to permit the Company to complete the acquisition. On thatdate, the Company also purchased a $1,250,000 interest in Alliance’sobligations to Xmark.

 

Atthe closing of its acquisition of the *Imagent*Business the Company delivered to Xmark its promissory notes in the totalprincipal amount of $2,500,000. These notes were payable in two equalinstallments on August 5, 2003 and November 3, 2003 and bore interestat 3% over the prime rate (payable in shares of the Company’s common stock). Atthe closing of the *Imagent*Business acquisition, the Company also issued Xmark an additional 1,056,144shares that represented payment of interest that was due to Xmark by Alliancethrough the closing date of the acquisition.

 

TheCompany defaulted on the principal payment due on August 5, 2003. TheCompany negotiated a new agreement with Xmark dated August 18, 2003pursuant to which the Company

 

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agreedto make an immediate payment of $1,250,000 and the remaining payment inNovember 2003.  The Company coulddefer the second payment for a monthly fee of between $50,000 and $100,000.

 

On May 3, 2004, the Company repaid to Xmark the last Senior SecuredNote in the principal amount of $1,250,000. Following that repayment, Xmark hadremaining the right to put to the Company 1,611,989 shares of the Company’scommon stock held by them at $1.00 per share. This put right was secured by all the assets of the Company’s *Imagent* Business and was exercisable infull on July 19, 2004.  InJune 2004, the Company entered into an agreement with Xmark whereby theCompany exchanged all puttable shares held by Xmark and other relatedobligations totaling $1,778,447, together with an additional fee of $350,000,for an aggregate of $2,128,447 of Secured Notes payable no later thanDecember 1, 2004.  The Secured Notesare secured by all of the Company’s assets. The Company repaid $500,000 of these secured notes on June 30,2004.

 

***Conversion of SeriesA Preferred Stock.* **Under the Certificate of Designations of the Series A PreferredStock the holder has a Series A liquidation preference entitling it as ofJune 10, 2004 to the first $16,534,840 of funds available for distributionto stockholders upon liquidation of the Company and has the right to convertshares of Series A Preferred Stock into common stock at any time afterOctober 20, 2001 at a conversion price of $84.68 per share.  Alternatively, the holder of Series APreferred Stock may exchange the initial 12,015 shares of Series A PreferredStock for common shares of Sentigen so that the holder of Series A PreferredStock owns 50% of the equity of Sentigen. As the initial 12,015 shares of the Series A Preferred Stock wereexchangeable at the holder’s option into additional shares of Sentigen, theCompany had classified $12,015,000 as mezzanine equity.

 

OnJune 10, 2004 the holder of the Company’s Series A Preferred Stockconverted all shares, including accrued but unpaid dividends, for 195,263shares of the Company’s common stock. Accordingly, $12,015,000 of Series A Preferred Stock the Company hadclassified as mezzanine equity has been reclassified as permanent equity, andthe Series A liquidation preference totaling $16,534,840 has beeneliminated.  In connection with theconversion of the Series A Preferred Stock, the Company also terminatedthe Sentigen joint venture with units of Elan through the purchase of Elan’s19.9% interest for certain future royalties on two products: N1177 andPH-50.  See “Results of Operations,”above.

 

The Company was in default under an equipment lease.  In June 2004 the Company settled thedemand by a lessor of approximately $787,000 for two payments totaling $100,000and the issuance of 616,580 shares of the Company’s common stock. The Companywill make an additional payment equal to the difference (if any) between thenet proceeds the lessor receives from sales of the stock during the 12 monthsafter the Company registers the shares and $468,601.  Due to the remaining contingency of a payment, the Company hascontinued to reflect the amount paid in stock, less the par value of the sharesissued, as a liability.

 

In December 2003, the Company entered into a license agreementwith Kyosei for the development and marketing of*Imagent* in Japan for all radiology and cardiologyindications.  The Company has received a notice from Scheringasserting a right against a portion of the proceeds received from Kyosei. The Company contests the assertion.  The Company has

 

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established a provision of $400,000 should its position not be sustained.  See “Results of Operations,” above.

 

In June 2004, the Company entered into a secured bridge loan of upto $750,000 with a bank.  The bank helda security interest in substantially all the Company’s assets, other thanintellectual property, junior to the security interest of Xmark and senior tothe security interest of the convertible and demand notes held by certaininstitutional investors.  OnJuly 1, 2004, the Company repaid the entire outstanding loan balance plusaccrued interest and related fees of $702,863. See “Subsequent Events,” above.

 

The Company has two long-term commitments that are not recorded on itsfinancial statements.  At the time of the acquisition of the*Imagent* business, the Company enteredinto a non-cancelable operating lease agreement with a unit of BaxterInternational for certain equipment used for the manufacture of*Imagent*.  The Company’s annual costfor this lease is approximately $126,000.  The Company leases  the office and manufacturing space in SanDiego, California.  Annual rent for the California lease, which expires in2008, is approximately $792,000.

 

**Plan of Operation**

 

During the next twelve months the Company will focus its effortsprimarily on exploring various options concerning its business, includingsecuring additional financing, joint ventures, licensing or selling all or aportion of its technology and other possible strategic transactions.  TheCompany’s ability to commercialize*Imagent*and/or develop PH-50 and N1177 depends on the successful implementation of oneor more of these transactions because its currently available capital is notsufficient to carry out its business plan or fully commercialize and developthese products.

 

Depending on the availability of capital and whether or not the Companypursues a sale or licensing strategy for*Imagent*, the Company will focus its operating efforts first on theadditional clinical development of a myocardial perfusion indication for *Imagent*, the sales and marketing of*Imagent,* the development of PH-50 andthen development of N1177.  Subject to the availability of sufficientcapital, the Company expects to continue to incur losses for at least the nextthree years as the Company intensifies research and development, preclinicaland clinical testing and associated regulatory approval activities and engagein or provide for the manufacture and/or sale of any products that the Companyhas or may develop.

 

Greater capital resources would also enable the Company to quicken andexpand its marketing and research and development activities, and its failureto raise additional capital will (absent a suitable collaborative agreementproviding for a third party to take over these functions) significantly impairor curtail its ability to conduct further activities.  In any event,complete development and commercialization of the Company’s technology willrequire substantial additional funds.  The Company is seeking to raisecapital through the sale of its common stock or other securities in a privateplacement to fund its immediate and longer-term capital needs. See “RiskFactors - The Company must raise additional financing in the future and itsinability to do so will prevent the Company from continuing as a going concernand implementing its business development plan,” below.

 

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As of June 30, 2004, the Company expects to pay the followingcontractual obligations and commitments:

 
|                                        |   | **Payments  due by Year** |          |
|---------------------------------------------|--------|---------------------------|---------------|
|                                        |   | **2004**                  |          | **2005-2006** | ** ** | **2007-2008** | ** ** | **Beyond  2008** | ** ** | **Total** | ** ** |
| **Recorded Liabilities**                    |   |                      |          |   |   |   |   |   |   |   |   |
| Xmark secured promissory notes              |   | $                         | 1,628,447     |   | $ | — |   | $ | — |   | $ | — |   | **$** | **1,628,447** |   |
| Bridge loan                                 |   | 702,863                   |          | — |   | — |   | — |   | **702,863** |   |
| *Imagent* purchase  obligations (remaining) |   | 2,155,425                 |          | — |   | — |   | — |   | **2,155,425** |   |
| Notes pursuant to unpaid prior legal fees   |   | 416,807                   |          | — |   | — |   | — |   | **416,807** |   |
| Equipment lease settlement obligations      |   | 567,984                   |          | — |   | — |   | — |   | **567,984** |   |
| Accrued royalty liability                   |   | 400,000                   |          |   |   |   |   |   |   | **400,000** |   |
|                                        |   |                      |          |   |   |   |   |   |   |   |   |
| **Commitments**                             |   |                      |          |   |   |   |   |   |   |   |   |
| Operating Lease Commitments                 |   | 478,365                   |          | 1,900,569 |   | 1,024,595 |   | — |   | **3,403,529** |   |
|                                        |   |                      |          |   |   |   |   |   |   |   |   |
| Total Contractual Obligations               |   | **$**                     | **6,349,891** | ** ** | **$** | **1,900,569** | ** ** | **$** | **1,024,595** | ** ** | **$** | **—** | ** ** | **$** | **9,275,055** |   |

 

**Recent Accounting Pronouncements**

 

During the quarter ended June 30, 2004, there were no new AccountingPronouncements impacting the Company’s accounting, financial position oroperating results.

 

**ITEM 3.****                             CONTROLSAND PROCEDURES**

 

Disclosure controls and procedures are defined by the SEC as thosecontrols and other procedures that are designed to ensure that informationrequired to be disclosed in the Company’s filings under the Securities Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms.  The Company’s Chief ExecutiveOfficer and Chief Financial Officer have evaluated the Company’s disclosurecontrols and procedures within 90 days prior to the filing of this QuarterlyReport on Form 10-QSB and have determined that such disclosure controls andprocedures are effective.

 

Subsequent to the Company’s evaluation, there were no significantchanges in internal control over financial reporting or other factors that havematerially affected, or are reasonably likely to materially affect theCompany’s internal controls over financial reporting.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.****                             LEGALPROCEEDINGS**

 

On June 18, 2003, the Company filed a complaint against Amershamand two other Amersham affiliates alleging that certain Amersham productsinfringe on claims in its patents covering *Imagent*.  The case is captioned as *Photogen Technologies, Inc. and AlliancePharmaceutical Corp. v. Amersham Health Inc. et. al.*, CivilAction No. 03CV2853(SRC), in the United States District Court for theDistrict of New Jersey. The Company’s complaint alleges that principallythrough their Optison® product, Amersham and related Amersham

 

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entities infringe on eight patents owned by the Company. The Company isalso seeking a declaration that the claims of fifteen Amersham patents areinvalid and are not infringed by its *Imagent*product. Alliance, the party from whom the Company recently acquired theCompany’s *Imagent* product, isalso a plaintiff in the suit.  TheCompany is seeking damages, an injunction against Amersham, a declaratoryjudgment and other relief.

 

Amersham filed an answer dated July 18, 2003 denying the materialallegations of the Company’s claims and asserting certain affirmative defensesand counterclaims. Amersham’s counterclaims against the Company include claimsof patent infringement of the fifteen Amersham patents, breach of contract,breach of good faith and fair dealing, and tortuous interference with contract.The parties are exchanging written discovery at this time.

 

It is not presently feasible to determine whether there is a reasonablepossibility that the assets have been impaired for purposes of Statement ofFinancial Accounting Standards No. 5, or the extent of damages or gain, if any,that might result depending on whether or not the Company prevails.  Such a determination will only be possibleafter the facts and circumstances of the litigation have been established and,potentially, litigated before a court of competent jurisdiction.  In any event, the Company will continue toincur litigation costs as it prosecutes its claims in the litigation.  Intellectual property disputes are oftensettled through licensing arrangements, which if resolved unfavorably, could becostly to the Company or ultimately make it unfeasible to market the product.  In any intellectual property litigation, itis possible that licenses necessary to settle the dispute would not beavailable on commercially reasonable terms or that the Company would not beable to redesign its technologies to avoid any claimed infringement thusresulting in the Company’s inability to sell the product.

 

On July 29, 2003, the European Patent Office revoked Amersham’sEuropean Patent (EP) No. 620744 with claims directed to contrast agents.The Company had brought the opposition proceeding against the EP ‘744 patent inthe European Patent Office. The EP ‘744 is a counterpart to the patents thatare the subject of the Company’s suit against Amersham in the United Statesdescribed above. See “Risk Factors—The Company filed a suit against Amershamfor patent infringement, which, if resolved unfavorably, could impede itsability to utilize its patents for *Imagent*,”below.

 

**ITEM 2.****                             CHANGESIN SECURITIES**

 

During the six-month period ending June 30, 2004, the Companyissued securities in the transactions described below without registrationunder the Securities Act.  These securities were offered and sold by theCompany in reliance upon exemptions from the registration requirements providedby Section 4(2) of the Securities Act and Regulation D under theSecurities Act relating to sales not involving any public offering, and/orRule 701 under the Securities Act relating to transactions occurring undercompensatory benefit plans.  The Company relied on representations andwarranties from the purchasers of the securities that they were acquiring thesecurities for their own account and not with a view to, or for sale inconnection with, any distribution of the securities in violation of theSecurities Act.

 

•                  InJanuary 2004, the Company recognized the issuance of 6,250 shares of itscommon stock as compensation for services provided by a consultant.

 

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•                  OnMarch 5, 2004, the Company issued 2,053,977 shares of its common stock tocertain creditors of Alliance.  The value of 1,985,522 of these shares wasto satisfy a previous obligation associated with acquisition of the *Imagent* Business.  The value of theremaining 68,455 shares was recorded as penalty expense due to delays insecuring shareholder approval of the issuance of these shares.

 

•                  InApril and June 2004, the Company issued 25,374,999 shares of commonstock and 14,717,502 shares of common stock underlying warrants, includingwarrants issued to its two agents pursuant to the sale of approximately$10.15 million of its common stock at a price of $0.40 per share plus, foreach share purchased, a warrant to purchase .5 of an additional shareexercisable at $.50 per share.

 

•                  InApril and June 2004, the Company issued 33,740,672 shares of itscommon stock at $0.40 per share to holders of its Secured Promissory Notes andRevolving Convertible Senior Secured Promissory Notes in exchange for theconversion of an aggregate of approximately $12,719,500 principal amount plusaccrued interest of these notes.

 

•                  InJune 2004, pursuant to the Exchange Agreement with Xmark, the Companyretired all of the remaining 1,611,989 puttable shares held by Xmark.

 

•                  InJune 2004, the Company issued 195,263 shares of its common stock pursuantto the conversion of all shares of its Series A Preferred Stock, includingaccrued but unpaid dividends.

 

•                  InJune 2004, the Company issued 616,580 shares of its common stock as partof a settlement of a demand of approximately $787,000 for certain leasepayments for an equipment lease.

 

**ITEM 3.****                             DEFAULTSUPON SENIOR SECURITIES**

 

During the quarter ended June 30, 2004:

 

•                  TheCompany was in default with respect to the payment of $4,160,000 principalamount of Revolving Secured Convertible Senior Secured Notes and accruedinterest.  The Company resolved thedefault by converting the entire principal and accrued interest under thosenotes on June 29, 2004 (in conjunction with its $10.15 million financing)into 11,069,720 shares of common stock at a conversion price of $.40 per share.

 

•                  TheCompany was in default under an equipment lease and the lessor had demanded$787,000; the Company resolved the default by entering into an agreementproviding for payment of $100,000 and the issuance of 616,580 shares of commonstock.  The Company will make anadditional payment equal to the difference (if any) between the net proceedsthe lessor receives from sales of the stock during the 12 months after theCompany registers the shares and $486,601.

 

•                  TheCompany was in default under obligations to pay an aggregate of $923,000 tocreditors of Alliance in connection with the Company’s acquisition of *Imagent*. The

 

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Company did not register the resale of sharesdelivered to certain of those creditors, which, in some cases, is a conditionto the effectiveness of agreements to release the Company from any claims bythat creditor.  Although the Companycannot give assurances of success, the Company believes the Company can resolvethese defaults and that they do not give rise to a reduction in the carryingvalue of the Purchased Technology of the *Imagent*Business.

 

**ITEM 4.****                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

On February 5, 2004, the Company held a Special Meeting ofStockholders pursuant to a Proxy Statement dated January 13, 2004 wherebythe stockholders: (i) approved the issuance of more than 20% of the Company’svoting stock to certain creditors of Alliance Pharmaceutical Corp in connectionwith the Company’s acquisition of Alliance’s assets related to its imaging anddiagnostic imaging business, which closed on June 18, 2003; (ii) approvedthe issuance of additional shares of common stock upon the conversion ofsecured promissory notes in the aggregate principal amount of $4,160,000, atthe same price as the Company sells shares in a qualified financing; (iii)approved an amendment to the Company’s articles of incorporation to change itsname to IMCOR Pharmaceutical Co.; (iv) authorized the Company’s Board ofDirectors to amend the Company’s articles of incorporation to effect, when andas determined by the Board in its sole discretion within the 2004 calendaryear, a reverse stock split in a range between one-for-two up to one-for-five;and (v) ratified the engagement of Moss Adams LLP as the Company’sindependent certified public accountants for the 2004 fiscal year.

 

**ITEM 5.****                             OTHERINFORMATION**

 

***RISK FACTORS***

 

This Form 10-QSB contains (and press releases and other publicstatements the Company may issue from time to time may contain) a number offorward-looking statements regarding its business and operations. Statements in this document that are not historical facts are forward-lookingstatements.  Such forward-looking statements include those relating to:

 

•                  theCompany’s current business and product development plans,

 

•                  theCompany’s future business and product development plans,

 

•                  thetiming and results of regulatory approval for proposed products, and

 

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

 

Examples of forward-looking statements include predictive statements,statements that depend on or refer to future events or conditions, andstatements that may include words such as “expects,” “anticipates,” “intends,”“plans,” “believes,” “estimates,” “should,” “may,” or similar expressions, orstatements that imply uncertainty or involve hypothetical events.

 

Forward-looking statements involve known and unknown risks anduncertainties that may cause the Company’s actual results in future periods todiffer materially from what is currently anticipated.  The Company makescautionary statements in certain sections of this Form 10-

 

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QSB, including under “Risk Factors.”  You should read thesecautionary statements as being applicable to all related forward-lookingstatements wherever they appear in this Form 10-QSB, in the materials referredto in this Form 10-QSB, in the materials incorporated by reference into thisForm 10-QSB, or in its press releases or other public statements.  Inlight of these risks, uncertainties and assumptions, the forward-looking eventsdiscussed in this Form 10-QSB or other documents incorporated by referencemight not occur.  No forward-looking statement is a guarantee of futureperformance and you should not place undue reliance on any forward-lookingstatement. The Company does not undertake any obligation to release publiclyany revisions to these forward looking statements, to reflect events orcircumstances after the date of this Form 10-QSB, or to reflect the occurrenceof unanticipated events, except as may be required under applicable securitieslaws.

 

The following are key risk factors that may affect the Company’s futureresults and/or the price of the Company’s common stock:

 

**Business and Financial Risks**

 

**The Company must raise additional financingin the future and its inability to do so will prevent the Company fromcontinuing as a going concern and implementing its business plan.**

 

TheCompany’s cash and securities on hand at June 30, 2004, followingexpenditures incurred by its operations was approximately $7,061,000. AtJune 30, 2004, the Company had liabilities, including current liabilitiesand deferred revenue of approximately $13,267,000. The Company is in defaultunder obligations to pay $923,000 to former secured creditors of Alliance inconnection with the Company’s acquisition of the *Imagent* Business.  The Company also has not registered theresale of shares the Company issued in connection with that acquisition, whichin some cases is a condition to the effectiveness of agreements to release theCompany from any claims by the Alliance creditor.

 

TheCompany will need substantial additional financing to continue plannedoperations including its manufacturing, marketing and product developmentprograms, and the repayment of debt. The Company estimates that it will need atleast $25,000,000 through December 31, 2005 to fund planned operations anddischarge debt.   The Company iscurrently seeking capital in one or more transactions to fund its immediate andlonger-term capital needs. Additional funds may not be available on acceptableterms, if at all, and existing stockholders may be diluted as a result of thoseofferings. The pricing of the Company’s common stock, or other securitiesconvertible into common stock, in any such transaction may also result in anincrease in the number of shares of common stock issuable upon exercise ofwarrants in accordance with the anti-dilution provisions in the instruments governingthose securities.

 

**The Company must repay a secured debt holderan aggregate of $1,578,447 in installments on or before December 1, 2004.**

 

An institutional stockholder had a put right for 1,611,989 shares ofthe Company’s common stock at $1.00 per share that was fully exercisable as ofJuly 19, 2004.  In June 2004,the Company exchanged all puttable shares and other related obligations for anaggregate of $2,128,447

 

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secured debt.  The holder has asecurity interest in all of the Company’s assets, including intellectualproperty.  The Company has made $550,000in payments on the notes.  The remaining$1,578,447 is due in installments on or before December 1, 2004.

 

**The Company has a history of losses, and the Company may notachieve or maintain profitability in the future or pay cash dividends.**

 

TheCompany has incurred losses since the beginning of its operations.  As of June 30, 2004, the Company hasincurred cumulative net losses (before dividends on preferred stock) ofapproximately $63,678,000.  The Companyexpects its losses to increase in the future as its financial resources areused for manufacturing, marketing, research and development, preclinical andclinical testing, regulatory activities, and other related expenses.  The Company may not be able to achieve ormaintain profitability in the future. The Company has never declared or paid any cash dividends to stockholdersand does not expect to do so in the foreseeable future.

 

**The Company does not have any material revenues from sales;accordingly, the Company is a development stage company.**

 

TheCompany and its technologies, other than its recently acquired *Imagent* product, are in early stages ofdevelopment. The Company began its business as a biopharmaceutical company in1997.  To date, the Company has notgenerated material revenues from sales or operations. The Company expects togenerate revenue from sales of *Imagent*,but there can be no assurance that the Company will be able to generate enoughrevenue from such sales to be profitable for at least several years, if at all.

 

**The Company’s inability to develop *Imagent* for use with the Phasic Changestechnique, and to continue development of PH-50 and N1177, may impede itsability to raise capital and achieve profitability.**

 

TheCompany is seeking to expand its label indication for *Imagent* for myocardial perfusion imagingfor the detection of coronary artery disease (CAD) using a novel techniquecalled Phasic Changes.  The Company isalso working toward further clinical development of PH-50 and N1177.  The Company believes that development of *Imagent* for the Phasic Changes techniquein particular will be important to the Company’s ability to attract capital andachieve future profitability.

 

Thereare a number of potential obstacles to these goals:

 

•                  TheCompany may not have sufficient capital to complete the clinical trials andother tasks necessary to obtain regulatory approval.

 

•                  Theresults of studies on *Imagent* forthe Phasic Changes technique are preliminary. These studies and others for PH-50 and N1177 may not provide sufficientdata to predict the products’ potential for use.

 

•                  TheFDA may not approve the use of *Imagent*for the Phasic Changes technique or PH-50 or N1177 for their plannedindications.

 

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•                  TheCompany has not completed an examination of whether it has sufficientintellectual property protection to use *Imagent*for the Phasic Changes technique. Intellectual property disputes relating to *Imagent*, PH-50 or N1177 could be costly to resolve and couldaffect the Company’s ability to commercialize products with those technologies.

 

•                  TheCompany may not attract capital or achieve profitability even if itsuccessfully introduces *Imagent*for the Phasic Changes technique, PH-50 or N1177.

 

•                  Asa result of changing economic considerations, market, clinical or regulatoryconditions, or clinical trial results, the Company may shift its focus ordetermine not to continue one or more of the product development projects theCompany is currently pursuing.

 

**The markets for imaging products are extremely competitive,and many of its competitors have greater resources and have products that arein more advanced stages of development than the Company does, which may givethem a competitive advantage over the Company.**

 

Inaddition to *Imagent,* there arecurrently two FDA approved ultrasound contrast agents being marketed in theU.S. by Amersham Health, Inc. and Bristol-Myers Squibb for certaincardiology applications. In addition, Bracco International has filed a New DrugApplication with the FDA seeking approval to market its product. Two othercompanies (POINT Biomedical and Acusphere) are in advanced clinical trials forthe use of ultrasound contrast agents for assessing certain organs and vascularstructures. The Company expects that competition in the ultrasound contrastimaging field will be based primarily on each product’s safety profile,efficacy, stability, ease of administration, breadth of approved indications,and physician, healthcare payer and patient acceptance. The Company is at thevery early stages of launching *Imagent*,and the Company cannot predict whether it will compete successfully with theseother products.

 

**The Company filed a suit against Amersham for patentinfringement that if resolved unfavorably could impede its ability to utilizeits patents for Imagent.**

 

TheCompany filed a complaint against Amersham Health, Inc. and two otherAmersham affiliates alleging that certain Amersham products infringe on claimsin its patents covering *Imagent*.The Company also seeks a declaration that its patents do not infringe onAmersham’s in this area, and other relief. Alliance joined the Company as aplaintiff in this suit. Amersham filed an answer denying the materialallegations of its claims and asserting certain counterclaims. If the suit isresolved unfavorably to the Company, the Company may have difficulty utilizingthe protections of its patents for *Imagent*and there may be other complications that may make it difficult or impossibleto implement its commercialization strategy for *Imagent*.

 

Intellectualproperty disputes are often settled through licensing arrangements that couldbe costly to the Company. In any intellectual property litigation, it ispossible that those licenses necessary to settle the dispute would not beavailable on commercially reasonable terms or that the Company would not beable to redesign its technologies to avoid any claimed infringement thus resultingin its inability to sell the product.

 

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**The Company’s proposed products are subject to extensivetesting and government approval, and the Company may not obtain or maintain theapprovals necessary to sell its proposed products.**

 

Other than Imagent for its current indication, none of theCompany’s  proposed imaging products hasreceived the FDA’s approval for commercial sales. An extensive series ofclinical trials and other associated requirements must be completed before theCompany’s proposed products can be approved and sold in the U.S. or othercountries.  Requirements for FDAapproval of a product include preclinical and clinical testing for effectiveuse and safety in animals and humans, which can be extremely costly.  The time frame necessary to perform thesetasks for any individual product is long and uncertain, and the Company mayencounter problems or delays that the Company cannot predict at this time.  The lack of adequate capital will contributeto delays in this process.  The Companymust also obtain regulatory approvals comparable to those required in the U.S.to market its products in other countries. Even if testing is successful, its proposed products may not demonstratesufficient effectiveness or safety to warrant approval by the FDA or otherregulatory authorities.  Any regulatoryapproval may not cover the clinical indications that the Company may seek.

 

Otherthan *Imagent* for its currentindication, the Company’s proposed imaging products generally must completepreclinical tests in animals and three phases of tests (also called clinicaltrials) in humans before the Company can market them for use.  Use of its technology has been limited primarilyto laboratory experiments and animal testing; only N1177 has completed Phase 1human clinical trials. The Company has not yet conducted substantive studies ofits compounds in development to evaluate their effectiveness on humansubjects.  The Company’s results fromearly clinical trials may not predict results that the Company will obtain inlarge-scale clinical trials, as even after promising results in early trials, anumber of companies have suffered significant setbacks in advanced clinicaltrials.

 

TheCompany may not conduct additional Phase 2 or Phase 3 clinical trials for itsproducts and such trials, if begun, may not demonstrate any efficacy or may notbe completed successfully in a timely manner, if at all.  The rate of completion of the Company’sclinical trials depends upon, among other things, the rate of patientenrollment.  Patient enrollment is afunction of many factors, including the size of the patient population for aparticular indication, the nature of the clinical protocol under which theCompany’s products will be studied, the proximity of the patient to a clinicalsite and the eligibility criteria for the study.  Delays in planned patient enrollment may result in increasedcosts, regulatory filing delays, or both. Furthermore, the Company, the FDA orother regulatory authorities may alter, suspend or terminate clinical trials atany time.  If the Company does notsuccessfully complete clinical trials and obtain regulatory approval for aproduct, the Company will not be able to market that product.

 

**Any products approved by the FDA are subjectto postmarket approval requirements of the FDA.**

 

TheCompany’s FDA approved product, *Imagent*,is subject to numerous postmarket approval requirements by regulatoryauthorities. The Company is subject to inspection and marketing surveillance bythe FDA to determine its compliance with regulatory requirements with respectto any approved products. If the FDA finds that the Company has failed tocomply, it can

 

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institutea wide variety of enforcement actions, ranging from a public warning letter tomore severe sanctions such as:

 

•                  recallor seizure of its products;

 

•                  fines,injunctions and civil penalties;

 

•                  operatingrestrictions, partial suspension or total shutdown of production; and

 

•                  criminalprosecution.

 

Anyenforcement action by the FDA may also affect the Company’s ability tocommercially distribute its products in the U.S.

 

**Product liability claims could increase itscosts and adversely affect its results of operations.**

 

Themarketing, sale and clinical testing of *Imagent*and the Company’s product candidates may expose the Company to productliability claims, and the Company may experience material product liabilitylosses in the future. The Company maintains certain levels of product liabilityinsurance for the use of its products, but its coverage may not continue to beavailable on terms acceptable to the Company or adequate for liabilities theCompany actually incurs. A successful claim brought against the Company in excessof available insurance coverage, or any claim or product recall that results insignificant adverse publicity against the Company, may have a material adverseeffect on its business and results of operations.

 

**If the Company does not obtain and maintainpatent or other protection of its core technologies (namely *Imagent* and PH-50 for cardiovascularimaging and N1177 for lymphography), the Company may have difficultycommercializing products using these technologies.**

 

TheCompany’s success depends in part on its ability to obtain, assert and defendits patents, protect trade secrets and operate without infringing theintellectual property of others. Among the important risks in this area arethat:

 

•                  theCompany’s patent applications may not result in issued patents. Moreover, anyissued patents may not provide the Company with adequate protection of itsintellectual property or competitive advantages, and the law on the scope ofpatent coverage is continually changing.

 

•                  variouscountries limit the subject matter that can be patented and limit the abilityof a patent owner to enforce patents in the medical field. This may limit theCompany’s ability to obtain or utilize those patents internationally.

 

•                  existingor future patents or patent applications (and the products or methods theycover) of the Company’s competitors (or others, such as research institutionsor universities) may interfere, invalidate, conflict with or infringe theCompany’s patents or patent applications. Similarly, the use of the methods ortechnologies contained in the

 

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Company’s patents, patent applications and other intellectual propertymay conflict with or infringe the rights of others.

 

•                  ifan advance is made that qualifies as a joint invention, the joint inventor orhis or her employer may have rights in the invention.

 

TheCompany will be able to protect its proprietary rights from unauthorized use bythird parties only to the extent that these rights are covered by valid andenforceable patents or effectively maintained as trade secrets. The Companyacquired a patent portfolio related to *Imagent*as part of the acquisition of the *Imagent*Business.  The Company has not completedits evaluation of intellectual property rights associated with the use of *Imagent* for the Phasic Changestechnique.   The Company also own twopatents in the U.S., and certain other patents in foreign countries includingAustralia, Canada, Japan and Germany that relate to methods for performing lymphography.

 

Inaddition to the patents and patent applications the Company acquired throughthe purchase of the *Imagent*Business, the Company has filed patent applications in the U.S. and under thePatent Cooperation Treaty covering a number of foreign countries. These patentapplications relate to the use of nanoparticulates, including PH-50, ascardiovascular imaging agents and to deliver pharmacologically activesubstances for treatment of various diseases. The Company is the exclusivelicensee from Nycomed Imaging AS of a group of patented proprietarynanoparticulate compounds including N1177 and PH-50. The Company is theexclusive licensee of U.S. and foreign patent applications from MassachusettsGeneral Hospital that relate to diagnostic imaging agents and methods for usingthe diagnostic imaging agents for medical location, treatment and diagnosis oftumors and other diseased tissues. Additional patents may never be issued on any of the patent applicationsthe Company owns or license from third parties.

 

Thepatent position of biopharmaceutical companies involves complex legal andfactual questions and therefore the Company cannot assure the enforceability ofthese patents.  A third party mightsuccessfully challenge the validity or enforceability of the Company’s patentsor if issued, patents that would result from its patent applications. Thepatents might not provide protection against competitive products or otherwisebe commercially valuable, and applications filed by others might result inpatents that would be infringed by the manufacture, use or sale of theCompany’s products.  Litigation overpatents and other intellectual property rights occurs frequently in theCompany’s industry and there is a risk that the Company may not prevail indisputes over the ownership of intellectual property. Further, an interferenceproceeding with the Patent and Trademark Office may be instituted over therights to certain inventions, and there is a risk that the Company may notprevail in such an interference proceeding. Those disputes can be expensive andtime consuming, even if the Company prevails. Intellectual property disputesare often settled through licensing arrangements that could be costly to theCompany.  In any intellectual propertylitigation, it is possible that licenses necessary to settle the dispute wouldnot be available on commercially reasonable terms or that the Company would notbe able to redesign its technologies to avoid any claimed infringement thusresulting in its inability to sell the product.

 

Confidentialityagreements covering the Company’s intellectual property may be violated, andthe Company may not have adequate remedies for any violation. The Company’strade secret

 

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intellectualproperty may in other ways become known or be independently discovered bycompetitors.  In addition, whereintellectual property results from a research project supported by governmentfunding, the government has limited rights to use the intellectual propertywithout paying the Company a royalty.

 

Tothe extent the Company uses intellectual property through licenses orsub-licenses, as is the case for some of its lymphography technology, itsrights are subject to the Company performing the terms of the license orsub-license agreement with third parties. The Company’s rights are also subjectto the actions of third parties the Company may not be able to control, such asits sub-licensor complying with the terms of its license with the patent ownerand the patent owner maintaining the patent.

 

**The Company depends on a small number ofemployees and consultants to provide management expertise, and the loss of thisexpertise may interfere with the Company's operations or delay its ability toimplement its business plan.**

 

The Company currently has three senior executive officers:  its Chief Executive Officer (Dr. Williams),its Chief Financial Officer (Mr. Boveroux), and its Senior Vice PresidentMarketing and Business Development (Mr. DeFranco).  The Company also has retained consultants to advise the Companyin regulatory affairs, product development, and business and financialmatters.  These individuals have enteredinto employment or consulting agreements, confidentiality and/ornon-competition agreements with the Company. If an individual performing one of these executive or consultingfunctions for the Company terminates his or her association with the Company orbreaches their agreement with the Company:

 

•      The Company could suffer competitivedisadvantage or loss of intellectual property protection.

 

•      The Company could experience a delay inthe implementation of its business plan until it arranged for anotherindividual or firm to fulfill the role.

 

**The raw materials for *Imagent* are subject to a long-term supplycontract with one supplier and the raw materials necessary for the manufactureof PH-50 and N1177 are supplied by one supplier. An interruption inavailability of those materials may impair its ability to market or test thoseproducts.**

 

TheCompany assumed the rights and obligations of Alliance under the terms of thelong-term supply agreement that Alliance had for the principal raw material for*Imagent.*  Raw materials used in *Imagent* cannot be changed withoutequivalency testing of any new material by the Company and approval of theFDA.  Some raw materials for *Imagent* are currently qualified from onlyone source and, although the Company has some inventory, the Company willattempt to acquire additional inventory of these materials and to negotiate long-termsupply arrangements.  There can be noassurance that the Company would be successful in negotiating any such longterm or other supply agreements.

 

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The Company currently relies on Nanosystems, a division of ElanCorporation plc, as the sole supplier of the raw nanoparticulates used tomanufacture PH-50 and N1177. The Company presently has limited supplies ofthese products on hand. While a sole supplier supplies its raw materials, thereare additional sources for these materials. However, to make any significantchange in the manufacturing process or change in suppliers, the Company mustconduct certain equivalency studies and receive approval by the FDA.Considerable delays in the Company’s research and development programs forthese products could result from its having to change to a differentsupplier.  There can be no assurancethat Nanosystems will continue to supply the Company with the raw materials thatthe Company needs in a timely manner on conditions that are acceptable to theCompany.

 

**The Company may encounter difficultiesexpanding its manufacturing operations.**

 

TheCompany leases a single 53,000 square foot facility located in San Diego,California, a portion of which houses its manufacturing operations. Thisfacility is subject to a variety of quality systems regulations, internationalquality standards and other regulatory requirements, including requirements forcurrent good manufacturing practice. The Company may encounter difficultiesexpanding its manufacturing operations in compliance with these regulations andstandards, which also could result in a delay or termination of manufacturingor an inability to meet product demand.

 

TheCompany will face risks inherent in operating a single facility for themanufacture of *Imagent.* At thistime, the Company does not have alternative production plans in place oralternative facilities available should the San Diego manufacturing facilitycease to function. These risks include unforeseen plant shutdowns due topersonnel, equipment or other factors, and the resulting inability to meetcustomer orders on a timely basis.

 

**The Company has to rely on third parties andcollaborative relationships for the marketing, manufacturing and clinical testingof *Imagent* and its proposedproducts, and it may be difficult to implement its business plans without thesecollaborations.**

 

TheCompany currently has agreements for sales, distribution and packaging of *Imagent* with several CardinalHealth, Inc. companies.  TheCompany has had and expect to continue in the future to have a variety ofresearch agreements with universities and other research institutions toinvestigate specific protocols for the preclinical development and testing ofits products or research activities related to other new potential products.The Company also contracts and expects to continue to contract with researchorganizations and other third parties to manage clinical trials of itsproducts. The Company must obtain and maintain collaborative relationships withthird parties for research and development, preclinical and clinical testing,marketing and distribution of its proposed products. Collaborativerelationships may limit or restrict its operations or may not result in anadequate supply of necessary resources. A collaborative partner could alsopursue alternative technologies as a means of developing or marketing productsfor the diseases targeted by the Company’s collaborative program.  If a third party the Company is collaboratingwith fails to perform under its agreement or fails to meet regulatorystandards, this could delay or prematurely terminate preclinical or clinicaltesting of the Company’s proposed products.

 

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**Its products may not be fully accepted byphysicians, laboratories and health insurance providers, which would reduce itsrevenue and limit its ability to raise capital.**

 

TheCompany’s growth and success will depend upon market acceptance by physicians,laboratories and health insurance providers of the Company’s products. Thisrequires acceptance of the Company’s products as clinically useful andcost-effective alternatives to other medical imaging products and methods. Inaddition, physicians may utilize imaging techniques other than those for whichthe Company’s products are being developed (such as magnetic resonance imaging(MRI) to image internal vasculature and organs and therefore, its products maynot be utilized.

 

**Changes in health care reimbursement policiesor legislation may make it difficult for patients to use or receivereimbursement for using its products, which could reduce its revenues.**

 

TheCompany’s success will depend, in part, on the extent to which health insurers,managed care entities and similar organizations provide coverage orreimbursement for using the medical procedures the Company has and plan todevelop. These third-party payers are increasingly challenging the price ofmedical procedures and services and establishing guidelines that may limitphysicians’ selections of innovative products and procedures. The Company alsocannot predict the effect of any current or future legislation or regulationsrelating to third-party coverage or reimbursement on its business. The Companymay not be able to achieve market acceptance of its proposed products ormaintain price levels sufficient to achieve or maintain any profits on itsproducts if adequate reimbursement coverage is not available. Failure byphysicians, hospitals and other users of the Company’s products to obtainsufficient reimbursement from third-party payers for the procedures in whichthe Company’s products would be used or adverse changes in governmental andprivate third-party payers’ policies toward reimbursement for such procedureswould have a material adverse effect on the Company’s business.

 

**Risks Related To The Company’s Common Stock**

 

**A small group of stockholders havesignificant voting power and may delay or prevent a change of control of IMCORand may have other adverse effect on the price of its common stock.**

 

Asof June 30, 2004, a small group of stockholders control approximately51,384,623 shares, or 64.4% of the Company’s issued and outstanding commonstock.  These stockholders are alsoparties to a Voting, Drag-Along and Right of First Refusal Agreement (the“Voting Agreement”) concerning the election of certain designees to the Boardof Directors and certain other corporate actions.  The Voting Agreement requires these stockholders to vote theirshares for the election of certain individuals nominated by parties to theVoting Agreement.  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.  Thesefactors may affect the market and the market price for its common stock in waysthat do not reflect the intrinsic value of the Company’s common stock.

 

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**The price and trading volume of its commonstock fluctuates significantly, like that of many biopharmaceutical companies,which may make it difficult for the Company or a stockholder to sell its commonstock at a suitable price and may cause dilution for existing stockholders whenthe Company issues additional shares.**

 

Duringthe period from January 1, 2004 through July 30, 2004 the closingtrade price of the Company’s common stock ranged from $2.20 to $0.19 pershare.  Daily trading volume ranged fromzero shares to approximately 476,141 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. Thefollowing factors may have an impact on the price of the Company’s commonstock:

 

•                  Sales performance of *Imagent;*

 

•                  Announcementsby the Company or others regarding scientific discoveries, technologicalinnovations, commercial products, patents or proprietary rights;

 

•                  Announcementsby the Company concerning the licensing or other transactions of its productsor technologies;

 

•                  Privatesales of a significant block of the Company’s common stock at a price below thethen current market price of the Company’s common stock and the subsequentregistration and sale of those shares;

 

•                  Theprogress of preclinical or clinical testing;

 

•                  Developmentsor outcome of litigation concerning proprietary rights, including patents;

 

•                  Changesin government regulation;

 

•                  Publicconcern about the safety of devices or drugs;

 

•                  Limited,if any, coverage by securities analysts;

 

•                  Theoccurrence of any of the risk factors described in this section;

 

•                  Salesof large blocks of stock by an individual or institution;

 

•                  Changesin the Company’s financial performance from period to period, securitiesanalysts’ reports, and general market conditions; and

 

•                  Economicand other external factors or a disaster or crisis.

 

50

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**If stockholders holding substantial amountsof its common stock should sell their stock in the public market, the price ofits stock could fall and it may be more costly for the Company to raisecapital.**

 

TheCompany has filed a registration statement on Form SB-2 on August 4, 2004(which is not yet effective) with respect to the sale of 25,374,999 shares ofits common stock (plus an additional 14,717,502 shares of its common stockissuable on conversion of warrants) by selling shareholders.  The Company has a commitment to register anadditional approximately 44,512,895 shares of its common stock (includingshares owned by funds controlled by two of its directors) following theeffectiveness of the August 4 registration statement.  We may also register the resale of sharesissuable pursuant to the exercise of options granted under our various optionplans.  In addition, some of theCompany’s shares are eligible for sale in the public market free of restrictionunder Rule 144 of the Securities Act. Others shares of the Company’s common stock are also subject toagreements requiring the Company to permit the holders of the shares, undercertain circumstances, to join in a public offering of its stock or to demandthat the Company register their shares for resale. The sale of these sharescould place downward pressure on the overall market price of the Company’scommon stock.

 

**The Company has issued a substantial numberof securities convertible into shares of its common stock that will result insubstantial dilution to the ownership interests of its existing shareholders.**

 

Asof August 15, 2004, the Company has reserved 21,522,016 shares of itscommon stock for issuance upon exercise or conversion of the followingsecurities:

 

•                  15,453,266shares upon exercise of outstanding stock warrants, including 14,717,502 sharesof common stock underlying warrants from the Company’s recent financing;

 

•                  5,875,470shares upon exercise of outstanding stock options; and

 

•                  193,280shares upon exercise of options available for future grants under its existingoption plans.

 

Inaddition, the Company’s Board of Directors recently approved increasing thetotal shares available for issuance under the 2000 Long Term IncentiveCompensation Plan from 4,568,750 to 30,000,000, subject to stockholder approvalwhich the Company expects to receive at its next meeting of stockholders.  The Company is contractually obligated toreserve an additional 5,078,402 shares pursuant to options to grant to theCompany’s Chief Executive Officer upon increase in the shares subject to the2000 Long Term Incentive Compensation Plan. If the Company’s options and warrants are all issued and exercised,investors may experience significant dilution in the voting power of theircommon stock. The sale of these shares could also place downward pressure onthe overall market price of the Company’s common stock.

 

51

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**Applicable Securities and Exchange Commissionrules governing the trading of “penny stocks” limits the trading and liquidityof its common stock, which may affect the trading price of its common stock.**

 

TheCompany’s common stock currently trades on the Pink Sheets. Because its commonstock continues to trade below $5.00 per share, its common stock is considereda “penny stock” and is subject to Securities and Exchange Commission rules andregulations, which impose limitations upon the manner in which its shares canbe publicly traded. These regulations require the delivery, prior to anytransaction involving a penny stock, of a disclosure schedule explainingthe penny stock market and the associated risks. Under these regulations,certain brokers who recommend such securities to persons other than establishedcustomers or certain accredited investors must make a special writtensuitability determination regarding such a purchaser and receive suchpurchaser’s written agreement to a transaction prior to sale. These regulationshave the effect of limiting the trading activity of its common stock andreducing the liquidity of an investment in its common stock.

 

**The Company does not intend to pay dividendsin the foreseeable future.**

 

TheCompany has never declared or paid a dividend on its common stock. The Companyintends to retain earnings, if any, for use in the operation and expansion ofits business and, therefore, do not anticipate paying any dividends on theCompany’s common stock in the foreseeable future.

 

**ITEM 6.****                             EXHIBITSAND REPORTS ON FORM 8-K**

 

(a)                                  Exhibits.

 

The following is a list of exhibits filed as part of this Form10-QSB.  Exhibits that were previously filed are incorporated byreference.  For exhibits incorporated by reference, the location of theexhibit in the previous filing is indicated in parenthesis.

 
| **EXHIBIT  NO.** |   | **DESCRIPTION**                                                                                                                                                                                                     |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                |
| +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 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.)  |
|             |   |                                                                                                                                                                                                                |
| *10.1            |   | Single-Tenant Industrial Lease dated November 7, 1997 by and  between WHAMC Real Estate Limited Partnership and Alliance Pharmaceutical  Corp.                                                                 |

 

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| **EXHIBIT  NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                          |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *10.2            |   | Landlord Consent to Assignment and Assumption dated as of  June 18, 2003, by and among IMCOR Pharmaceutical Co. (f/k/a Photogen  Technologies, Inc.), EOP-Industrial Portfolio, L.L.C., and Alliance Pharmaceutical  Corp.                                                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +10.3            |   | Form of Securities Purchase Agreement dated as of April 19,  2004, between IMCOR Pharmaceutical Co. and each of the purchasers signatory  thereto. (Filed as Exhibit 4.11 to the Company’s quarterly report on Form  10-QSB for the quarter ended March 31, 2004 and incorporated herein by  reference.)                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +10.4            |   | Form of Warrant Agreement dated as of April 19, 2004 between  IMCOR Pharmaceutical Co. and each of the purchasers signatory to the  Securities Purchase Agreement dated as of April 19, 2004. (Filed as  Exhibit 4.12 to the Company’s quarterly report on Form 10-QSB for the quarter  ended March 31, 2004 and incorporated herein by reference.)                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +10.5            |   | Form of Registration Rights Agreement dated as of April 19, 2004  entered into by and between IMCOR Pharmaceutical Co. and each of the  purchasers signatory to the Securities Purchase Agreement dated as of  April 19, 2004. (Filed as Exhibit 4.13 to the Company’s quarterly report  on Form 10-QSB for the quarter ended March 31, 2004 and incorporated  herein by reference.) |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +10.6            |   | Form of Securities Purchase Agreement dated as of April 19,  2004, by and among IMCOR Pharmaceutical Co., Oxford Bioscience Partners IV  L.P., MRNA Fund II L.P. and Mi3 LP.   (Filed as Exhibit 4.14 to the Company’s quarterly report on Form  10-QSB for the quarter ended March 31, 2004 and incorporated herein by  reference.)                                                 |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +10.7            |   | Form of Registration Rights Agreement dated as of April 19, 2004  by and among IMCOR Pharmaceutical Co. and each of Oxford Bioscience Partners  IV L.P., MRNA Fund II L.P. and Mi3 LP. (Filed as Exhibit 4.15 to the  Company’s quarterly report on Form 10-QSB for the quarter ended  March 31, 2004 and incorporated herein by reference.)                                              |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +10.8            |   | Exchange Agreement dated as of June 4, 2004 by and among IMCOR  Pharmaceutical Co., Xmark Fund, L.P., Xmark Fund, Ltd., Oxford Bioscience  Partners IV L.P., MRNA Fund II, L.P. and Mi3 L.P. (Filed as Exhibit 10.23 to  the Company’s Form SB-2 filed on August 3, 2004 and incorporated herein  by reference.)                                                                          |

 

53

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| **EXHIBIT  NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                      |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| +10.9            |   | Senior Secured Promissory Note dated June 4, 2004 between IMCOR  Pharmaceutical Co. and Xmark Fund, L.P. (Filed as Exhibit 4.12 to the  Company’s Form SB-2 filed on August 3, 2004 and incorporated herein by  reference.)                                                           |
|             |   |                                                                                                                                                                                                                                                                                                 |
| +10.10           |   | Senior Secured Promissory Note dated June 4, 2004 between IMCOR  Pharmaceutical Co. and Xmark Fund, Ltd. (Filed as Exhibit 4.13 to the  Company’s Form SB-2 filed on August 3, 2004 and incorporated herein by reference.)                                                            |
|             |   |                                                                                                                                                                                                                                                                                                 |
| *10.11           |   | Termination Agreement dated June 9, 2004 by and among IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Elan Corporation,  plc, Elan Pharma International Ltd., Elan International Services, Ltd., and  Sentigen, Ltd.  Confidential portions  of this exhibit were redacted. |
|             |   |                                                                                                                                                                                                                                                                                                 |
| *10.12           |   | License Agreement dated June 9, 2004 between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Elan Pharma  International Ltd.  Confidential  portions of this exhibit were redacted.                                                                                      |
|             |   |                                                                                                                                                                                                                                                                                                 |
| *10.13           |   | Letter Agreement dated June 9, 2004 by and among IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Elan Drug Delivery,  Inc., and Elan Pharma International Ltd.   Confidential portions of this exhibit were redacted.                                                       |
|             |   |                                                                                                                                                                                                                                                                                                 |
| *10.14           |   | Letter Agreement dated June 27, 2004 by and between IMCOR  Pharmaceutical Co. and Brian M. Gallagher.                                                                                                                                                                                           |
|             |   |                                                                                                                                                                                                                                                                                                 |
| +10.15           |   | Forbearance Agreement dated June, 2004 by and between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Philips Medical  Capital, LLC (Filed as Exhibit 10.22 to the Company’s Form SB-2 filed on  August 3, 2004 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.                                                                                                                                   |

 

54

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| **EXHIBIT  NO.** |   | **DESCRIPTION**                                                                                                                                                    |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *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. |

 

----

+ Incorporated by Reference.

* Filed herewith.

 

(b)                                 Reportson Form 8-K.

 

The following report on Form 8-K was filed during the three-monthperiod ending June 30, 2004:

 

On April 23, 2004, the Company filed a Form 8-K reporting itresults of operations for the fiscal year ended December 31, 2003 andstating that it had accumulated losses since inception of $51,519,000, whichraises substantial doubt about its ability to continue as a going concern.

 

55

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**Signatures**

 

In accordance with the requirements of the Exchange Act, the registranthas caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| Date: August 20, 2004 | IMCOR Pharmaceutical Co.                                                                                                          |
|----------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
|                       |                                                                                                                              |
|                       |                                                                                                                              |
|                       | /s/ Taffy J. Williams                                                                                                             |   |
|                       | Taffy J. Williams, Ph.D., President  and Chief Executive Officer                                                                  |
|                       |                                                                                                                              |
|                       |                                                                                                                              |
|                       | /s/ Brooks Boveroux                                                                                                               |   |
|                       | Brooks Boveroux, Senior Vice President - Finance  and Chief Financial Officer (Principal Financial and  Chief Accounting Officer) |

 

56

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**EXHIBIT INDEX**

 
| **EXHIBIT  NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                                                                          |
|------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +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 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.)                                                                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.1            |   | Single-Tenant Industrial Lease dated November 7, 1997 by and  between WHAMC Real Estate Limited Partnership and Alliance Pharmaceutical  Corp.                                                                                                                                                                                                                                                      |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| *10.2            |   | Landlord Consent to Assignment and Assumption dated as of  June 18, 2003, by and among IMCOR Pharmaceutical Co. (f/k/a Photogen  Technologies, Inc.), EOP-Industrial Portfolio, L.L.C., and Alliance  Pharmaceutical Corp.                                                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +10.3            |   | Form of Securities Purchase Agreement dated as of April 19,  2004, between IMCOR Pharmaceutical Co. and each of the purchasers signatory  thereto. (Filed as Exhibit 4.11 to the Company’s quarterly report on Form  10-QSB for the quarter ended March 31, 2004 and incorporated herein by  reference.)                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +10.4            |   | Form of Warrant Agreement dated as of April 19, 2004 between  IMCOR Pharmaceutical Co. and each of the purchasers signatory to the  Securities Purchase Agreement dated as of April 19, 2004. (Filed as  Exhibit 4.12 to the Company’s quarterly report on Form 10-QSB for the quarter  ended March 31, 2004 and incorporated herein by reference.)                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +10.5            |   | Form of Registration Rights Agreement dated as of April 19, 2004  entered into by and between IMCOR Pharmaceutical Co. and each of the  purchasers signatory to the Securities Purchase Agreement dated as of  April 19, 2004. (Filed as Exhibit 4.13 to the Company’s quarterly report  on Form 10-QSB for the quarter ended March 31, 2004 and incorporated  herein by reference.) |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| +10.6            |   | Form of Securities Purchase Agreement dated as of April 19,  2004, by and among IMCOR Pharmaceutical Co., Oxford Bioscience Partners IV  L.P., MRNA Fund II L.P. and Mi3 LP.   (Filed as Exhibit 4.14 to the Company’s quarterly report on Form  10-QSB for the quarter ended March 31, 2004 and incorporated herein by  reference.)                                                 |

 

57

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| **EXHIBIT  NO.** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                             |
|------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| +10.7            |   | Form of Registration Rights Agreement dated as of April 19, 2004  by and among IMCOR Pharmaceutical Co. and each of Oxford Bioscience Partners  IV L.P., MRNA Fund II L.P. and Mi3 LP. (Filed as Exhibit 4.15 to the  Company’s quarterly report on Form 10-QSB for the quarter ended  March 31, 2004 and incorporated herein by reference.) |
|             |   |                                                                                                                                                                                                                                                                                                                                                        |
| +10.8            |   | Exchange Agreement dated as of June 4, 2004 by and among IMCOR  Pharmaceutical Co., Xmark Fund, L.P., Xmark Fund, Ltd., Oxford Bioscience  Partners IV L.P., MRNA Fund II, L.P. and Mi3 L.P. (Filed as Exhibit 10.23 to  the Company’s Form SB-2 filed on August 3, 2004 and incorporated herein  by reference.)                             |
|             |   |                                                                                                                                                                                                                                                                                                                                                        |
| +10.9            |   | Senior Secured Promissory Note dated June 4, 2004 between IMCOR  Pharmaceutical Co. and Xmark Fund, L.P. (Filed as Exhibit 4.12 to the  Company’s Form SB-2 filed on August 3, 2004 and incorporated herein by  reference.)                                                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                        |
| +10.10           |   | Senior Secured Promissory Note dated June 4, 2004 between IMCOR  Pharmaceutical Co. and Xmark Fund, Ltd. (Filed as Exhibit 4.13 to the  Company’s Form SB-2 filed on August 3, 2004 and incorporated herein by  reference.)                                                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                        |
| *10.11           |   | Termination Agreement dated June 9, 2004 by and among IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Elan Corporation,  plc, Elan Pharma International Ltd., Elan International Services, Ltd., and  Sentigen, Ltd.  Confidential portions  of this exhibit were redacted.                                                        |
|             |   |                                                                                                                                                                                                                                                                                                                                                        |
| *10.12           |   | License Agreement dated June 9, 2004 between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Elan Pharma  International Ltd.  Confidential  portions of this exhibit were redacted.                                                                                                                                             |
|             |   |                                                                                                                                                                                                                                                                                                                                                        |
| *10.13           |   | Letter Agreement dated June 9, 2004 by and among IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.), Elan Drug Delivery,  Inc., and Elan Pharma International Ltd.   Confidential portions of this exhibit were redacted.                                                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                                                        |
| *10.14           |   | Letter Agreement dated June 27, 2004 by and between IMCOR  Pharmaceutical Co. and Brian M. Gallagher.                                                                                                                                                                                                                                                  |
|             |   |                                                                                                                                                                                                                                                                                                                                                        |
| +10.15           |   | Forbearance Agreement dated June, 2004 by and between IMCOR  Pharmaceutical Co. (f/k/a Photogen Technologies, Inc.) and Philips Medical  Capital, LLC (Filed as Exhibit 10.22 to the Company’s Form SB-2 filed on  August 3, 2004 and incorporated herein by reference.)                                                                          |

 

58

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| **EXHIBIT  NO.** |   | **DESCRIPTION**                                                                                                                                                    |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *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. |

 

----

*Filed herewith

+Incorporated herein by reference

 

59

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